How Far Is Too Far?

How Far Is Too Far?

The Prearranged Sale And The Palmer / Blake Conundrum
Article posted in Compliance on 13 July 1999| comments
audience: National Publication | last updated: 16 September 2012


Many charitable gifts have been prevented or the tax benefits overturned because the donor had proceeded too far in selling the property before contributing it to charity. "How Far is Too Far? The Prearranged Sale and the Palmer / Blake Conundrum" explores the judicial history of this issue and presents planners with practical guidelines they can use to evaluate charitable gifts of assets for which a sale may be imminent.

By Emanuel J. Kallina, II, Esq. and Philip Temple, Esq.

Mr. Smith, a long-time donor to charity, visits your office during his annual migration to your city and excitedly recounts to you how he has made arrangements to sell his business to Mr. Jones.

Over the years, Smith has been a consistent contributor, but has never been able to donate as much as he wished he could. During the conversation, you can tell that he has not yet closed the sale, but is far along in the process. There is a great deal of relief on his face as he details his plans to enjoy his remaining years, mentioning of course that he wants to use a portion of the pre-tax sale proceeds to make a significant charitable gift.

The relief on his face is the exact opposite of how you feel. The longer Smith talks, the more you develop a sick feeling in your stomach that he may have gone "too far" in the sale of the business. You worry that Smith may have progressed to such an extent in selling his business that he will be taxed on all the gain, and that a substantial gift to charity may be cut to half of what it could be (or even worse), if he has to pay taxes on the sale. Obviously, he needs to give appreciated assets to charity prior to the sale in order to avoid capital gains taxes on the contributed amounts.

Twenty minutes later, he winds down the summary of the sale and his retirement plans. With a great deal of pride, he concludes with:

"I came back to you, just as you asked and just as I promised, to discuss charitable planning when I was ready to sell my business!"

Obviously, Smith has not been specific enough for you to determine whether or not he has gone "too far." What questions do you ask yourself? What kind of questions do you ask Smith?


The first question is legal in nature:

What standards are used to judge whether or not Smith has gone too far in consummating the sale of his business?

The IRS has presented an array of scary legal theories over the years in an attempt to tax the donor on the sale of assets that have been contributed to charity. Typically, the Service raises the specter of the Supreme Court, citing those famous tax cases where the Court has held: the incidence of taxation depends upon the substance of the transaction and not mere formalism; 1 taxation is not so much concerned with the refinements of title as it is with actual command over the property; 2 a mere transfer in form, without substance, may be disregarded for tax purposes 3, and; a given result at the end of a straight path is not made a different result because reached by following a devious path. 4

Utilizing those cases as a foreboding point of reference, the Service then argues the "step-transaction doctrine":

"...where a taxpayer has embarked on a series of transactions that are in substance a single, unitary, or indivisible transaction, the courts have disregarded the intermediary steps and have given credence only to the completed transaction." 5

The heart of the Service's argument is that it can ignore intermediary steps in an integrated transaction, where the steps are so interdependent that the legal relations created by one step would have been fruitless without the completion of the series. 6

Not wanting to give up on any legal theory that it might utilize to win, the Service usually applies the icing to the cake in the form of an allegation that the taxpayer has committed the mortal sin of "assigning income." Once again the Service cites the Supreme Court as authority, claiming a taxpayer cannot insulate himself or herself from taxation merely by assigning a right to income to another.7

Fortunately for Smith and the rest of the taxpayers, the courts have applied those ominous legal theories in a fashion or in the context that the Supreme Court intended. Thus, for example, the Tax Court in the seminal case of Palmer addresses the IRS' arsenal of cases and theories:

"Despite the undoubted validity of those doctrines, we find them to be inapplicable in this case. Similar attacks have been presented by the respondent [IRS] in a variety of cases involving gifts of stock followed by its redemption, and the attacks have generally been rejected by the courts.... The tax consequences to the donor turn on which path he chooses, and so long as there is substance to what he does, there is no requirement that he choose the more expensive way." 8

The Palmer court recognized the underlying principle that"...a gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of a sale." 9

From a factual standpoint, the taxpayer in Palmer contributed appreciated stock in a corporation to a charitable foundation. The taxpayer owned voting control of the corporation and exercised de facto control of the charitable foundation. One day after the gift, the corporation redeemed its stock that was owned by the charitable foundation. The Tax Court held that "...the presence of an actual gift [to the charitable foundation] and the absence of an obligation to have the stock redeemed have been sufficient to give such gifts independent significance."

