## Facts

- S. Prestley Blake, a major shareholder of Friendly Ice Cream Corporation, bought a yacht (“America”) in 1972 for $500,000 and sought to dispose of it due to ownership burdens.
- Blake became involved with Kings Point Fund, Inc., a charitable organization, and discussed donating the yacht.
- Instead of transferring the yacht directly, Blake transferred 35,000 shares of Friendly’s stock to the Fund; Blake’s adjusted basis was $98 and the stock’s fair market value was about $686,875.
- The Fund promptly sold the stock for over $700,000.
- The Fund used a substantial portion of the sale proceeds to purchase the yacht from Blake for $675,000.
- Soon after acquiring the yacht, the Fund sold it for approximately $250,000.
- The IRS treated the arrangement as a constructive sale of the stock by Blake followed by a charitable contribution of the yacht, and assessed capital gains tax on the stock appreciation; the Tax Court upheld that characterization.

## Issues

1. Whether the stock transfer to the charity and the charity’s later purchase of the taxpayer’s yacht should be respected as separate transactions (a charitable contribution of stock and an independent yacht sale), or collapsed under step-transaction principles into a sale of the stock by the taxpayer followed by a charitable contribution of the yacht.
2. Whether step-transaction treatment requires a legally binding obligation on the charity to purchase the yacht at the time the taxpayer transferred the stock, or whether a prior understanding is sufficient.

## Decision

- The Second Circuit affirmed the Tax Court.
- The court held that the charity would have been legally obligated to purchase the yacht on the record presented.
- The court further held that, even absent an enforceable obligation, the Tax Court’s finding of a prior understanding that the charity would liquidate the stock and buy the yacht supported recharacterization.
- As recharacterized, the gain from the stock sale was taxable to Blake, and Blake’s charitable deduction was limited to the fair market value of the yacht (valuation not disputed on appeal).

## Legal Principles

- Tax consequences turn on the substance of an integrated arrangement, not the formal sequencing of steps, when the steps are interdependent parts of a single plan.
- Under the step-transaction doctrine, a purported charitable gift of appreciated property may be treated as a taxable sale by the donor if the charity’s disposition of the property and transfer of proceeds back to the donor (directly or through purchasing the donor’s property) occurs pursuant to a prior arrangement.
- A formally enforceable contract is not required to collapse steps if the factfinder reasonably determines there was an advance understanding that the charity would liquidate the donated asset and use the proceeds in a prearranged manner benefiting the donor.

## Conclusion

The Second Circuit treated the stock donation and yacht purchase as a single plan: Blake, in substance, sold appreciated stock and then donated the yacht, making the stock appreciation taxable to him while limiting any charitable deduction to the yacht’s value.


Blake v. Commissioner, 697 F.2d 473 (2d Cir. 1982)