DocketNumber： Docket Nos. 9026-83, 9027-83, 1707-84
Filed Date： 6/27/1985
Status： Non-Precedential
Modified Date： 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
WHITAKER,
| Addition to Tax | ||
| Petitioners | Deficiency | Under Sec. 6653(a) 1985 Tax Ct. Memo LEXIS 317">*318 |
| Bernard and Barbara | $11,185 | $582 |
| Lightman (Lightman) | ||
| Morris and Rita | 10,914 | 562 |
| Kesselman (Kesselman) | ||
| Robert S. and Lorraine | 10,088 | 521 |
| Kingsbury (Kingsbury) |
Due to concessions by respondent in docket Nos. 9026-83 and 9027-83, the two issues remaining for decision in each docket are:
(1) The fair market value of 19 paintings donated to the El Paso Museum of Art in 1979; and
(2) whether petitioners are liable for additions to tax under sec. 6653(a) as a consequence of claiming charitable contribution deductions based on valuation of the paintings greatly in excess of their costs.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. Petitioners Lightman and Kingsbury were residents of Providence, Rhode Island when their respective petitions were filed. Petitioners Kesselman were residents of Sharon, Massachusetts when their petition was filed.
During December 1978, petitioners individually purchased 19 oil paintings which they donated to the El Paso Museum of Art on December 30, 1979. On their 1979 Federal income tax returns, petitioners claimed charitable contribution deductions significantly greater than their costs. Attached to each return was an appraisal by John Aaron, a member of Appraisers Association of America, Inc. Said appraisals valued each painting in an amount equal to that claimed on the return. In the notice of deficiency issued in each case, respondent determined that petitioners' charitable contribution deductions were limited to their costs for the paintings. The following schedule sets forth the purchase prices and claimed deduction, by painting:
| Purchase | Claimed | |
| Price | Deduction | |
| Petitioners Lightman | ||
| Autumn in N.E. | $ 500 | $2,800 |
| Woods at Sunset | 500 | 2,800 |
| Apple Trees | 500 | 2,800 |
| Coastal Scene | 500 | 2,800 |
| Providence Market Scene | 500 | 2,800 |
| N.E. House | 500 | 2,800 |
| Providence Market Scene | 1,000 | 7,500 |
| $4,000 | $24,300 | |
| Petitioners Kesselman | ||
| Winter Scene | $ 500 | $ 2,500 |
| Autumn Scene | 500 | 2,500 |
| Fort Scene | 500 | 2,500 |
| Sunset Scene | 500 | 2,500 |
| Spring Scene | 500 | 2,500 |
| Salt Marsh | 2,400 | 12,500 |
| $4,900 | $25,000 | |
| Petitioners Kingsbury | ||
| Church Scene | $ 500 | $ 2,500 |
| Cape Cod Scene | 500 | 2,500 |
| Spring Scene | 500 | 2,500 |
| Abstract Landscape | 500 | 2,500 |
| Storm Scene | 500 | 2,500 |
| Two Pumpkins | 2,400 | 12,500 |
| $4,900 | $25,000 |
With 1985 Tax Ct. Memo LEXIS 317">*319 the exception of "Salt Marsh" and "Two Pumpkins," the above identified paintings are the work of Mabel M. Woodward (Woodward), a turn of the century American impressionist painter. The majority of these paintings are small: three are 8 X 10 inches and ten are 8.5 X 10.5 inches. Of the remaining four, one is 9 X 11 inches, two are 10 X 13 inches and one is 16 X 20 inches. Woodward's paintings have been exhibited at the National Academy and The Chicago Art Institute. Local shows of her work have been held at the Boston, Rockport and Providence Art Clubs and the Providence Water Color Club.
In the 1950's, the Shein family purchased 337 Woodward paintings from her estate for $5,000. Over the next 13 years, individual Woodward paintings were sold by Helen Shein. In 1972, the Voss Galleries of Boston, Inc. (Voss Galleries) held an exhibition of Woodward's work. From 1972 through 1975, the Voss Galleries sold approximately 35 Woodward paintings individually. Voss Galleries obtained prices of $1,500 to $2,500 for small Woodward paintings and up to $7,000 for larger works.
