UNITED STATES TAX COURT
Agency decision
Ask Donna
What actually matters in this document.
Text
EBCC
S EVICE
STAT.
5._ . JUTE
FILES
T.C. Memo. 1998-35
UNITED STATES TAX COURT
ESTATE OF EMANUEL TROMPETER, DECEASED, ROBIN CAROL TROMPETER
GONZALEZ AND JANET ILENE TROMPETER POLACHEK, CO-EXECUTORS,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Docket No.
e
11170-95.
Filed January 27,
1998.
D died on Mar. 18, 1992, and his Federal estate
tax return reported the value of his estate (E) on the
alternate valuation date. R determined higher values
for many of the reported assets, assigned values for
unreported assets, and disallowed certain deductions.
R also detèrmined that E was liable for the fraud
penalty under sec. 6663(a), I.R.C. Held: Taxable
estate redetermined, including redeterminations of fair
market value. Held, further, E is liable for the fraud
penalty.
Robert A. Levinson, Avram Salkin, Bruce I. Hochman,
Charles P. Rettig, and Frederic J. Adam; for petitioner.
Irene Carroll, Anne E. Daugharty, Linette Angelastro,
and Donald E. Osteen, for respondent.
Í
SERVED JAN 2 7 1998
077
- 2 MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge:
This case is before the Court pursuant to a
petition filed on behalf of the Estate of Emanuel Trompeter (the
estate) to redetermine respondent's determination of a
$22,833,693 deficiency in Federal estate tax and a $14,875,909
fraud penalty under section 6663(a).
Respondent determined, as
an alternative to the fraud penalty, that the estate is liable
for an accuracy-related penalty for negligence and gross
valuation misstatement under section 6662.
Following concessions, the primary issue that the Court must
decide is the September 18, 1992, fair market value of the
following assets which the parties agree are included in the
gross estate of Emanuel Trompeter (the decedent):
1.
1,533.482 shares of Sterling Holding Co.
(Sterling)
series A exchangeable preferred stock (Sterling preferred stock).
We hold that the applicable value (including accrued dividends)
is $1,974,845.
2.
Two hundred twenty seven rare gold coins.
We hold that
the applicable value is $8,129,523.
The Court also must decide the following secondary issues:
1.
Whether the decedent's gross estate includes $14 million
of diamonds, jewels, gems, art, and artifacts that were not
reported on his Federal estate tax return.
We hold that his
gross estate includes $4.5 million of these assets.
- 3 2.
Whether certain other items determined by respondent to
be included in the decedent's gross estate are so included.
We
hold they are to the extent and in the amounts stated herein.
3.
Whether Sylvia Trompeter (Ms. Trompeter) had a bona fide
claim against the estate because the decedent, her former
husband, failed to disclose the value and extent of his coin
holdings during their divorce proceeding.
4.
We hold she did not.
Whether the estate is liable for the fraud penalty
determined by respondent under section 6663(a).
We hold it is.¹
Unless otherwise stated, all section references are to the
applicable provisions of the Internal Revenue Code, and all Rule
references are to the Tax Coùrt Rules of Practice and Procedure.
Dollar amounts are rounded to the nearest dollar.
The term
"co-executors" refers collectively to the estate's coexecutors,
Robin Carol Trompeter Gonzalez (Ms. Gonzalez) and Janet Ilene
Trompeter Polachek (Ms. Polachek).
FINDINGS OF FACT
I.
Overview
Some of the facts have been stipulated and are so found.
The stipulations and the exhibits submitted therewith are
incorporated herein by this reference.
The decedent was born in
New York on February 22, 1919, and he resided in Thousand Oaks,
California, when he died on March 18, 1992.
At the time of the
1 On account of this holding, we do not decide the
alternative determinations under sec. 6662.
- 4 filing of the petition, Ms. Gonzalez resided in Florida, and
Ms. Polachek resided in California.
The coexecutors are the decedent's sole beneficiaries and
his only surviving children.
Their mother is Ms. Trompeter.
Each coexecutor is college educated, has extensive work
experience, and knows about her obligation to file valid Federal
tax returns.
The coexecutors enjoy a close and friendly
relationship with Ms. Trompeter.
The coexecutors are cotrustees of the Emanuel Trompeter
Trust (the Trust), a trust that holds most of the decedent's
assets.
The Trust was revocable during the decedent's life,
and the decedent was its sole trustee until Ms. Gonzalez
became cotrustee with him in September 1991.
Ms. Polachek became
a cotrustee with Ms. Gonzalez following the decedent's death.
II.
The Decedent's Sale of Trompeter Electronics, Inc.
(TEI)
In 1960, the decedent and Ms. Trompeter formed TEI.
TEI
manufactured mainly electronic components which assisted in the
guidance system of air to ground missiles.
TEI also manufactured
components used in the television industry.
In March 1989, Sterling, a private company with a calendar
yearend, acquired all TEI stock in a leveraged transaction in
which the decedent and Ms. Trompeter received approximately
$14 million in cash and 3,000 shares of a newly issued Sterling
preferred stock.
These shares were the only shares of this type
of.preferred stock that Sterling issued, and holders of these
shares were generally entitled to more rights than holders of
- 5 Sterling's other preferred shares.
Of the 3,000 shares of
Sterling preferred stock received by them, the decedent received
1,533.482 shares and Ms. Trompeter received the rest.
Holders of
Sterling preferred stock were entitled to receive "preferential
dividends" on the liquidation value of the stock, when and as the
dividends were declared by Sterling's board of directors, and
they were entitled to certain preferences in the event of
042
liquidation.
Preferential dividends accrued daily at the annual
rate of 8.5 percent through the end of 1989, 9.83 percent during
1990, 11.17 percent during 1991, and 12.5 percent from the
beginning of 1992 through the date on which the Sterling
preferred stock was either redeemed or exchanged.
To the extent
that the dividends were not paid on January 15 of each year,
beginning January 15, 1990, all dividends which had accrued on
each share then outstanding would be added to the liquidation
value of that share and would remain a part thereof until the
dividends were paid.
The decedent and Ms. Trompeter were
entitled, subject to minimal restrictions, to exchange their
Sterling preferred stock for Sterling's 8-1/2 percent/12-1/2
percent subordinated debentures due December 31, 1995.
At designated intervals, Sterling was required by the
purchase agreement (the purchase agreement) underlying the
Sterling preferred stock to redeem shares of the stock at $1,000
per share plus accrued dividends.2
Sterling had to use its "best
2 The number of shares to be redeemed from each holder of
(continued...)
- 6 efforts" to redeem 1,000 shares of the Sterling preferred stock
on December 31, 1991, and another 1, 000 shares on December 31,
1992.
Sterling had a mandatory obligation to redeem 1,000 shares
of the Sterling preferred stock on each December 31, 1993 through
1995.
Redemptions and payments of dividends were prohibited
during any period of default on Sterling's senior debt.
Redemptions and payments of dividends were also prohibited by
provisions set forth in Sterling's senior debt and senior
subsidiary debt agreements.
These provisions generally tied
redemption to Sterling's profitability as shown in its
consolidated income statement.
Sterling's 1990 through 1992
consolidated income statements, which were part of those years'
financial statements which were audited and discussed without
qualification by Sterling's independent auditor, listed the
following information:
1990
Net sales
Cost of sales
Gross profit
$21, 801, 718
10,714,187
11,087,531
1991
1992
$20, 528, 033 $21, 77'7, 553
10,901,822 11,023,910
9,626,211 10,753,643
Selling, general &
administrative expenses
5,111,078
4,782,155
4,639,865
Amortization of goodwill &
other intangible assets
3,493,354
26,089,709
1,798,837
Operating income (loss)
2.483,099
(1,245,653)
4,314,941
2 ( . . . continued)
Sterling preferred stock would equal the product of the total
number of shares of Sterling preferred stock redeemed on that
date multiplied by a fraction. The fraction's numerator equaled
the total number of shares of Sterling preferred stock then held
by that holder. The fraction's denominator equaled the total
number of shares of Sterling preferred stock then outstanding.
- 7 Other income (expense) :
Amortization of deferred
financing costs:
interest expense
interest and other income
Total other expense
(448,855)
(4,089,050)
157,973
(4,379,932)
(448,855)
(3,557,997)
45,661
(3,961,191)
(460,522)
(3,003,309)
26,360
(3,437,471)
Income (loss) before income taxes
(1,896,833)
(5,206,844)
877,470
- 0 -
- 0 -
- 0 -
(1,896,833)
(5,206,844)
877,470
Provision for income taxes
Net income (loss)
1Includes $2, 953, 646 of amortization for a noncompetition agreement that
was writtenoff on account of the death of a party thereto.
No dividends were paid on the Sterling preferred stock from
its issuance through September 18, 1992, and no shares were
redeemed during that time.
Sterling had a positive cash-flow and
was timely paying interest and principal on its senior debt.
Sterling also was paying its monthly operating expenses.
Sterling had postponed paying interest and/or principal on some
of its liabilities which otherwise were due.
These postponements
were done with the consent of the relevant creditor(s).
When the decedent died, the Trust held 1,533.482 shares of
Sterling preferred stock.
On the decedent's Federal estate tax
return, the estate reported the applicable value of each share at
$10 and the total value at $15,335.
Approximately 13 months
after the date of valuation, Sterling informed its shareholders
that it was proposing to refinance and redeem the Sterling
preferred stock in accordance with the purchase agreement.
In
order to secure the refinancing, Sterling proposed to redeem each
share of the Sterling preferred stock at $1,000, plus, in lieu of
the accrued dividends, 5-percent interest from the time that each
- 8 share was issued until the time that it was redeemed.
On
January 17, 1994, after Ms. Trompeter and the coexecutors had
agreed to Sterling's redemption proposal, Sterling paid the
Trust $1,947,845 in redemption of the 1,533.482 shares.
Of the
$1,947,845 amount, $414,363 was for "interest". .
At the time of the leveraged transaction, the California
Franchise Tax Board (CFTB) was auditing TEI's State tax
liability.
In connection therewith, the decedent and Ms.
Trompeter agreed to indemnify Sterling equally for:
(1) Any tax,
penalty, or interest arising from the audit, and (2) any other
tax liability of TEI that related to the period ending on or
before a stated date.
Estimated amounts for these liabilities
were $3.3 million and $700,000, respectively.
In order to have
funds available to pay these liabilities, and to ensure
performance of certain noncompetition agreements, the decedent
and Ms. Trompeter agreed to place their Sterling preferred stock
and certain Government bonds into an escrow account.
On
March 17, 1989, the decedent and Ms. Trompeter transferred a
total of $4 million into an escrow account at City National Bank
(CNB).
Eleven days later, they transferred their Sterling
preferred stock into the account.
The decedent's cash of
$1,986,607 and his Sterling preferred stock were kept in a
subaccount that CNB maintained solely for his benefit, and
Ms. Trompeter's cash of $2,013,393 and her Sterling preferred
stock were kept in a separate subaccount at CNB that was
maintained for her.
