Williford v. Commissioner, Docket No. 26613-89.

Citation67 T.C.M. 2542
Decision Date30 March 1994
Docket NumberDocket No. 26613-89.
PartiesGraham D. Williford v. Commissioner.
CourtUnited States Tax Court

Gary A. Moreland and Arthur R. Snyder, 4006 Beltline Rd., Dallas, Tex., for the petitioner. Martin M. Van Brauman, for the respondent.

Memorandum Opinion

COLVIN, Judge:

This case is before the Court on petitioner's motion for award of reasonable administrative and litigation costs pursuant to section 7430 and Rule 231.1

After concessions, we must decide:

Whether respondent's positions relating to: (a) Valuation of property contributed by petitioner to a charitable organization, and (b) petitioner's treatment of certain paintings as capital assets rather than inventory, were substantially justified. We hold that respondent's positions were not substantially justified. Powers v. Commissioner [Dec. 49,059], 100 T.C. 457 (1993); Frisch v. Commissioner [Dec. 43,459], 87 T.C. 838 (1986).

2. Whether petitioner meets the net worth requirement of 28 U.S.C. section 2412(d)(1)(B)(1988). We hold that he does.

In accordance with Rule 232, the parties have submitted memoranda supporting their positions and affidavits. Since no material fact is in dispute, we conclude that a hearing is not necessary for the proper consideration and disposition of this motion.

Background

1. Petitioner and the Underlying Tax Case

Petitioner lived in Fairfield, Texas, when he filed his petition. By notice of deficiency dated August 10, 1989, respondent determined deficiencies in petitioner's Federal income tax in the amounts of $259,097 for 1984, $9,515 for 1985, and $348,377 for 1986. Respondent also determined additions to tax totaling $155,862 for 1984, $6,660 for 1985, and $106,425 for 1986.

The two primary issues in the underlying case, Williford v. Commissioner [Dec. 48,408(M)], T.C. Memo. 1992-450, were: (1) The fair market value of a frieze painted by Thomas Wilmer Dewing donated by petitioner to the Brooklyn Museum of Art in 1984 (the valuation issue); and (2) whether paintings petitioner sold in 1984 and 1986 were inventory held for sale to customers or investment property (the capital gains issue). Respondent determined in the notice of deficiency that petitioner was entitled to deduct $1,300 for his donation of the frieze and that the paintings were held as inventory. Petitioner bought the frieze in 1969. We held that the frieze had a fair market value of $375,000 when petitioner donated it in 1984. We held for petitioner on the capital gains issue (i.e., that petitioner did not hold the paintings for sale to customers). We considered eight factors, all of which we concluded favored petitioner.

Respondent's total adjustment to petitioner's income, and the portion of the adjustment attributable to the capital gains and charitable contribution issues for 1984 and 1986, are as follows:

                Portion of adjustment
                             Total adjustment         attributable to—
                                to income       ----------------------------
                Tax           determined by       capital       donation of
                Year            respondent      gains issue   frieze in 1984
                1984 .....      $578,060          $387,525        $190,535
                1985 .....        35,690              0             35,690
                1986 .....       743,675           667,200          76,475
                

2. The Audit of Petitioner's 1984-86 Federal Income Tax Returns

Petitioner filed his 1984 and 1985 income tax returns on December 12, 1985, and August 19, 1986, respectively. Petitioner timely filed his 1986 return on April 15, 1987.

Petitioner reported the following with respect to his Schedule C art activity and Schedule D painting sales:

                Item                                                            1984      1985      1986
                Schedule C
                  Gross income ...........................................          0   $31,784   $   1,040
                  Cash expenses ..........................................   $ 52,830    36,630      31,594
                  Purchases ..............................................     76,276    43,307      98,667
                                                                             _________  _______   _________
                    Net cash loss ........................................   (129,106)  (48,153)   (129,221)
                  Cost of sales ..........................................          0    24,255       1,300
                Schedule D capital asset sales ...........................    649,865             1,112,000
                  Capital ................................................    387,525               667,200
                

Richard York (York), an art expert who was appointed to the Commissioner's Art Advisory Panel before the trial of this case, appraised the frieze for petitioner. Petitioner attached York's appraisal to his 1984 return. Petitioner reported a cost basis of $10,000 for the frieze on his 1984 tax return.

