Williford v. Commissioner
| Decision Date | 10 August 1992 |
| Docket Number | Docket No. 26613-89. |
| Citation | 64 T.C.M. 422 |
| Parties | Graham D. Williford v. Commissioner. |
| Court | U.S. Tax Court |
Arthur R. Snyder, for the petitioner.
Martin M. Van Brauman and Mark B. Barta, for the respondent.
Memorandum Findings of Fact and Opinion
The primary issues in this case are whether petitioner held certain paintings for sale to customers, the fair market value of a frieze contributed by petitioner, and related additions to tax.
Respondent determined the following deficiencies and additions to tax:
Additions to Tax
Sec. Sec. Sec. Sec. Sec
Year Deficiency 6651 6653(a)1 6653(a)(2)1 66592 6661
1984 ....................... $259,097 $67,647 $18,678 3 $28,580 $40,957
1985 ....................... 9,515 2,700 1,105 3 2,855 0
1986 ....................... 348,377 -- 17,419 3 11,471 77,535
1 Section 6653(a)(1)(A) and (a)(1)(B) were in effect for 1986
2 Respondent concedes that if the addition to tax under section 6659 is applicable, the addition to tax under
section 6661 is not
3 Fifty percent of the interest due on $259,097, $9,515, and $348,377 for 1984, 1985, and 1986, respectively
By notice of deficiency, respondent also determined that petitioner was liable for increased interest under section 6621(c).
The issues for decision are:
1. Whether paintings petitioner sold in 1984 and 1986 were held for sale to customers. We hold that they were not.
2. Whether the fair market value of a frieze contributed by petitioner was $500,000 in 1984. Respondent contends that it was $150,000. We hold that it was $375,000.
3. Whether petitioner is liable for an addition to tax for late filing under section 6651(a)(1)1 for 1984 and 1985. We hold that he is.
4. Whether petitioner is liable for additions to tax for negligence for 1984 and 1985 under section 6653(a)(1) and (2) and for 1986 under section 6653(a)(1)(A) and (B). We hold that petitioner is liable as to sections 6653(a)(1) and 6653(a)(1)(A) with respect to the Schedule C deductions relating to his sale of investment paintings. As to sections 6653(a)(2) and 6653(a)(1)(B), we hold that he is not liable with respect to his characterization of the paintings as capital assets and his valuation of the Garrett frieze.
5. Whether petitioner is liable for additions to tax for valuation overstatement and substantial understatement of taxes under sections 6659 or 6661 for 1984, 1985, and 1986. We hold that he is not liable under section 6659. A Rule 155 computation is necessary to determine whether he is liable under section 6661.
6. Whether petitioner is liable for the interest on substantial underpayments attributable to tax-motivated transactions under section 6621(c) for 1984, 1985, and 1986. We hold that he is not.
7. Whether petitioner is liable for self-employment taxes for 1984 and 1986. We hold that he is not.
Some of the facts have been stipulated and are so found.
Petitioner resided in Fairfield, Texas, when he filed his petition. Petitioner engaged in farming activities from 1960 to 1968.
Petitioner has collected the works of 19th Century American Impressionist artists since 1957. His collection includes works by artists from the Hudson River School dating from 1820 to 1905. He owns works by Thomas Cole, Asher Brown Durand, Sanford R. Gifford, Worthington Whittredge, Elihu Vedder, Charles Caryl Coleman, and Thomas Wilmer Dewing. Petitioner's personal collection includes several hundred paintings.
Petitioner filed Federal income tax returns for 1984 on December 12, 1985, and for 1985 on August 19, 1986. Petitioner did not obtain extensions of time to file these returns. Petitioner's 1986 return was timely filed.
From 1980 through the years at issue, petitioner was a part-time art dealer, with no other interests except in family land investments. Petitioner spent about 10 percent of his time in 1984 through 1986 as an art dealer. Petitioner does not maintain a gallery open to the public.
Petitioner bought and sold for resale paintings with a value of $5,000 to $25,000. Petitioner sold art at auction or on consignment to other art dealers. Edward Shein (Shein) and Richard T. York (York) were the art dealers primarily used by petitioner. Petitioner did not conduct his art activities under any trade name.
Petitioner also bought paintings as an investment. Petitioner acquired "Two Boys and a Dog After a Fox" by William H. Beard by exchanging other paintings for it in 1962. He bought "Japanese Screen" by Robert Reid in 1964, "The Reader" by John White Alexander in 1964, "Two Heads" by Elihu Vedder in 1968, and "The Song" by Thomas Wilmer Dewing in 1970. In 1980 petitioner traded a painting he bought in 1973 for "Drifting On the Lagoon" by Ralph Curtis. In 1982 he traded two paintings (one acquired in the mid-1960s and one in 1970) for—"Quince Blossom" by Charles Caryl Coleman. Petitioner acquired these paintings for his personal collection and kept them in his apartment.
