Blake v. C.I.R., 273

• Citation: 697 F.2d 473
• Decision Date: 28 December 1982
• Docket Number: D,No. 273,273
• Parties: 83-1 USTC P 9121 S. Prestley BLAKE and Setsu Blake, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ocket 82-4098.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 473

697 F.2d 473

83-1 USTC P 9121

S. Prestley BLAKE and Setsu Blake, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 273, Docket 82-4098.

United States Court of Appeals Second Circuit.

Argued Oct. 18, 1982.

Decided Dec. 28, 1982.

Robert K. Gad, III, Ropes & Gray, Boston, Mass. (Harry K. Mansfield, of counsel), for appellants.

Stephen Gray, Atty., Dept. of Justice, Tax Div., Washington, D.C. (Glen L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Richard Farber, Attys., Dept. of Justice, Tax Division, Washington, D.C., of counsel), for appellee.

Before OAKES and WINTER, Circuit Judges, and MacMAHON, District Judge. ^*

OAKES, Circuit Judge:

This appeal presents a familiar problem in the tax law involving step-transaction analysis. The context is one in which a taxpayer "contributes" a substantially appreciated asset to a charitable organization which then liquidates the contribution and purchases another asset from the taxpayer. The question in this case is whether the taxpayer is entitled to treat the transfer of the first asset--corporate stock--as a contribution and treat the transfer of the second asset--a yacht--as a sale, or whether, as the Tax Court held, ¹ the transactions here must be recharacterized for tax purposes as a sale of the stock by the taxpayer followed by a contribution to the charity of the vessel. The vessel, it might be noted, was sold by the charity shortly after it had been purchased from the taxpayer for a little less than half of what the charity paid the taxpayer out of the proceeds of the stock. The taxpayer contends that the charity had no legally binding obligation to purchase the yacht and that absent such an obligation the transactions here must be treated according to the form they took: a contribution followed by a sale of an asset. We disagree. We hold that in this case the charity would have been legally obligated to purchase the yacht and that, even if it were not legally obligated, the Tax Court's finding that the transactions were undertaken pursuant to an understanding arrived at in advance is sufficient to sustain the Commissioner's position. We therefore affirm the Tax Court, Arnold Raum, Judge, in its decision that the gain realized on the sale of the stock was attributable to the taxpayer. It follows that only the market value of the yacht, not challenged on this appeal, was deductible as a contribution.

I. Facts

The taxpayer in this case, S. Prestley Blake, was a co-founder and major stockholder in the Friendly Ice Cream Corporation. In 1972, Blake purchased the yacht "America" for $500,000. ² The America is a replica of the original yacht America, built in 1851, after which the America's Cup race is named. Although not particularly well suited to racing or chartering, the yacht does have a certain mystique owing to its historical associations. Subsequent to the transactions recounted below, the America became familiar nationally because it was featured in the Tall Ships' Sail to New York City during the Bicentennial celebration of 1976. Blake, however, had nothing but trouble with the yacht. The vessel required frequent repair, and Blake found various captains and crews unsatisfactory. With one exception, Blake's ambition to defray expenses associated with owning the boat through chartering was never realized. He ultimately decided to dispose of the yacht; in his own words, he "had to get rid of [the America] at all costs," because it "was taking too much ... time and concern."

Blake had made a number of charitable gifts throughout his career, particularly in western New England, his home and the place where he started business. He attempted to donate the America to Mystic Seaport in Mystic, Connecticut, but that institution declined the gift. More unhappy cruises followed. Some time later, Blake approached the Kings Point Fund, Inc. (the Fund), a qualified charitable organization ³ associated with the United States Merchant Marine Academy at Kings Point, New York. In January and February of 1975, Blake and the superintendent of the Academy discussed the possibility of the Academy's use of the America as a training vessel, and the Superintendent wrote Blake a letter in late February of 1975 confirming the Academy's interest in the proposition. The letter expressed gratitude for Blake's "extremely generous offer to donate" the America and to "provide an additional annual grant of $10,000 towards its maintenance." The record indicates that the Fund's directors had discussed the possibility of acquiring the America at an earlier meeting where it was suggested that the boat be kept for at least two years and that Blake donate $10,000 annually and that twelve other major donors be solicited to raise an additional $125,000 for upkeep. On March 13, 1975, some two weeks after the Superintendent wrote Blake, the Fund's directors met again. It was reported at the meeting that Blake was "very receptive to donating his YACHT AMERICA to the Kings Point Fund" and the minutes of the meeting indicate that "[f]urther negotiation packages to this acquisition [were] to be discussed." A motion to acquire the America, subject to the consent of the Superintendent and approval of legal counsel, carried the Board unanimously.

