UNITED STATES of America, Appellant, v. William D. FRAZELL and Martha T. Frazell, Appellees.
No. 20758.
United States Court of Appeals Fifth Circuit.
Aug. 5, 1964.
The clause excepting the loss of a loan describes the excluded risk as:
“Any loss the result of the complete or partial nonpayment of or default upon any loan made by or obtained from the Insured, whether procured in good faith or through trick, artifice, fraud or false pretenses. * * * Section 1(d).
The instant damage arose in this manner. An arrangement was made by the Bank with a customer to advance upon sales invoices, with annexed freight receipts showing the customer‘s shipments to its vendees, approximately 75% of the face of each invoice, provided there was also attached to it the customer‘s 30-day note payable to the Bank for the amount of the advance. These papers had to be accompanied, too, by a document purporting to sell and assign the invoice to the Bank. On collection of the invoice by the customer, the consignee‘s check would be applied first to the 30-day note, including interest, and the balance put to the account of the customer at the Bank.
The plan worked well for several years until the customer delivered to the Bank false and counterfeit invoices. These represented, as genuine shipments, consignments that had not in truth been made. Included were freight receipts on which the name of the carrier had been forged.
As the District Court held, contrary to the insistence of the Bank, we think each of the transactions was in law a loan. True, the Bank filed notices of the assignment of the invoices as the
With no factual conflict, the District Court was altogether right in declaring the loss conclusively excluded from the indemnification of the bond and the defendant Lumbermens Mutual Casualty Company entitled to a verdict.
Affirmed.
Edward L. Shaheen, U. S. Atty., Shreveport, La., Louis F. Oberdorfer, Asst. Atty. Gen., Meyer Rothwacks, Harry Baum, Michael I. Smith, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., for appellant, E. V. Boagni, Asst. U. S. Atty., of counsel.
W. Scott Wilkinson, Shreveport, La., for appellees.
Before TUTTLE, Chief Judge, and HUTCHESON and GEWIN, Circuit Judges.
TUTTLE, Chief Judge.
This is an appeal by the Government from a judgment in favor of the taxpayer. Frazell v. United States, 213 F.Supp. 457 (W.D.La. 1963). As the largely undisputed facts are set out at length in the opinion of the district court, only a summary will be presented here. On February 9, 1951, William Frazell, a geologist, entered into a contract with the N. H. Wheless Oil Company, a partnership, and W. C. Woolf, under which Frazell was to check certain areas to determine whether potentially productive oil and gas properties might be procured there. He was to recommend those properties he found suitable to Wheless and Woolf, and upon their joint approval, he was to attempt to acquire such properties, taking title thereto in the names of Wheless and Woolf in equal shares. In return for these services, Frazell was to receive “a monthly salary or drawing account,” plus expenses, and specified interests in the property acquired. It was agreed, however, “that Frazell shall not be entitled to, nor shall he be considered as owning, any interest in said properties until such time as Wheless and Woolf shall have recovered their full costs and expenses of said properties” including the amounts paid out to Frazell. 213 F.Supp. at 470.
The arrangement proved successful, and it was evident in the early part of 1955 that Wheless and Woolf would fully recover their costs and expenses by the end of November of that year. In April 1955, the 1951 contract was terminated, and by contract dated April 20, 1955, all the properties acquired under the earlier arrangement were transferred to the W.W.F. Corporation, a Delaware corporation formed specifically to acquire these properties in return for the issuance of debentures to Wheless and Woolf and of stock to Wheless, Woolf, and Frazell. Frazell received 6,500 shares of W.W.F. stock (13% of the total issued), having a fair market value of $91,000.00, but he included no part of this amount in his 1955 income tax return. The Commissioner ruled that the $91,000.00 should have been included in income and assessed a deficiency, which Frazell paid under protest and seeks to recover here.
Frazell contends that he received the W.W.F. stock in a tax-free exchange within the terms of
“No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control * * * of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property.”
