CONRAD JANIS AND MARIA G. JANIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent CARROLL JANIS AND DONNA L. SELDIN JANIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14318-01, 1344-02
UNITED STATES TAX COURT
Filed May 12, 2004
T.C. Memo. 2004-117
COHEN, Judge
Michael Schlesinger, for petitioners in docket No. 1344-02.
Lydia A. Branche and Shawna A. Early, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies in petitioners Conrad Janis and Maria G. Janis’s (Conrad and Maria)
| Year | Deficiency | Sec. 6662(a) Penalty |
|---|---|---|
| 1995 | $334,589 | $66,918 |
| 1996 | 24,739 | 4,948 |
| 1997 | 158,356 | 31,671 |
Respondent determined deficiencies in petitioners Carroll Janis and Donna L. Seldin Janis’s (Carroll and Donna) Federal income taxes for 1995, 1996, and 1997 and penalties under
| Year | Deficiency | Sec. 6662(a) Penalty |
|---|---|---|
| 1995 | $532,930 | $106,586 |
| 1996 | 58,635 | 11,727 |
| 1997 | 169,248 | 33,849 |
The issues for decision in these consolidated cases are:
(1) Whether petitioners, who inherited an art gallery, can calculate the gallery’s cost of goods sold using the undiscounted value of the gallery’s collection of artwork rather than the discounted value as determined for estate tax purposes and (2) whether petitioners are liable for accuracy-related penalties under
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. At the time that Conrad and Maria filed their petition at docket No. 14318-01, they resided in California. At the time that Carroll and Donna filed their petition at docket No. 1344-02, they resided in New York.
Background
Sidney Janis (Sidney), the father of petitioners Conrad Janis (Conrad) and Carroll Janis (Carroll), owned and operated as a sole proprietorship the Sidney Janis Gallery (gallery) in New York City from 1948 until 1988. Pursuant to a trust agreement, Sidney transferred the gallery to an irrevocable trust in April 1988. In the trust agreement, Sidney named himself, Conrad, and Carroll as the trustees of the trust. Sidney retained an income interest in the trust for his life as well as a general power of appointment over the trust’s assets. At Sidney’s death, the trust was to terminate, and any trust assets that Sidney had not exercised his general power of appointment over were to be distributed to Conrad and Carroll in equal shares. Sidney died on November 23, 1989. In his will, Sidney named Conrad and Carroll co-executors and sole beneficiaries of his estate.
Carroll obtained a bachelor of science degree as well as a master’s degree in art history from Columbia University. Before
Determining the Value of the Gallery and Its Collection for Purposes of Sidney’s Estate Tax Return
Sidney’s estate filed a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on February 28, 1991. George J. Noumair prepared the Form 706. On the Form 706, the value of the gallery was reported to be $19,533,750. This amount included a discounted value of $12,403,207 for the 464 works of art (the collection) that the gallery owned on the date of Sidney’s death, cash and cash equivalents of $8,171,302, and liabilities of $1,040,759.
In order to determine the value of the gallery for estate tax purposes, Sidney’s estate employed Sotheby’s to prepare an appraisal of the collection. Sotheby’s explained the basis for its appraisal as follows:
In accordance with your request, we have appraised the works of art owned by the Sidney Janis Gallery, with a view towards determining the fair market value thereof as of May 23, 1990, six months after the date of death of Sidney Janis. * * * We have valued these works on an item-by-item basis at fair market value. * * *
* * * * * * *
Despite the large number of works held by the Gallery, we have not taken into account any overall dimunition [sic] in value which might occur if the entire holdings were to be placed for sale in the ordinary course in the market at one time, which is the
underlying basis for the attached appraisal. We have valued these works of art on an individual basis as of the relevant valuаtion date. Furthermore, we have not taken into account any dealer’s discount. It is common practice in the trade for a gallery to sell a work to another dealer at a discount ranging as high as 40% off the value in the retail market and, more commonly, in the one third range, so that the dealer may make a profit on resale.
Lastly, we have not undertaken to determine the value of the Gallery as a whole. * * *
Based upon its review, Sotheby’s determined that the undiscounted value of the collection was $25,876,630.