The escrow agent was required to pay any
_ 9 _
claim that was submitted to the agent upon settlement of the
aforementioned liabilities.
Ms. Trompeter could withdraw certain
amounts of the cash from her subaccount before the agent paid the
liabilities, as could the decedent with respect to the cash in
his subaccount.
In early 1993, settlement was reached regarding TEI's
liability to CFTB.
On April 5, 1993, Ms. Gonzalez, on behalf of
042
the Trust, and Ms. Trompeter directed CNB to disburse funds from
the respective subaccounts to pay CFTB the amount of the
settlement.
Ten days later, CNB paid $3,077,100 out of the
escrow to CFTB.
Of this amount, $1,538,550 was paid on behalf of
the Trust, and $1,538,550 was paid on behalf of Ms. Trompeter.
Because the cash in Ms. Trompeter's subaccount totaled only
$1,423,772, the coexecutors authorized payment of the $115,266
shortage³ out of the decedent's subaccount.
III.
The Decedent's Coin Collection and Other Assets
The decedent learned that he had terminal cancer sometime in
the early part of.1991.
Attempting to place his affairs in
order, the decedent initiated the sale of his most valuable
asset, a proof gold coin collection.4
The decedent had collected
gold coins for at least 20 years and, before his death, he was a
3 We recognize that $1,538,550 minus $1,423,772 equals
$114,778, and that there is a $488 discrepancy. The parties have
not explained this discrepancy. Because the parties refer to the
shortage as $115,266, we do likewise.
4 The term "proof" describes the special minting process for
certain coins designed to be issued as gifts to dignitaries or
sold at a premium to collectors.
- 10 -
nationally known coin collector who owned many rare gold coins
and some silver coins.
The "Trompeter Collection", as it was
known in the coin world, was the decedent's premier gold coin
collection, consisting of 400 gold coins from the 19th and early
20th century.
One hundred and ninety one of these coins (the 191
coins) consisted of the following:
1.
$5 Liberty Head gold pieces (Half Eagles)
from 1858-1907;
2.
$5 Indian Head gold pieces (Half Eagles) from
1908-1915;
3.
4.
5.
$10 Liberty Head gold pieces (Eagles) from
1858-1907;
$10 Indian Head gold pieces (Eagles) from
1907-1915;
$20 Liberty Head gold pieces (Double Eagles)
from 1850-1907;
6.
$20 Saint Gaudens gold pieces (Double Eagles)
7.
The Amazonian Set, consisting of six coins;
and
Various patterns5 of $5, $10, and $20 gold
pieces.
from 1907-1915;
8.
The remaining coins in the Trompeter Collection were primarily
$1, $2-1/2, $3, and certain pattern gold coins.
The decedent had diligently obtained each coin in the
Trompeter Collection, often piece by piece, and his collection
was one of a kind.
The collection included a coin in every
denomination and in every year that a proof gold coin had been
minted by the U.S. Mint, with the exception of one coin, and
almost every proof coin in the Trompeter Collection was one of a
limited number of proof coins that had been minted for that year
5 Patterns are pieces that are minted not for general
circulation, but to determine if the coin, as made, would be
acceptable for general usage.
- 11 and one of a minuscule number of proof gold coins that still were
in existence.
The decedent divided the Trompeter Collection into
two parts and consigned both parts to an auction house named
Superior Stamp & Coin Co.
(Superior) with instructions to sell
the coins at auction in return for his paying it a commission of
7.5 percent of the gross proceeds.
The decedent dealt mainly
with Ira M. Goldberg (Mr. Goldberg), who was a part owner of
042
Superior and its primary manager.
In order to determine a coin's market value, the coin
generally must be graded on a scale from 1 to 70.
Uncirculated
coins are graded at between 60 and 70, and grade differences of
one point for uncirculated coins may account for percentage
differences in value of 50 percent or substantially more.
Every
increase in grade above a 62 increases the value of the coin
dramatically, and the difference in value between a coin that is
graded a 62 and a coin that is graded a 63 is material.
An
escalation in value is most apparent when the grade increases
above 63.
Beginning in April 1991, the decedent began grading each
coin in the Trompeter Collection in preparation for the auction,
and he began assigning each coin a value and reserve price; the
reserve price is the lowest amount at which a coin may sell at
auction. The decedent was assisted in this process by Mr.
Goldberg.
Both Mr. Goldberg and the decedent were experienced in
grading and pricing gold coins.
The decedent, in particular, had
been grading gold coins for at least 20 years.
Of the 400 coins
- 12 -
in the Trompeter Collection, the decedent graded 174 according to
the 70 point grade scale mentioned above, and he graded each of
the remaining 226 coins as either "proof", "general proof",
"choice proof", or "general to choice proof".
The decedent did
not assign a number grade to any of the remaining 226 coins.
The
following chart shows the number of coins that received each
grade from the decedent:
Grade
Number of Coins
60
63
64
65
13
38
73
50
Proof
General proof
Choice proof
General to choice proof
Total
1
132
56
_32
400
Superior proposed to sell the Trompeter Collection in two
auctions, the first of which it held on February 25, 1992.
Superior auctioned 209 of the 400 coins in the Trompeter
Collection for sale at the first auction, and there was a high
demand in response thereto.'
Two hundred and one of the 209
coins auctioned for sale sold for the total amount of $3,850,622.
Approximately $2,628,730 of the gross proceeds was attributable
to the decedent's proof coins which he had valued at $2,598,000.
Shortly after the first auction concluded, Superior began
preparing a catalog of the 191 coins for sale at the second
auction which was scheduled for October 13, 1992.
The decedent
' The 209 coins auctioned for sale at the first auction did
not include any of the 191 coins mentioned above.
- 13 -
had graded many of these coins as either general proof, choice
proof, or general to choice proof, and he had calculated that the
total value of these coins was $7,635,000 as of July/August 1991.
The decedent died on March 18, 1992.
Shortly thereafter,
Mr. Goldberg asked two independent grading services, Professional
Coin Grading Service (PCGS) and Numismatic Grading Co.
grade the 191 coins.
(NGC), to
Contrary to the decedent's expressed views,
042
Mr. Goldberg believed that the 191 coins would realize more at
auction if they were graded by an independent grading service.
In March 1992, PCGS graded all 191 coins, but for the 6-piece
Amazonian set and three other coins which PCGS refused to grade,
and PCGS encapsulated the graded coins into a tamper-proof
plastic container.
One month later, all 191 coins, but for the
6-piece Amazonian set, were graded by NGC after NGC had removed
the coins from their containers.
The following chart shows the
number of coins that received each grade from PCGS and NGC:
Grade
Number of Coins--PCGS
Number of Coins--NGC
60
61
62
63
64
65
66
67
68
69
0
3
17
69
78
12
1
1
0
1
182
1
0
12
21
71
51
22
5
1
1
185
Total
.
On May 4, 1992, Superior communicated the results of the
PCGS grading to Robert A. Levinson (Mr. Levinson), the estate's
attorney, and Mr. Levinson communicated these results to the
- 14 -
coexecutors.
The coexecutors believed that PCGS' grades were
lower than expected and would lead to lower sale prices at the
second auction because the rare coin market was in a "recession".
On June 29, 1992, Mr. Levinson asked Mr. Goldberg to postpone the
second auction.
When Mr. Goldberg refused, the coexecutors, as
cotrustees of the Trust, sued Superior to enjoin the second
auction.
Ms. Gonzalez represented to the court in seeking the
injunction that the 191 coins were worth more than $12 million.
On September 24, 1992, the Superior Court of the State of
California for the County of Los Angeles (the superior court)
issued an order enjoining the second auction.
This was the
beginning of protracted litigation between Superior and the
estate.
This litigation was settled 2 years later with the
superior court rescinding the contract with Superior under which
Superior was entitled to auction the 191 coins in return for a
7.5 percent seller's commission, and with Superior's returning
the 191 coins to the estate.
The estate acquired numerous appraisals of the 191 coins
immediately prior to and during the litigation with Superior.
On July 2, 1992, Julian M. Leidman (Mr. Leidman) valued the 191
coins at $8.5 million, based on the assumption that the coins
would be sold individually over an extended period of time in
other than a declining market.
The estate used this appraisal in
the litigation to enjoin the second auction.
Approximately
4 months later, Mr. Leidman appraised the 191 coins at $3.451
million.
The estate used this appraisal to value the coins at
- 15 -
$3,192,175 on the estate tax return; the reported value equals
the $3.451 million appraisal less an estimated 7.5 percent
seller's commission of $258,825 which would be payable to
Superior assuming that all 191 coins sold at the second auction.
Mr. Leidman also valued the 191 coins at $4.5 million as of the
date of the decedent's death, and $3.78 million as of the
alternate valuation date.
042
During the litigation between Superior and the estate, the
estate recovered 36 additional coins which were owned by the
decedent, and which Mr. Goldberg had not disclosed to the estate
beforehand.
The decedent had consigned most of these coins to
Superior to sell at auctions other than the two scheduled in
1992.
It was not until Mr. Goldberg was questioned about
additional coins during the discovery process in the superior
court proceeding that he admitted that some of the decedent's
other coins were in his possession.
In or around March 1993,
Superior informed the estate that the decedent had consigned
numerous coins to Superior in 1991, and that 24 of these coins
had not yet been sold.
One month later, Superior returned these
24 coins to the estate along with two other coins.
The remaining
10 coins (out of the 36 additional coins recovered by the estate)
consisted of the 8 coins which went unsold at the February 1992
auction and two other coins for which the record does not
disclose the history.
The 36 additional coins were described on
the estate tax return as "Additional group of gold coins" and
- 16 -
35 of these coins were valued on the return at $275,400.
No
value was placed on the 36th coin.
In February 1992, the decedent instructed his personal
accountant, Henry Schiffer (Mr. Schiffer), to prepare a list of
the decedent's assets and each asset's estimated value.
The
I
document was entitled "Ed Trompeter asset list (not including
coins) as of February 21, 1992".
The document was based on
conversations between Mr. Schiffer and the decedent, records
maintained in Mr. Schiffer's office, and his contacts with people
who maintained other records for the decedent.
Included on Mr.
Schiffer's one-page list was, among other things, a gun
collection valued at $10,000, a music collection valued at
$50,000, and diamonds and other gems totaling $500,000.
None of
these items were included on the decedent's estate tax return.
IV.
Pertinent Claims Against the Estate
The 'decedent and Ms. Trompeter separated on August 8, 1984,
and 2 years later they were in the midst of a divorce proceeding.
During the pendency of this proceeding, Barry Stuppler (Mr.
Stuppler), president of a coin and appraisal store named Gold
& Silver Emporium, prepared two disclosure statements identifying
the decedent's community property coins and each coin's appraised
value.
The appraisal on the first statement totaled $5,200,673.
The appraisal on the second statement totaled $1,684,444.