Petitioner's 1984 tax return was referred for audit to review his charitable deduction for the frieze. The examination was opened around September 30, 1987. Respondent did not contact York during the audit of petitioner's 1984-86 returns. Respondent asked petitioner to agree to extend the time to assess tax for his 1984 tax year. Petitioner did so on December 14, 1987. Petitioner was not otherwise contacted or interviewed by any of respondent's agents during the audit of his 1984-86 income tax returns.

Donna Shults (Shults) was petitioner's representative in the administrative proceeding. Respondent's agents did not contact petitioner or his representatives during the 20 months from September 30, 1987, to May 10, 1989, except to request copies of power of attorney forms.

In a memorandum dated January 12, 1989, Revenue Agent Jim Keller (Keller) identified the issues he thought were present in the case: (1) The fair market value and cost basis of the frieze; (2) whether the frieze was inventory property; (3) whether the recipient was a tax-exempt entity; and (4) whether the Schedule D art sales should have been reported as Schedule C sales (i.e., the capital gains issue). There is no indication in the record that petitioner knew about Keller's memo.

On May 10, 1989, Shults terminated petitioner's consent to extend the time to assess tax for 1984. However, at respondent's request, on June 14, 1989, Shults signed an agreement on petitioner's behalf to extend the time to assess tax for 1984 until June 30, 1990.

By letter to Shults dated May 10, 1989, Keller said he wanted to focus on petitioner's donation of the frieze. In that letter, Keller requested information about the frieze and the artist. By letter dated June 20, 1989, Keller told Shults that he would refer the valuation of the frieze to the Commissioner's Art Advisory Panel in Washington, D.C. By letter dated July 6, 1989, Keller asked petitioner to extend the time to assess tax for taxable years 1985 and 1986 because of the charitable contribution carryovers to 1985 and 1986. At that time, respondent had about 1 year remaining to assess tax for 1984, 2 months for 1985, and 10 months for 1986.

By letter dated July 11, 1989, Keller requested a copy of petitioner's 1986 tax return, which the agent had not been able to obtain on a timely basis from the Austin Service Center. On July 12, 1989, Keller asked Shults for information for the referral to the Commissioner's Art Advisory Panel and stated that he would request that a notice of deficiency be issued disallowing the charitable contribution unless petitioner agreed to extend the time to assess tax for 1985 beyond August 19, 1989, and for 1986 beyond April 15, 1990. There is no indication in the record that the time remaining to assess tax for 1984 and 1986 was insufficient for respondent to obtain an appraisal from the Commissioner's Art Advisory Panel.

Petitioner retained Arthur Snyder (Snyder) as counsel on July 14, 1989. Snyder represented petitioner at respondent's Appeals Division and at trial.

On July 18, 1989, Shults provided most of the frieze information Keller had requested. On July 19, 1989, Shults told Keller petitioner would not agree to extend the time to assess tax for 1985 and 1986 because the case had been under audit for 22 months. The only issue respondent had raised with petitioner's representatives up until that time was the contribution of the frieze in 1984, for which petitioner had previously agreed to extend the time to assess tax. Keller told her that the notice of deficiency would include all applicable penalties and would shift the 1984 and 1986 Schedule D painting sales to Schedule C (the capital gains issue). Respondent had not asked Shults or Snyder for any information about the capital gains issue. Keller gave no reason why the notice of deficiency would be issued for 1984 and 1986 without investigating the case at a time when 10 and 8 months, respectively, remained to assess tax for 1984 and 1986.

Keller's workpapers include his research and analysis of the issues he suspected were present in the case, including the capital gains and valuation issues. Keller's workpapers contain the following statements:

Problem is that taxpayer purchased all Schedule D paintings many years ago; lends credibility to his argument that held with eye to investment and appreciation over time.

In talking with employee of donee Brooklyn Museum of Art who personally knows taxpayer, he was described as an "Art Collector."

In order to protect government interest in the issues I propose to reclassify all Schedule D 8412 and 8612 painting sales as Schedule C transactions.

I do not have sufficient information to determine with certainty that * * * [1984] and * * * [1986] painting sales were bona fide Sch. C activities; but a pattern of classifying large dollar dispositions as "capital assets" and small dollar as "inventory" is apparent, and motive is present: doing so reduced * * * [taxpayer's] taxable income by significant amount * * *

I spoke with Linda Ewing of the Painting and Sculpture Department of the Brooklyn Museum. She verified that frieze was contributed in 1984: it has never been...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT