Anthony J. and Jacqueline O. Pasqualini, et al. ¹ v. Commissioner., United States Tax Court - Memorandum Decision, T.C. Memo. 1994-323, Docket Nos. 45377-86, 45507-86, 45508-86, 46096-86, 46466-86, 48955-86, 48956-86, 24165-87, 32279-87, 37626-87, 39093-87, 39094-87, 39095-87, 39096-87, 39535-87, 39541-87, 39603-87, 39604-87, 8692-89, 8702-89, 9332-89, 9391-89, 9394-89, 26140-89, 18463-90, 2011-91., Filed July 18, 1994

Anthony J. and Jacqueline O. Pasqualini, et al. ¹ v. Commissioner.

United States Tax Court - Memorandum Decision

T.C. Memo. 1994-323

Docket Nos. 45377-86, 45507-86, 45508-86, 46096-86, 46466-86, 48955-86, 48956-86, 24165-87, 32279-87, 37626-87, 39093-87, 39094-87, 39095-87, 39096-87, 39535-87, 39541-87, 39603-87, 39604-87, 8692-89, 8702-89, 9332-89, 9391-89, 9394-89, 26140-89, 18463-90, 2011-91.

Filed July 18, 1994.

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¹ The following cases are consolidated herewith for purposes of this proceeding: Arthur and Josephine Hassler, Docket No. 45507-86; Donald J. and Marilyn L. Saltzman, Docket No. 45508-86; Vincent Perito, Docket No. 46096-86; Leroy and Diane Seacor, Docket No. 46466-86; Raymond J. and Lucille Wendel, Docket No. 48955-86; Raymond J. and Lucille Wendel, Docket No. 48956-86; Mark and Carol Tendler, Docket No. 24165-87; William and Lillian Marion, Docket No. 32279-87; Vincent Perito, Docket No. 37626-87; Kenneth and Judith A. Pfeil, Docket No. 39093-87; David and Muriel Bloom, Docket No. 39094-87; Joel H. and Rachelle Schartoff, Docket No. 39095-87; Charles W. and Maryann Maeder, Docket No. 39096-87; Emanuel M. and Susan R. Leaf, Docket No. 39535-87; Emil W. and Yvonne Solimine, Docket No. 39541-87; Joseph J. and Gloria P. Leonhard, Docket No. 39603-87; Joseph and Carolyn Mangino, Docket No. 39604-87; Peter M. and Dorothea M. Albano, Docket No. 8692-89; Frederick G. and Kathryn Wendel, Docket No. 8702-89; Barry and Christine Adler, Docket No. 9332-89; Barry and Christine Adler, Docket No. 9391-89; Barry Adler, Docket No. 9394-89; Nicholas L. and Carol A. Ribis, Docket No. 26140-89; Arthur and Josephine Hassler, Docket No. 18463-90; Richard T. and Delores Wendel, Docket No. 2011-91.

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Thaddeus A. Oberc, 67 Evergreen Place, E. Orange, N.J., Harvey R. Poe, Gerald S. Rotunda, Robert J. Alter, Herbert L. Zuckerman, and Richard J. Sapinski, for the petitioners. William S. Garofalo and Brendan G. King, for the respondent.

Memorandum Findings of Fact and Opinion

COLVIN, Judge: Petitioners in these consolidated cases claimed charitable contribution deductions for the donation of a total of 180,000 Christmas cards to Catholic Charities. Respondent disallowed the deductions and determined income tax deficiencies, with additions to tax and increased interest, as reflected in the appendix, infra. After concessions, the issues for decision are:

(1) Whether the Christmas cards had a fair market value in 1982 of $1,890,000 ($10.50 per card) as petitioners contend or $22,500 (25 cents per card for 90,000 cards and zero for 90,000 cards) as respondent contends. We hold that the fair market value was $67,500 (50 cents per card for 120,000 cards, 25 cents per card for 30,000 cards, and zero for 30,000 cards).

(2) Whether petitioners are liable for: (a) Additions to tax for negligence under section 6653(a), overvaluation under section 6659, and substantial understatement under section 6661, and for (b) increased interest with respect to tax-motivated transactions under section 6621(c). We hold that they are.