Needless to say, the IRS was not pleased. It argued that the taxpayer's control of the foundation precluded the court from ignoring the interrelated nature of the gift/redemption. But the Tax Court noted that Iowa law required the taxpayer to exercise his control as an officer and director of the foundation in a fiduciary capacity. Further, the Tax Court stated that there was nothing in the record to indicate that the taxpayer exercised command over the use and enjoyment of the foundation property in violation of his fiduciary duty.

The Service continued its assault in Palmer, arguing that the redemption was anticipated. The Tax Court finally ended the matter by holding that "expectation is not enough." 10 At the time of the gift, "...the redemption had not proceeded far enough along for us to conclude that the foundation was powerless to reverse the plans of the petitioner [taxpayer]. In light of the presence of an actual, valid gift and because the foundation was not a sham, we hold that the gift of stock was not in substance a gift of the proceeds of redemption."

Palmer would not be such a critical case in this area of the "pre-arranged sale," were it not for the IRS' agreement or acquiescence in Rev. Rul. 78-197 that the Tax Court was correct.11 In this Revenue Ruling the Service specifically acknowledged that the taxpayer in Palmer had voting control of both the corporation and a tax-exempt private foundation. Further, the Service stated that the gift, followed by the redemption, was "[p]ursuant to a single plan." Nonetheless, the Revenue Ruling concluded:

"The Service will treat the proceeds of a redemption of stock under facts similar to those in Palmer as income to the donor only if the donee is legally bound, or can be compelled by the corporation, to surrender the shares for redemption."

After the issuance of Rev. Rul. 78-197, one would think that the issues concerning prearranged sales would be resolved, and that the IRS would not pursue the matter further. This was not to be the case, however; there were numerous cases and rulings to follow, particularly in situations where the Service perceived or sensed a "sham."

The best known case of this sort, of course, is Blake,12 which creates our conundrum. The old expression "bad facts make bad law" is very appropriate in this case.


Factually, S. Prestley Blake, a co-founder and majority stockholder of the Friendly Ice Cream Corporation, purchased a yacht in 1972 known as America, from the Shafer Brewing Company for $2.5 million.13 The yacht was a replica of the original 1851 yacht, also named America, after which the America's Cup Race is named. Blake enjoyed the vessel for several years, using it personally and for entertaining clients, but it ended up being an expensive albatross. Blake wanted to sell the yacht; however, after consulting with several yacht brokers, marine surveyors, and appraisers, Blake was told that the current market value of the yacht was only about $350,000. Armed with this information, Blake embarked on a different strategy; he decided to give America to charity.

Initially, Blake was declined by one charity, but then found the Kings Point Fund, a charitable institution that was the fund-raising arm for the U. S. Merchant Marine Academy at Kings Point, NY, a service academy. The year was 1976 and the Bicentennial was at hand. If the Academy owned the boat, it could lead the parade of small boats into New York Harbor for the 4th of July celebration.

Blake proposed the following transaction to the academy. He would contribute $700,000 of stock in Friendly Ice Cream Company (traded on the New York Stock Exchange) to the academy, after which, the academy would sell the stock on the open market and use $675,000 of the proceeds to purchase America from Blake. Under this scenario, Blake would be able to claim an income tax charitable contribution deduction for $700,000 and a long-term capital loss on the sale of America in the amount of $1.8 million. Against the advice of counsel, Blake and the Academy completed the transaction.

After the 4th of July celebration, the Academy sold the yacht for a net amount of $200,000. At trial, the taxpayer admitted that he would not have contributed as much stock, but for the charity's intention to purchase the yacht. Under state law, the Second Circuit stated it was clear that the charity was obligated to purchase the yacht under a theory of promissory estoppel. The taxpayer maintained that the charity made no commitment upon which his reliance was based, but the Tax Court made a factual determination to the contrary. This decision was buttressed by the testimony of a director of the charity who stated that the Board of Directors understood the charity would use the proceeds from the sale of the stock to purchase the vessel.

In case there were any questions remaining in the court's mind, Blake resolved all doubts when he testified on direct examination that "...he would not have made a donation as substantial as the amount of the market value of the stock he transferred 'except for the boat thing.'"

