Chiu v. Comm'r of Internal Revenue, Docket No. 14166-83.
| Decision Date | 15 April 1985 |
| Docket Number | Docket No. 14166-83. |
| Citation | 84 T.C. 722,84 T.C. No. 48 |
| Parties | ROBERT C. CHIU and CAROL A. CHIU, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners purchased gemstones and minerals in the years 1977, 1978, and 1979, and approximately 1 year after the dates of purchase donated them to the Smithsonian Institution. HELD, the most reliable evidence of the fair market value of the items was the cost of the items to the petitioners. NANCY HERBERT and ROBERT J. KASTL, for the respondent.
RONALD W. GABRIEL, and CHARLES M. STEINES, for the petitioners.
Respondent determined deficiencies in petitioners' Federal income taxes as follows:
+----------------+
¦Year¦Deficiency ¦
+----+-----------¦
¦1978¦$20,508.17 ¦
+----+-----------¦
¦1979¦46,429.93 ¦
+----+-----------¦
¦1980¦36,550.00 ¦
+----------------+
In dispute is the value of certain gemstones and mineral specimens donated by petitioners to the Smithsonian Institution.
Some of the facts have been stipulated, and the stipulation is incorporated herein by this reference. Petitioners were residents of Columbus, Ohio, at the time they filed their petition herein. They filed joint Federal income tax returns for the taxable years 1978, 1979, and 1980 with the Cincinnati Service Center, Covington, Kentucky.
On or about October 3, 1977, petitioners acquired a group of 10 gemstones from Pala Properties International, Inc. (Pala) of Fallbrook, California, at a cost of $11,000. This group included one 36.40 carat sinhalite acquired at a cost of $2,912. On or about October 15, 1977, petitioners acquired one 75 carat cats-eye rubellite tourmaline from Gemarvi Pedras Preciosas Limitada Governador (Gemarvi) of Valaderes, Brazil, at a cost of $7,500. On or about December 21, 1978, petitioners donated the sinhalite and the tourmaline to the Smithsonian Institution (the Smithsonian). On their tax return for 1978, petitioners claimed a deduction of $15,470 for contribution of the sinhalite and $35,625 for contribution of the tourmaline.
On or about April 22, 1978, petitioners acquired from Charles Key of Sarasota, Florida, a 239 carat topaz at a cost of $5,975. On or about July 30, 1978, they acquired from Gemarvi one 7.66 carat euclase at a cost of $3,500. On or about August 24, 1979, they donated to the Smithsonian the topaz, the euclase, the nine other gemstones acquired from Pala in October 1977 at a total cost of $8,088, and one 7.10 carat cerussite, the seller, date of acquisition, and cost of which are unknown.
On or about November 19, 1978, petitioners acquired from Charles Key one 373.29 carat lithium niobate for $4,479. On or about December 27, 1979, they donated the lithium niobate to the Smithsonian.
On their tax return for 1979, petitioners claimed charitable deductions of $35,850 for the topaz, $19,150 for the euclase, $39,619 for the group of nine gemstones, $532 for the cerussite, and $24,263.85 for the lithium niobate.
On or about July 11, 1979, petitioners acquired one 18.29 carat euclase from International Lapidaries of Boynton Beach, Florida, at a cost of $15,000. On or about August 4, 1979, petitioners acquired 27 mineral specimens from Mineral Kingdom of Woodmere, Long Island, New York, at a cost of $5,000. On or about November 5, 1980, petitioners donated the euclase and the 27 mineral specimens to the Smithsonian. On their tax return for 1980, petitioners claimed a deduction of $64,015 for the euclase and $28,775 for the 27 mineral specimens.
In the statutory notice of deficiency, respondent disallowed petitioners' claimed deductions in excess of $10,750 for 1978, $26,555 for 1979, and $20,000 for 1980.
Petitioners never purchased any insurance with respect to any of the gemstones or mineral specimens contributed by them to the Smithsonian in 1978, 1979, or 1980. They had never sold any gemstones or minerals. Petitioner Robert C. Chiu is by occupation a physician, and petitioners have no demonstrated experience in dealing in gems or minerals.
The prices for gemstones and mineral specimens remained stable during the years in issue, and there was no significant appreciation in value of the items donated by petitioners to the Smithsonian between the times of acquisition and the times of donation.
