Johnson v. Comm'r of Internal Revenue
| Decision Date | 17 September 1985 |
| Docket Number | Docket No. 26253–83. |
| Parties | FREDERICK C. JOHNSON AND JUDITH A. JOHNSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P's purchased a substantial number of Indian artifacts and etchings. After holding them for the required capital gain period, P's donated substantially all the artifacts and about two fifths of the etchings to a qualified charitable organization. A pattern of abuse designed to achieve excessive valuations of the donated items was evident. The donated items were grossly overvalued. Held, respondent's valuation of the donated items reflects fair market value as of the dates of donation. Held further, we find, sua sponte, an addition to interest under section 6621(d) to be appropriate due to substantial underpayments attributable to tax motivated transactions. Arthur H. Boetler, for the petitioners.
Wayne Appleman, for the respondent.
Respondent determined the following deficiencies in petitioners' Federal income taxes:
+----------------+
¦Year¦Deficiency ¦
+----+-----------¦
¦1976¦$8,195 ¦
+----+-----------¦
¦1977¦17,217 ¦
+----+-----------¦
¦1978¦152 ¦
+----------------+
The issues in this case are the fair market value of certain Indian artifacts 1 and etchings donated to the Museum of Native American Cultures (“MONAC”) 2 and the application of section 6621(d) 3 as to interest on substantial underpayments attributable to tax motivated transactions.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioners resided in Bellevue, Washington, when they filed their petition in this case.
Petitioner Frederick Johnson (“Frederick”) was a contractor. Petitioner Judith Johnson (“Judy”) was a homemaker and part time purveyor of art and antiques.
Petitioners began to collect art and antiques in 1970, and Judy took art history courses during 1976. During the years in issue, however, petitioners' level of art sophistication approximated only that of a hobbyist.
Petitioners became friendly with Patsy Converse Bates (“Bates”) in March of 1976. Bates operated the Converse Galleries, where she performed as a dealer and appraiser of art and antiques.
Bates introduced petitioners to Wilfred Schoenberg (“Schoenberg”) in May of 1976. Schoenberg had founded MONAC in December of 1965. During the years 1976 and 1977, he served MONAC as president, chairman, and curator. Schoenberg was intimately involved in the encouragement of donations to MONAC.
MONAC published a brochure to inform potential investors of a special service which it provided. MONAC represented in the brochure that it could locate special bargains of Indian art objects for potential donors. Upon request, MONAC would arrange to deliver the purchased items to potential donors or provide storage for the appropriate capital gain holding period. Additionally, MONAC unilaterally would provide at least two appraisals of the art objects as well as other necessary documentation related to substantiation for tax purposes. MONAC maintained a list of ten to twelve experts who would provide appraisals of such donated items at no cost. These experts often were “friends” or “associates” of MONAC.
In June of 1976 and following the procedures outlined in the MONAC brochure, Schoenberg located certain artifacts in the gallery of Paul Masa (“Masa”), an experienced dealer of Indian artifacts. Masa had paid $9,000.00 for the artifacts less than one year prior to his sale of the artifacts to petitioners. Petitioner purchased the artifacts on June 28, 1976. In arranging the transaction, petitioners never discussed their purchase with Masa. Schoenberg delivered the artifacts to petitioners for inspection. Upon inspection, petitioners paid Masa $12,000 for the artifacts by personal check.
Prior to petitioner's purchase of the artifacts, Schoenberg prepared two valuation lists of the artifacts. One list contained 145 artifacts valued at $40,385. The other list contained 144 artifacts valued at $48,805. Schoenberg offered no explanation as to the divergent valuations. Petitioners received the lists from Schoenberg about the time he delivered the artifacts to them for inspection. According to Schoenberg, he had prepared both lists to serve as estimates for insurance purposes. However, there is no indication in the record that petitioners ever insured the artifacts.
Petitioners donated 132 artifacts to MONAC in December of 1976. As outlined in the brochure, MONAC secured two appraisals of the donation as follows:
+---------------------------------------------+
¦Appraiser ¦Appraisal¦Date ¦
+---------------------------+---------+-------¦
¦Tom Fitzgerald (Fitzgerald)¦$50,705 ¦1/25/77¦
+---------------------------+---------+-------¦
¦Bates ¦63,845 ¦1/22/77¦
+---------------------------------------------+
Petitioners adopted the Bates appraisal and valued the contribution at $63,845 on their 1976 tax return.