In the meanwhile, Blake was apparently consulting with his tax lawyers. Four days after the March 13 meeting, he wrote the Fund that he had transferred 35,000 shares of Friendly stock "to advance your training program for young cadets in a way that you see fit." The stock had an adjusted basis in Blake's hands of $98, but a market value of $686,875 at the time of transfer. The Fund immediately sold the stock in a series of transactions netting $701,688.89. At an April 8, 1975, meeting of the Fund's directors, it was reported that "Mr. Blake had donated ... $714,000 ... worth of Friendly Ice Cream stock" to the Fund, that the Fund "then sold same," and that $675,000 "is to be used to purchase the yacht AMERICA and the remainder is to be used toward the maintenance of the vessel." The Board unanimously accepted "the generous donation of Mr. P. Blake to be used for the purchase of the yacht America and her maintenance." Almost immediately, however, the Board set out to sell the yacht; at a June 17, 1975, meeting a possible sale was discussed which would allow the Academy to use the vessel for the Bicentennial "Tall Ships Parade." This sale was approved, the minutes noting that it would "net the Fund over $200,000." Presumably this sale was carried out over the summer; the minutes of a meeting of September 18, 1975, show that, in addition to selling half a dozen other smaller craft, the Fund sold the America for $250,000, netting it some $200,000. The taxpayer does not dispute that, but for his expectation that the Fund would purchase the vessel, he might not have contributed the stock. But he argues that he had, at most, an expectation in this regard because there was no binding, enforceable commitment on the Fund's part to purchase the vessel. He points out that the directors of the Fund were free not to purchase the yacht if they determined that it would not be in the Fund's best interests to do so and that he alone bore the risk that events occurring between the transfer of the stock and either its sale or the purchase of the yacht would reduce the value of the stock or the yacht respectively. Thus, the taxpayer argues, there was a mere "coincidence" of two transactions and the principles underlying the tax treatment of charitable contributions require separate treatment of these transactions in the absence of an obligation binding the charity to purchase an asset of the contribution. Blake Brief at 7.

Under Grove v. Commissioner, 490 F.2d 241 (2d Cir.1973), the taxpayer argues reversal is required. Grove is presented to us as in a line of cases including, e.g., Palmer v. Commissioner, 62 T.C. 684 (1974), aff'd on other grounds, 523 F.2d 1308 (8th Cir.1975), acq'd in Rev.Rul. 78-197, 1978-1 C.B. 83; DeWitt v. United States, 204 Ct.Cl. 274 (Ct.Cl.1974); Carrington v. Commissioner, 476 F.2d 704 (5th Cir.1973); Sheppard v. United States, 361 F.2d 972 (Ct.Cl.1966); and Granite Trust Co. v. United States, 238 F.2d 670 (1st Cir.1956). We will first examine whether there was a legally binding agreement in this case, although this point was neither relied upon by the Tax Court nor particularly argued by the Commissioner, because the premise of the taxpayer's argument is that there was no legal obligation whatsoever. We will then address the Tax Court's holding that the understanding between the parties was alone sufficient to justify recharacterization of these transactions, irrespective whether the understanding was legally enforceable.

II. The Fund's Obligation to Blake

If there was a legally binding agreement on the Fund's part to purchase the vessel with the entirety of the proceeds derived from the sale of the transferred stock, the taxpayer seems to concede that there would be no contribution here in excess of the fair market value of the yacht at the time of its transfer. See 5 J. Mertens, Law of Federal Income Taxation Sec. 31.02 at 6 (1980). The existence of such an obligation is determined, of course, with reference to state law. Helvering v. Fuller, 310 U.S. 69, 74-75, 60 S.Ct. 784, 787, 84 L.Ed. 1082 (1940); compare Estate of Gilchrist v. Commissioner, 630 F.2d 340, 345 (5th Cir.1980) (state law determines type of property interest, federal law determines which incidents of ownership are taxable); Wolder v. Commissioner, 493 F.2d 608, 612 (2d Cir.1974) (state law determines legal rights to property, federal law controls characterization for tax purposes).

In terms of choice of law, it would appear that the law of New York, the place where the Fund was incorporated, where the meetings were held, to where Blake wrote his letter of March 17 informing the Fund of the stock transfer, and from where the Superintendent of the...