Neely v. Comm'r of Internal Revenue

Decision Date17 December 1985
Docket NumberDocket Nos. 24184-81,26934-82.
Citation85 T.C. 934,85 T.C. No. 56
PartiesRALPH NEELY and VIRGINIA G. NEELY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Petitioners made deductible charitable contributions of African art objects to qualified organizations. They also claimed deductions for fees paid to their art consultant for services relating to their art collection. Office furniture was transferred to one petitioner after his company was merged into another and his employment was terminated. Legal expenses were incurred in a suit to compel disclosure of financial information brought against a closely held corporation by a minority shareholder.

HELD, respondent's determinations of fair market value for the donated art are sustained. HELD, FURTHER, petitioners are liable for additions to tax under section 6653(a). HELD, FURTHER, fees paid by petitioners to their art consultant are deductible in part under section 212(3). HELD, FURTHER, the office furniture transferred was not a gift and its fair market value at the time of the transfer is taxable income to petitioners. HELD, FURTHER, legal fees incurred in connection with the stock related to the disposition of a capital asset. They are therefore not deductible, but must instead be included in the basis of the asset. HELD, FURTHER, amendment of respondent's answer to assert application of section 6621(d) is not prejudicial to petitioners and leave to amend is granted. Where multiple items of similar nature are part of a single charitable contribution, a valuation overstatement, for purposes of section 6621(d), is to be determined by comparing the aggregate value claimed by taxpayer with the aggregate amount determined to be the correct amount of such valuation. The rate of interest prescribed by section 6621(d) is applicable after December 31, 1984. REID E. ROBISON and KENNETH L. BUETTNER, for the petitioners.

JUANDELL D. GLASS, for the respondent.

OPINION

CLAPP, JUDGE:

Respondent determined deficiencies in, and additions to, petitioners' Federal income tax as follows:

+-------------------------------------------+
                ¦          ¦    ¦           ¦Sec. 6653(a)1  ¦
                +----------+----+-----------+---------------¦
                ¦Docket No.¦Year¦Deficiency ¦addition to tax¦
                +----------+----+-----------+---------------¦
                ¦24184-81  ¦1976¦$182,606.00¦$9,130         ¦
                +----------+----+-----------+---------------¦
                ¦          ¦1977¦54,592.00  ¦2,730          ¦
                +----------+----+-----------+---------------¦
                ¦          ¦1978¦370,210.00 ¦18,511         ¦
                +----------+----+-----------+---------------¦
                ¦26934-82  ¦1979¦166,678.50 ¦8,334          ¦
                +----------+----+-----------+---------------¦
                ¦          ¦1980¦38,944.00  ¦1,947          ¦
                +-------------------------------------------+
                

The issues for decision are 1) the amount deductible for charitable contributions of African art to qualified organizations in all years in issue; 2) whether respondent properly assessed an addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations regarding petitioners' claimed values for the contributed art; 3) whether fees paid in 1977 and 1978 in connection with petitioners' art collection were properly deductible; 4) whether office furniture transferred to petitioner Ralph Neely (Neely) was taxable income or a non-taxable gift; 5) whether legal fees paid in 1977 and 1978 in relation to stock owned by petitioner Virginia Neely (Mrs. Neely) were properly deductible against ordinary income or should have been added to basis, and 6) whether respondent's motion to amend his answers should be granted, and if so, whether the imposition of section 6621(d) increased interest raised in the amendments is appropriate. For convenience, our Findings of Fact and Opinion are combined.

Some of the facts, and the exhibits pertaining thereto, are stipulated and are so found. Petitioners Ralph Neely and Virginia G. Neely are husband and wife, who, at the time they filed their petition, resided in Reno, Nevada. They filed their tax returns for the years in issue with the Internal Revenue Service in Ogden, Utah.

Petitioner Ralph Neely graduated from the University of Texas with a Bachelor of Science degree in Business in 1936 and later earned a graduate degree in business and investment management. He held several jobs while working his way through his undergraduate and graduate studies. One of these positions, which continued after graduation, was with the State of Texas Insurance Department. He later joined an insurance brokerage firm in Oklahoma City. During World War II, Neely became an officer in the United States Naval Reserve and served four years of active duty. Subsequently, he re- entered the insurance brokerage business. In 1959, he joined a business which later became the Doric Corporation (‘Doric‘). By 1973, he was president, chairman of the board of directors and chief executive officer, which positions he held until 1976. In April 1975, Doric was merged into a subsidiary (‘Esmark‘) of Esmark, Inc. In 1976, Neely exercised an option in his employment agreement to become a consultant to the firm. That same year, the Doric offices in Oklahoma City were closed and its operations transferred to the Chicago headquarters of Esmark.

