Blake v. Commissioner
| Decision Date | 01 October 1981 |
| Docket Number | 8550-79.,Docket No. 8549-79 |
| Citation | 1981 TC Memo 579,42 TCM (CCH) 1336 |
| Parties | S. Prestley Blake and Setsu Blake v. Commissioner. S. Prestley Blake v. Commissioner. |
| Court | U.S. Tax Court |
Robert K. Gad, III, and Harry K. Mansfield, 225 Franklin St., Boston, Mass., for the petitioners. Pamela v. Gibson and Daniel P. Ehrenreich, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined the following deficiencies and additions to tax with respect to petitioners' income taxes:
Addition to Tax
Sec. 6653(a)
Year Deficiency I. R. C. 1954
1973 ............ $113,269 $ 5,663
1974 ............ 145,549 8,580
1975 ............ 319,369 15,968
1976 ............ 38,633 1,932
After concessions, the following questions remain: (1) whether petitioners may deduct the losses incurred by Mr. Blake's electing small business corporation in the operation of the yacht America, or whether such losses are nondeductible because they were incurred in an activity not engaged in for profit; (2) whether, in an effort to dispose of the America, there was a prearranged plan involving the "sale" of the yacht to an exempt organization which paid therefor with funds realized from the sale of greatly appreciated stock which Mr. Blake had meanwhile purported to donate to that organization for that purpose, and whether in the circumstances of this case there was thus in substance merely a charitable gift of the yacht and a sale of the appreciated stock on behalf of Mr. Blake; (3) whether, if both parts of the preceding question are answered in the affirmative, the Commissioner erred in his determination of the fair market value of the yacht at the time of its transfer; and (4) whether any underpayment of tax was due to negligence or intentional disregard of rules and regulations.
Some of the facts have been stipulated. The stipulation of facts and related exhibits are incorporated herein by reference.1
At the time of the filing of their petitions herein, petitioners were residents of Somers, Connecticut, a suburb of Springfield, Massachusetts. Petitioners were husband and wife during 1973, 1974, and 1975; they filed joint returns for those years. The petitioners were divorced in 1976, and Mr. Blake is the only petitioner with respect to that year, although a joint return was also filed for that year. Mr. Blake will sometimes hereinafter be referred to as "petitioner".
Petitioner is about 67 years of age. In the mid-thirties he and his brother started an ice cream business with $547 borrowed from their parents. The business consisted of a small ice cream shop. A second store was opened five years later. With the coming of World War II both stores were closed, but they were reopened after the war, and thereafter more stores were added each year. In 10 years there were 50 stores, and ultimately the business included 625 stores or "restaurants" in the eastern, mid-Atlantic, and mid-western United States, together with two manufacturing plants. At some unspecified time the business was incorporated as the Friendly Ice Cream Corporation. Petitioner played the dominant role in the enterprise and was chairman of the board. He was substantially responsible for the financial success of the venture, and remained functionally in control of the enterprise, notwithstanding that the company had meanwhile "gone public" with more than half of the outstanding shares publicly held as a result of three successive public sales by the Blakes of a portion of their shares. The remaining shares, some 40 to 45 percent of the total number outstanding, were owned by petitioner and his brother together with members of their respective families. Shares of the corporation were publicly traded in the over the counter market. About three years ago the entire business of Friendly Ice Cream Corporation was sold for $162,000,000. Petitioner retired at about that time. However, he had reduced his active participation in the affairs of that corporation to some extent in prior years.
Petitioner had great business acumen, and throughout the tax years he was a man of considerable wealth. He was a person of standing in his community and had made a number of philanthropic gifts to nearby institutions. Among such gifts were $325,000 for a "Blake Student Center" at a local school and $275,000 for a "Herbert P. Blake Chair". Then, in conjunction with a person named Dewitt Wallace, he gave $85,000 to "seed" a new dormitory, designated "Wallace-Blake Hall". The record discloses some 10 additional gifts ranging from $22,000 to $500,000. Most of these gifts resulted in the naming of a facility for Mr. Blake, e.g., "Blake Athletic Field", "Blake Arena", and .