Petitioners purchased 500 etchings by Ace Powell from Masa in February of 1977. They paid Masa $5,000 for the etchings. The basis of Masa in these etchings was approximately $3,700. Schoenberg was not an agent in the transaction.
In March of 1977, Judy began employment with Bates at Converse Galleries. Judy's job was to sell art and antiques. In her employee capacity, Judy drafted a letter to a potential investor which detailed items available for a “tax write-off” and represented that the items “should appraise out” at specific values which averaged in excess of four times investor cost. Judy left this employment in January of 1978 because she questioned the moral values of Bates. In November of 1981, Bates was found guilty of attempted theft in the first degree concerning a fraudulent insurance claim. The matter of the Bates conviction was not related in any manner to petitioners.
Petitioners donated 194 of the Powell etchings to MONAC in February of 1977. They claimed a deduction for the contribution of the etchings in an amount of $13,975 on their 1977 Federal income tax return. MONAC had provided two appraisals of the Powell etchings. In February of 1978, petitioners had Bates prepare a third appraisal. Bates appraised the etchings in an amount of $13,975, which was in excess of both appraisals furnished by MONAC and which petitioners deducted on their 1977 tax return. Petitioners used the Bates appraisal as the basis of this contribution deduction on their 1977 tax return, notwithstanding that Judy had left the employment of Bates in January of 1978 because she questioned Bates' moral character.
In the notice of deficiency, respondent determined that the fair market value of the donated items were:
+------------------+
¦Artifacts ¦$19,618¦
+----------+-------¦
¦Etchings ¦5,000 ¦
+------------------+
EXPERT VALUATIONS
One of petitioners experts is Michael Johnson, (“Johnson”), who operated an art gallery in Seattle, Washington for a period of twelve years. The gallery emphasized American Indian art. Johnson closed the gallery in 1980. However, he actively continued in business as a private dealer and appraiser of American Indian art.
Johnson stated that Indian art prices soared during the mid 1970's in general and during 1976 in particular. He estimated the average annual appreciation rate to be 20 percent during that period.
Johnson valued the artifacts collection at $35,150. Johnson concluded that the artifacts were, in general, of average to slightly below average quality. He did not view the artifact collection. His valuation is based on photographs and descriptions supplied by petitioners. He indicated that the photographs were not particularly helpful due to poor photocopying quality. Therefore, he relied primarily on the descriptions. Johnson did not value each artifact on an individual basis. Instead he grouped the artifacts according to tribal association. Sotheby Parke Bernet (“Sotheby”) catalogs for the years 1979, 1980, 1981, and 1982 were used to determine a price range for each tribal group. Johnson then multiplied the number of artifacts in each tribal group by a single price within the range which he determined to be representative of the entire group.
Another of petitioner's experts is Walter Crawford, (“Crawford”) who has extensive experience concerning American Indian items due to varied involvement since 1926. His primary experience has been that of a dealer of Indian items, including pottery, textiles, and jewelry. Additionally, he has been an appraiser of such Indian items for thirty years.
Crawford did not view any of the items in issue. He determined a valuation based on the photographs and descriptions supplied by petitioners. At trial, he was not sure whether the descriptions were provided by petitioners. Although Crawford was aided by an assistant in the preparation of his report, the assistant did not sign the report or testify at trial.
Crawford indicated that an appraisal was not possible for forty-one artifacts because petitioners had supplied unclear photocopied photographs. In these instances, he provided an estimated value rather than appraised value.
Crawford valued the artifact collection at $48,420. He valued each item on an individual basis. He researched public auction catalogs and sales records of other dealers of similar items. Crawford attached to his report three catalogs from public auctions held in years 1979, 1980, and 1981.
Crawford has in the past performed several appraisals for MONAC at no expense. He first met Schoenberg in 1974 at which time he donated a collection of Northwest items to MONAC. Crawford has remained a frequent benefactor of MONAC.
Respondents' expert, Richard Cleland (“Cleland”), owned an art gallery in Scottsdale, Arizona. He had been in the business for thirteen...
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