Andrew Crispo Gallery, Inc. v. C.I.R.

• Decision Date: 22 February 1994
• Docket Number: No. 1766,D,1766
• Citation: 16 F.3d 1336
• Parties: -1201, 94-1 USTC P 50,097 ANDREW CRISPO GALLERY, INC., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ocket 93-4036.
• Court: U.S. Court of Appeals — Second Circuit

Page 1336

16 F.3d 1336

73 A.F.T.R.2d 94-1201, 94-1 USTC P 50,097

ANDREW CRISPO GALLERY, INC., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 1766, Docket 93-4036.

United States Court of Appeals, Second Circuit.

Argued June 23, 1993.

Decided Feb. 22, 1994.

Walter J. Rockler, Washington, D.C. (Julius M. Greisman, David P. Gersch, Anthony N. O'Brien, Susan K. Matlow, Arnold & Porter, Washington, D.C., of counsel), for Petitioner-Appellant.

Kenneth W. Rosenberg, U.S. Department of Justice, Tax Division, Washington, D.C. (Michael L. Paup, Acting Assistant Attorney General, Gary R. Allen, Gilbert S. Rothenberg, U.S. Department of Justice, Tax Division, Abraham N. Shashy, Office of Chief Counsel, Internal Revenue Service, Washington, D.C., of counsel), for Respondent-Appellee.

Before: NEWMAN, Chief Judge, VAN GRAAFEILAND and ALTIMARI, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

Andrew Crispo Gallery, Inc. ("Crispo Gallery" or "the Gallery") appeals from a decision of the United States Tax Court (Cohen, J.) which determined a deficiency of $2,001,792.14 in income tax for the 1987 taxable year. For the reasons that follow, we affirm in part and vacate and remand in part.

Crispo Gallery began operations in New York City in 1973. It bought and sold artwork for its own account, sold artwork on consignment, and held art exhibitions. It did not sell by way of auction. Andrew Crispo became the Gallery's president and sole shareholder in 1980, and thereafter managed all of its affairs.

Between 1975 and 1982, Crispo Gallery transferred numerous works of art to RNB Leasing Corporation and Sovereign American Arts Corporation ("the Ackerman entities"), both managed by Martin and Diane Ackerman. The transfers secured loans that the Ackerman entities made to Crispo Gallery. The Ackerman entities agreed to transfer each of the works of art back to the Gallery for a price equal to the original loan amount plus interest, which, not surprisingly, was at a usurious rate. Crispo Gallery made periodic payments as required by the transactions until some time in 1982.

Although the transfers were recorded on invoices, Crispo Gallery and the Ackerman entities repeatedly described the transactions as loans in their records and correspondence. Crispo Gallery paid insurance and storage costs for the artwork while it was in possession of the Ackerman entities. The Tax Court properly concluded that "these transactions were secured loans, not sales." Andrew Crispo Gallery, Inc. v. Commissioner, 63 T.C.M. (CCH) 2152, 2162, 1992 WL 31221 (1992).

During 1982, the Ackerman entities began to sell some of the artwork when Crispo Gallery failed to make required payments. In 1983, Andrew Crispo and Crispo Gallery brought an action in New York State Supreme Court against the Ackermans and the Ackerman entities to recover some of the transferred works. The court dismissed the suit in January 1985 because Crispo refused to comply with discovery. The Appellate Division affirmed the judgment of dismissal, and the New York State Court of Appeals declined to hear the case in October 1986. For tax purposes, this decision of the Court of Appeals finally determined that Crispo Gallery had no legal right of recovery.

In 1984, Crispo Gallery was the subject of a federal investigation for tax fraud spanning the years 1979 to 1982, and substantially all of its records were subpoenaed by the government. In 1985, Andrew Crispo pled guilty to an information charging him with aiding and abetting corporate income tax fraud. He was incarcerated from April 1986 until July 1989. During this time, Gallery representatives repeatedly requested the return of the subpoenaed records. The Department of Justice returned some of the records in 1987 and 1988, but they were in a sad state of disarray. Moreover, many of the records relevant to the Gallery's tax reporting had been lost, including the ledger account listing the cost and disposition of all works in inventory.

In March 1985, one of Crispo Gallery's principal creditors, Rosenthal and Rosenthal, exercised a lien and seized all artwork owned by the Gallery. In 1986, the Internal Revenue Service seized all of the Gallery's property, including the artwork in the hands of Rosenthal and Rosenthal. In November and December 1987, Sotheby's, Inc. sold some of the seized artwork at auction pursuant to a Consignment Agreement with the IRS. The purchasers of the artwork paid for it in 1988.