After the death of his father in 1975, Edward Shein and his mother, Helen Shein, decided to liquidate the family's 1985 Tax Ct. Memo LEXIS 317">*320 remaining Woodward paintings. Edward Shein is a 19th-20th century fine arts dealer specializing in American paintings. Rather than individual sales, commencing in 1977 1985 Tax Ct. Memo LEXIS 317">*321 the Sheins sought to liquidate their Woodward paintings by selling them in lots at prices significantly lower than previously obtaining by Voss Galleries. The following table reflects such bulk sales by the Sheins in 1977, 1978 and 1979:
| No. of | Price | ||||
| Paintings | Painting | Per | Total | ||
| Year | Purchaser | in Lot | Size | Painting | Price |
| 1977 | Deal | 16 | 10 X 13 | $500 | $8,000 |
| Shatkin | 3 | 20 X 16 | 1,000 | 3,000 | |
| Shatkin | 8 | 10 X 14 (1) | 600 | ||
| 16 X 20 (7) | 1,000 | 7,600 | |||
| 1978 | Kingsbury | 5 | 8-1/2 X 10-1/2 | 500 | 2,500 |
| Kesselman | 5 | 8-1/2 X 10-1/2 | 500 | 2,500 | |
| Lightman | 8 | 8 X 10 (3) | 500 | ||
| 9 X 11 (1) | 500 | ||||
| 10 X 13 (2) | 500 | ||||
| 16 X 20 (2) | 1,000 | 5,000 | |||
| 1979 | Kingsbury | 36 | 8 X 10 (10) | N/A | |
| 8-1/2 X 11 (13) | N/A | ||||
| 10 X 13 (3) | N/A | ||||
| 16 X 20 (9) | N/A | ||||
| 24 X 30 (1) | N/A | 20,000 |
The record does not reflect any other sales of Woodward paintings in 1977 or 1978. In 1979, the Sheins made one individual sale of a 34 X 26 inch painting for $7,000. Also in 1979, three Woodward paintings which had been purchased from the Sheins in 1977 were sold by the Brockton Art Museum as follows:
| 1977 Purchase | 1979 Sale | |
| Painting Size | Price | Price |
| 10 X 14 | $600 | $400 |
| 16 X 20 | 1,000 | 1,000 |
| 16 X 20 | 1,000 | 650 |
After 1979, the record reflects only individual, as opposed to bulk, sales of Woodward paintings. In 1980, three paintings purchased in 1977 were resold for $100 to $400 less than their respective purchase prices. One large Woodward painting (28 X 24 inches) was sold by the Sheins in 1980 for $7,000. In 1981 and thereafter, individual Woodward paintings were sold or appraised for considerably higher prices than sales of comparably sized paintings sold in bulk in 1977 through 1979.
Approximately 6 months prior to their donation, petitioners Kesselman lent their Woodward paintings to the El Paso Museum of Art. The as yet undiscussed paintings contributed by petitioners Kesselman and Kingsbury to the El Paso Museum of Art in 1979 were the works of Karl Knaths, a 20th century American modern painter. Knaths' paintings have been or are exhibited in, among other institutions, the Corcoran Gallery of Art, the Hirshhorn Museum and Sculpture Garden, the National 1985 Tax Ct. Memo LEXIS 317">*322 Collection of Fine Arts of the Smithsonian Institution in Washington, D.C., the Metropolitan Museum of Art in New York City, the Boston Museum of Fine Arts and The Philadelphia Museum of Art. Karl Knaths died in 1971 and the Shawmut Bank of Cape Cod (Bank) was appointed executor of his estate and trustee of a trust established for his wife's support with the reversion to other designated income beneficiaries. At that time, 248 of Knaths' paintings were appraised and transferred to the trust. Between 1971 and 1978, the Bank sold some of these paintings through Paul Rosenberg & Co. in New York (Rosenberg Gallery), as well as making individual sales to other bank clients. Sales through the Rosenberg Gallery during this period netted the Bank over $5,000 per painting. The Bank's private sales were made pursuant to a price structure provided by the Rosenberg Gallery so as not to underprice the Gallery's sales efforts.Prices obtained by the Bank ranged from $3,500 to $6,000 per painting. In 1978, Mrs. Knaths died and the terms of the trust altered requiring a change in the composition of the trust to assets which would produce income. Consequently, a decision was made to dispose of the 1985 Tax Ct. Memo LEXIS 317">*323 approximately 100 remaining Knaths paintings. The Bank attempted to wholesale these paintings to numerous galleries but the best offer they received was approximately $1,000 per painting. In 1978, they sold the remaining paintings, in bulk, to Edward Shein for approximately $1,800 per painting. From 1978 through 1980, Edward Shein sought to resell the Knaths paintings individually at a $500 to $600 mark-up per painting. In 1981, Sotheby sold a Knaths painting entitled "Sunset-Salt Marsh" for $2,860 which was similar to the "Salt Marsh" painting donated by petitioners Kesselman to the El Paso Museum of Art in 1979. OPINION As to the deficiencies determined by respondent, the sole issue for decision relates to the amount of the deductions to which petitioners are entitled for their 1979 contributions to the El Paso Museum