Another issue for decision, whether, if petitioners had sold the Christmas cards, the gain would have been ordinary income and reduced petitioners' charitable contribution deductions pursuant to section 170(e)(1)(A), will be decided by separate opinion.

There are two groups of petitioners: (a) Clients of the accounting firm of Albano, Leaf, Saltzman, Pfeil, Maeder & Co. (the Albano, Leaf firm), and (b) accountants employed by the Albano, Leaf firm. Petitioners Adler, Pasqualini, Hassler, Perito, Seacor, Raymond Wendel, Mangino, Ribis, Frederick Wendel, Solimine, Marion, and Richard Wendel were clients of the Albano, Leaf firm. Petitioners Saltzman, Tendler, Schartoff, Pfeil, Bloom, Maeder, Leaf, and Albano were accountants employed by the Albano, Leaf firm. Respondent concedes that the notice of deficiency was not timely mailed to petitioner Vincent Perito for 1982.

Petitioners in the following docket Nos. resided in New York when they filed their petitions: 45377-86, 46466-86, 9332-89, 9391-89, and 9394-89. Petitioner in docket Nos. 46096-86 and 37626-87 resided in Connecticut when he filed his petition.

Petitioners in the following docket Nos. resided in New Jersey when they filed their petitions: 45507-86, 45508-86, 48955-86, 48956-86, 24165-87, 32279-87, 39093-87, 39094-87, 39095-87, 39096-87, 39535-87, 39541-87, 39603-87, 39604-87, 8692-89, 8702-89, 26140-89, 18463-90, and 2011-91.

Section references are to the Internal Revenue Code. Rule references are to the Tax Court Rules of Practice and Procedure. The term "petitioners" generally does not include spouses of the persons who were actively involved in the transactions.

Findings of Fact

Some of the facts have been stipulated and are so found.

1. Petitioners' Medical Goods Contributions

This section relates to events that preceded petitioners' purchase and charitable contribution of the Christmas cards.

Petitioner Barry Adler (Adler) worked in the medical industry before and during the years at issue. In the late 1970s, Adler bought medical equipment at a bankruptcy auction and donated it to a hospital. Adler discussed making charitable contributions of medical equipment with his accountant, petitioner Donald Saltzman (Saltzman), after he contributed the equipment to the hospital. Saltzman is a certified public accountant and member of the Albano, Leaf firm. He has been Adler's accountant since the late 1960s. The parties stipulated that, except for petitioners Saltzman and Leaf, the members of the Albano, Leaf firm were not tax specialists but had an accountant's knowledge of the Internal Revenue Code.

In 1980, Adler and Saltzman began an arrangement in which Adler bought medical supplies and equipment at bankruptcy auctions for clients or members of the Albano, Leaf firm. The goods were stored for 1 year and then donated primarily to West Hudson Hospital or Pan American Development Foundation. From 1980 to 1982, Adler bought medical goods to be donated by members and clients of the Albano, Leaf firm for which the donors claimed charitable contribution deductions of $3 to $4 million. Adler received a 10-percent commission for these purchases.

Petitioners Pasqualini, Hassler, Perito, Marion, Seacor, Raymond Wendel, Frederick Wendel, and Richard Wendel of the clients' group and Pfeil, Maeder, Leaf, Albano, and Saltzman of the accountants' group deducted charitable contributions of medical goods totaling $202,830 under this arrangement in 1982. ² The Internal Revenue Service (IRS) began auditing this arrangement in late 1982 or early 1983.

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² Petitioners Hassler deducted a charitable contribution of medical goods in 1983.

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2. The Customs Service Auction of Christmas Cards

On December 8, 1981, Adler went to a U.S. Customs Service (Customs Service) auction preview at the World Trade Center in New York City to buy medical equipment. While there, he saw Christmas cards with gold medallions among the property to be auctioned 2 days later. There were 10 lots of 18,000 cards each, for a total of 180,000 cards. The Customs Service auction catalogue stated that the cards were valued for import duty purposes at $10.50 each, for a total of $1,890,000.