Over the years petitioner lent paintings to museums for public exhibitions, including several of the paintings he sold in 1984 and 1986.
Petitioner lived in an apartment at 102 East 10th Street in New York City during part of 1984. He had a couple of hundred paintings in his private collection in his apartment. He also conducted his part-time art dealership from that apartment. He stored his dealer inventory mainly at Cirker Hayes, a storage warehouse in New York City, and also had some at his apartment. Petitioner acquired the same kind of art for resale as the art that he collected.
In 1984, petitioner advertised "Two Boys and a Dog After a Fox" for sale. In 1984 petitioner sold Shein the following paintings: (1) "Two Boys and a Dog After a Fox" for $100,000, (2) "The Japanese Screen" for $150,000, and (3) "The Song" for $400,000. Petitioner had not offered to sell paintings to Shein before Shein's 1984 purchases.
Petitioner delivered a pastel by Walter Gay to the Richard York Gallery to sell in 1984. A buyer unknown to petitioner bought the painting for $5,625.
Petitioner used some of the proceeds from these sales to purchase an apartment at 250 West 82d Street in New York City.
Petitioner lived at and conducted his part-time art business from his 250 West 82d Street apartment in 1985 and 1986. Petitioner also kept his personal collection there in 1985 and 1986.
In 1986 petitioner sold Shein the following paintings: (1) "Two Heads" for $500,000, (2) "The Reader" (also called "The Woman in Black") for $250,000, and (3) "Quince Blossom" for $250,000.
Petitioner delivered "Drifting On the Lagoon" to York to sell for him. York sold it for $128,000 in 1986. Over a 10-year period, York bought, sold, or took on consignment approximately 12 to 15 paintings for petitioner.
Petitioner did not maintain complete records identifying the paintings sold, selling prices, dates of sales, original costs, or dates of purchases and exchanges.
Petitioner kept "Two Boys and a Dog After a Fox" in storage because it was too big for his apartment. He kept "The Reader which he sold in 1986, either in the warehouse or in the apartment.
Petitioner listed his occupation as "art dealer" on his 1984 and 1985 returns and listed his business activity as "art sales" on Schedule C filed with his 1984, 1985, and 1986 returns. Petitioner listed Principal Business Code 5884 ("other retail stores") on Schedules C filed with his 1985 and 1986 returns.
Petitioner reported no income from his Schedule C art activity for 1984. He treated all of the paintings sold (totaling $663,115) and the donated frieze (discussed below) as dispositions of capital assets.
Petitioner reported $52,830 in Schedule C expenses for 1984, which includes advertising of "Two Boys and a Dog After a Fox" ($1,202), the use of the apartment ($15,615), storage ($8,767), art restoration ($12,672), and other miscellaneous expenses. Petitioner did not advertise his inventory.
For 1985, petitioner reported that his Schedule C art activity had gross receipts of $31,784, cost of goods sold of $24,255, and expenses of $36,630, for a net loss of $28,716.
For 1986, petitioner reported that his Schedule C art activity had gross receipts of $1,040, cost of goods sold of $1,300, and expenses of $31,594, for a net loss of $31,854. Petitioner had sales of paintings of $1,128,000 which he treated as the disposition of capital assets.
Petitioner deducted storage warehouse expenses for Cirker Hayes as a Schedule C expense for 1984 through 1986.
Petitioner purchased the "Garrett frieze" by Thomas Wilmer Dewing (Dewing) in 1969 for $1,800, and donated it to the Brooklyn Museum of Art on December 20, 1984. The Brooklyn Museum of Art is a section 501(c)(3) organization qualifying as a charitable organization under section 170(a)(1) and (c) in 1984.
The Garrett frieze was commissioned by architect Stanford White and installed in the Baltimore, Maryland, home of Mr. and Mrs. Robert Garrett (now the Engineers Club in Baltimore).
Dewing painted from about 1875 to 1910. Dewing completed the Garrett frieze in 1885. It is 110.50 feet long. It consists of five panels with the following dimensions:
Two panels ................. 29 ft. × 39 in
One panel .................. 30 ft. 6 in. × 39 in
Two panels ................. 11 ft. × 39 in
The Garrett frieze is a decorative frieze, consisting of repetitive patterns. When donated in 1984, it was in good condition for a 100-year old painting. It was repairable through a careful and expert job of restoration.
Petitioner reported $10,000 as his basis in the Garrett frieze on the 1984 retur...
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