Anselmo v. C.I.R.

• Citation: 757 F.2d 1208
• Decision Date: 16 April 1985
• Docket Number: No. 83-5569,83-5569
• Parties: -1357, 53 USLW 2531, 85-1 USTC P 9335 Ronald P. ANSELMO and Kay W. Anselmo, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1208

757 F.2d 1208

55 A.F.T.R.2d 85-1357, 53 USLW 2531, 85-1

USTC P 9335

Ronald P. ANSELMO and Kay W. Anselmo, Petitioners-Appellants, v. COMMISSIONER, INTERNAL REVENUE, Respondent-Appellee.

No. 83-5569.

United States Court of Appeals, Eleventh Circuit.

April 16, 1985.

Ralph A. Muoio, Caplin & Drysdale, Chartered, Stafford Smiley, Washington, D.C., for petitioners-appellants.

Joel Gerber, Acting Chief Counsel, IRS, Michael L. Paup, Chief, Appellate Section, Glenn L. Archer, Jr., Asst. Atty. Gen., Ann B. Durney, Elaine F. Ferris, U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from the Decision of the United States Tax Court.

Before TJOFLAT and VANCE, Circuit Judges, and ATKINS ^*, District Judge.

TJOFLAT, Circuit Judge:

This "charitable contribution" tax case presented the Tax Court with a classic battle of experts on the issue of the fair market value of the donated property, 461 low-quality Bolivian gems. The Commissioner's experts valued the gems as if they had been sold in bulk to a manufacturer of jewelry; the taxpayers' experts valued the gems as components of finished pieces of jewelry sold at retail. The Tax Court found that a different market was the most appropriate one for assessing fair market value and, concluding that neither side had rebutted the presumption of correctness accorded the value established by the Commissioner's notice of deficiency, rejected the expert opinions on both sides. The taxpayers now appeal.

I.

Ronald P. Anselmo, one of the taxpayers, is an attorney in Fort Lauderdale, Florida. In early 1977, Robert Karoly, an investment advisor with R.G. Wilson & Co., Inc., of Fort Lauderdale, offered to sell Anselmo a tax shelter involving the taxpayer's purchase and subsequent donation of semiprecious stones to charity. Karoly claimed that the shelter produced a tax deduction of more than five times the stones' original cost, on account of the disparity between the South American wholesale price of the stones, where they are mined and cut, and the retail price of the stones in the United States. Karoly explained that an individual could purchase loose stones at the South American wholesale price, and after holding them for nine months, could claim a charitable deduction for them based on the retail price of jewelry in the United States.

The idea appealed to Anselmo. On March 3, 1977 he agreed to purchase $15,000 worth of stones through R.G. Wilson & Co., Inc. On March 21 or 22, 1977, Wilson's agent bought 461 large, low-quality gems in Bolivia on Anselmo's behalf. The purchase consisted of 443 amethysts, sixteen aquamarines, one bicolor tourmaline and one blue topaz. The stones, collectively, weighed 3,337 carats. Anselmo acquired title to them at the time of purchase.

Wilson delivered the stones to Anselmo in Fort Lauderdale in May 1977. It also provided him with three separate written appraisals, each valuing the stones, collectively, at $80,679.70. Anselmo thereafter asked Dr. Joel Arem, a recognized authority on gems, to confirm the stones' appraised value. Dr. Arem placed their retail market value at $81,915.

Each of these appraisers followed the same path of reasoning to arrive at the fair market value of the stones. First, they assumed that a stone's fair market value was the price at which it sold in a retail jewelry store. But these stores usually do not carry low quality, unset gems. Instead, such stones are sold, after being incorporated into finished pieces of jewelry such as rings and pendants, by catalog and discount stores and jewelry stores catering to less selective customers. The appraisers therefore estimated the retail value of a stone by calculating the portion of a finished jewelry item's retail price that could be attributed to the gem; specifically, they subtracted the scrap metal value of the setting from the jewelry item's retail price.

On December 30, 1977, Anselmo donated all 461 gems to the National Museum of Natural History, Smithsonian Institution, in Washington, D.C. The Smithsonian decided to use the stones as study or laboratory pieces, rather than exhibit stones, because of their poor quality.

On their 1977 joint tax return, Anselmo and his wife, Kay Anselmo, the other taxpayer in this case, claimed a charitable deduction for $80,680, the fair market value of the stones on the date of the gift, pursuant to section 170(a)(1) of the Internal Revenue Code. 26 U.S.C. Sec. 170(a)(1) (1982). ¹ Because of the percentage limitation on charitable deductions, the Anselmos limited the amount of their 1977 deduction to $43,357 and carried the unused portion over to 1978. See 26 U.S.C. Sec. 170(b)(1) (1982).