Adler immediately contacted Saltzman to ask whether the cards could be purchased and donated to obtain tax benefits. Saltzman said yes, if they found a charitable donee to use the cards in its normal operations. Adler contacted a friend of his, Hy Frankel (Frankel), who occasionally did work for Catholic Charities, Diocese of Brooklyn (Catholic Charities). Frankel said that Catholic Charities might be interested in the cards.

Saltzman contacted Leonard Gubar, an attorney at Spengler, Carlson, Guber, Brodsky & Rosenthal (Spengler, Carlson), a law firm which specialized in tax matters. Saltzman described the proposed transaction and made an appointment for Adler and him to meet the next day with Gubar and Len Schneidman, another Spengler, Carlson tax partner. Schneidman briefly researched the deductibility of the cards. Gubar and Schneidman gave Saltzman and Adler the impression that they believed the proposed acquisition and donation of the cards was a sound arrangement, and that it was reasonable for petitioners to use the Customs Service value for charitable contributions purposes because the Customs Service is a branch of the Treasury Department.

Gubar told Saltzman that Spengler, Carlson wanted to buy two or three lots of the cards for their clients. Saltzman let them buy only one lot because he wanted to make the others available to his firm and its clients.

Saltzman and one of his partners, Peter Albano, contacted clients to recommend that they buy and donate the cards. They concentrated primarily on people who could invest money on short notice and who had participated in the medical goods contribution arrangement. Saltzman told the clients that Spengler, Carlson believed that the donation arrangement was sound and that they wanted to participate in it. Saltzman told petitioners the IRS might challenge the value of the Christmas cards when they bought them. The Albano, Leaf firm did not receive compensation from its clients for arranging the Christmas cards donation.

On December 10, 1981, Adler, Saltzman, and Emil Solimine (Solimine) purchased the 180,000 Christmas cards for $30,000 at the Customs Service auction. After the auction, Solimine insured the cards at their Customs Service value ($1,890,000). Adler paid for the cards to be delivered and stored in a warehouse, where they remained until they were delivered to Catholic Charities. The cards were packed in large crates which were about 5 feet high and 5 feet across and weighed about 600 pounds.

Petitioners have not dealt with Christmas cards or any similar property in any trade or business.

3. The Christmas Cards

Each of the Christmas cards contained one of a series of six medallions embossed on gold foil which depicted a common Biblical scene related to Christmas (e.g., the Nativity). The Christmas cards were essentially identical; only the medallion and the text describing the scene on the medallion varied. The cards stated that the medallions were replicas of a gold medal created by Norman Sillman, "one of the World's renowned sculptors". The record contains samples of four of the six different cards and medallions. Four of the scenes were The Annunciation, The Manger Scene, The Three Wise Men, and the Departure To Egypt.

Each Christmas card was inside a folder (the outer folder). The outer folder bore the following legend on the inside left page:

The Order of The Holy Cross of Jerusalem

APOSTOLIC MISSION TO THE CHILDREN OF CENTRAL AND SOUTH AMERICA 60 EAST 94TH STREET, NEW YORK, N.Y. 10028 * Telephone 348-0948

THE STORY OF CHRISTMAS IN MEDALLIC ART

On the back of each card was a Maltese cross type seal, followed by these words:

Lorenzo Michel de Valitch

Titular Bishop of Ephesus Grand Chancellor

A donation has become available through your purchase of this card replica and is gratefully acknowledged.

The welfare of children is the concern of all. Please contact us for further information. All contributions are tax-exempt under Certificate of the U.S. Treasury Department M-69-E00 573.

Each card contained the words "A Merry Christmas and a Prosperous New Year" on the outside front cover. On the middle of the left inside page were the words "wish you". "Wish you" is printed on the wrong side of the page on each card; it should have been printed on the outside front cover.

On the inside right page of each card was a small gold foil medallion and a Biblical quotation. The card with the Departure To Egypt medallion bears a Biblical quotation from St. Matthew 2:13/14, which refers to King "Herold". This is a misspelling of King "Herod". The card with the Three Wise Men medallion did not capitalize "Bethlehem" and "I".