Shortly after the decedent's death, Ken Lodgen (Mr. Lodgen),
the estate's accountant, informed the coexecutors that the
decedent¡may not have disclosed his entire gold coin collection
9
- 17 -
to Ms. Trompeter during the divorce proceeding, and that Ms.
Trompeter may have a claim against the estate with respect
thereto.
On June 16, 1992, Mr. Lodgen, using only Mr. Stuppler's
first disclosure statement, supplied Mr. Levinson with a list
allegedly identifying community property coins that were not
disclosed to Ms. Trompeter during the divorce proceeding.
Many
of the undisclosed coins set forth on Mr. Lodgen's list were
042
included in Mr. Stuppler's second disclosure statement, which
Mr. Lodgen did not know about when he compiled his list.
Based on the information provided by Mr. Lodgen, Ms.
Trompeter claimed that she was not told about the existence of
some of the decedent's gold coins acquired during their marriage,
and that these coins were community assets.
On August 13, 1992,
she filed a creditor's claim against the estate in probate court.
This claim was denied.
On or about September 24, 1992, she sued
the estate in the superior court, alleging, among other things,
that the decedent had fraudulently concealed coins valued in
excess of $10 million.
Ten months later, the parties to that
proceeding purportedly settled the case for $1,370,734; i.e.,
$1,486,000 less an offset of $115,266 in connection with the
estate's payment 6f the shortage.
Under the terms.of the
"settlement", the estate was required to pay Ms. Trompeter the
amount stated therein by the earlier of (1) June 15, 1996, or
(2) 90 days after the estate recovered possession of the 191 gold
coins from Superior.
On or around December 4, 1996, the superior
court entered judgment against the estate for $1,370,734 plus
- 18 -
interest from August 1, 1993, at a rate of 3.6 percent compounded
semiannually through and including December 1, 1996.
the estate has not paid any of the judgment.
To date,
The estate deducted
$1,486,000 on the decedent's Federal estate tax return for Ms.
Trompeter's claim.
A second claim against the estate was filed by Vivian
Ballard Wong (Ms. Wong).
She had a personal relationship with
the decedent, and they had planned to marry.
Ms. Wong filed a
creditor's claim against the estate based on the decedent's
alleged promise to transfer one-third of his estate to her.
The
claim was settled for $70,000.
A third claim against the estate was filed by Joe Pasko
(Mr. Pasko), the son of a female former acquaintance of the
decedent.
Mr. Pasko filed a creditor's claim against the estate
on January 14, 1993, alleging that the decedent had agreed to
allow him to sell the decedent's diamonds, jade and ivory
collections, ancient Chinese artifacts, and handmade unique wool
rug.
He alleged that these goods were worth at least $14
million, and that he was due a $1.4 million commission.
Mr. Pasko's claim was denied.
On June 15, 1993, Mr. Pasko filed
suit against the estate in the superior court.
The suit was
successfully opposed by the estate on demurrer.
V.
Preparation and Filing of Estate Tax Return
Right before the decedent died, he discussed his holdings
with Ms. Gonzalez in depth, and he introduced her to his
attorneys, accountants, financial advisers, bankers, and
- 19 -
acquaintances in the coin world.
Following the decedent's death,
the coexecutors fired the decedent's long-time counsel and
retained Mr. Levinson to deal with estate tax matters.
The
coexecutors also fired the decedent's long-time accountant,
Mr. Schiffer, and retained the accounting firm of Frankel,
Lodgen, Lacher, Golditch & Sardie (Frankel Lodgen) to serve as
the estate's accountants.
Ms. Gonzalez instructed Mr. Schiffer
042
to forward the decedent's records to Frankel Lodgen.
Patricia L. Bates (Ms. Bates) of Frankel Lodgen prepared the
estate and 1991 gift tax returns based primarily on files
received from Mr. Schiffer.
Ms. Bates arbitrarily chose in
May 1993 to report the total value of the decedent's Sterling
preferred stock at $15,335.
She and the coexecutors were both
aware that prior valuations of his stock had been much greater
than $15,335, and that at least one recent appraisal had listed
the value of his stock in excess of $3 million.
Ms. Bates had
also valued the decedent's stock 1 month earlier at $462,000, a
value which included a 70-percent discount that she believed
applied primarily to take into account the decedent's minority
interest and the fact that the stock was not paying dividends.
Ms. Bates brought her $462,000 valuation to the attention of
Ms. Gonzalez in or about April 1993.
Ms. Bates reported the
value of the decedent's 191 coins at $3,192,175 based on Mr.
Leidman's corresponding appraisal.
Ms. Gonzalez did not inform
Ms. Bates that Mr. Leidman had valued these coins at $8.5 million
on another occasion.
Ms. Bates asked Ms. Gonzalez whether the
- 20 decedent owned any jewelry or diamonds at the time of his death.
Ms. Gonzalez answered "no", and Ms. Bates did not report any
jewelry or diamonds as assets of the decedent's estate.
On or before June 10, 1993, Frankel Lodgen presented
Ms. Gonzalez with the decedent's estate tax return.
She reviewed
this return at length with Ms. Bates, and both Ms. Bates and
Ms. Gonzalez signed the return on that day.
Ms. Polachek signed
the return 1 day later, and 5 days after that, the coexecutors
filed the decedent's estate tax return with respondent.
The
coexecutors, on behalf of the estate, elected to value the estate
on the alternate valuation date of September 18, 1992.
estate was returned at $26,422,781.
The gross
The taxable estate was
returned at $12,002,201.
VI.
Reward Agreement
Various sources alerted respondent that the estate may have
underpaid its estate tax.
Among other things, several
individuals supplied respondent wit,h information regarding the
decedent's holdings and estimated values.
One of the primary
catalysts for respondent's audit of the decedent's estate tax
return was an informant's claim filed by Mr. Goldberg and his
cousin Larry Goldberg (collectively the Goldbergs).
Following
numerous discussions, respondent and the Goldbergs entered into a
reward.agreement, under which the Goldbergs agreed to provide
respondent with certain information on the decedent and his
estate in exchange for a reward not to exceed $1 million.
Under
the agreement, the Goldbergs were required, if necessary, to
- 21 -
testify before any court, grand jury, or any other forum
investigating the decedent or his estate.
Payment of the reward
was contingent on respondent's conclusion that respondent
received valuable information from the Goldbergs which was not
previously known and which directly resulted in the collection of
taxes, additions to tax, fines, and/or penalties from the estate.
Under the reward agreement, the Goldbergs were not entitled to a
042
reward if the evidence furnished was of no value.
VII.
Respondent's Jeopardy Assessment
On February 24, 1995, respondent, pursuant to a jeopardy
assessment, seized assets located in two safe deposit boxes that
were registered in the name of the Trust.
The boxes were located
respectively at First Interstate Bank and Union Bank in Encino,
California.
The safe deposit box at First Interstate Bank
contained gold coins which belonged to the Trust and which, with
one exception, were the 36 additional coins reported on the
decedent's estate tax return.
The safe deposit box at Union Bank
contained assets that were not reported on the decedent's return.
These unreported assets included gold and silver coins and a
portion of the jewelry and gems in issue.
The coexecutors
reported on the decedent's estate tax return that he neither
owned nor had access to a safe deposit box at the time of his
death.
In addition to the two safe deposit boxes at the banks,
the decedent had a safe in his house.
The coexecutors knew of
the existence and location of the safe and safe deposit boxes,
and they knew that the decedent had access to all three "safes".
- 22 OPINION7
Congress has imposed a graduated estate tax on wealth
passing frým one generation to another.
The decedent was a man
of considerable
wealth, and his transfer of this wealth to the
I
objects of|his bounty was subject to this tax to a significant
degree.
Th the extent that his wealth could be excluded from his
taxable estate, his estate tax burden would be reduced and a
greater portion of his wealth would pass on to the coexecutors,
who were his daughters and only beneficiaries.
From the point of
view of the coexecutors, they would benefit directly by the
removal of any value from the decedent's taxable estate.
Taxpayers may remove value from an estate, and otherwise
minimize their taxes, by employing any legitimate means.
In the
case at hand, the question is whether the means employed by the
estate were.legitimate.
Respondent argues they were not.
During the trial, respondent elicited testimony from
witnesseslwho included Kathleen Goldberg, Ira M. Goldberg, and
Larry Goldberg. We find little of this testimony to be credible.
Much of their testimony was vague, elusive, uncorroborated,
inconsistènt, and self-serving. Mr. Goldberg, in particular, is
a person of questionable veracity. He did not reveal assets held
by Superior which rightly belonged to the estate, he is a paid
informant| who is biased, and he was involved in litigation with
the estate whidh fostered ill will between him and the estate's
representatives. Under the circumstances, we are not required
to, and we do not, rely on the testimony of these witnesses to
support respondent's positions herein. See Combs v. Plantation
Patterns,l 106 F.3d 1519, 1538 (11th Cir. 1997); Henson v.
Commissioner, 887 F.2d 1520, 1526 (11th Cir. 1989), affg. T.C.
Memo. 1988-275; Ruark v. Commissioner, 449 F.2d 311, 312 (9th
Cir. 1971), affg. per curiam T.C. Memo. 1969-48; Clark v.
Commissioner, 266 F.2d 698, 708-709 (9th Cir. 1959), affg. in
part and remanding in part T.C. Memo. 1957-129; Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986).
I
- 23 -
Respondent has generally determined that the estate, acting
through its coexecutors:
the Government,
(1) Attempted to conceal assets from
(2) intentionally undervalued assets, and
(3) intentionally overvalued deductions.
Respondent has adjusted
the reported values of the subject assets and deductions,
determined values for the unreported assets, and determined that
the estate committed fraud.
did nothing fraudulent.
The estate generally argues that it
According to the estate, it may have
misvalued some of the reported assets and deductions, and failed
to report some other assets, but it did not do so with the
requisite fraudulent intent.
The estate also asserts that it did
not misvalue the items to.the extent determined by respondent.
We must disentangle the proffered values of decedent's
wealth and determine whether the disputed items are adjustments
to his reported taxable estate.
We also must pass on
respondent's determination of fraud.
assertion that we do not take lightly.
Fraud is a powerful
A bright line exists
between fraudulent and negligent conduct, and an attempt to
remove value from an estate does not necessarily constitute
fraud.
One is not required to arrange his or her affairs so that
the Government will receive more tax than it is rightfully owed.
Nor is it fraudulent to construe an ambiguous law reasonably in a
manner that is adverse to the Government.
Fraud occurs, however,
when a taxpayer deliberately overvalues property with an eye
towards tax evasion, or attempts to conceal taxable assets from
the reach of the Commissioner.
- 24 -
Property includable in a decedent's gross estate is included
at its fair market value on either:
(1) The date of the
decedent's death or (2) the alternate valuation date described in
section 2032.
Fair market value is "the price at which the
property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or to sell and
both having reasonable knowledge of relevant facts".
