## Facts

- William D. Frazell, a geologist, contracted in 1951 with N.H. Wheless Oil Company and W.C. Woolf to locate and help acquire oil and gas properties for them.
- Under the agreement, Frazell received a monthly drawing account (plus expenses) and a contingent future interest in the acquired properties.
- The agreement stated Frazell would have no ownership interest in the properties until Wheless and Woolf recovered all costs and expenses, including amounts paid to Frazell.
- By 1955, the venture succeeded and it appeared costs would be fully recovered by late 1955.
- In April 1955, the parties terminated the 1951 arrangement and formed W.W.F. Corporation to hold the assembled properties.
- The properties were transferred to the corporation; Wheless and Woolf received debentures and stock, and Frazell received 6,500 shares (13%) valued at $91,000.
- Frazell did not report the $91,000 value as income on his 1955 return.
- The Commissioner assessed a deficiency, treating the stock as taxable income; Frazell paid and sued for a refund.
- The district court ruled for Frazell, treating the stock as received in a tax-free exchange; the United States appealed.

## Issues

1. Whether Frazell’s receipt of 6,500 shares of W.W.F. Corporation stock in 1955 was taxable compensation for services or part of a nonrecognition exchange under I.R.C. § 351(a).
2. Whether Frazell held a present, transferable “property” interest capable of being transferred to the corporation for § 351(a) purposes, rather than a contingent, service-based expectancy.
3. Whether, if Frazell did not transfer “property,” he could be treated as part of the § 351 transferor group for the “control immediately after the exchange” requirement.

## Decision

- The Fifth Circuit reversed the district court.
- The court held the $91,000 fair market value of the 6,500 shares was includible in Frazell’s 1955 gross income.
- The court concluded § 351(a) did not apply to Frazell’s receipt of stock because he did not transfer qualifying “property” to the corporation.
- The stock issuance to Frazell was characterized as compensation for services and for a contingent contractual arrangement, not as stock received in exchange for property.

## Legal Principles

- Section 351(a) nonrecognition applies only when stock or securities are received solely in exchange for “property” transferred to the corporation and the transferors are in statutory control immediately after the exchange.
- A service provider who receives stock primarily for services generally recognizes taxable compensation; such issuance is not sheltered by § 351 merely because other participants transferred property in a qualifying exchange.
- A contingent, subordinate right to share in future value—dependent on prior cost recovery by others—may be insufficient to constitute a present, transferable “property” interest for § 351 purposes.

## Conclusion

The Fifth Circuit held that Frazell’s stock received at incorporation was taxable compensation in 1955 because his rights under the prior agreement were too contingent to constitute “property” contributed under § 351(a), and he could not treat the issuance as part of a tax-free exchange.


United States v. Frazell, 335 F.2d 487 (5th Cir. 1964)