Although some of the smaller items in issue potentially could be sold to jewelers to be set in jewelry, the most likely ultimate consumer for most of the items was an individual collector or a museum.
The amounts claimed by petitioners on their tax returns were based on appraisals obtained by petitioners. Most of the appraisals were obtained from William W. Pinch (Pinch) at or about the time that the items were acquired. On or about May 15, 1984, in preparation for trial of this case, Pinch reappraised most of the items that had been contributed to the Smithsonian by petitioners during the years in issue. The reappraisal was requested to take account of the Court's opinion in Anselmo v. Commissioner, 80 T.C. 872 (1983). Set forth in the Appendix is a chart showing the amounts determined by Pinch's reappraisal and the values attributed by other experts testifying at trial, as set forth below.
Pinch is a collector of mineral specimens and the owner and curator of the Pinch Mineralogical Museum, which contains approximately 16,000 mineral specimens. He has been engaged in the field since 1947 and is sufficiently knowledgeable to be regarded as an expert in mineralogy. He is not, however, formally trained in gemology or appraisal techniques.
From 1979 through the time of trial, Pinch was employed by Investment Rarities to buy gemstones and train employees who would be selling gemstones over the telephone. Investment Rarities sold gemstones to the public for a standard markup of 25 percent.
Pinch's reports comprising his May 1984 appraisals were prepared by petitioners' counsel from the appraisal reports attached to petitioners' tax returns. Language drafted by counsel and defining fair market value was added. Pinch nonetheless signed the appraisals. In several instances his testimony at trial in July 1984 differed from certificates of appraisal signed by him and dated May 15, 1984. For example, his 1979 appraisal of the 3.00 carat jeremejevite (acquired as a part of the nine gemstones purchased in October 1977 at a cost of $8,088) described the item as ‘probably the world record,‘ and valued it at $6,000. His May 1984 report repeated that statement and value, although, according to Pinch, A similar incident occurred with respect to the 18.29 carat euclase acquired in July 1979. Another item was appraised as an ‘exceedingly large‘ epidote. Although Pinch was advised prior to trial that this item was not an epidote, he did not change his report prior to testifying that Other items described by Pinch as without flaws or ‘clean‘ were shown to have visible inclusions. His appraisal reports were replete with superlatives such as ‘exceedingly‘ large or rare, ‘superb‘ and ‘flawless,‘ that were not justified upon an item-by-item examination by the various experts at trial.
Pinch's appraisals for the most part were not based on any actual sales of comparable items. In many instances he relied on reported offering prices without verifying whether those prices had ever in fact been paid for such items. Some of his valuations were based on information from William Larson, the owner of Pala. His appraisals did not take into account the cost of the items appraised, even those acquired from Pala at about the same time as his original appraisal. In valuing the 75.00 carat cat's-eye rubellite tourmaline acquired in October 1977, Pinch ignored the purchase price of $7,500. His appraisal report valued the stone as of December 1978 at $28,125 while stating: ‘It is a bit difficult to place a value on a gem when there are no records of similar size and quality stones ever being sold.‘ Although his reports identified alternative ultimate consumers for the items appraised, he did not determine alternative values.
Paul Desautels (Desautels) was curator of the Gem and Minerals Collection at the Smithsonian for 25 years, including the time that the items in issue here were donated. He left the Smithsonian in 1982. At the time of trial, he was employed as a consultant to an individual collector of mineral specimens. He is knowledgeable and qualified as an expert in gems and minerals. He received no formal training, however, in gemology or in appraisal of gemstones or mineral specimens, and he does not have extensive experience in the purchase or sale of gems or minerals.
Desautels did not generally place values on items at the time they were donated to the Smithsonian. Although he expressed an opinion of the value of some mineral specimens in issue at the time of trial of this case, many of those specimens were not in the same condition as they had been at the time of the donation because they had been damaged after the time of donation. His valuation at the time of trial was therefore based on his recollection of the condition of the items from 2 to 5 years earlier. Desautels had no explanation for the damage to the mineral specimens that took place after the donation to the Smithsonian because valuable items were set apart in a special room to be handled only by special persons.
Desautels' estimates of the values of the items donated to the Smithsonian were based on his observation of the range of offering prices for specimens and his opinion of the relative quality of the particular specimen. The range of prices for some varieties was as great as from $30 to $200 a carat for blue topaz; $100 to $10,000 for wulfenite crystals; $100 to $7,000 for anglesite...
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