Sec.
20.2031-1(b), Estate Tax Regs.; see also secs. 2031(a), 2032(a);.
Fair market value is a factual determination, and the trier of
fact must weigh all relevant evidence of value and draw
appropriate inferences.
Commissioner v. Scottish Am. Inv. Co.,
323 U.S. 119, 123-125 (1944); Helvering v. National Grocery Co.,
304 U.S. 282, 294 (1938).
Respondent's determination of fair
market value is presumed correct, and the taxpayer must prove it
wrong.
Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).
An actual arm's-length sale of property is most indicative
of its fair market value, assuming that the date of the sale is
close to the valuation date.
See Ward v. Commissioner, 87 T.C.
78, 101 (1986); Estate of Andrews v. Commissioner, 79 T.C. 938,
940 (1982).
If actual sales are not available, fair market value
is determined based on a hypothetical willing buyer and a
hypothetical willing seller.
These hypothetical persons are not
specific individuals or entities, and their hypothetical
characteristics may differ from the personal characteristics of
the actual seller or a particular buyer.
Commissioner, 823 F.2d 483, 486
Estate of Watts v.
(11th Cir. 1987), affg. T.C.
- 25 Memo. 1985-595; Estate of Bright v. United States, 658 F.2d 999,
1005-1006 (5th Cir. 1981); Kolom v. Commissioner, 644 F.2d 1282,
1288
(9th Cir. 1981), affg. 71 T.C. 235 (1978); Estate of
Newhouse v. Commissioner, 94 T.C. 193, 218 (1990); Estate of
Reynolds v. Commissioner, 55 T.C. 172, 195
(1970); see also
Mandelbaum v. Commissioner, T.C. Memo. 1995-255, affd. without
published opinion 91 F.3d 124
(3d Cir. 1996).
Experts often help the Court determine fair market value.
We need not follow an expert's opinion, however, when it is
contrary to our judgment.
If we believe it appropriate, we may
adopt or reject an expert's opinion in its entirety, Helvering v.
National Grocery Co., supra at 294-295, or adopt only selective
portions of the opinion, Parker v. Commissioner, 86 T.C. 547, 562
(1986).
See Doherty v. Commissioner, 16 F.3d 338, 340 (9th Cir.
1994), affg. T.C. Memo. 1992-98.
With these basic principles in
mind, we turn to the issues in dispute.
1.
Fair Market Value of the Decedent's Sterling Preferred Stock
Before addressing the value of the decedent's Sterling
preferred stock, we pause briefly to decide a relevancy issue
raised by the estate as to facts concerning Sterling's redemption
of the Sterling preferred stock.
Respondent argues that the
January 17, 1994, redemption of the Sterling preferred stock sets
the stock's fair market value on the applicable valuation date.
Respondent contends that the stock's fair market value totals
$1,947,845, an amount that respondent derives from adding the
- 26 redemption price of $1,533,482 to the $414,363 amount that was
paid for "interest".
The estate argues that facts concerning the redemption are
irrelevant to our determination.
The estate claims that the
redemption was not foreseeable on the applicable valuation date
of September 18, 1992, given -Sterling's questionable financial
condition and its failure to meet redemptions which were
scheduled, but not made, before that date.
The estate points to
the purchase agreement, under which Sterling could not redeem any
of the Sterling preferred stock, or pay any dividends with
respect thereto, if the redemption or payment would violate the
terms of the senior debt or occur during any period of default on
senior debt.
The estate also observes that Sterling had forgone
partial redemptions in 1991 and 1992.
We disagree with the estate that facts concerning the
redemption are irrelevant to our determination of value.
Although these facts may not necessarily set the fair market
value of the Sterling preferred stock on the applicable valuation
date, see Estate of Scanlan v. Commissioner, T.C. Memo. 1996-331
(adjustments made to redemption price to account for þassage of
time, as well as the change in the setting from the date of the
decedent's death to the date of the redemption), affd. without
published opinion 116 F.3d 1476 (5th Cir. 1997), we believe they
are relevant to our determination of that fair market value.
Estate of Gilford v. Commissioner, 88 T.C. 38, 52
See
(1987); Estate
of Jephson v. Commissioner, 81 T.C. 999, 1002 (1983); see also
- 27 -
Estate of Van Horne v. Commissioner, 720 F.2d 1114, 1116 (9th
Cir. 1983), affg. 78 T.C. 728 (1982); Estate of Scanlan v.
Commissioner, supra.
That the Sterling preferred stock would be
redeemed on or before the December 31, 1995, date set forth in
the purchase agreement, at or about the price stated therein, was
foreseeable on September 18, 1992, based on the facts available
on that date.
Doherty v. Commissioner, supra at 340.
The estate
is mistaken in asserting that Sterling's financial position was
too weak on September 18, 1992, to effectuate a redemption of the
Sterling preferred stock on or after that date.
Sterling's 1990
through 1992 cash-flow was positive, and its losses for 1990 and
1991 stemmed mainly from its amortization of intangible assets
and deferred financing costs.
Sterling's loss in 1991 was also
attributable to the one-time writeoff of $2,953,646, an expense
that sprang automatically from the death of a party subject to
the underlying noncompetition agreement.
net income of $877,770 in 1992.
Sterling also realized
Although Sterling's 1992 income
statement did not report this income until after the applicable
valuation date, it is reasonable to conclude under the facts
herein that Sterling had (or could have obtained) enough
information on September 18, 1992, to ascertain that it would
report a significant amount of net income for that year.
The fact that Sterling had not effectuated partial
redemptions in 1991 or 1992 is also not controlling.
Redemptions
during those periods were based on a "best efforts" standard, and
Sterling's failure to redeem the Sterling preferred stock during
- 28 -
those years under the circumstances herein does not support a
finding that Sterling would have breached its obligation to
effectuate the mandatory redemptions which were scheduled for
each December 31, 1993 through 1995.
Indeed, Sterling met its
obligation to redeem the decedent's Sterling preferred stock when
it redeemed all Sterling preferred stock on January 17, 1994.
We
will overrule the estate's relevancy objection to the
admissibility of facts concerning the redemption.
Turning to the valuation issue, special rules govern the
valuation of corporate stock.
When stock is listed on an
established securities market, the stock's value usually equals
its listed market price.
When stock is not listed on such a
market, the stock's value may be based on arm's-length sales (if
any) that have occurred within a reasonable time of the valuation
date.
(1982).
Estate of Andrews v. Commissioner, 79 T.C. 938, 940
In the absence of arm's-length sales, the value of
unlisted stock may be based on the value of listed stock of the
subject corporation, or, if the corporation has no listed stock,
the listed stock of like corporations engaged in the same or a
similar line of business.
Sec. 2031(b); Estate of Hall v.
Commissioner, 92 T.C. 312, 336 (1989).
Unlisted stock may also
be valued indirectly by reference to the subject corporation's
net worth, its prospective earning power, its dividend-earning
capacity, its goodwill, its management, its position in the
industry, the economic outlook for its industry, the degree of
control represented by the block of its stock to be valued, and
- 29 the amount and type of its nonoperating assets if not considered
elsewhere.
See Estate of Hall v. Commissioner, supra at 335;
Estate of Andrews v. Commissioner, supra at 940; sec. 20.20312(f), Estate Tax Regs.; see generally Rev. Rul. 59-60, 1959-1
C.B. 237.
In ascertaining the value of stock in a decedent's
estate, all shares of that stock are aggregated.
See Ahmanson
Found. v. United States, 674 F.2d 761 (9th Cir. 1981).
042
When ascertaining the value of unlisted stock by reference
to listed stock, a discount from the listed price may be
warranted in order to reflect the unlisted stock's lack of
marketability.
Such a discount, commonly known as a
"marketability discount", reflects the absence of a recognized
market for closely held stock and accounts for the fact that
closely held stock is generally not readily transferable.
Mandelbaum v. Commissioner, T.C. Memo. 1995-255.
See
A marketability
discount also reflects the fact that a buyer may have to incur a
subsequent expense to register the unlisted stock for public
sale.
See Estate of Trenchard v. Commissioner, T.C. Memo.
1995-121.
The estate must prove the presence and amount of a
marketability discount.
Rule 142(a); Estate of Gilford v.
Commissioner, supra at 50-51.
Respondent did not call an expert at trial to support
respondent's determination that the value of the decedent's
Sterling preferred stock was $1,947,845.
Respondent relies
mainly on Sterling's financial condition and Sterling's ability
to redeem the decedent's shares in accordance with the purchase
- 30 -
agreement.
The estate counters that the fair market value of the
shares was $184,018.
The estate called an expert, Herbert T.
Spiro (Mr. Spiro), to support this value, and the Court received
his report into evidence.
See Rule 143(f).
Mr. Spiro, who is
certified by the American Society of Appraisers, was a professor
of finance at California State University, Northridge,
California, from 1969 to 1988.
He currently manages a
professional consulting organization which specializes in
economic feasibility assessment and financial analysis.
Mr. Spiro valued the Sterling preferred stock by referencing
the price-to-book values of comparable publicly traded preferred
stock issues and arriving at a percentage to apply to the
Sterling preferred stock.
He concluded that the Sterling
preferred stock was generally equivalent to a "C" and/or "D"
rated security," and that the Sterling preferred stock was closer
to a "D" rating because it was nonpaying and much of Sterling's
debt was "technically" in default.
He noted that, near the
applicable valuation date, Sterling had $2.8 million'in accrued
but undeclared dividends on all of its stock and $3.1 million of
accrued but unpaid interest.
Mr. Spiro identified 10 comparable preferred stock issues.
From those issues, he concluded that the following companies'
issues at the high end of the "D" rating and the low end of the
042
A "C" rated security is a nonpaying issue. A "D" rated
security is a nonpaying issue of an issuer that is in default on
its debt.
- 31 -
"C" rating were comparable to the Sterling preferred stock:
TransWorld Airlines (TWA), Rymer Foods (Rymer), and SPI Holding
(SPI).
TWA's preferred stock had a "D" rating and was trading
near the alternate valuation date at 11 percent of its call
price.
Rymer's preferred stock had a "C" rating and was trading
near the alternate valuation date at 10.9 percent of its call
price.
SPI's preferred stock had a "C" rating and was trading
042
near the alternate valuation date at 12.5 percent of its call
price.
Mr. Spiro used the 11, 10.9, and 12.5 percentages from
these comparable issues to derive a multiple to apply to the
redemption price of Sterling's preferred stock to arrive at its
freely traded value.
He settled on a 15-percent multiple for the
Sterling preferred stock, concluding that an upward adjustment to
the percentages derived from the comparable issues was necessary
because Sterling had a positive cash-flow and was timely paying
interest and principal on its senior debt.
He calculated that
the freely traded value of each subject share was $150 (i.e.,
15 percent of the $1,000 redemption price, exclusive of accrued
dividends), and that the freely traded value of all of the
decedent's Sterling preferred stock totaled $230,022.