of Art. Section 170(a)(1) allows as a deduction any charitable contribution to an organization described in section 170(c). The parties agree that the El Paso Museum of Art is a qualified recipient under section 170(c). They further agree that the donated paintings were "capital gain property" within the meaning of section 170(b)(1)(C)(iv). (1) Prices obtained at contemporary sales of the artists' work; and (2) petitioners' costs. In valuing the donated paintings for purposes of section 170, fair market value should be computed "on the price an ultimate consumer would pay," i.e., the retail price under the circumstances herein. Petitioners also argue that their purchases of the donated paintings were at "wholesale, bulk, forced or distress sale rates" and their costs are, at best, poor indicators of fair market value. Although Edward Shein described himself as a "wholesale" dealer, we conclude that petitioners' purchases were at retail prices. None of the petitioners were art dealers and nothing in the record indicates that the prices they paid to the Sheins were other than retail. To the contrary, comparable, if not identical, prices were paid to the Sheins by other retail customers. Petitioners are correct that fair market value under the instant circumstances is to be determined on an individual, rather than bulk, basis. Based on the record evidence, we also conclude that petitioners' purchases were not at forced or distress prices. The Sheins' decision to liquidate their remaining Woodward paintings does not indicate their subsequent sales were at forced or distress prices. Similarly, despite Edward Shein's testimony that he resold the Knaths' paintings "fast" to meet his bank obligations, the record 1985 Tax Ct. Memo LEXIS 317">*330 reflects only 18 sales by Shein over a 3-year period. Additionally, the prices Shein obtained were consistent with prices obtained for Knaths' work at auction sales during this period. Having addressed petitioners' general arguments as to valuation, 1985 Tax Ct. Memo LEXIS 317">*331 he has significant knowledge of, and extensive experience with, Woodward paintings. In fact, the Vose Gallery is recognized as the prominent gallery for Woodward's work. As the following chart reflects, Vose's valuation 1985 Tax Ct. Memo LEXIS 317">*332 of the Woodward paintings were, generally, significantly lower than those claimed by petitioners on their returns and which they continue to assert should be allowed as deductions: Respondent's major criticism of Vose's valuations is that, in making his appraisal, Vose relied on color photographs of the paintings rather than actually viewing them. We do not consider this a defect in his appraisal technique. Reliance on photographs is not unusual in appraising paintings. Respondent relies on the testimony and expert report of Rudolf G. Wunderlich to support the valuations determined in the statutory notices of deficiency. Wunderlich was a dealer and appraiser of American art of the 18th, 19th and 20th centuries from 1938 until 1982. He is a leading authority on American Western paintings 1985 Tax Ct. Memo LEXIS 317">*333 and bronzes, in particulart, the bronzes of Frederic Remington and Charles M. Russell. In addition to his appraisal work for museums, Wunderlich served on the Art Advisory Panel to the Internal Revenue Service for 2 years. Prior to his work on this case, Wunderlich had never appraised, purchased or sold any Woodward paintings. Respondent's valuations of the 17 Woodward paintings based on costs total $9,000 whereas Wunderlich's total valuation for these paintings is $11,500. For two paintings their valuations are identical; for two respondent's are higher (by $100 and $200) and for the remaining 13 paintings Wunderlich's valuations are higher (ranging from $50 to, in one instance, $1,500). Based on the entire record, we hold that, with one exception, the fair market values of the Woodward paintings in December 1979 are identical to Vose's appraisal valuations, as adjusted. The exception is the painting "Autumn Scene" donated by petitioners Kesselman. In 1984, when viewed by Wunderlich, this painting was damaged. No evidence as to the specific date said damage occurred was proffered. For want of definitive evidence, and based on the limited testimony of Edward Shein, we found 1985 Tax Ct. Memo LEXIS 317">*334 that this painting was loaned to, and damaged during shipment to, the El Paso Museum of Art 6 months prior to petitioners Kesselmans' donation. Only Wunderlich considered the damaged condition in valuing this painting. Therefore, we hold that Wunderlich's valuation, $300, accurately reflects the fair market value of the painting "Autumn Scene" as of December 1979. Petitioners have the burden of proving respondent's