Sidney’s estate determined the discounted value of the collection by first applying a discount totaling $4,059,540 to account for the large number of works in the collection by Jean Arp, Louis Michel Eilshemius, Auguste Herbin, Morris Hirshfield, Piet Mondrian, Grandma Moses, and Kurt Schwitters. This discount had been recommended by Sotheby’s. Next, a $350,000 discount was applied to account for the gallery’s partial interest in three works of art in the collection. A $2,862,279 discount was then applied to account for the portion of the collection that would likely be sold in the dealer market (as opposed to the retail market). Finally, a $6,201,604 discount was applied to account for (1) the inability to sell the gallery in the retail market for individual works of art, (2) the gallery buyer’s not paying the full resale price of the underlying assets acquired in the
The Form 706 was examined by the Internal Revenue Service (IRS). In order to determine whether the correct value had been reported for the gallery on the Form 706, the IRS Art Advisory Panel (Panel) examined the collection. The Panel reviewed 227 of the 464 works of art in the collection, which represented 95 percent of the collection’s undiscounted value as determined by Sotheby’s. The Panel accepted the values determined by Sotheby’s for the remaining works of art in the collection. Based upon this review, the Panel determined that the undiscounted value of the collection was $36,636,630 rather than the $25,876,630 undiscounted value that had been determined by Sotheby’s. The Panel determined the collection’s undiscounted value by adding the undiscounted values that it had determined for each work of art in the collection.
The Panеl determined that the discounted value of the collection was $22,955,077. In determining this value, the Panel considered the various discounts that had been applied by Sidney’s estate. While the Panel did not entirely agree with the discounts claimed by Sidney’s estate, the Panel did agree that the application of a blockage discount was appropriate. The Panel gave the following explanation as to the factors that it
In general, a blockage discount is applied to property in an estate in an attempt to reflect the market’s response to a large number of items. Traditionally, as the casеs of David Smith, Louisa Calder and Georgia O’Keeffe attest, a blockage discount is applicable in response to a large number of works by one artist, usually in an artist’s estate. The Estate of Sidney Janis is not an artist’s estate, and does not involve a large number of works by one particular artist, but rather works by many different artists. However, since it is a valuation problem involving a gallery inventory, some of the general principles are applicable.
A number of factors have been considered in determining whether a blockage discount is appropriate and to what extent it should be applied to the subject properties. Consideration was given to the prominence of the artists; the types of works in the estate; the distribution of the items (for example, the number and types, and their quality and saleability); the number of similar items available in the marketplace; the market’s response to such works around the valuation date; the number of sales and the prices at which sales were made during the period immediately preceding and following death; the annual sales of the gallery; length of time necessary to dispose of the items; the works that are saleable within a relatively short period of time; the works that can only be marketed over a long period; the demonstrated earning capacity of the business; the tangible and intangible assets, including goodwill; and, the reputation of the gallery and the provenance.
In addition, consideration was given to the possible disbursemеnt and handling of the gallery. One option would be the continuation of the gallery through Sidney Janis’ surviving sons and the selling of the items in the course of business. Another option would be the sale of the gallery to a willing purchaser.
Attention was given to the gallery’s annual gross and net receipts of the inventory since 1985.
On or about January 27, 1994, Conrad and Carroll, as co-executors of Sidney’s estate, agreed to the adjustments mаde by the IRS with respect to the gallery and to the additional amount of tax owed by Sidney’s estate by signing a Form 890, Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment--Estate, Gift, and Generation-Skipping Transfer Tax. The examination of the Form 706 was concluded on or about February 2, 1994, when the IRS sent to Conrad and Carroll an Estate Tax Closing Letter. Under
Reporting the Gallery’s Operations From 1990 Through 1997
Conrad and Carroll operated the gallery through the trust until November 8, 1995. As of November 8, 1995, the trust was terminated and its assets (including the gallery) were distributed to Conrad and Carroll in equal shares. Subsequently, Conrad and Carroll contributed their interests in the gаllery to
David J. Silverman (Silverman) prepared the fiduciary income tax returns for the trust and the Forms 1065 for the partnership during those years. Silverman is an accountant and has been an enrolled agent since approximately 1974. Silverman assisted in the preparation of the Form 706 for Sidney’s estate and had been a longtime tax adviser to the gallery and to Carroll and Donna prior to preparing the tax returns for the trust and the partnership. Silverman has also written extensively on the subject of taxes and has represented other art galleries in their tax matters.