Mr. Spiro
reduced this freely traded value by 20 percent to reflect the
stock's alleged lack of marketability, and opined that the fair
market value of the decedent's Sterling preferred stock on the
applicable valuation date was $184,018.
We are unpersuaded by Mr. Spiro's analysis and opinion.
Sterling preferred stock was a better grade than a "C" or "D"
The
- 32 -
rated security.
In addition to the fact that Sterling was paying
its monthly operating expenses, Sterling was servicing its senior
debt.
The fact that Sterling may have postponed paying interest
and/or principal on some of its liabilities is not entitled to
much weight, because any postponed payment was done with the
consent of the relevant creditor.
Mr. Spiro also relied
inappropriately on companies that were not comparable to
Sterling.
TWA, for example, had filed for bankruptcy on
January 31, 1992, and its auditor had expressed substantial doubt
concerning its ability to continue as a going concern.
by contrast, was not in bankruptcy.
Sterling,
Moreover, its 1990 through
1992 financial statements were accompanied by its auditor's
unqualified opinion on the validity of those statements.
The
auditor did not conclude that Sterling was on the verge of
bankruptcy or that its future corporate existence was in doubt.
Likewise, Rymer's financial status resembled that of TWA.
Rymer
had been told that its line of credit would not be renewed, which
raised serious concerns that, absent its recapitalization, it
would be driven into bankruptcy.
Nothing in the record persuades
us that Sterling was on the verge of bankruptcy.
To the
contrary, the record indicates that Sterling was a viable entity
that recapitalized primarily to alter its capital structure.
Finding no help from the only expert to testify on this
issue, we are left to value the decedent's Sterling preferred
stock based on the record at hand.
We do not agree with
respondent that the redemption price of the Sterling preferred
- 33 -
stock equals its fair market value on September 18, 1992, a date
that preceded the redemption by 16 months.
Sterling's mandatory
obligation to redeem the stock, however, does establish a
benchmark for determining the applicable value.
We concluded
above that it was foreseeable on September 18, 1992, that
Sterling would redeem the Sterling preferred stock on or before
December 31, 1995, at or about the price stated in the purchase
agreement.
We conclude similarly that a hypothetical willing
buyer would have bought (and a hypothetical willing seller
would have sold) the decedent's Sterling preferred stock on
September 18, 1992, at a price that approximated the present
value of the amounts that a holder of the decedent's Sterling
preferred stock would have received for the mandatory
redemptions.
On each December 31 of 1993 through 1995, Sterling
was obligated to redeem approximately 511.161 shares of Sterling
preferred stock from the decedent (or a successor holder).
Taking into account the fact that dividends accrued daily under
the purchase agreement at the rates which were set forth therein,
we find that Sterling was obligated to pay the following amounts
for the redeemed shares on the respective dates:
$986,978, and $1,118,368.8
$871,023,
Applying a reasonable discount rate
of 4 percent to each amount to ascertain its present value on
042
We find these amounts by using well-established present
value formulae. For purposes of our computation, we assume that
the Sterling preferred stock was issued on Mar. 15, 1989.
Although the record discloses that Sterling issued the Sterling
preferred stock in Mar. 1989, the record does not reference a
specific date.
- 34 -
September 18, 1992, we find that these payments were worth
$827,298, $900,676, and $980,562 on that date.
We conclude that
the applicable value of the decedent's Sterling preferred stock
was approximately $2,708,536 ($827,298 + $900,676 + $980,562) on
September|18, 1992.
We need not pinpoint exactly the fair market value of the
decedent's Sterling preferred stock on the applicable valuation
date.
Suffice it to say that respondent determined that the
applicable value of the decedent's Sterling preferred stock
(including the accrued dividends) was $1,947,845, a value which
is approximately 28 percent less than the approximate fair market
value which we determine herein, and the estate has not persuaded
us that the actual fair market value was less than respondent's
determination.
issue.
We sustain respondent's determination on this
S,ee Anselmo v. Commissioner, 80 T.C. 872, 886
(1983),
affd. 757 F.2d 1208 (11th Cir. 1985).
2.
Two Hundred Twenty-Seven Gold Coins
a.
The 191 Coins
Respondent determined that the applicable value of the
191 coins was $8.5 million.
Respondent called an expert,
I
Steven Conturi (Mr. Conturi), to support this determination, and
the Court received his report into evidence.
See Rule 143(f).
Mr. Conturi has been in the retail and/or wholesale rare coin
business!since 1975.
He ascertained that the value of the 191
coins was $9,081,000, by referencing the price at which the coins
last traded on the open market as listed in certain numismatics
- 35 newsletters.
Mr. Conturi acknowledged that overall sale prices
in the coin market were lower toward the later part of 1992, but
concluded that this "recession" had little if any effect on
premium coin collections like the Trompeter Collection.
Mr.
Conturi did not factor in any type of discount to arrive at his
conclusion of fair market value.
The estate argues that the applicable value of the 191 coins
#
was between $4.5 million and $4.8 million.
two experts.
The estate relies on
The first expert, Maurice Rosen (Mr. Rosen), is the
president of Numismatic Counseling, Inc., a rare coin company
that specializes in assembling and managing investment
portfolios.
He has been the editor of the Rosen Numismatic
Advisory (a provider of coin analysis and market commentary)
since 1976, and he was a part-time grader at NGC from 1987
through 1990.
He valued the 191 coins according to the following
methodology.
First, he assigned an unadjusted value to each
coin, based on raw price data and relevant grading factors.
In
so doing, he graded 61 percent of the coins the same as PCGS,
26 percent of the coins lower than PCGS, and 13 percent of the
coins higher than PCGS.
In the case of one set of coins (the
6-piece Amazonian Set), he did not grade the set but relied
solely on his opinion as to its fair market value.
Second, he
aggregated each coin's unadjusted value to arrive at an
unadjusted value for all coins.
Third, he adjusted his
aggregated unadjusted value to reflect four discounts and one
premium.
The first discount, he testified, was a tainted status
- 36 -
discount that takes into account the market's awareness that the
second grading by NGC was on the high side and that the initial
grading by PCGS was arguably the more reliable of the two
gradings.
The second discount, he testified, was a blockage
discount that takes into account his belief that the market will
react negatively to a sale of a large collection of coins at one
time.
The third discount, he testified, was a market factor
discount that takes into account his belief that the rare coin
market was in a poor state on the applicable valuation date and
that dealers were reluctant to buy gold coins except at bargain
basement prices.
The fourth discount, he testified, was a
contracts/low bids discount that takes into account his belief
that Superior's contractual right to sell the coins at auction
would have a depressing effect on their values.
Mr. Rosen
testified that the Superior contract and the sale of all coins at
one time would potentially foster a prearranged bidding scheme
whereby buyers would deliberately bid low.
Mr. Rosen established a range for each discount:
10 to 20
percent for the tainted status discount; 10 to 25 percent for the
blockage discount; 10 to 15 percent for the market factor
discount; and zero to 15 percent for the contracts/low bids
discount.
Acknowledging that his discounts overlapped somewhat,
he concluded that it was inappropriate to take the aggregated
75-percent maximum discount.
He took the aggregated 30-percent
minimum discount and reduced the aggregated unadjusted value of
the coins by this percent.
He then increased the resulting value
- 37 by a small premium, which he concluded ranged from zero to 10.
percent, to reflect the recognition of the decedent's name and
its connection to the collection.
Mr. Rosen then reduced the new
amount by 7.5 percent to reflect Superior's auction fee.
His
unadjusted total valuation for the 191 coins was $6,202,850.
After applying the aforementioned discounts, premium, and the
7.5-percent auction fee, Mr. Rosen concluded that the fair market
value of the 191 coins on the applicable valuation date was
$4,217,163.
The estate's second expert, Julian M. Leidman (Mr. Leidman),
has dealt in rare coins full-time for over 30 years.
He is a
member of the American Numismatic Association and the
Professional Numismatists Guild.
He was retained by the estate
to prepare five different appraisals of the subject coins.
Four
of these appraisals, all of which are mentioned above in our
findings of fact, were for the 191 coins.
For purposes of this
proceeding, Mr. Leidman valued the 191 coins at $3.78 million.
In so doing, he considered the decedent's contract to sell the
coins through Superior, a declining coin market, the large number
of pieces contained in the collection, the impact of flooding the .
market, and the period of time in which the coins were to be
sold.
He also assumed that the coins would be sold as a
collection and not individually.
He contended that a 20-percent
blockage discount was warranted, but did not ascertain such a
discount separately because he inherently factored this discount
into his analysis.
- 38 -
- Although we find the experts helpful to our understanding of
the world of numismatics, we find none of them helpful to our
determination of the fair market value of the 191 coins.
Mr.
Conturi aÃcertained the fair market value of the 191 coins based
on the grades assigned by NGC, and he gave no consideration to
PCGS' grades, which were the lower of the two gradings.
Mr.
Rosen failed to consider market factors in reaching his
conclusich of the coins' unadjusted value, and he took into
account novel discounts which are not recognized for Federal tax
purposes.
His tainted status discount, for example, rests on
assumptions that we do not find to be valid on the facts herein.
This is also true for his market factor and contracts/low bid
discounts.
With respect to the contract/low bid discount, in
particular, auctions are an appropriate and often used means of
presenting and selling rare coins.
We do not see how an auction
sale would have a ·depressing effect on the sale prices of the
decedent's coins.
As to the blockage discount, a blockage
discount typically reflects the depressing effect of placing a
large block of stock on the open market for sale at one time.
See sec. 20.2031-2(e), Estate Tax Regs.; see also Estate of
Sullivan v. Commissioner, T.C.. Memo. 1983-185.
Even if we were
to assume that such a discount applied to the rare coin market,
which we do not find to be a valid assumption under the facts
herein, the discount would be inapplicable here because the
Trompeter Collection was an impressive collection with many
unique coins.
The market would have been able to handle all
- 39 -
191 coins, as evidenced by the fact that 96.2 percent of the
decedent's 209 coins auctioned at the first auction sold there
for an aggregate price that approximated the aggregate value
calculated by the decedent.
Nor do we find Mr. Leidman helpful to our determination of
the coins' fair market value.
He valued the 191 coins at $3.78
million based on the assumption that the coins would be
042
liquidated because they had to be sold.
In making such an
assumption, Mr. Leidman admittedly disregarded the mandate of
section 20.2031-1(b), Estate Tax Regs., that "fair market value
* * * is not to be determined by a forced sale price".1°
He also
assumed inappropriately that the coins would be sold as a group
and not individually.
Finding none of the experts helpful to our determination of
the coins' fair market value, we proceed to value the coins based
on the record at hand.
We are guided by the decedent's valuation
of the subject coins.
The decedent was a noted collector, with
at least 20 years' experience in collecting and grading coins.
The record shows that he did an excellent job in ascertaining the
value of coins.