The Tax Court ruled that Blake had actually sold the stock to the Academy for $700,000 followed by a charitable gift of the yacht. Accordingly, Blake recognized gain on the sale of the stock and was denied the capital loss of $1.8 million of the yacht. Blake was, however, permitted to claim a charitable deduction for the determined value of the yacht in the amount of $200,000.

As a consequence of the audit of Blake's Form 1040, the Academy's Form 990 was then audited. The District Office found that an indirect act of private inurement had occurred and recommended the revocation of the Academy's tax-exempt status. The matter went all the way to the National Office of IRS before exempt status was maintained.14 On the basis of the Tax Court's factual findings, the Second Circuit had little trouble concluding that Blake had expected the charity to purchase his vessel and that he had an enforceable cause of action under promissory estoppel theory, as a matter of law, if the charity refused.

Also as a matter of law, the Second Circuit noted that it could not overrule the decision of the lower court in this case, unless the factual determination of the Tax Court was "clearly erroneous" and lacked "evidence to support its findings."

If the Second Circuit had stopped with this conclusion, the case would not be potentially deemed to reverse the decision in Palmer. Unfortunately, the appellate court went further, stating:

"Thus, whether or not the 'understanding' the Tax Court found here was legally enforceable under state law, we hold that where there is an understanding that a contribution of appreciated property will be utilized by the donee charity for the purpose of purchasing an asset of the contributor, the transaction will be viewed as a matter of tax law as a contribution of the asset -- at whatever its then value is -- with the charity acting as a conduit of the proceeds from the sale of stock. This makes the taxpayer/putative donor taxable on the gain of the stock... Where there is, as here, an expectation on the part of the donor that is reasonable, with an advance understanding that the donee charity will purchase the asset with the proceeds of the donated stock, the transaction will be looked at as a unitary one."

Blake created a great deal of uncertainty in the charitable world. The IRS' continued references to Blake as being valid law, notwithstanding Rev. Rul. 78-197, on the surface is confusing and inconsistent with its own published opinion.

Despite the apparent inconsistencies between Palmer, Rev. Rul. 78-197, and Blake, there are logical interpretations of these and other relevant cases and rulings. After an extensive review of the law in the area, those inconsistencies are more perceived than real. Blake dealt solely with a situation in which there was a gift of an appreciated asset to charity, so that the charity in turn could purchase an asset from the donor. In effect, there was a quid pro quo being required by the donor, in order for the donor to make such a substantial gift. Even the donor admitted this.

In fact, viewed in its entirety, Blake involved a taxpayer who received a charitable deduction of $700,000 for a boat that was really worth $200,000 to $250,000 as evidenced by the sales price three to four months later. If a situation does not involve a quid pro quo, or if it does not involve a scheme to obtain an inflated tax deduction, arguably the result would be the same as in Palmer and Rev. Rul. 78-197; namely that the obligation must be legally enforceable to tax the donor on the resulting gain.

This latter interpretation of Blake, restricting the case on its facts to a situation where such a quid pro quo exists, is supported by the Second Circuit's later decision in Greene.15


In Greene, the taxpayer contributed futures contracts to an IRC §501(c)(3) private operating foundation which he founded in the early 1970s. In 1974, the taxpayer obtained a private letter ruling from the Service to the effect that he would be entitled to an income tax charitable deduction in an amount equal to the fair market value of the contracts on the date of gift, and that there would be no gain recognized to him when the charity subsequently sold the futures contracts.

In 1981, IRC §1256 was amended to provide that 60% of the gain on futures contracts would be long-term capital gain, and the balance would be treated as short-term capital gain regardless of the holding period. In 1982, Greene donated the 60% long-term capital gain portion to the charity, taking a full deduction.

In the lower court proceeding, the IRS contested the deduction, arguing that the 1974 ruling was inapplicable on its facts, since the law had changed. Accordingly, the Service contended that (1) the gift of the 60% long-term capital gain portion was an anticipatory assignment of income, and (2) the step-transaction doctrine applied to collapse the transactions (i.e., a gift and then a sale) into one step.