determinations in the notices of deficiency are incorrect. Rule 142(a); In accord with our decision as to each painting, we hold that the fair market values of the paintings donated to the El Paso Museum of Art by petitioners in 1979 are: Sales Year Seller Price 1978 Sotheby $3,000 1978 Sotheby 3,600 1979 Christies 2,200 1979 Sotheby 9,000 1979 Rosenberg 1985 Tax Ct. Memo LEXIS 317">*324 9,900 (Resale of preceding painting 1 mo. later) 1979 Rosenberg 9,075 1979 Sotheby $3,000-5,000 (est.) 1980 Sotheby 4,000 1980 Sotheby 4,000 1980 Sotheby 2,575 1980 Sotheby 3,300 Petitioners' Petitioners' Expert's Return Vose's Difference Valuation as Percentage Painting Valuation Valuation in Valuations of Return Valuations Autumn in N.E. $2,800 $1,530 $1,270 55% Woods at Sunset $2,800 680 2,120 24% Apple Trees $2,800 2,125 675 76% Coastal Scene $2,800 2,125 675 76% Providence Market Scene $2,800 2,975 175 106% N.E. House $2,800 2.975 175 106% Providence Market Scene 7,500 5,950 1,550 79% Winter Scene 2,500 1,530 970 61% Autumn Scene 2,500 1,530 970 61% Fort Scene 2,500 1,360 1,140 54% Sunset Scene 2,500 1,360 1,140 54% Spring Scene 2,500 1,530 970 61% Church Scene 2,500 1,190 1,310 48% Cape Code Scene 2,500 1,020 1,480 41% Spring Scene 2,500 1,530 970 61% Abstract Landscape 2,500 1,190 1,310 48% Storm Scene 2,500 1,700 800 68% Petitioners Lightman = $18,360 Petitioners Kesselman = 8,480 Petitioners Kingsbury = 9,030
In the notices of deficiency, respondent also determined additions to tax pursuant to section 6653(a). Respondent premises this determination on the failure of any petitioner to testify that due care had been exercised in preparing the returns or to explain the gross overvaluation claims for the donated paintings on petitioners' returns. Petitioners bear the burden of disproving respondent's determination that the negligence addition is applicable.
To reflect the foregoing,
1. On grant of the joint motion at the commencement of trial, the following petitioners are consolidated for trial, briefing and opinion: Morris Kesselman and Rita Kesselman, docket No. 9027-83 and Robert S. Kingsbury and Lorraine Kingsbury, docket No. 1707-84.↩
2. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.
3. The record does not reflect any sales of Woodward paintings in 1975 or 1976.
4. Similarly, the Lightmans donation was preceded by a loan to the Museum.↩
5. Although Edward Shein testified he resold most of the approximately 100 Knaths paintings "fast," the record reflects only 18 such sales during the period 1978 through 1980. ↩
6. This includes the paintings sold to petitioners Kesselman and Kingsbury. ↩
7. One of these sales was to petitioners Kesselman. ↩
8. Two such sales were to petitioners Lightman and three such sales were to petitioners Kesselman.↩
9. This painting had been included in several major exhibitions, including ones at the Corcoran Gallery of Art and the National Academy of Design which significantly enhanced its value.
10. In support of this argument, one of petitioner's expert witnesses, Jeffrey R. Brown, testified concerning "the market factors or forces that underlie or influence the prices of art works" in addition to the traditional criteria which influence prices such as quality, size, and condition of a work. While interesting, we are not persuaded that the dichotomy he proposes between orderly and disorderly markets for paintings exists. ↩
11. On brief, petitioners cite a 1980 law review article (Speiller 80 Colum. L. Rev. at 229) which lends support to an estimate that 40 percent of auction sales are made to consumers rather than dealers. Similarly, respondent's expert estimated that at least 50 percent of such sales are to individuals.
12. Petitioners also assert that, in valuing the donated paintings, the values at which said paintings were insured by the El Paso Museum of Art is significant as they represent an "objective estimate of the fair market value" of the paintings and an independent verification of petitioners' valuations. We disagree. Petitioners determined the amounts for which said paintings were initially insured by the museum and, therefore, said amounts have no probative value. Similarly, the insurance values placed on unidentified Woodward paintings at an unspecified time by the Brockton Art Museum are irrelevant to this case.↩
13. Vose's appraisal was in terms of 1984 values rather than 1979, the year of the donations.During trial he stated such appraisals should be adjusted downward by 10-15 percent to obtain the 1979 values. Accordingly, Vose's valuations have been reduced by 15 percent.
14. Contrary to petitioner's assertions, we do not consider Vose's appraisal valuations to be "in substantial accord" with, or "significant substantiation" of, petitioners' return valuations.↩