He ascertained that the 201 coins sold at the
February 1992 auction were worth $2,598,000, and these coins sold
for approximately $2,628,730.
The actual sales price differed by
less than 2 percent from the decedent's valuation of these coins.
1° Mr. Leidman acknowledged on cross-examination that the
191 coins would be worth $8.5 million if the compulsion aspect
was removed.
- 40 -
The decedent valued the 191 coins at $7,635,000.
Although
the estate presented some evidence of a "buyer's market", we find
that the economic downturn would not have materially affected the
sale of the 191 coins because they were part of a premier
collection.
We also do not believe under the facts herein that a
reduction for an estimated seller's commission is warranted.
Under section 20.2053-1(b)(3), Estate Tax Regs., an item may be
deducted on an estate tax return though its exact amount is not
then known, provided it is ascertainable with reasonable
certainty and will be paid.
The superior court rescinded the
contract with Superior under which Superior would receive a
7.5-percent seller's commission, and the 191 gold coins were
returned to the estate.
We find no certainty that the estate
will sell the coins in the future under a commission arrangement,
and, even if we did, we are unable to ascertain the amount of any
future seller's commission with reasonable certainty.
We hold
that the applicable value of the 191 coins is $7,635,000,
b.
Thirty-Six Additional Coins
Respondent determined that the applicable value of the
36 additional coins was $816,300.
Respondent's expert, Mr.
Conturi, valued these coins using the same methodology that he
employed to value the 191 coins.
Mr. Conturi concluded that the
fair market value of the 36 coins was $609,770 on the alternate
valuation date.
Respondent concedes that the value of these
36 coins is no higher than Mr. Conturi's valuation.
- 41 -
The estate asserts that the fair market value of the
36 coins' was $274,650.
Mr. Leidman valued 35 of these coins, and
his analysis generally parallels his analysis for the 191 coins.
He testified that 35 of the 36 coins had a fair market value of
$274,650 on the alternate valuation date; neither he nor the
estate addressed the value of the 36th coin at trial.
We have the same inherent problems with the experts'
042
valuations of the 36 additional coins, as we did with their
valuations of the 191 coins.
We reject both of their opinions.
We are uncomfortable, however, with the value ascribed to these
coins by respondent.
Accordingly, we proceed to value the coins
based on the record at hand.
Although the decedent did not value
the 36 additional coins, he did value the 191 coins mentioned
above, and the 36 coins were sufficiently similar to the 191
coins to allow us to rely on the decedent's valuation of the 191
coins for purposes of valuing the 36 additional coins.
The
decedent valued the 191 coins at $7,635,000, a figure that is
18.9 percent lower than the $9,081,000 value ascertained by
Mr. Conturi.
Based on our analysis of the 191 coins, we find
that Mr. Conturi overvalued the 36 coins by 18.9 percent.
We
conclude that the fair market value of the 36 additional coins on
the applicable valuation date was $494,523 (i.e., $609,770 less
18.9 percent).
3.
Fair Market Value of Unreported Items
Respondent determined that the estate failed to report
$14 million in diamonds, jewelry, gems, art, and artifacts.
- 42 -
Respondent's determination is based primarily on Joe Pasko's
(Mr. Pasko) claim for the $1.4 million commission, wherein he
stated that the decedent retained him to sell assets that were
worth at least $14 million.
Respondent's determination is also
based on the value of the assets that were seized from the safe
deposit boxes.
The estate has conceded that the estate failed to report
approximately $1 million of this $14 million amount.
The estate
argues that certain of the seized assets were property that the
decedent had given in September 1991 to the coexecutors, in their
individual capacities.
The estate points to the testimony of the
coexecutors to the effect that the decedent had given them most
of the seized assets, and that they had placed the assets in one
of the safe deposit boxes for safekeeping.
We are unpersuaded by the coexecutors' testimony that the
decedent gave them some of the seized assets, and the record
shows to the contrary; e.g., several witnesses testified that
they had seen some of the seized assets in the decedent's
possession after the alleged gifts took place.
We look to the
objective facts in the record, and we find that a Federal gift
tax return was never filed reporting these items as gifts.
We
also find that these items were seized from a safe deposit box
that was in the name of the Trust.
We conclude that the seized
assets were owned by the decedent (through the Trust) when he
died, and that they were includable in his gross estate.
- 43 -
We are unable to conclude, however, that the estate failed
to report $14 million in assets, as determined by respondent.
The record does not disclose all of the unreported assets that
respondent believes makes up the disputed amount of approximately
$13 million, and we conclude from the record that Mr. Pasko was
not knowledgeable on the full extent of the decedent's holdings.
Following our detailed review of the record, we find that the
estate failed to report $4.5 million of assets (inclusive of the
approximately $1 million amount conceded by the estate).
In
addition to the items which were seized from the safe deposit
boxes, the unreported assets consist mainly of gems, jewelry,
furniture, and a music collection.
4.
Other Items
a.
The $115,266 Shortfall
Respondent increased the decedent's adjusted taxable gifts
by $115,266 to reflect a post-death gift made to Ms. Trompeter in
connection with the $3,077,100 payment to CFTB.
Ms. Trompeter
was obligated to indemnify Sterling for half of the amount paid
to CFTB, but, because her subaccount had only $1,423,772 in cash
when the payment was due, the coexecutors authorized the escrow
agent to pay the $115,266 shortage from the decedent's
subaccount.
Respondent determined that the estate's payment of
the shortage, coupled with the later "offset" of the $115,266 in
connection with the "settlement" of Ms. Trompeter's claim, was an
adjusted taxable gift made by the coexecutors on behalf of the
estate.
- 44 -
We disagree with respondent's determination.
Although
respondent is correct that Ms. Trompeter became liable to the
estate for $115,266 when its assets were used to pay a portion of
her obligation, and that she never repaid this amount to the
estate, these facts standing alone do not mean that the estate
made a $115,266 gift to her.
The value of the loaned funds was
included in the decedent's gross estate.
Thus, no further
addition to the decedent's estate is warranted on account of this
transaction.
b.
We hold for the estate on this issue.
The Decedent's 1990 Bad Debt Deduction
Respondent increased the decedent's adjusted taxable gifts
by $327,447 to reflect respondent's disallowance of various bad
debt deductions claimed by the decedent on his 1990 Federal
income tax return.
The decedent claimed a $327,447 short-term
capital loss, described as "loans to third parties", with respect
to the following transactions:
(1) On February 17, 1990, he gave
Ms. Wong $30,000; the underlying "note" conditions repayment of
the "loan" on Ms. Wong's sale of her residence;
(2) on May 21,
1990, he gave Ms. Wong $38,000; the record contains neither a
note nor any other reliable evidence of a loan;
(3) on May 26,
1990, he gave $209,447 to Ms. Wong's mortgagee; the record
contains neither a note nor any other reliable evidence of a
loan;
(4) on October 17, 1990, he gave Phil Skauronski (Mr.
Skauronski) $25,000, and Mr. Skauronski gave the decedent a
"note" stating that he would repay the $25,000 with 15.5 percent
interest in 12 equal monthly payments; and (5) on October 22,
- 45 -
1990, the decedent gave Mr. Pasko $25,000; Mr. Pasko and the
decedent both signed a "note" that did not provide for interest,
security, collateral, or a fixed schedule of repayment.
Mr.
Pasko has never made any payments on this "loan".
Respondent argues that these transactions were not bona fide
loans, but unreported taxable gifts.
The estate does not address
the "loans" to Mr. Skauronski and Mr. Pasko.
The estate contends
that the payments to Ms. Wong were loans, or, in the alternative,
consideration for services rendered.
We agree with respondent.
An individual may claim a
short-term capital loss for a nonbusiness bad debt that becomes
worthless during the taxable year.
Sec. 166(d).
so, however, the debt must be bona fide.
·In order to do
A bona fide debt arises
"from a debtor-creditor relationship based upon a valid and
enforceable obligation to pay a fixed or determinable sum of
money".
Sec. 1.166-1(c), Income Tax Regs.
A bona fide debt does
not include an advance to a friend solely for reasons other than
to make a profit.
Case law establishes a two-part test for determining whether
a transfer of money qualifies as debt.
First, repayment of the
purported debt cannot be contingent upon a future event.
Second,
the transfer must be made with a reasonable expectation, belief,
and intention that it will be repaid.
See Zimmerman v. United
States, 318 F.2d 611 (9th Cir. 1963).
Whether a transfer is made
with the requisite expectation, belief, and intent is factual,
John Kelley Co. v. Commissioner, 326 U.S. 521 (1946), and the
- 46 following nonexclusive factors, none of which is controlling by
itself, are relevant to this determination:
or other evidence of indebtedness exists;
charged;
(1) Whether a note
(2) whether interest is
(3) whether there is a fixed schedule for repayments;
(4) whether any security or collateral is requested;
there is any written loan agreement;
repayment has been made;
(5) whether
(6) whether a demand for
(7) whether the parties' records, if
any, reflect the transaction as a loan;
(8) whether any
repayments have been made; and (9) whether the borrower was
solvent at the time of the loan, see Zimmerman v. United States,
supra at 613; Estate of Maxwell v. Commissioner, 98 T.C. 594, 604
(1992), affd. 3 F.3d 591 (2d Cir. 1993); Clark v. Commissioner,
18 T.C. 780 (1952), affd. 205 F.2d 353
(2d Cir. 1953).
These
factors focus primarily on ascertaining the intent of the parties
to the transfer through their objective and subjective
expectations.
Bauer v. Commissioner, 748 F.2d 1365, 1367-1368
(9th Cir. 1984), revg. T.C. Memo. 1983-120; A.R. Lantz Co. v.
Commissioner, 424 F.2d 1330, 1333-1334 (9th Cir. 1970).
Applying this two part analysis to the subject transactions,
we find that the $30,000 transfer to Ms. Wong fails the first
part of this analysis.
Because the underlying note conditions
repayment of the "loan" on the sale of her house, she was under
no absolute obligation to repay the "loan".
She would never have
to repay the "loan", for example, if she never sold her home.
This transaction is not bona fide debt for purposes of section
166.
- 47 -
As to the other transactions, none of these transactions
evidence a repayment contingency.
Thus, we conclude that they
meet the first part of our analysis and turn to the second part.
We divide the remaining transactions as follows:
transactions with or concerning Ms. Wong,
(1) Remaining
(2) transaction with
Mr. Skauronski, and (3) transaction with Mr. Pasko.
Ms. Wong's remaining transactions do not meet the second
part of our analysis.
We find no note or evidence of
indebtedness for the transactions.
We do not find that she was
required to pay interest on the "loaned" amounts.
We do not find
a fixed schedule of repayment, security, or collateral.
We do
not find that the decedent or his estate demanded that she repay
any part of the "loaned" amounts, or that she actually repaid any
amount.
We do not find that either she or the decedent
considered either transaction a loan.
We conclude that Ms.
Wong's remaining transactions were not bona fide loans.11
As for the $25,000 transfer to Mr. Skauronski, we find
similarly.