As to the assignment of income doctrine, the lower court ignored Greene's relationship to the charity as a director and officer, commenting that this fact alone did not cause Greene to be taxed on the long-term capital gain portion. Further, the lower court felt the "[r]easonable probability of gains existing from a property's sale is not enough alone to make a gift an anticipatory assignment of income." In fact, the lower court stated the Service should have expected, when it issued its 1974 ruling, that donated futures contracts "would be sold almost immediately to insure that the value of such volatile securities would be realized and thus useful to the recipient [charity]." Finally, from a factual standpoint, the court found that Greene retained no control over the timing of the sales of the futures contracts.

As to the step-transaction doctrine, Greene argued that the critical question was whether the futures contracts were donated with no strings attached or prearrangement made. The Service argued Blake, namely that:

"If, by means of restrictions on a gift to a charitable donee, either explicitly formulated or implied or understood, the donor so restricts the discretion of the donee that all that remains to be done is to carry out the donor's prearranged plan for disposition of the stock, the donor has effectively realized the gain inherent in the appreciated property." Blake v. Commissioner, supra.

On appeal in Greene, the Second Circuit explicitly enunciated two tests that the Service and the courts use to apply the step-transaction doctrine, and implicitly referenced a third test:

  1. The End Result Test - a series of separate transactions will be collapsed if they are really parts of a single transaction intended from the outset to achieve an ultimate result.16
  2. The Mutual Interdependence Test - a series of separate transactions will be collapsed if they are so interdependent that the legal relations created by one transaction would be fruitless without the completion of the series.17
  3. The Binding Commitment Test - a series of separate transactions will be collapsed if there is a legal obligation, after the first step, for other steps to occur.

The Second Circuit held that the "end result" test did not apply, because there was no prearranged agreement to sell the property, although it was highly likely that a sale would occur. As to the mutual interdependence test, the Second Circuit likewise held this concept inapplicable:

"Moreover, this case is distinguishable from those in which the interdependence test has been met. For example, in Blake v. Commissioner, a taxpayer donated appreciated stock to a charity with an understanding that the charity would liquidate the stock and purchase the taxpayer's yacht. See [83-1 USTC ¶9121], 697 F.2d at 478-79. We applied the step transaction doctrine to disregard the initial gift of the stock, and treated the transaction as a gift of the yacht. Id. at 480. Here, in contrast, taxpayers made a substantial gift to the Institute and received nothing in return. They retained a right to a portion of the income from the contracts, but giving a partial gift is quite different from giving away something with an understanding that the donee will later buy something back from the donor with the proceeds of the donated gift. There was no understanding that the Institute would handle the contracts or the donated portion of the proceeds from sale in any way that would benefit the Greenes. In fact, they were not benefited by the charity."

For our purposes, the third test seems to be utilized by the courts when dealing with a factual scenario in which there is no quid pro quo or sham. Perhaps the second test (mutual interdependence) could apply, but this would be rare indeed where the donor has made a gift to charity which, in and of itself, has independent significance. Only in the case of a quid pro quo or a sham would it seem likely or probable that the first or second test should apply.

 Ferguson Clouds the Waters

More recently, Ferguson v. Commissioner 18 has served to cloud the distinctive line that was drawn in Palmer and Blake. In Ferguson, three individuals donated appreciated stock to charitable organizations immediately before their corporation was sold to another in a tender offer. The Tax Court held that the taxpayers were taxable on the gain in the stock transferred under the anticipatory assignment of income doctrine.

Factually, the taxpayers and their children owned 18.8 percent of the stock of American Health Companies Inc. ("AHC"). In July of 1988, AHC entered into a merger agreement with two acquiring corporations ("X"). Under the agreement, X was to purchase AHC's stock in a tender offer and then merge into AHC.

On August 3rd, AHC's board voted on a tender offer made by X. The taxpayers abstained from voting, as board members, on the tender offer; nonetheless, the offer was approved.

Between August 15th and 21st, the taxpayers executed "donation-in-kind" records stating their collective intention to donate 61,111 shares of AHC stock to charities. The taxpayers' stockbroker ("Broker") helped the taxpayers create separate accounts for ALL of their respective stockholdings. On August 26, the charities were formed.

As of August 30th, more than 50% of AHC's outstanding shares had been tendered or guaranteed. On September 8th, the Broker transferred the shares to the newly formed charities, at which time over 95% of the outstanding shares of AHC stock had been tendered or guaranteed. On September 9, 1988, the merger took place, with AHC stock being traded for X stock.

