## Facts

- Philip and Harriet Grove were taxpayers; Philip Grove was majority shareholder, vice-president, and director of a closely held corporation.
- Beginning in 1954 and continuing through 1964, Grove made annual donations to a charitable educational institution of blocks of the corporation’s stock.
- Each donation was structured so that Grove retained a life interest in income generated from the donated property (or its reinvested proceeds), while the charity received the remainder interest; Grove limited his charitable deduction accordingly.
- No formal agreement required the charity to cause the corporation to redeem the donated shares, and no formal obligation required the corporation to redeem them.
- After receiving stock, the charity regularly offered the shares to the corporation for redemption; the corporation redeemed the shares and paid the charity the redemption price.
- The charity invested the redemption proceeds in income-producing assets and paid Grove the income under the life-income arrangement.
- Grove reported taxable items of income he received from the charity’s distributions.
- The Commissioner asserted deficiencies, treating the corporation’s redemption payments to the charity as constructive dividends to Grove.

## Issues

1. Whether the corporation’s redemption of shares previously donated by Grove to a charity should be treated as a redemption of Grove’s shares, producing constructive dividend income to Grove.
2. Whether the pattern of gifts followed by redemptions and reinvestment for Grove’s life-income interest should be collapsed under step-transaction or substance-over-form principles due to a prearranged plan.

## Decision

- The Second Circuit affirmed the Tax Court’s judgment for the taxpayers.
- The court held the stock transfers were bona fide and irrevocable charitable gifts, with the charity obtaining meaningful ownership rights.
- Because there was no binding obligation or enforceable understanding requiring redemption, the redemption proceeds paid to the charity were not constructive dividends to Grove.
- The court declined to treat the steps as a single integrated transaction taxable as a corporate distribution to Grove followed by a charitable contribution.

## Legal Principles

- A constructive dividend may be found where corporate funds are distributed for a shareholder’s benefit; however, redemption payments are not attributed to the donor-shareholder when the corporation redeems stock owned by an independent charitable donee.
- Step-transaction and substance-over-form doctrines generally do not recharacterize a charitable stock gift followed by a redemption when the gift is complete before redemption and the charity is not obligated to redeem.
- A completed gift requires transfer of legal title and genuine dominion in the donee; a donor’s retained right to income from subsequent investments does not, by itself, make the donee a conduit.
- The absence of a binding redemption commitment is central to rejecting constructive-dividend treatment in charitable gift/redemption arrangements.

## Conclusion

The court held that when stock is donated to a charity through a completed, irrevocable transfer and the charity is under no binding obligation to redeem, the corporation’s later redemption of the charity’s shares does not create constructive dividend income to the donor, even if the charity reinvests proceeds and pays the donor income under a retained life-interest arrangement.


Grove v. Commissioner, 490 F.2d 241 (2d Cir. 1973)