On or about August 6, 1991, Silverman prepared the fiduciary income tax return filed for the trust for 1990. Attached to this fiduciary income tax return was a Schedule C, Profit or Loss from Business. The Schedule C reflected the trust’s operation of the gallery during 1990. In order to determine the cost of goods sold (COGS) for 1990, the gallery used the discounted value of the collection as originally reported on Sidney’s estate tax return, $12,403,207, as the value of the gallery’s inventory at the beginning of that year. The value reported for the gallery’s
Silverman prepared the trust’s fiduciary income tax returns for 1991 and 1992 in similar fashion. On the Schedule C attached to the trust’s fiduciary income tax return for 1991, the gallery reported that its COGS was $1,235,185 and that its operations generated a net loss of $432,229. This loss was carried through to the trust’s fiduciary income tax return for 1991 and, along with the trust’s net operating loss for 1989 and a portion of the trust’s net operating loss for 1990, offset the income that the trust earned that year.
On the Schedule C attached to the trust’s fiduciary income tax return for 1992, the gallery reported that its COGS was $35,000 and that its operations generated a net loss of $652,797. This loss was carried through to the trust’s fiduciary income tax return for 1992 and caused the trust to report a net operating loss for that year.
On or about February 19, 1994, Silverman prepared amended fiduciary income tax returns for the trust for 1990, 1991, and
As the result of the IRS’ audit of the estate’s 706 the following adjustmеnts were made:
1. The trust’s inventory was valued at $36,636,630
* * * * * * *
The adjustments to the inventory * * * required adjustments to previously filed returns that effected [sic] the cost of goods sold & the operating expenses for 1990 and in turn required the recomputation of the 1990, 1991 & 1992 NOL’s
The same explanation was given on the Forms 8275 that were attached to the amended returns for 1991 and 1992.
By using the Panel’s undiscounted value for the collection as its inventory value at the beginning of 1990, the gallery increased the reported amount of its COGS for 1990, 1991, and 1992 as follows:
| Year | Original COGS | Amended COGS |
|---|---|---|
| 1990 | $48,891 | $102,000 |
| 1991 | 1,235,185 | 1,660,000 |
| 1992 | 35,000 | 45,000 |
This increase in its COGS caused the gallery to generate a larger net loss for each of those years. Consequently, the trust’s net operating loss for 1990 increased, the amount of the net operating loss from 1990 that was applied against the trust’s income earned in 1991 decreasеd, and the trust’s net operating loss for 1992 increased.
The trust’s fiduciary income tax returns for 1993, 1994, and 1995 also reflected the gallery’s use of the collection’s undiscounted value as the value for its inventory. On those returns, the gallery reported the following amounts from its operations:
| Year | COGS | Net Loss |
|---|---|---|
| 1993 | $235,000 | $727,416 |
| 1994 | 727,500 | 117,363 |
| 1/1/95-11/8/95 | 3,365,040 | 804,141 |
The trust’s fiduciary income tax return filed for 1995 reported the trust’s operations for the period between January 1, 1995, and November 8, 1995 (i.e., the day on which the trust was terminated), and was the trust’s final return. The trust’s fiduciary income tax return for 1995 reported that the value of the gallery’s inventory was $31,518,850 as of November 8, 1995.
Two Schedules K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc., were attached to the trust’s fiduciary income tax return for 1995. These Schedules K-1 reported that the net operating losses that had been generated by the trust’s operations, which were reported to total $3,500,960, were distributed to Conrad and Carroll in equal share (i.e., $1,750,480 each).
For the period between the trust’s termination and December 31, 1995, Conrad and Carroll separately reported their one-half interests in the gallery’s operations on Schedules C that were attached to their Forms 1040, U.S. Individual Income Tax Return, for 1995. On these Schedules C, Conrad and Carroll reported that their one-half interests in the gallery’s inventory had a beginning value of $15,759,425 (i.e., a value equal to one-half of the ending inventory value reported on the trust’s final return). They reported that their one-half interests in the gallery’s inventory had an ending value of $15,561,925.
As reflected on the partnership’s Forms 1065 for 1996 and 1997, the partnership valued the gallery’s inventory in accordance with the collection’s undiscounted value. Accordingly, the partnership reported that the value of the gallery’s inventоry at the beginning of 1996 was $31,123,850 (i.e., an amount equal to the sum of the reported values of the inventory comprising Conrad’s and Carroll’s one-half interests in the gallery as of the end of 1995). The following explanation was given on the Forms 8275 that were attached to the partnership’s Forms 1065 for 1996 and 1997:
Value of paintings of the Sidney Janis Art Gallery where [sic] valued at $36,636,630 by the IRS at the decedent’s (Sidney Janis’) death. After a blockage discount allowed by the IRS on audit the estate paid inheritance tax on $14,500,000 (the after blockage value of the paintings). In accordance with the decision in Elizabeth G. Augustus, 40 BTA 1201, * * * (ACQ), the heirs in operating the art gallery used the individual value of the paintings prior to the blockage discount as the basis of the paintings sold in determining gain or loss on these sales.