In Crispo Gallery's 1986 income tax return, it claimed a $928,000 loss based on the artwork not recovered from the Ackerman transactions. There is no dispute as to the cost to the Gallery of each painting that was lost in these transactions. The Tax Court held, however, that the Gallery had failed to show that it had not previously deducted or otherwise recovered the costs on which it is claiming a loss and that therefore the Gallery could not deduct the cost of the unrecovered works.

In its 1987 tax return, Crispo Gallery claimed a net operating loss carryover of $3,139,890 from the taxable year 1986. Part of this loss involved the $928,000 deduction for the Ackerman transactions and certain 1986 business expense deductions. The Gallery also reported its gross profits from the Sotheby's sales as $2,092,675, but deferred recognition of all but $74,260 of that amount until the 1988 taxable year by classifying the transactions as installment sales under Internal Revenue Code section 453.

On May 12, 1988, the Commissioner sent Crispo Gallery a statutory notice of deficiency for the 1987 taxable year pursuant to a purported termination assessment under section 6851 of the Code. ¹ The notice asserted a deficiency in the amount of $2,559,639.13. Among other things, it disallowed the deduction of the net operating loss carryover from 1986, stating:

The amount of $3,139,890.00 claimed as a net operating loss carryover deduction from the taxable year ended December 31, 1986 is disallowed at this time pending completion of the examination for year 1986 currently in process to determine whether any or all of the losses claimed will be allowable.

The notice also denied the deferred recognition of the asserted installment sales income, thereby adding $3,154,240 to the gross receipts for the 1987 taxable year.

Crispo Gallery appealed to the Tax Court for a redetermination of the deficiency. Prior to trial, the Gallery moved to dismiss the disallowance of the net operating loss carryover on the ground that the above-quoted notice of deficiency concededly was provisional in nature. The Court denied the motion.

In a memorandum opinion filed February 24, 1992, see 63 T.C.M. (CCH) 2152, 1992 WL 31221, the Tax Court reaffirmed its ruling that the notice of deficiency was valid and held that the Gallery had the burden of proving entitlement to any deductions claimed. Judge Cohen also held that the Gallery was required to include the income from the Sotheby's auction in its gross receipts for the 1987 taxable year. She held that the auction sales were not installment sales, and she ruled that Crispo Gallery had not given the Commissioner adequate notice of its alternative claim that the gross receipts from the sales should be included in 1988 income because the sales were not complete until 1988. Judge Cohen also disallowed the 1986 net operating loss carryover deduction to the extent it was based on miscellaneous business expenses and the losses arising from the Ackerman transactions.

Pursuant to the Tax Court's opinion, the parties submitted an agreed computation of deficiency under Tax Court Rule 155. On November 20, 1992, the Tax Court entered a decision determining a deficiency in income tax due from Crispo Gallery for the taxable year 1987 in the amount of $2,001,792.14.

Crispo Gallery contends on appeal that the May 1988 notice of deficiency was invalid because it failed to comply with the requirements of Code sections 6212(a) and 6213(a). Section 6212(a) authorizes the Secretary of the Treasury or his delegate to send a taxpayer a notice of deficiency if the Secretary "determines that there is a deficiency in respect of any tax imposed." Section 6213(a) provides in part that "the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency" and "[t]he Tax Court shall have no jurisdiction to enjoin any action or proceeding under this subsection unless a timely petition for a redetermination of the deficiency has been filed."

Although the Code does not prescribe the appropriate content of a notice of deficiency, at a minimum it must identify the taxpayer, indicate that the Commissioner has made a determination of deficiency, and specify the taxable year and amount of the deficiency. See Estate of Yaeger v. Commissioner, 889 F.2d 29, 35 (2d Cir.1989), cert. denied, 495 U.S. 946, 110 S.Ct. 2205, 109 L.Ed.2d 531 (1990). Crispo Gallery contends that the Commissioner failed to make a proper determination of a tax deficiency. It argues that the disallowance was made without any examination or consideration of the loss carryover and was tentative in nature; that the notice itself declared that the statutorily required determination was being deferred until some future date.

In support of its arguments concerning the asserted absence of the examination needed for a determination, Crispo Gallery cites principally to Scar v. Commissioner, 814 F.2d 1363 (9th Cir.1987) and Kong v. Commissioner, 60 T.C.M. (CCH) 696, 1990 WL 127133 (1990). These cases are distinguishable. In Scar, the Commissioner sent the taxpayers a notice of deficiency disallowing certain deductions that the taxpayers never had claimed and taxing the deficiency at the highest marginal rate. 814 F.2d at 1364-66. In Kong, the taxpayer received a deficiency notice disallowing a deduction for a partnership loss and stating: " 'In order to protect the government's interest and since your original income tax return is...