The IRS determined that the taxpayers were taxable on the gain attributable to the AHC shares that were donated to the charities. The Taxpayers argued that --

  • the gifts had been made on August 15th and 21st;
  • the charities were not legally obligated to tender their AHC stock;
  • the right to the tender offer's proceeds did not mature until October 12th when X's directors adopted a resolution stating the terms of the merger; and
  • Broker acted as agent for the charities, so the gifts were completed when they delivered their stock certificates to the Broker on August 15th and 21st.

Tax Court (Judge James S. Halpern) held that Broker was not an agent of charity, but instead an agent of the taxpayers.

"[Taxpayers] have failed to explain how the gifts to the charitable foundations occurred on August 15, 1988, and August 21, 1988, respectively, when the [charitable] foundations were formed on or about August 26, 1988."

There was no unconditional delivery of stock to charities or to their agents as required under Sec. 1.170A-1(b) of the income tax regulations, until September 9, 1988, when taxpayers relinquished control. When taxpayers relinquished control on September 9th, over 95% of the outstanding shares of AHC stock had been tendered or guaranteed, meaning that the taxpayers and the charity had no ability to prevent X from completing the transaction.

"...[W]e do not believe that application of the anticipatory assignment of income doctrine is conditioned on the occurrence of a formal shareholder vote. We believe, instead, that when more than 50 percent of the outstanding shares of AHC stock had been tendered or guaranteed, which in effect was an approval of the merger agreement, and the Charities could not vitiate the intention of the shareholders, who had tendered or guaranteed a majority of AHC stock, of the [taxpayers], and of [X], the right to merger proceeds matured. When the Charities received AHC stock on September 9, 1988, payment in exchange for those shares pursuant to the tender offer was imminent (i.e., 4 days from the date of the gifts). Moreover, the Charities did not even need to tender their shares, but would have received $22.50 a share in cash because the merger agreement provided that shares outstanding after the tender offer would be converted into the right to receive $22.50 in cash." "The fact that AHC shareholders may not have had a legal right to the merger proceeds prior to acceptance of the tendered or guaranteed shares by [X] does not change our conclusion. The Court of Appeals for the Eighth Circuit in Hudspeth v. United States...rejected the taxpayer's contention that the gifts preceded the time when an enforceable right to the liquidation proceeds accrued and focused, instead, on the fact that the donees could not change the future course of events; i.e., the liquidation of the corporation." [emphasis added].

It is worthy of noting that Judge Halpern could have based his decision on the fact that, when the gift was made on September 8th, 95% of all AHC stock had been tendered. He chose instead to use the August 31st date, at which time more than 50% of the AHC stock had been tendered. He chose to ignore the fact that X was not compelled to go forward with the stock tender offer unless it had 85% (because X could waive this requirement). He focused his attention on the ability of the charities to prevent the transaction from taking place.19

The Ferguson decision has served to cloud the bright lines of Palmer and Rev. Rul. 78-197 regarding legal obligation on the part of the donor to proceed with the transaction.


On the facts of our hypothetical Mr. Smith, there is no quid pro quo or sham. Thus, the "legal obligation" standard enunciated in Palmer and Rev. Rul. 78-197 (the binding commitment test) can be utilized, versus the "Prearranged Sale" standard of Blake which relies on the "End Result" test.

If Smith is not legally committed, you can assist him in structuring the transaction utilizing charitable gift vehicles, including outright gifts, bargain sales, charitable remainder trusts, pooled income funds, and gift annuities.

As a general matter, there are three ways in which Smith may have gone "too far," is legally obligated to sell to Jones, and must thus recognize the gain on the sale: (1) he has signed a binding Letter of Intent ("LOI"); (2) he has a written Agreement; and/or (3) he has entered into a binding oral contract.

