Pasqualini v. Commissioner
| Decision Date | 18 July 1994 |
| Docket Number | Docket No. 39096-87.,Docket No. 32279-87.,Docket No. 9332-89.,Docket No. 9391-89.,Docket No. 18463-90.,Docket No. 45508-86.,Docket No. 39541-87.,Docket No. 48955-86.,Docket No. 26140-89.,Docket No. 37626-87.,Docket No. 46466-86.,Docket No. 39095-87.,Docket No. 2011-91.,Docket No. 39094-87.,Docket No. 8702-89.,Docket No. 46096-86.,Docket No. 9394-89.,Docket No. 45377-86.,Docket No. 48956-86.,Docket No. 39093-87.,Docket No. 39604-87.,Docket No. 8692-89.,Docket No. 45507-86.,Docket No. 39603-87.,Docket No. 39535-87.,Docket No. 24165-87. |
| Citation | 68 T.C.M. 89 |
| Parties | Anthony J. and Jacqueline O. Pasqualini, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Thaddeus A. Oberc, 67 Evergreen Place, E. Orange, N.J., Harvey R. Poe, Gerald S. Rotunda, Robert J. Alter, Herbert L. Zuckerman, and Richard J. Sapinski, for the petitioners. William S. Garofalo and Brendan G. King, for the respondent.
Memorandum Findings of Fact and Opinion
Petitioners in these consolidated cases claimed charitable contribution deductions for the donation of a total of 180,000 Christmas cards to Catholic Charities. Respondent disallowed the deductions and determined income tax deficiencies, with additions to tax and increased interest, as reflected in the appendix, infra. After concessions, the issues for decision are:
(1) Whether the Christmas cards had a fair market value in 1982 of $1,890,000 ($10.50 per card) as petitioners contend or $22,500 (25 cents per card for 90,000 cards and zero for 90,000 cards) as respondent contends. We hold that the fair market value was $67,500 (50 cents per card for 120,000 cards, 25 cents per card for 30,000 cards, and zero for 30,000 cards).
(2) Whether petitioners are liable for: (a) Additions to tax for negligence under section 6653(a), overvaluation under section 6659, and substantial understatement under section 6661, and for (b) increased interest with respect to tax-motivated transactions under section 6621(c). We hold that they are.
Another issue for decision, whether, if petitioners had sold the Christmas cards, the gain would have been ordinary income and reduced petitioners' charitable contribution deductions pursuant to section 170(e)(1)(A), will be decided by separate opinion.
There are two groups of petitioners: (a) Clients of the accounting firm of Albano, Leaf, Saltzman, Pfeil, Maeder & Co. (the Albano, Leaf firm), and (b) accountants employed by the Albano, Leaf firm. Petitioners Adler, Pasqualini, Hassler, Perito, Seacor, Raymond Wendel, Mangino, Ribis, Frederick Wendel, Solimine, Marion, and Richard Wendel were clients of the Albano, Leaf firm. Petitioners Saltzman, Tendler, Schartoff, Pfeil, Bloom, Maeder, Leaf, and Albano were accountants employed by the Albano, Leaf firm. Respondent concedes that the notice of deficiency was not timely mailed to petitioner Vincent Perito for 1982.
Petitioners in the following docket Nos. resided in New York when they filed their petitions: 45377-86, 46466-86, 9332-89, 9391-89, and 9394-89. Petitioner in docket Nos. 46096-86 and 37626-87 resided in Connecticut when he filed his petition.
Petitioners in the following docket Nos. resided in New Jersey when they filed their petitions: 45507-86, 45508-86, 48955-86, 48956-86, 24165-87, 32279-87, 39093-87, 39094-87, 39095-87, 39096-87, 39535-87, 39541-87, 39603-87, 39604-87, 8692-89, 8702-89, 26140-89, 18463-90, and 2011-91.
Section references are to the Internal Revenue Code. Rule references are to the Tax Court Rules of Practice and Procedure. The term "petitioners" generally does not include spouses of the persons who were actively involved in the transactions.
Some of the facts have been stipulated and are so found.
This section relates to events that preceded petitioners' purchase and charitable contribution of the Christmas cards.
Petitioner Barry Adler (Adler) worked in the medical industry before and during the years at issue. In the late 1970s, Adler bought medical equipment at a bankruptcy auction and donated it to a hospital. Adler discussed making charitable contributions of medical equipment with his accountant, petitioner Donald Saltzman (Saltzman), after he contributed the equipment to the hospital. Saltzman is a certified public accountant and member of the Albano, Leaf firm. He has been Adler's accountant since the late 1960s. The parties stipulated that, except for petitioners Saltzman and Leaf, the members of the Albano, Leaf firm were not tax specialists but had an accountant's knowledge of the Internal Revenue Code.
