Mailloux v. Commissioner of Internal Revenue

Melvin Mailloux and Robert Foley (plaintiffs) performed services related to the sale of stock and the obtaining of private investments for Rocky Mountain Uranium Corporation. A total of 1.45 million shares were issued in exchange for uranium-mining claims. In addition to commissions, Mailloux and Foley received 120,000 shares each from the principal promoter of the corporation, Critchell Parsons; at the time of receipt, the shares were valued at around $3 per share. All transfer of stock was subject to approval by Parsons. Mailloux and Foley did not report receipt of the shares on their tax returns in the year the shares were received. Parsons prevented Mailloux and Foley from selling shares for a year and a half; Mailloux and Foley subsequently sold the shares for five to 10 cents per share. The commissioner of the Internal Revenue Service (defendant) issued an assessment of tax based on the determination that the stock was compensation and valued the stock based on the date of receipt. Mailloux and Foley appealed to the United States Tax Court, contending that the shares were received in exchange for uranium claims. Parsons testified that Mailloux and Foley had no interest in the claims transferred to the corporation. The Tax Court found in favor of the commissioner, and Mailloux and Foley appealed to the United States Court of Appeals for the Fifth Circuit, contesting the finding that the shares were not received in a tax-free exchange and also claiming that the shares had a much lower value than the commissioner’s determination.