Grove v. Commissioner

Philip Grove (plaintiff) founded a corporation, a construction firm, and controlled a majority of the corporation’s shares since its inception. At some point, Rensselaer Polytechnic Institute (RPI) solicited Grove to gift shares of the corporation’s stock to RPI under RPI’s life-income-funds plan. Under the plan, donors received a life interest in the income generated from the donated stock and RPI received full title to the stock upon the death of the donor. Grove agreed to give shares of his corporation to RPI with two main conditions. First, the corporation was not obligated to redeem RPI’s shares. Second, if RPI sold its shares, the proceeds would be invested and managed by an established professional firm, which turned out to be Merrill Lynch. Grove made annual contributions of shares of the corporation to RPI. Eventually, RPI began seeking redemption of its shares by the corporation. Routinely, the corporation would approve the redemption and pay RPI the book value of its redeemed shares. RPI then invested the money received with Merrill Lynch, but Merrill Lynch invested the money as directed by Grove’s personal investment adviser. Merrill Lynch paid the income from those investments to RPI, which then paid Grove according to the life-income-funds plan. Grove reported the payments from RPI as taxable income. The commissioner of the Internal Revenue Service (IRS) (defendant) assessed deficiencies in Grove’s taxable income related to the stock redemption by Grove’s corporation and demanded Grove pay additional taxes on the full value of the stock redemptions. Grove refused and filed a petition in tax court. The tax court found in favor of Grove. The commissioner appealed to the United States Court of Appeals for the Second Circuit.