Following is a checklist of questions that can be used to evaluate just how far Smith has gone and to determine if a charitable transaction can be structured:

I. Assuming Smith has signed a Letter of Intent or other written agreement--

  1. Did the LOI or Agreement expressly state whether or not it was the intention of the parties that the LOI be legally binding, or was the LOI a mere expression of the parties' general intent (a so-called, "agreement to agree")?
  2. Did the LOI or Agreement expressly or by implication contemplate that the agreement of the parties would be formalized or finalized by a written agreement?
  4. Did the LOI or Agreement contain all of the necessary elements to a contract which are required for the LOI or Agreement to be legally enforceable and did the parties reach an agreement ("meeting of the minds") with respect to each and every necessary material element to the contract?
    1. Parties to the agreement.
    2. Offer by one party.
    3. Acceptance by the other party.
    4. Consideration being given by each party in terms of:
      1. money,
      2. services,
      3. other property and/or
      4. forbearance
        5.  Time for completion of the sale.
  5. By its terms, does the LOI or Agreement negate all other communications (both written and oral), so that the LOI constitutes the full, sole, and absolute agreement of the parties?
  7. If the LOI or Agreement is legally binding, are there any contingencies?
  9. If there are contingencies, are any of these in Smith's control?
  11. If the contingencies are within Smith's control, is there any requirement on Smith's part that he exercise "good faith" in attempting to fulfill these contingencies?
  13. If the contingencies are not within Smith's control or if Smith must exercise good faith to fulfill these contingencies, then are there any contingencies within the buyer's control?
  15. If there are contingencies within the buyer's control, what is the likelihood that the contingencies will likely be fulfilled by the buyer?
  16. If the contingencies will likely be met by the buyer, is he willing to rescind the LOI or Agreement?

II. Assuming Smith has entered into an Oral Contract--

  1. Is the oral contract for the purchase of real property (i.e., real estate), or personal property (e.g., stock)? If it is for real property, it is void under the Statute of Frauds of most states.
  2. Assuming that the oral contract was for the purchase of personal property, was it the final expression of the parties, or was it the intention of the parties that the oral contract be reduced to writing?
  3. Did the oral contract contain all of the necessary elements to a contract which are required for the oral agreement to be legally enforceable? Did the parties reach an agreement ("meeting of the minds") with respect to each and every necessary material element to the contract?
      1. Parties to the agreement.
      2. Offer by one party.
      3. Acceptance by the other party.
      4. Consideration being given by each party in terms of
          money, services, other property and/or forbearance.
           5.  Time for completion of the sale.
    2. By its terms, does the oral contract negate all other communications (both written and oral), so that the oral agreement constitutes the full, sole, and absolute understanding of the parties? If so, have all oral and written contracts been terminated according to their terms?
    4. If the oral contract is legally binding, are there any contingencies?
    6. If there are contingencies, are any of these in Smith's control?
    8. If the contingencies are within Smith's control, is there any requirement on Smith's part that he exercise "good faith" in attempting to fulfill these contingencies?
    10. If the contingencies are not within Smith's control or if Smith must exercise good faith to fulfill these contingencies, then are there any contingencies within the buyer's control?
    12. If there are contingencies within the buyer's control, what is the likelihood that the contingencies will be fulfilled by the buyer?
    14. If the contingencies will likely be met by the buyer, is he willing to rescind the oral contract?


    Assuming that Smith wants to restructure the transaction, whether it is or is not legally enforceable, there are a number of practical considerations to be taken into account.

    If a buyer agrees to rescind an otherwise binding agreement, it should not be rescinded merely for the purpose of facilitating and protecting the tax integrity of a charitable transfer by the seller; rather, it should be based on a material business purpose. Lest the buyer, on direct examination in Tax Court makes the statement, "? we rescinded the deal because of that charitable gift thing."

    I. Nature of the Buyer

    1. Is the buyer a friendly/non-friendly purchaser?
    2. Might the buyer have "buyer's remorse" and take the opportunity to back out of the transaction.
    3. Does the buyer not have to or must purchase now?
    4. Is the buyer in a strong or weak negotiating position?

    II. Nature of the Seller

    1. Does the seller have significant or little donative intent?
    2. Does the seller strongly believe in or does not care about the concept of social capital (that is, whether the donor wants to control those dollars which he cannot keep for himself and his heirs, and would rather determine where the excess goes (i.e., to charity), instead of paying taxes and letting the government decide how to spend his money)?
    3. Does the seller have a good or bad relationship with the buyer?
    4. Would a reduction in the purchase price be required in order to effectuate some gift planning?
    5. Does the seller have to sell now?
    6. Does the seller have a high or low anxiety tolerance?
    7. Is the seller in good or bad health?
    8. Is the seller in a strong or weak negotiating position?