The рartnership reported the following amounts from its operation of the gallery during 1996 and 1997:
| Year | COGS | Ordinary Loss |
|---|---|---|
| 1996 | $985,000 | $512,916 |
| 1997 | 1,277,000 | 546,466 |
The Schedules K-1 (Form 1065), Partner’s Share of Income, Credits, Deductions, etc., attached to the partnership’s Forms 1065 for 1996 and 1997 indicate that the partnership’s ordinary losses were distributed equally between Conrad and Carroll.
Petitioners’ Income Tax Returns for 1995, 1996, and 1997
Dean A. Avedon, C.P.A., prepared Conrad and Maria’s joint income tax returns for 1995, 1996, and 1997. Silverman prepared the Schedules K-1 (Form 1065) that were attached to those returns. On each of those joint income tax returns, Conrad and Maria reported that they had no taxable income and owed no income tax. On their joint income tax return for 1995, Conrad and Maria reported the net operating loss carryover of $1,750,480 that had been distributed to them from the trust. The following explanation was given on this Form 8275 for the existence of the claimed net operating loss carryover:
Value of paintings of an art gallery (Sidney Janis Gallery) transferred to a trust were valued at $36636630 by the IRS at the decedent’s (Sidney Janis) death. After a blockage discount allowed by the IRS on audit the estate paid inheritance tax on an amount of $14500000 after the blockage discout [sic] reported on Form 706. In accordance with the decision in Elizabeth G. Augustus, 40 BTA 1201, 12/10/31 (ACQ) the trust used the individual value of the paintings prior to the blockage discount for the paintings sold by trust and for the one (1) painting sold by the heirs as reported on Schedule C.
Silverman prepared Carroll and Donna’s joint income tax returns for 1995, 1996, and 1997. On their joint income tax return for 1995, Carroll and Donna reported the net operating loss carryover of $1,750,480 that had been distributed to them from the trust. In addition, they reported that they had no taxable income for that year. On their joint income tax returns for 1996 and 1997, Carroll and Donna reported net operating loss carryovers of $123,985 and $202,381, respectively. They also reported that they had no taxable income and owed no income tax for 1996 and $15,312 of taxable income and owed $1,531 for 1997. Neither a Form 8275 nor a similar disclosure statement was attached to Carroll and Donna’s joint income tax returns for 1995, 1996, or 1997.
Examination of Petitioners’ Income Tax Returns for 1995, 1996, and 1997
Petitioners’ 1995, 1996, and 1997 income tax returns were examined by the IRS. As a part of this examination, the trust’s fiduciary income tax returns for the years 1990 through 1995 and the partnership’s Forms 1065 for 1996 and 1997 were also examined. Respondent determined that, for purposes of calculating the gallery’s COGS for the years 1990 through 1997,
| Year | COGS Per Return | COGS As Adjusted |
|---|---|---|
| 1990 | $102,000 | $40,369 |
| 1991 | 1,660,000 | 1,055,779 |
| 1992 | 45,000 | 17,180 |
| 1993 | 235,000 | 98,008 |
| 1994 | 727,500 | 287,929 |
| 1/1/95-11/8/95 | 3,365,040 | 1,331,811 |
| 11/9/95-12/31/95 | 395,000 | 156,333 |
| 1996 | 985,000 | 389,842 |
| 1997 | 1,277,000 | 505,410 |
These adjustments to the gallery’s COGS caused a corresponding adjustmеnt to the gallery’s reported profits or losses for those years. Accordingly, respondent determined that the trust should have reported that net operating losses totaling only $193,144 were distributed to Conrad and Carroll on its 1995 fiduciary income tax return. Respondent also determined that the partnership should have reported income rather than losses from its operation of the gallery during 1996 and 1997.