In 1980, Adler and Saltzman began an arrangement in which Adler bought medical supplies and equipment at bankruptcy auctions for clients or members of the Albano, Leaf firm. The goods were stored for 1 year and then donated primarily to West Hudson Hospital or Pan American Development Foundation. From 1980 to 1982, Adler bought medical goods to be donated by members and clients of the Albano, Leaf firm for which the donors claimed charitable contribution deductions of $3 to $4 million. Adler received a 10-percent commission for these purchases.
Petitioners Pasqualini, Hassler, Perito, Marion, Seacor, Raymond Wendel, Frederick Wendel, and Richard Wendel of the clients' group and Pfeil, Maeder, Leaf, Albano, and Saltzman of the accountants' group deducted charitable contributions of medical goods totaling $202,830 under this arrangement in 1982.2 The Internal Revenue Service (IRS) began auditing this arrangement in late 1982 or early 1983.
On December 8, 1981, Adler went to a U.S. Customs Service (Customs Service) auction preview at the World Trade Center in New York City to buy medical equipment. While there, he saw Christmas cards with gold medallions among the property to be auctioned 2 days later. There were 10 lots of 18,000 cards each, for a total of 180,000 cards. The Customs Service auction catalogue stated that the cards were valued for import duty purposes at $10.50 each, for a total of $1,890,000.
Adler immediately contacted Saltzman to ask whether the cards could be purchased and donated to obtain tax benefits. Saltzman said yes, if they found a charitable donee to use the cards in its normal operations. Adler contacted a friend of his, Hy Frankel (Frankel), who occasionally did work for Catholic Charities, Diocese of Brooklyn (Catholic Charities). Frankel said that Catholic Charities might be interested in the cards.
Saltzman contacted Leonard Gubar, an attorney at Spengler, Carlson, Guber, Brodsky & Rosenthal (Spengler, Carlson), a law firm which specialized in tax matters. Saltzman described the proposed transaction and made an appointment for Adler and him to meet the next day with Gubar and Len Schneidman, another Spengler, Carlson tax partner. Schneidman briefly researched the deductibility of the cards. Gubar and Schneidman gave Saltzman and Adler the impression that they believed the proposed acquisition and donation of the cards was a sound arrangement, and that it was reasonable for petitioners to use the Customs Service value for charitable contributions purposes because the Customs Service is a branch of the Treasury Department.
Gubar told Saltzman that Spengler, Carlson wanted to buy two or three lots of the cards for their clients. Saltzman let them buy only one lot because he wanted to make the others available to his firm and its clients.
Saltzman and one of his partners, Peter Albano, contacted clients to recommend that they buy and donate the cards. They concentrated primarily on people who could invest money on short notice and who had participated in the medical goods contribution arrangement. Saltzman told the clients that Spengler, Carlson believed that the donation arrangement was sound and that they wanted to participate in it. Saltzman told petitioners the IRS might challenge the value of the Christmas cards when they bought them. The Albano, Leaf firm did not receive compensation from its clients for arranging the Christmas cards donation.
On December 10, 1981, Adler, Saltzman, and Emil Solimine (Solimine) purchased the 180,000 Christmas cards for $30,000 at the Customs Service auction. After the auction, Solimine insured the cards at their Customs Service value ($1,890,000). Adler paid for the cards to be delivered and stored in a warehouse, where they remained until they were delivered to Catholic Charities. The cards were packed in large crates which were about 5 feet high and 5 feet across and weighed about 600 pounds.
Petitioners have not dealt with Christmas cards or any similar property in any trade or business.
Each of the Christmas cards contained one of a series of six medallions embossed on gold foil which depicted a common Biblical scene related to Christmas (e.g., the Nativity). The Christmas cards were essentially identical; only the medallion and the text describing the scene on the medallion varied. The cards stated that the medallions were replicas of a gold medal created by Norman Sillman, "one of the World's renowned sculptors". The record contains samples of four of the six different cards and medallions. Four of the scenes were The Annunciation, The Manger Scene, The Three Wise Men, and the Departure To Egypt.
Each Christmas card was inside a folder (the outer folder). The outer folder bore the following legend on the inside left page:
The Order of The Holy Cross of Jerusalem
APOSTOLIC MISSION TO THE CHILDREN OF CENTRAL AND SOUTH AMERICA 60 EAST 94TH STREET, NEW YORK, N.Y. 10028 * Telephone 348-0948
On the back of each card was a Maltese cross type seal, followed by these words:
Lorenzo Michel de Valitch
A donation has become available through your purchase of this card replica and is gratefully acknowledged.
The welfare of children is...
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