    III. Nature of the Transaction

    1. Is the transaction one-sided in favor of buyer or seller, due to one or more factors?
    2. Due to the nature of the business, are other buyers interested in purchasing the business?
    3. Rather than selling, does the seller have other options, such as liquidating the business, or letting his children/heirs inherit the business at his death?
    4. Have the buyer and seller negotiated a price which is the maximum amount the buyer is willing to pay or the minimum amount seller is willing to accept?
    5. The purchase price is acceptable to the buyer/seller, but other facts make the transaction less attractive:

      1. Are there contingencies that must be fulfilled by the buyer or seller, which are difficult, expensive and/or impossible?
      2. Must representations and warranties be made by the buyer or seller?
      3. Will represenattions and warranties survive settlement, to the dislike of the buyer or seller?
      4. Will legal fees be charged by lawyers to draft documents and negotiate language and conditions?


    It is fair to say that supported by the questions that must be asked of the potential donor as outlined above, the question of when a donor has gone too far is fact specific and a matter of relative risk.

    Is the charitable donee legally bound to complete a previously negotiated sales transaction or can it, renegotiate, change the terms, or walk away from the transaction altogether without legal recourse? Therefore, it is imperative that the facts are fully elicited and expert legal and tax counsel are obtained to protect all the parties before the gift is completed.


    1. Commissioner v. Court Holding Co. [45-1 USTC 9215], 324 U.S. 331, 334 (1945).back

    2. Corliss v Bowers [2 USTC 525], 281 U.S. 376, 378 (1930).back

    3. Commissioner v. P.G. Lake, Inc. [58-1 USTC 9428], 356 U.S. 260 (1958).back

    4. Minnesota Tea Co. v. Helvering [38-1 USTC 9050], 302 U.S. 609, 613 (1938).back

    5. Palmer v. Commissioner, 62 T.C. 684 (1974), aff'd on another issue, 523 F.2d 1308 (8th Cir. 975).back

    6. Palmer v. Commissioner, supra; American Bantam Car Co., 11 T.C. 397, 405 (1948), aff'd. [49-2 USTC 9471] , 177 F.2d 513 (3d 1949), cert. denied, 339 U.S. 920 (1950).back

    7. Commissioner v. Sunnen [48-1 USTC 9230] , 333 U.S. 591 (1948); Helvering v. Horst [40-2 USTC 9787], 311 U.S. 112 (1940); Corliss v. Bowers, supra; [2 USTC 281], 281 U.S. 111 (1930).back

    8. Palmer v. Commissioner, supra, citing the Supreme Court in Gregory v. Helvering, [35-1 USTC 9043], 293 U.S. 465 (1935).back

    9. Humacid Co., 42 T.C. 894, 913 (1964).back

    10. Hudspeth v. United States [73-1 USTC 9136] , 471 F.2d 275 (8th Cir. 1972). See also, W. B. Rushing, 52 T.C. 888 (1969), aff'd [71-1 USTC 9339] 441 F.2d 593 (5th Cir. 1971).back

    11. Rev. Rul. 78-197, 1978-1 CB 83.back

    12. Blake v. Commissioner [83-1 USTC 9121] , 697 F.2d 473 (2d Cir. 1982), aff'g 42 TCM 1336 (1981).back

    13. The recitation of facts in the Appeals Court Opinion says the yacht was purchased for $500,000. However, earlier discussions of the case among attorneys involved appear to support a purchase price in excess of $2,000,000.back

    14. Interestingly, had this been a recent matter, the intermediate sanctions now provided for this type of transaction involving an excess benefit would likely have been imposed. IRC §4958.back

    15. Greene v. United States, 13 F.3d 577 (1994), aff'g [93-1 USTC 50,033] 806 F.Supp. 1165 (1992).back

    16. Penrod v. Commissioner, CCH Dec. 43,941, 88 T.C. 1415, 1429 (1987). See also, Stephen S. Bowen, "The End Result Test," TAXES, Dec., 1994 at p. 722.back

    17. American Bantam Car Co. v. Commissioner, supra.back

    18. Ferguson v. Commissioner, 108 T.C. #14 (1997)back

    19. See also, Julian P. Kornfeld v. Comm'r , 81 AFTR2d Par. 98-466 No. 96-9016 (10th Cir. - published 3/3/98), aff'g T.C. No. 13169-95.back

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