The Commissioner filed a notice of deficiency, dated August 8, 1980, which placed the fair market value of the donated stones at $16,800, rather than $80,680, and reduced the Anselmos' tax deduction accordingly. This new amount corresponded roughly to the Anselmos' cost of the stones plus the cost of the subsequent appraisal by Dr. Arem. The Anselmos petitioned the Tax Court for a redetermination of the resulting deficiencies (which were in the amount of $12,874 and $19,207 for the years 1977 and 1978, respectively). In response to this petition, the Commissioner claimed an increased deficiency because IRS appraisers valued the stones on the contribution date at only $9,295.

At trial the only issue for the tax court to decide was the proper calculation of the Anselmos' deduction under section 170(a)(1) of the Code. The applicable treasury regulation provided that, where "a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution." Treas.Reg. Sec. 1.170 A-1(c)(1) (1982). In applying this standard, the court presumed the Commissioner's determination of fair market value in the notice of deficiency to be correct. Helvering v. Taylor, 293 U.S. 507, 513-14, 55 S.Ct. 287, 290, 79 L.Ed. 623 (1935); Southwestern Life Insurance Co. v. United States, 560 F.2d 627, 635 (5th Cir.1977), cert. denied, 435 U.S. 995, 98 S.Ct. 1647, 56 L.Ed.2d 84 (1978). Under Rule 142(a), Tax Court Rules of Practice and Procedure, the Anselmos had the burden of proving that the valuation should have been higher than that stated in the notice of deficiency, 26 U.S.C. fol. Sec. 7453 (1982). ² Because the IRS sought an increased deficiency, it had the burden of proving a lower valuation. Reiff v. Commissioner, 77 T.C. 1169, 1173 (1981). Both sides offered extensive expert testimony. Their respective witnesses generally agreed on the size and overall poor quality of the stones. Therefore, the dispute focused primarily on establishing the relevant market for the purpose of appraising the stones' fair market value.

The two sides differed dramatically on the fair market value of the stones. The Anselmos' experts fixed the value of the stones between $60,788 and $81,915 while the Commissioner's witnesses appraised them at somewhere between $8,878.54 and $8,945.05. The major reason for this discrepancy was the market the experts assumed in valuing the stones. The Anselmos' experts assumed that the gems were mounted in typical finished jewelry items and sold in retail stores. They valued each gem by determining the portion of a piece of jewelry's retail price that represented the value of the gem. The Commissioner's experts, on the other hand, valued the gems on the assumption that the 461 stones would be sold together to a single jewelry manufacturer or retail jeweler who would use them in the manufacture of finished pieces of jewelry. Such a large bulk sale would involve a discount from the usual price.

The parties offered considerable evidence on the chain of distribution of low quality unset colored stones to support their choice of the relevant market for appraisal purposes. The experts agreed that these gems pass through many hands on the trip from the mine to the retail customer and that each hand receives generous compensation for its part in the journey. The stones are mined and cut in Brazil. Under the general pattern, the stones are sold to exporters who in turn sell them to importers in the United States. The stones then pass through several layers of wholesalers, distributors, and jobbers. Manufacturing jewelers eventually purchase the stones and mount them in settings, many of which are precast to fit standard size stones. The manufacturing jeweler sells the finished jewelry item to jewelry or department stores, either directly or through middlemen. The retailers' markup alone typically runs between one hundred and three hundred percent of the cost of the jewelry item. On occasion, jewelry stores will buy lower quality gems before they are set in jewelry and offer them for sale directly to the public or complete the manufacturing process themselves. The vast majority of such low quality stones, however, are made into rings, pendants, or other jewelry before being delivered to the individual purchaser.

The court concluded that the Commissioner's experts were correct in assuming that the gems would be marketed to retail and manufacturing jewelers. Therefore, the stones should have been valued with reference to the price paid by the jewelry manufacturers instead of a portion of the price paid by consumers for finished jewelry items. The court rejected these experts' opinions, however, because they improperly assumed that the gems would be sold as a group, at a substantial discount, rather than individually. The Commissioner therefore failed to rebut the presumed correctness of the fair market value stated in the notice of deficiency. The court also rejected the opinions of the taxpayers' experts. Their retail market, in which the buyer and seller bargained over the portion of the price of a finished jewelry item attributable to the stone, did not exist. Thus having found that the most relevant market was the one in which the...