Although the estate presented evidence of a note
issued to the decedent for the transaction, we do not find this
"note" dispositive.
his name.
We know nothing about Mr. Skauronski, but
Although the estate contends that the estate made a
demand for repayment of the "loaned proceeds", the record does
not support this contention.
We conclude that this transaction
was not a bona fide loan.
¹¹ Nor do we find that the subject amounts were paid to
Vivian Ballard Wong as compensation for services rendered.
- 48 -
Nor do we find that the transaction between the decedent and
Mr. Pasko was a bona fide loan.
Although the transaction is
evidenced by a "note" signed by both Mr. Pasko and the decedent,
the note provides no schedule of repayment, no interest, no
security, and no collateral.
this "note".
Nor were payments actually made on
We conclude that this transaction was not a bona
fide loan.
Because we find that none of the bad debts claimed by the
decedent were bona fide loans, we proceed to address whether the
amounts of the purportedly worthless debts are included in the
decedent's estate tax computation as adjusted taxable gifts.
An
estate's tax liability equals (1) the tentative tax on the sum of
the taxable estate plus the adjusted taxable gifts, less (2) the
aggregate tax on all gifts made after December 31, 1976.
2001(b).
Sec.
Adjusted taxable gifts are computed by subtracting
certain deductions (none of which are applicable herein) and
exclusions from the taxable gifts that were made during the
taxable period.
Sec. 2001(b); Estate of Smith v. Commissioner,
94 T.C. 872, 874
(1990).
A taxable gift is any transaction
whereby property is passed gratuitously to another.
25.2511-1(c), Estate Tax Regs.
Sec.
The decedent is allowed to
exclude annually $10,000 of the total gifts which he made to each
person.
See sec. 2503(b).
We hold that the decedent's transfers to or on behalf of
Ms. Wong, Mr. Skauronski, and Mr. Pasko are includable in the
decedent's estate tax computation as taxable gifts.
After
- 49 -
applying the annual exclusion for each donee, the decedent's
adjusted taxable gifts for 1990 are increased by $267,447,
$15,000, and $15,000, respectively, or a total of $297,447.
c.
The $258,825 Claim Against Superior
Respondent determined that the estate had a $258,825 claim
against Superior, and that this claim was miscellaneous property
of the estate.
The estate valued this claim at zero on the
estate tax return, identifying it as a claim against Superior for
the release of coins assigned to Superior.
The return noted that
the probability and amount of any collection of this claim was
unknown.
We hold for the estate on this issue.
The value of this
claim was zero on the applicable valuation date, as evidenced by
the fact that the estate received only its coins back in
settlement of its dispute with Superior.
The value of the
returned coins was included in the gross estate, as discussed
above.
5.
Ms. Trompeter's Claim
Respondent disallowed the estate's $1,486,000 deduction for
the claim of Ms. Trompeter.
Respondent argues primarily that a
genuine controversy did not exist between Ms. Trompeter and the
estate, and that the estate claimed the deduction solely to
reduce its estate tax liability.
Respondent contends that the
estate challenged the claim in probate court to create the
appearance of a valid claim, and that Ms. Trompeter's complaint
in superior court was a sham.
Respondent contends that the
- 50 -
superior court's consent decree approving the purported
settlement was not on the merits of her claim.
Alternatively,
respondent argues, even if the estate and Ms. Trompeter were
involved in a real controversy, the estate has not proven that
Ms. Trompeter's claim was allowable under applicable State law.
Respondent contends that the record does not show that coins were
withheld from her during the divorce proceeding, which is the
linchpin of her claim.
The estate concedes that its original
computation of the deduction for Ms. Trompeter's claim was wrong,
and that subsequent recomputations are less than the reported
amount.
The estate asserts that it is entitled to a deduction of
$682,025.
We agree with respondent's result on this issue.
For
purposes of computing a taxable estate for Federal estate tax
purposes, an estate may deduct certain claims against it that are
allowable "by the laws of the jurisdiction * * * under which the
estate is being administered".
Sec. 2053(a).
Claims are
deductible if they are based on the personal obligation of the
decedent at the time of his or her death.
Tax Regs.
Sec. 20.2053-4, Estate
A liability arising out of tort is an example of a
claim that is deductible under section 2053(a).
The issue here is whether Ms. Trompeter had a valid claim
against the estate under California law.
We begin our inquiry by
looking at the proceeding in the superior court, which culminated
in that court's entering a consent decree in favor of Ms.
Trompeter.
Section 20.2053-1(b)(2), Estate Tax Regs., provides
- 51 that a consent decree before a local court will be accepted as a
basis for an estate tax deduction.
Section 20.2053-1(b)(2),
Estate Tax Regs. further provides that:
The decision of a local court as to the amount and
allowability under local law of a claim or
administration expense will ordinarily be accepted if
the court passes upon the facts upon which
deductibility depends * * * However * * * It must
appear that the Court actually passed upon the merits
of the claim. This will be presumed in all cases of an
active and genuine contest. * * *
As noted by the Court of Appeals for the Ninth Circuit, "an order
of a state Court that adversely affects the tax right of the
United States and which is based upon a nonadversary proceeding,
does not foreclose the federal courts from [independently]
determining the tax liabilities".
111, 113-114 (9th Cir. 1955)
222 F.2d 131, 136
Wolfsen v. Smyth, 223 F.2d
(quoting Newman v. Commissioner,
(9th Cir. 1955), affg. 19 T.C. 708
(1953)); see
also Robinson v. Commissioner, 102 T.C. 116 (1994), affd. on this
issue 70 F.3d 34
(5th Cir. 1995).
As an initial matter, we find that the State court
proceeding did not involve a real and bona fide controversy
between adverse parties, and that the superior court's decree was
not the result of its consideration of the merits of Ms.
Trompeter's.claim.
Memo. 1972-141.
See Estate of Nilson v. Commissioner, T.C.
Ms. Trompeter was the coexecutors' mother, and
the coexecutors' actions during the State court proceeding were
more akin to daughters' trying to share inherited wealth with
their parent at the expense of the tax collector, than a party
- 52 -
suing another in a truly adversarial proceeding in a court of
law.
As a point of fact, the coexecutors did not investigate or
legitimately challenge the validity of Ms. Trompeter's claim
before they let their mother receive a significant part of the
decedent's estate.
Nor did Ms. Trompeter pursue payment on the "settlement" in
a meaningful manner.
She only pursued collection of the
"settlement" when the superior court informed the parties there
that they had neglected to file a dismissal in the case.
Before
this time, neither party had acted on the settlement or moved
toward final judgment in 3 years.
The estate had recovered the
191 coins from Superior in 1994, and the estate's recovery of the
coins was the prerequisite to payment under the "settlement"
agreement.
Surely, a reasonable party in an adversarial
proceeding would have pursued collection of the "settlement" once
the estate recovered the coins.
We hold that the State court
action was nonadversarial.
We also are unpersuaded that the State court actually passed
upon the merits of Ms. Trompeter's claim, or that the claim would
have been allowed if examined on its merits.
Mr. Lodgen's
conjecture that coins in which Ms. Trompeter had a community
interest were not disclosed to her during the divorce proceeding
was specious.
He relied inappropriately on unsubstantiated
information acquired from Superior and Mr. Goldberg.
Mr. Lodgen
failed to take into account a second set of coins disclosed in
the divorce settlement negotiations.
Mr. Lodgen failed to
- 53 -
recognize the relevant time period for compiling the decedent's
coin holdings.12
We sustain respondent's determination on this
issue.
6.
Fraud Penalty
Respondent determined that the estate is liable for the
fraud penalty under section 6663(a).
Respondent determined that
the fraud penalty applies to the underpayment of tax attributable
to the omission of assets, the undervaluation of assets, and the
deduction for Ms. Trompeter's claim.
Section 6663(a) imposes a 75-percent penalty on an
underpayment that is attributable to fraud.
6664(a)
(definition of "underpayment").
See also sec.
When respondent proves
that some part of an underpayment is attributable to fraud, the
entire underpayment is attributable to fraud unless the taxpayer
proves otherwise.
Sec. 6663(b).
Section 6663(a) does not reach
any portion of an underpayment for which there is reasonable
cause or for which the taxpayer.acted in good faith.
Sec.
6664(c).
12 Ken Lodgen included all coins purchased before June 22,
1987, as coins that possibly were undisclosed by the decedent.
Under Cal. Civ. Code sec. 5118 (1983), which was in effect at the
time, "The earnings and accumulations of a spouse * * * while
living separate and apart from the other spouse, are the separate
property of the spouse". When we exclude the coins that were
acquired after the decedent and Sylvia Trompeter separated on
Aug. 8, 1984, and the coins without a proven purchase date, we
are unpersuaded that any of the decedent's coins in which -Ms.
Trompeter had a community property interest were excluded from
Barry Stuppler's combined appraisal statements.
- 54 -
Respondent must prove fraud by clear and convincing
evidence.
Sec. 7454; Rule 142(b); see also Castillo v.
Commissioner, 84 T.C. 405, 408 (1985).
Respondent must prove
that the estate underpaid its taxes, Lee v. United States,
466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett v. Commissioner,
465 F.2d 299, 303
(7th Cir. 1972), affg. T.C. Memo. 1970-274;
Parks v. Commissioner, 94 T.C. 654, 660-664
(1990), and that the
estate did so with the requisite fraudulent intent.
Fraud
requires an intentional wrongdoing on the part of the taxpayer
with the specific purpose of evading a tax believed to be owing.
Conforte v. Commissioner, 692 F.2d 587, 592 (9th Cir. 1982),
affg. in part, revg. in part on other grounds 74 T.C. 1160
(1980); Miller v. Commissioner, 94 T.C. 316, 332
v. Commissioner, 92 T.C. 661, 698 (1989).
(1990); Petzoldt
A fraudulent intent is
present if the estate filed a return intending to conceal,
mislead, or otherwise prevent the collection of tax.
v. United States, 317 U.S. 492, 499
See Spies
(1943); Akland v.
Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), affg. T.C. Memo.
1983-249; Rowlee v. Commissioner, 80 T.C. 1111, 1123
(1983).
With respect to the first prong, the estate concedes that it
failed to report certain assets and undervalued other assets.
The estate also concedes that the nonreporting of these assets
generated an underpayment of Federal estate tax.
We hold that
respondent has met the first prong in that the record shows
-. 55 -
clearly and convincingly that the estate underpaid its tax
liability.¹³
Turning to the second prong, a fraudulent intent may be
proven by circumstantial evidence because direct proof of a
taxpayer's intent is rarely available.
be drawn from the relevant facts.
Reasonable inferences may
Spies v. United States, supra
at 499; Akland v. Commissioner, supra at 621; Stephenson v.
Commissioner, 79 T.C. 995, 1006
Cir. 1984).
(1982), affd. 748 F.2d 331
(6th
The fraudulent intent of an executor is treated as
that of the estate.