Petitioner is an avid yachtsman. He began his salt-water yachting activities nearly 40 years ago. In that time he has owned four ocean-going vessels, and has sailed in many parts of the world. He is a member of several of the world's most famous yacht clubs. In 1972 and for some years thereafter he owned a 47-foot ketch named the Ben-Bow. He ordinarily did not employ any full-time crews. He had never been in the business of operating boats for profit.
In November 1972, Mr. Donald Parrot, president of John G. Alden, Inc., yacht brokers and naval architects, advised Mr. Blake that the yacht America was for sale. The America is a replica of the original yacht America built in 1851, after which the America's Cup is named. The replica (herein referred to simply as the America) was built in 1967 for the F & M Schaefer Brewing Co. at a cost of $1,000,000. It was well known among yachtsmen. It had been used largely to promote the beer business of the Schaefer Company. The America is a 105-foot long, gaff-rigged sailing schooner, with a diesel auxiliary engine. It is not suitable for racing against boats of modern design. Nor is it as suitable as other boats its size for chartering since it has only two staterooms, less than the usual number of at least three for a boat of that size. Nevertheless, these disadvantages are offset, at least in part, by the boat's mystique due to its historical associations. Petitioner was definitely intrigued by the idea of acquiring the America. He and Mr. Parrot took the vessel on a trial sail, from Annapolis to New York in 24 to 36 hours, moving at times under sail and at times by power. The boat was generally manned by a captain, an engineer and five other crew members.
In November 1972 petitioner delivered his $50,000 personal check to the seller as a deposit toward the purchase of the America. The purchase price was $500,000. However, the purchase was formally concluded, not by Mr. Blake as an individual, but by his wholly owned corporation, S.P. Blake, Inc., a Delaware corporation which was created for that purpose. It was formed on November 20, 1972. The corporation issued 100 shares of no-par common stock to Mr. Blake for $450,000. These funds, together with Mr. Blake's $50,000 down payment, were used to purchase the America. The $50,000 down payment was recorded on the books of the corporation as a loan by Mr. Blake. Shortly after its formation, the corporation duly filed an election to be treated as a subschapter S corporation. S.P. Blake, Inc., never had any property other than the America or assets related thereto. The record does not show that the corporation was ever intended to, or in fact did, engage in any activities unrelated to the America. The corporation and the America were at all times relevant subject to the ultimate control of petitioner.
During the negotiations for the purchase of the vessel Mr. Parrot and petitioner discussed the possibility of offering the America for charter. In a telephone conversation, Parrot supplied estimates of crew costs, repairs, supplies, insurance, and charter management expenses. Assuming that the America could be chartered for between 20 and 25 weeks a year at a fee of $6,500 per week, chartering the America would have produced a cash flow profit on the basis of Parrot's estimates, if normal depreciation were not taken into account. Petitioner had never been in the business of chartering a boat, nor did he consult other owners of charter boats or other sources to obtain estimates of operating expenses and to assess the possibility of profit from chartering prior to purchase of the America.
Actual delivery of the America was made in January 1973, to the buyer's agent, Mr. Donald Parrot.
After the purchase of the America, S.P. Blake, Inc., on January 1, 1973 entered into a charter marketing agreement with Whittemore and Williams, Inc. ("Whittemore and Williams"), a yacht management and brokerage firm located in Greenwich, Conn. Whittemore and Williams is in the business of managing yachts held for charter purposes. Mr. Blake dealt primarily with Mr. William H. Whittemore of that firm. On February 15, 1973, S.P. Blake, Inc., entered into a management agreement with Whittemore and Williams. Under the latter agreement, Whittemore and Williams agreed to "use its best efforts to care for, operate, manage, maintain, supervise and, if requested, charter and/or sell" the America in consideration of receipt of an annual management fee. S.P. Blake, Inc., remained responsible for the expenses of operating, maintaining, and chartering the America and was required to deposit funds for payment of those expenses with Whittemore and Williams. At least during the years 1973 and 1974 Whittemore and Williams maintained detailed accounts of the America's expenses, set forth in records dated at approximately monthly intervals.
Prior to taking delivery of the America in January 1973, the following schedule was prepared, in consultation with Mr. Blake, for use...
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