## Facts

- Rocky Mountain Uranium Corporation was incorporated in 1954; mining claims were transferred to the corporation for stock issuance.
- The corporation issued 900,000 shares to promoter Critchell Parsons; each taxpayer (Mailloux and Foley) received 120,000 shares transferred from Parsons’s block.
- The taxpayers also had an arrangement to receive 10% of proceeds from certain pre-public stock sales and received $12,000 under that arrangement.
- The stock transfer agreement restricted the taxpayers from selling their shares without Parsons’s approval.
- In 1954, the taxpayers sold portions of their shares at prices averaging over $1 per share.
- Later in 1954, disputes arose; Parsons instructed the transfer agent not to transfer the taxpayers’ certificates, preventing further sales until a settlement in 1956.
- After the dispute ended, the taxpayers sold remaining shares in 1956–1957 at substantially lower prices (about $0.05–$0.10 per share).
- The Commissioner treated the 120,000 shares received by each taxpayer as compensation for services and valued the stock at $0.50 per share upon receipt, issuing deficiencies.
- The Tax Court upheld both the compensation characterization and the $0.50 per share valuation.

## Issues

1. Whether the shares received by each taxpayer were compensation for services or stock received in a nonrecognition exchange under I.R.C. § 351.
2. If the shares were compensation, whether the stock had fair market value upon receipt and whether the Tax Court erred by valuing it at $0.50 per share without adequately accounting for the contractual restriction on sale.

## Decision

- The Fifth Circuit affirmed the Tax Court’s finding that the shares were compensation for services, not stock received in a § 351 exchange.
- The court rejected the claim that the stock had no fair market value at receipt, citing actual sales and evidence of a market.
- The court reversed the Tax Court’s $0.50 per share valuation and remanded for reconsideration of fair market value with proper consideration of the contractual transfer restriction and its effect on marketability.

## Legal Principles

- Shares transferred to individuals who did not own the property contributed to a corporation may be treated as taxable compensation when the evidence shows the transfer was for promotional or related services.
- Tax Court findings on underlying factual disputes and credibility are upheld on appeal when supported by substantial evidence and not clearly erroneous.
- Stock subject to restrictions on transfer may still have fair market value, but restrictions on alienability can materially reduce value and must be considered in determining fair market value at the time of receipt.
- Evidence of contemporaneous sales and an active market is strong proof that stock has ascertainable fair market value, even in a speculative venture.

## Conclusion

The court held that the taxpayers received the stock as compensation taxable upon receipt, but required a new valuation analysis because the Tax Court did not sufficiently account for contractual limits on the taxpayers’ ability to sell, which could significantly reduce fair market value.


Mailloux v. Commissioner of Internal Revenue, 320 F.2d 60 (5th Cir. 1963)