Based upon these adjustments, respondent determined that adjustments to petitioners’ joint income tax returns for 1995, 1996, and 1997 were appropriate. With respect to their joint income tax returns for 1995, respondent determined that
OPINION
Petitioners’ Basis in the Collection for Purposes of Determining the Gallery’s Cost of Goods Sold
Respondent contends that the basis of the individual works of art in the collection is the proportionate amount of the discounted value that was agreed to for estate tax purposes, which should be used to calculate the gallery’s COGS. Respondent further contends that petitionеrs are estopped under the duty of consistency from claiming that the collection’s discounted value, as determined for estate tax purposes, is only a presumptive value that may be rebutted for income tax purposes. We address each of these contentions in turn.
Petitioners argue that (1) Augustus v. Commissioner, 40 B.T.A. 1201 (1939), has facts that are identical to this case and, therefore, is controlling and (2) the “appraised value” contemplated by section 1.1014-3(a), Income Tax Regs., is the undiscounted fair market value that was determined by the Panel for each work of art in the collection. For the reasons set forth below, petitioners’ arguments are unpersuasivе.
In Augustus v. Commissioner, supra at 1202, 1203, the Board of Tax Appeals was presented with a question regarding the basis of 2,525 shares of F.W. Woolworth Co. stock that the taxpayer sold in 1935 for $149,203.99. These shares had been acquired by the taxpayer from the intestate estate of her mother and were appraised as of the date of her mother’s death, November 9, 1928, for Federal estate tax purposes. Id. at 1203-1204. After applying a blockage discount, respondent determined that the shares of stock had a value equal to $207,050 (i.e., $82 per share), and the Federal estate tax liability of the estate of the taxpayer’s mother was determined on that basis. Id. at 1204. The average selling price of shares of F.W. Woolworth Co. stock on November 9, 1928, as determined from sales made on the New York Stock Exchange, was $86.70 per share. Id. at 1208.
Whether the petitioner has established that value is a question of fact. No evidence supporting the application of the blockage rule appears in the record. However, the facts stipulated disclose that the volume of trading in this particular stock at or about the date of death of petitioner‘s mother was not only very large, compared with the block of stock to be valued, but that the price trend was upward. In our judgment, this record thus overcomes the presumption of correctness attaching to respondent‘s determination of basis. We find that on November 9, 1928, the fair market value of the 2,525 shаres of stock sold by petitioner in 1935 was $86.70 per share. [Id.; citation omitted and emphasis added.]
Contrary to petitioners’ understanding of Augustus, the Board of Tax Appeals concluded that the taxpayer could use the undiscounted fair market value of the F.W. Woolworth Co. stock as of November 9, 1928, as her basis for income tax purposes because
A blockage discount was applied in determining the value of the collection because of the collection‘s size and nature. In determining the blockage discount, the Panel took into account, inter alia, the possibility that the market might be flooded if the individual works of art were put up for sale at the same time or, alternatively, the possibility that the collection would be disposed of over time in order to realize each work‘s full value. See, e.g., Calder v. Commissioner, 85 T.C. 713, 721-726 (1985); Estate of Smith v. Commissioner, 57 T.C. 650, 658-659 (1972), affd. 510 F.2d 479 (2d Cir. 1975). Because the substantive effect of the blockage discount was to establish a proportionate value for each work of art in the collection that reflected thеse
2. Whether Respondent Has Established That Petitioners Are Estopped by the Duty of Consistency
The “duty of consistency“, sometimes referred to as quasi-estoppel, applies in this Court. E.g., Estate of Letts v. Commissioner, 109 T.C. 290, 296-301 (1997); Cluck v. Commissioner, 105 T.C. 324, 331-336 (1995); LeFever v. Commissioner, 103 T.C. 525, 541-545 (1994), affd. 100 F.3d 778 (10th Cir. 1996); Unvert v. Commissioner, 72 T.C. 807, 814-818 (1979), affd. 656 F.2d 483 (9th Cir. 1981); Mayfair Minerals, Inc. v. Commissioner, 56 T.C. 82, 89-94 (1971), affd. 456 F.2d 622 (5th Cir. 1972). The duty of consistency is based on the theory that a taxpayer has a duty to be consistent in the tax treatment of items and will not be permitted to benefit from the taxpayer‘s own prior error or omission. LeFever v. Commissioner, supra at 541. The duty of consistency doctrine prevents a taxpayer from taking one position one year and a contrary position in a later year after the limitations period has run for