The district court agreed that
It is fundamental that “compensation for services” is taxable as ordinary income under the
The regulation pertaining to partnerships provides that
“the value of an interest in such partnership capital so transferred to a partner as compensation for services constitutes income to the partner under section 61. The amount of such income is the fair market value of the interest in capital so transferred * * * at the time the transfer is made for past services. * * * The time when such income is realized depends on all the facts and circumstances, including any substantial restrictions or conditions on the compensated partner‘s right to withdraw or otherwise dispose of such interest.”
This rule would have been directly applicable had the 1951 contract continued in effect through November 1955, the date on which Wheless and Woolf would have fully recovered their costs in the venture. The contract made it clear that Frazell would “not have the right to dispose of any rights which may accrue to him” before those costs were recovered. 213 F.Supp. at 472. But after November, he would have received a largely unrestricted1 interest in about 13% of the partnership properties. That this interest was primarily, if not entirely, in return for Frazell‘s services to the enterprise is undisputed. Thus, so much of the inter-
The applicable rule is in no way changed by Frazell‘s contention that his interest in the enterprise was a “carried interest.” There are three recognized varieties of “carried interest,” and each “may be created under varied circumstances, e. g., * * * as compensation for services rendered, e. g., by a geologist. * * *” Williams & Meyers, Oil and Gas Law, vol. 2, § 424 (1959). The interest created by the 1951 contract most nearly fits into the “Menahan” category of “carried interests;” that is, “a springing executory interest * * * conveyed by the carrying party [Wheless and Woolf] to the carried party [Frazell], such interest to become possessory upon the satisfaction of * * * [the carrying party‘s] costs.” Williams & Meyers, op. cit. supra § 424.1, p. 423. Even if Frazell is taken to have had some sort of interest in the properties in question from their first acquisition, his interest would not have become possessory until November 1955. Under
The fact that the contract was terminated prior to November 1955 should have no effect on the tax consequences of Frazell‘s arrangements. The transactions of April 1955 may be viewed in either of two ways: (1) If Frazell‘s partnership interest became possessory immediately upon the termination of the 1951 contract, so much of that interest received as compensation for services was taxable to him under the rule of
This is not to say that the full $91,000.00 is ordinary income. The trial court found that, just as Wheless and Woolf contributed large amounts of capital, “Frazell supplied to the venture a very valuable oil map which was his private property.” 213 F.Supp. at 461. Indeed the record shows that prior to entering into the 1951 contract Frazell had acquired several maps which apparently proved very helpful to the work of the venture. Among the reasons given by Mr. Wheless for desiring to employ Frazell was that “he had accumulated maps, geological data and various information that was valuable to the arrangement that it would have taken a long time for someone else just moving into the territory to accumulate.” And Frazell himself testified that he “had contributed considerable information and maps which resulted in the discovery and production of oil. * * *” Although it is clear that the greater part of the 13% interest received by Frazell was received as compensation for services, the court‘s finding and the cited testimony suggest that some part of that interest might have been received in return for “property;” namely, the maps. That part of the property Frazell received in 1955 attributable to his contribution of maps is not taxable in 1955 no matter whether we view the interest received as a partnership interest vesting on the termination of the 1951 contract (
Before the nonrecognition rule can be applied to the maps in this case,
The judgment is therefore reversed and the case remanded to the district court to determine whether the maps introduced at the original trial were contributed by Frazell to the oil venture created by the 1951 contract. If the court finds that the maps were so contributed, it shall determine their value as of the time of their contribution. Such part of $91,000.00 as exceeds the value of the maps as determined by the trial court is properly taxable to Frazell as ordinary income.2
Reversed and remanded.
HUTCHESON, Circuit Judge (dissenting).
This is an appeal from a judgment of Judge Dawkins in a taxpayer‘s suit for refund. The judgment is based upon a careful opinion by Judge Dawkins, reported in 213 F.Supp. 457. I was, and am, of the opinion that we should affirm per curiam on that opinion.
The district court‘s determination was that the transaction which gave rise to the litigation was a tax free exchange of property for stock within the meaning of
It seems to me that the district judge‘s opinion is incontrovertible, that the contentions of the appellant are technical and unsubstantial, and that the majority opinion is not a correct statement of the law. I, therefore, dissent from it.
TUTTLE
CHIEF JUDGE