Petitioner Virginia Neely graduated from Vassar College, and later continued her education by taking various art courses. Some of these were at the University of Oklahoma and were sponsored by the Oklahoma Art Museum. During World War II, Mrs. Neely worked with a steamship line in San Francisco, assisting in cargo and troop movements. She later returned to Oklahoma City, where she worked for a brief period as a medical lab technician. She has also been a housewife and is the mother of five children. Mrs. Neely has pursued her interest in art by studying ceramics of both Chinese and American origin, antique furniture of the French, English, and Early American styles, and oriental rugs. Through her pursuits she has acquired an interest in, and an aptitude for, interior design.

In addition to these other forms of art, Mrs. Neely also became attracted to African art. The term ‘African art‘ embraces sculpture crafted by native artisans and usually takes the form of masks or icons of the types used in tribal rituals. In 1968, Neely, aware of his wife's interest, gave her a Christmas present of a piece of African art which she had admired. Gradually, petitioners added pieces to their collection. Initial acquisitions were made from Ben Pickard (‘Pickard‘), a dealer in Oklahoma City. In 1972, petitioners made the acquaintance of Thomas L. McNemar (‘McNemar‘) while he was in Oklahoma City for the purpose of discussing African art with Pickard. By that time, petitioners had resolved to amass a very large personal collection of African art, and they purchased 118 pieces from McNemar in the period 1972 to 1974 for a total price of $161,267. McNemar sold the art to petitioners at his cost plus a 10 to 20 percent markup. Petitioners did not examine the art prior to the purchases.

Mrs. Neely, in 1973, formed Vaney, Ltd., (‘Vaney‘), an Oklahoma closely held corporation, of which she was the sole shareholder. Later that year, Vaney entered into a joint venture agreement with Ben Pic ard, Inc., creating the partnership Pickard Art Galleries, Ltd. (‘PAG‘). The stated purpose of the partnership was to operate an art gallery. Ben Pickard was the original manager of the gallery. He purchased for the gallery substantial amounts of African art from McNemar. McNemar decided what pieces would be shipped to the gallery, and he determined the prices he would be paid for these items. Although Pickard did not negotiate the prices the gallery paid for the pieces, he had authority to accept or reject any of the shipments. In the course of purchasing over 1,200 pieces from McNemar, Pickard made no rejections. PAG held a public auction in Dallas in June 1975, at which it offered more than 200 pieces of the African art. None of the items sold.

PAG, in financing its purchases of art, became primarily liable on promissory notes aggregating $250,000 to Liberty National Bank and Trust Company of Oklahoma City (‘Liberty‘). Petitioners were guarantors on these notes. In addition to the guaranty, Liberty had obtained a security interest in the art and certain other assets of PAG. PAG defaulted on the debt and although the bank had a right to call upon the guaranty without first foreclosing upon the collateral it elected to do the latter. Liberty chose to foreclose on the secured property (rather than call the guaranty) as a direct result of petitioners' agreement to bid a minimum of $260,000 for the property in bulk. The bank then took possession of the secured property, which consisted largely of African art, and on March 16, 1976, offered the property at a foreclosure auction. As of that date, the outstanding balance due Liberty, including interest and miscellaneous costs, was $255,761. The foreclosure sale was promoted by advertisement in the Wall Street Journal and in the principal newspapers in Dallas, Houston, and Los Angeles, these being considered by Liberty to be the major markets for the African art being sold. Nevertheless, petitioners' bid of $260,000 was the only bid. The amount of the bid allocable to the 1,202 pieces of African art included in the sale (other items were included in the bulk sale) is $246,909. Thus, by March 1976 petitioners owned approximately 1,300 pieces of African art, for which they had paid slightly more than $400,000.

McNemar was an acquaintance of Tom Seligman (‘Seligman‘), the curator at the M. H. de Young Memorial Museum (‘de Young‘) in San Francisco, California. Subsequent to the foreclosure auction in 1976, McNemar suggested that petitioners make a charitable contribution of some of the art to that museum. He did not suggest to petitioners, and they did not pursue, the possibility...

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