See Estate of Pittard v. Commissioner,
69 T.C. 391 (1977); see also Estate of Fox v. Commissioner,
T.C. Memo. 1995-30, affd. without published opinion 100 F.3d 945
(2d Cir. 1996); Estate of Edens v. Commissioner, T.C. Memo. 1981-
557, affd. without published opinion 696 F.2d 989 (4th Cir.
1982).
Courts have relied on certain indicia of fraud in deciding
whether a taxpayer had the requisite fraudulent intent.
Indicia
of fraud include:
(1) Understating income,' (2) maintaining
inadequate records,
(3) failing to file tax returns,
(4) giving
implausible or inconsistent explanations of behavior,
(5) concealing assets,
authorities,
(6) failing to cooperate with tax
(7) engaging in illegal activities,
(8) attempting
to conceal illegal activities, and (9) dealing in cash.
Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); see also
l³ Our disallowance of Ms. Trompeter's claim also generates
an underpayment.
- 56 -
Bradford v. Commissioner, 796 F.2d 303, 307-308
(9th Cir. 1986),
affg. T.C. Memo. 1984-601; Lee v. Commissioner, T.C. Memo. 1995-
597.
These "badges of fraud" are nonexclusive.
Commissioner, 99 T.C. 202, 211 (1992).
Niedringhaus v.
The taxpayer's education
and business background are also relevant to the de'termination of
fraud.
Id.
Bearing these general principles in mind, we turn to
the indicia of fraud that are relevant to the instant case.
a.
Undervaluation of Assets
Respondent argues that the estate intentionally undervalued
the decedent's gold coins and Sterling preferred stock, and that
this undervaluation evidences fraud.
We agree.
When we view the
record as a whole, we conclude, clearly and convincingly, that
the estate intentionally undervalued the decedent's taxable
estate, and that the estate did so with the specific intent of
evading tax.
Numerous facts evidence that the estate filed the decedent's
Federal estate tax return intending to evade Federal estate tax
by undervaluing assets and overvaluing deductions.
First, the
estate's undervaluation of decedent's Sterling preferred stock
was significant.
The estate reported that the applicable value
was $15,335, and we have determined that the applicable value was
approximately $2,708,536.
The difference between these two
values is $2,693,201, or, in other words, the reported value was
less than 1 percent of our determined value.
Although the estate
attempts to place the blame for the undervalued Sterling
preferred stock on Ms. Bates, the fact of the matter is that
- 57 -
Ms. Gonzalez obviously knew that Ms. Bates' valuation of $15,335
was wrong and reported Ms. Bates' $15,335 value aiming solely to
evade tax.
Ms. Gonzalez knew of a prior valuation of the
Sterling preferred stock in excess of $3 million, and she knew
that Ms. Bates arbitrarily chose the $15,335 figure reported on
the estate tax return as the stock's value.
Ms. Gonzalez also
knew that Ms. Bates had valued the stock at $462,000 1 month
before she valued it at $15,335.
Given Ms. Gonzalez's education
and business acumen, as well as her knowledge that the preferred
stock was entitled to certain preferences, that the preferred
stock was accruing dividends daily at a substantial rate, that
the preferred stock was soon going to be subject to a mandatory
redemption, and that a redemption of the preferred stock would
result in the holder(s) thereof receiving millions of dollars in
proceeds, we are hard pressed to conclude, as requested by the
estate, that Ms. Gonzalez was ignorant of the approximate value
of the decedent's Sterling preferred stock, or that she thought
that the stock was worth only $15,335.
We conclude the contrary.
Second, the estate undervalued decedent's gold coins by a
significant amount.
The estate reported that the applicable
value of the 191 coins was $3,192,175, and that the applicable
value of the additional coins was $275,400.
We have determined
that the applicable values were $7,635,000 and $494·,523,
respectively.
The total value that we have determined for the
coins is $4,661,948 more than the total value reported by the
estate, or, in other words, the reported total value was
- 58 -
approximately 42.7 percent of the determined total value.
Ms. Gonzalez knew that the 191 coins had been appraised at a
significantly higher amount than the value reported on the
return, and she secreted Mr. Leidman's $8.5 million appraisal
from Ms. Bates.
Given the additional fact that Ms. Gonzalez and
the decedent had discussed his coin holdings at a time close to
his death, and that she had represented to the court in the
Superior litigation that the 191 coins were worth more than
$12 million, we find that Ms. Gonzalez was well aware that the
$3,467,575 total value reported on the return was wrong.
Third, the estate failed to report any value for the assets
in the safe deposit box at Union Bank, and, in an attempt to
conceal the existence of this box, the coexecutors stated on the
estate tax return that decedent did not own or have access to a
safe deposit box at the time of his death.
In a further attempt
to conceal the existence of the safe deposit box at Union Bank,
the coexecutors failed to report the existence of the safe
deposit box at First Interstate Bank, choosing only to report a
value for 35 of the coins which were found therein.¹4
In yet
another attempt to conceal the contents of the safe deposit box
at Union Bank, Ms. Gonzalez falsely answered in the negative when
14 The estate would have reported the existence of the safe
deposit box at First Interstate Bank by stating on the decedent's
estate tax return that he had access to a safe deposit box when
he died. Such a statement would most likely have led respondent
to investigate further the circumstances of the box, which could
have led respondent to discover the safe deposit box at Union
Bank.
- 59 -
Ms. Bates asked her whether the decedent owned any jewelry or
diamonds when he died.
The decedent did own jewelry and diamonds
at that time, and these assets were kept in the safe deposit box
at Union Bank.
Fourth, the estate chose to report no value for the $4.5
million of assets which we have determined were includable in
the decedent's gross estate.
The coexecutors knew about these
assets, as evidenced by the fact that the decedent informed
Ms. Gonzalez of his holdings at about the time of his death.
The
decedent also introduced Ms. Gonzalez to the persons who would
know most about his holdings, and he had Mr. Schiffer schedule a
list of the decedent's assets as of February 21, 1992.
Mr.
Schiffer's list included the decedent's gun collection, music
collection, and various diamonds and other gems, none of which
were included in the decedent's gross estate.
Fifth, the coexecutors fabricated (and deducted on the
estate tax return) a $1,486,000 "claim" by Ms. Trompeter.
As
mentioned above, we find that the coexecutors devised this claim
attempting to transfer some of the decedent's property to their
mother at the expense of the tax collector.
In fact, the estate
has conceded in this proceeding that it overstated its deduction
for the "claim" by $803,975.
We conclude that this factor evidences fraud.
b.
Implausible and Inconsistent Explanations of Behavior
Respondent argues that Ms. Gonzalez offered numerous
implausible and inconsistent explanations of her behavior, and
- 60 that these "explanations" evidence fraud.
We agree.
We find
much of Ms. Gonzalez' testimony incredible and inconsistent with
reliable evidence in the record.
For example, Ms. Gonzalez
testified that the decedent gave her some of the disputed
jewelry, and that she placed this jewelry in the safe deposit box
unbeknownst to him.
This testimony was pointedly rebutted by the
credible testimony of independent witnesses to the effect that
the decedent possessed this jewelry after the time when the gift
was allegedly made.
Ms. Gonzalez also equivocated on when the
decedent purportedly gave her the assets seized from the safe
deposit box.
In one breath, Ms. Gonzalez stated that she
received the assets at one time, while, in another breath, she
stated that she received the assets at a different time.
Ms. Gonzalez also testified that she intentionally kept
documents from Ms. Bates, the estate's tax preparer, testifying
with respect to Mr. Leidman's $8.5 million appraisal, that she
did not think the appraisal was relevant to the estate's
valuation of the 191 coins.
The appraisal was relevant to Ms.
Bates' reporting of that value, and Ms. Gonzalez' secretion of
that and other documents from Ms. Bates is an example of
implausible behavior under the facts herein.
Ms. Gonzalez also
testified incredibly that she did not know that she had signed
the decedent's estate tax return under the penalties of perjury.
Ms. Gonzalez is college educated, and she has prior work
experience.
She also is knowledgeable on, and has experience
- 61 -
with, her personal income tax returns which are filed under
penalties of perjury.
We conclude that this factor evidences fraud.
c.
Omission or Concealment of Assets
Respondent argues that the estate omitted and concealed
assets, and that these actions evidence fraud.
Respondent points
to the fact that the estate failed to report a large amount of
042
assets. The estate concedes that certain items were wrongly
omitted from the decedent's estate tax return, but argues that
the estate did not fail to report these items intending to
conceal them.
The estate contends that the items seized from the
safe deposit boxes were given to the coexecutors in September
1991, and that the coexecutors believed that the assets were not
includable in the estate.
We agree with respondent that the presence of unreported
assets in this case is evidence of fraud.
The decedent had
advised Ms. Gonzalez of his holdings at a point in time that was
close to his death, and he had introduced her to all of his
advisers.
The coexecutors simply did not include all of the
decedent's assets in his gross estate.
Even if we were to assume
arguendo (and contrary to the record) that the decedent gave some
items to the coexecutors in September 1991, this does not explain
why several other items were omitted from the decedent's estate
tax return.
This also does not explain the fact that the estate
attempted to conceal the safe deposit boxes from the Government
by reporting on the decedent's estate tax return that he neither
- 62 -
owned nor had access to a safe deposit box when he died.
The
coexecutors knew that the decedent owned the safe deposit boxes
at the banks, or at least that he had access to them.
The
coexecutors also knew that the decedent owned and had access to
the safe in his house.
We conclude that this factor evidences fraud.
d.
Failure To Cooperate
Respondent argues that fraud is seen from Ms. Gonzalez'
failure to include any diamonds in the estate, and her failure to
disclose all of the decedent's records revealing purchases of
jewelry, gems, art, and other artifacts when originally
requested.
We agree.
Ms. Gonzalez failed initially to provide
respondent with all of the decedent's canceled checks which
evidenced the purchase of jewelry, gems, art, and other
artifacts.
Ms. Bates also asked Ms. Gonzalez whether the
decedent owned any jewelry or diamonds when he died, and Ms.
Gonzalez answered in the negative.
We conclude that this factor evidences fraud.
e.
Other Considerations
Each coexecutor is college educated, and both have extensive
work experience.
Each knows about her obligation to file valid
Federal tax returns.
- 63 -
f.
Conclusion
After our detailed review of the facts and circumstances of
this case, in conjunction with our analysis of the factors
mentioned above, we conclude that respondent has clearly and
convincingly proven that the coexecutors filed the decedent's
estate tax return intending to conceal, mislead, or otherwise
prevent the collection of tax.
We also conclude that section
6664(c) does not insulate the estate from this penalty; we find
no reasonable cause for the underpayment, nor that the estate
acted in good faith with respect to the underpayment.
We sustain
respondent's determination of fraud.
We have considered all arguments made by the parties, and,
to the extent not addressed above, find them to be irrelevant or
without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.
i
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.