The printing on the sample cards in the record is in red ink and is of poor quality. Some of the cards have small red spots resulting from the cards having been stacked before the ink was dry. The imprinting of the text is uneven. In some places the ink is splashed on the page.

The medallions are round, paper thin, and about 1 13/16 inches in diameter. The medallions are under a plastic acetate film that is attached at the top and fastened to the right inside page of the card. The medallions are easily removed from under the acetate cover.

The words "Embossed on 23 carat gold" appear on each card on the right inside page below the medallion. However, the medallions are not 23 carat gold. The middle of the medallion is paper, the front is gold foil, and the back is an aluminum and copper foil. An independent testing service assayed the contents of the gold medallions. The medallions weigh .371 grams each. Of this amount, only .439% (less than 1/2 of 1 percent) or 1.62 mg is gold. The workmanship is of average quality. On December 31, 1982, the price of gold was $449.90 per troy ounce.

4. Donation of the Cards to Catholic Charities

After the auction, Frankel referred Adler to Thomas DeStefano (DeStefano), the Executive Director of Catholic Charities. Catholic Charities is tax exempt under section 501(c)(3). Adler sent DeStefano one of the cards which petitioners intended to donate. Adler did not send DeStefano an outer folder, which referred to the Order of the Holy Cross of Jerusalem. DeStefano told Frankel that Catholic Charities could use the cards to distribute to its parishes. Shortly after the auction, Catholic Charities agreed to accept the cards.

Petitioners held the cards for more than 1 year. Around December 27, 1982, petitioners donated the cards to Catholic Charities. The cards were insured, shipped, stored, and donated in bulk. The outer folders were in the crates when the cards were donated to Catholic Charities. The cards did not include envelopes.

In December 1982, Adler gave DeStefano a list of donors and the number and Customs Service value of the cards donated by each. DeStefano accepted the donation and sent acknowledgement letters to the donors.

Adler arranged storage until Catholic Charities could use the cards. In the spring of 1983, DeStefano arranged for the crates containing the cards to be stored at the St. Anthony's Hospital building (St. Anthony's) in New York City. St. Anthony's was a former hospital that various organizations affiliated with the Catholic Church used as a storage facility. The cards were stored at St. Anthony's for several years. The cards were later misplaced or discarded during renovations at St. Anthony's. This was discovered in 1989.

5. Petitioners' 1982 Tax Returns and Investigation of the Cards' Fair Market Value

Shortly after the auction, Saltzman suggested that Adler contact the Customs Service to obtain the workpapers used to value the cards. Adler wrote to the Customs Service to request this information. In May 1982, Adler received a letter from Alice Wong, Director of the Merchandise Control Unit of the Customs Service, which included a worksheet showing the value which appeared in the December 1981 auction catalogue ($1,890,000) and an excerpt from 19 C.F.R. sec. 127.23 (1993) which establishes the procedure for appraising unclaimed merchandise by the Customs Service. Adler received the worksheet before petitioners filed their Federal income tax returns for tax year 1982.

Saltzman did not do any legal research regarding whether petitioners could use the Customs Service value for charitable deduction purposes before the auction or before they filed their 1982 returns. Petitioners did not know the expertise of the Customs Service employee who completed the worksheet, learn how the Customs Service chose the value, or order an appraisal of the cards before they filed their returns.

As stated above, respondent began auditing the medical equipment donations in late 1982 or early 1983. One or two of the Albano, Leaf firm clients had their medical donations questioned during the audit. Petitioners filed their returns for tax year 1982 in October 1983. ³ Petitioners each claimed a deduction on their 1982 tax returns for a charitable contribution of the Christmas cards based on the Customs Service value of $1,890,000 ($10.50 per card). Deductions that exceeded the percentage limitations in section 170(d) were carried forward to tax year 1983 or later. Petitioners attached to their returns a copy of the acknowledgement letter sent by Catholic Charities, a copy of the Customs Service auction catalogue, and a statement showing how the deduction was calculated.