The taxpayer‘s duty of consistency applies if: (1) The taxpayer made a representation of fact or reported an item for tax purposes in one tax year; (2) the Commissioner acquiesсed in or relied on that fact for that year; and (3) the taxpayer desires to change the representation previously made in a later tax year after the earlier year has been closed by the statute of limitations. LeFever v. Commissioner, supra at 543; see also Kielmar v. Commissioner, 884 F.2d 959, 965 (7th Cir. 1989); Herrington v. Commissioner, 854 F.2d 755, 758 (5th Cir. 1988), affg. Glass v. Commissioner, 87 T.C. 1087 (1986); Shook v. United States, 713 F.2d 662, 667 (11th Cir. 1983); Hess v. United States, 210 Ct. Cl. 483, 537 F.2d 457, 463 (1976); Beltzer v. United States, 495 F.2d 211, 212 (8th Cir. 1974); Estate of Letts v. Commissioner, supra at 297; Cluck v. Commissioner, supra at 332. When these requirements are met, respondent may act as if the previous representation is true, even if it is not, and the
The three elements of the duty of consistency refer to conflicting representations that are made by a taxpayer. The duty of consistency, however, can also bind a beneficiary of an estate to a representation made on an estate tax return if the beneficiary was a fiduciary of the estate. Beltzer v. United States, supra; see also Hess v. United States, supra; Estate of Letts v. Commissioner, supra at 298; Cluck v. Commissioner, supra at 333; LeFever v. Commissioner, supra at 543-544; Griffith v. United States, 27 AFTR 2d 71-754, 71-1 USTC par. 9280 (N.D. Tex. 1971); McMillan v. United States, 14 AFTR 2d 5704, at 5706-5707, 64-2 USTC par. 9720, at 93,839 (S.D. W. Va. 1964). Whether there is sufficient identity of interests between the рarties to apply the duty of consistency in such a situation depends on the facts and circumstances of each case. Cluck v. Commissioner, supra at 335. In this case, there is a sufficiently close relationship between petitioners and Sidney‘s estate because Conrad and Carroll were co-executors and beneficiaries of Sidney‘s estate as well as cotrustees and beneficiaries of the trust to which the gallery had been transferred prior to Sidney‘s death. See, e.g., Hess v. United States, supra at 464; Estate of Letts v. Commissioner, supra at 298-299; LeFever v. Commissioner, supra at 543-544; Griffith v. United States, supra; McMillan v. United States, supra. Accordingly, petitioners and Sidney‘s estate are sufficiently related to be treated as one taxpayer for purposes of the duty of consistency.
Respondent has established that all three elements of the duty of consistency are present in this case. Conrad and Carroll agreed that the discounted value of the collection was $14,500,000, and the Commissioner relied upon that value in assessing the estate tax owed by Sidney‘s estate. Once the period for assessment against Sidney‘s estate had closed, however, petitioners claimed that the collection‘s undiscounted value should be used to calculate the gallery‘s COGS. Because all three elements of the duty of consistency are satisfied, we hold that petitioners are bound to use the collection‘s discounted value as their basis for purposes of calculating the gallery‘s COGS for 1990 through 1997.
Section 6662 Accuracy-Related Penalties
In petitioners’ statutory notices of deficiency, respondent asserted accuracy-related penalties under
The
The evidence in this case shows that Carroll and Donna reasonably and in good faith relied on Silverman‘s advice as to using the collection‘s undiscounted value to calculate the gallery‘s COGS. Silverman had had a long relationship with Carroll and Donna and with the gallery. Carroll, although well educated, testified that he did not have any special training or knowledge with respect to the subject of Federal income taxes. Moreover, Carroll trusted Silverman with the gallery‘s books and records and his personal financial matters. Accordingly, we believe that Carroll respected Silverman‘s judgment when it came to tax matters and that this trust extended to Silverman‘s explanation of the applicability of the reasoning of Augustus v. Commissioner, 40 B.T.A. 1201 (1939), to petitioners’ situation. Therefore, the imposition of a
Neither Conrad nor Maria was present at trial, and the record does not establish whether either of them spoke with Silverman directly about Augustus. There is evidence, however, that Silverman met with Conrad‘s attorney and discussed the
Conclusion
We hold that petitioners are liable for deficiencies in their income taxes for 1995, 1996, and 1997. We also hold that the accuracy-related penalties under
Decisions will be entered for respondent with respect to the deficiencies and for petitioners with respect to the penalties.