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³ Petitioners Bloom filed their return for tax year 1982 in late September 1983.

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6. Valuation of the Cards by the Customs Service

The Customs Service sold the Christmas cards because an import duty of $78,246 had not been paid. The Customs Service valued the cards for import duty purposes at $7 foreign value and $10.50 domestic value per card. Foreign value is the price or value of the item in the foreign country from which it was imported under 19 U.S.C. sec. 1677b (1988). The Customs Service estimates the domestic value of unclaimed merchandise that is to be sold at auction based on the foreign value plus other costs incident to the landing of the merchandise in the United States and the importer's wholesale markup.

The Customs Service valuation process may be based on an invoice from the foreign exporter stating the transaction value, i.e., the price paid or payable, for the goods under 19 U.S.C. sec. 1401a(b)(1)(1988). However, there is often no invoice for unclaimed merchandise. Absent an invoice, the value may be based on the opinion of a Customs Service national import specialist. See 19 U.S.C. sec. 1401a(f)(1)(1988).

Evelyn Booker (Booker) was the Customs Service commodity specialist who completed part of the Customs Service appraisal form and selected the $10.50 value for the Christmas cards. She specialized in textile valuation and had no expertise in valuing greeting cards. Her worksheet for the Customs Service valuation contains no analysis. ⁴ The record does not show whether Booker consulted with a national import specialist. National import specialists are Customs Service employees who provide expertise about classifying and valuing specific types of merchandise for Customs Service inspectors and commodity specialists. Booker did not test the purity of the gold medallions. ⁵ The record does not include information about the specifics of the valuation of the cards.

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⁴ George McIntyre, a Customs Service supervisory inspector, and Carl Abramowitz, a Customs Service national import specialist who specialized in greeting cards in 1981 and was not involved in valuing the cards at issue here, both testified that appraisals of abandoned or unclaimed merchandise are a low priority for Customs Service appraisers. This is borne out by the lack of analysis in Booker's worksheet for the cards.

⁵ Booker testified that she would not have tested the purity of the gold medallions, and would have relied on the statement of gold content on the cards. Carl Abramowitz testified that unclaimed or abandoned merchandise is generally not subject to laboratory analysis of its contents.

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Opinion

1. Value of the Christmas Cards

a. Fair Market Value

The first issue for decision is the fair market value of the Christmas cards for which petitioners claimed charitable contribution deductions totaling $1,890,000.

Section 170(a)(1) allows a deduction for any charitable contribution made within the taxable year. The taxpayer bears the burden of proving he is entitled to deductions. Rule 142(a); New Colonial Ice Co. v. Helvering [4 USTC ╤ 1292], 292 U.S. 435, 440 (1934). In general, the amount of a charitable contribution made in property other than money is the fair market value of the property at the time of the contribution. Sec. 1.170A-1(c)(1), Income Tax Regs. 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 sell and both having a reasonable knowledge of the facts. United States v. Cartwright [73-1 USTC ╤ 12,926], 411 U.S. 546, 550-551 (1973); sec. 1.170A-1(c)(2), Income Tax Regs.

Fair market value is a question of fact. Lio v. Commissioner [Dec. 42,249], 85 T.C. 56, 66, 68 (1985), affd. sub nom. Orth v. Commissioner [87-1 USTC ╤ 9215], 813 F.2d 837 (7th Cir. 1987). Fair market value is a question of judgment rather than mathematics. Hamm v. Commissioner [64-1 USTC ╤ 12,206], 325 F.2d 934, 940 (8th Cir. 1963), affg. [Dec. 25,193(M)] T.C. Memo. 1961-347. Valuation is an approximation derived from all the evidence. Helvering v. Safe Deposit & Trust Co. [42-1 USTC ╤ 10,167], 316 U.S. 56, 66-67 (1942); Silverman v. Commissioner [76-2 USTC ╤ 13,148], 538 F.2d 927, 933 (2d Cir. 1976), affg. [Dec. 32,831(M)] T.C. Memo. 1974-285.

b. The Customs Service Valuation

Petitioners argue that the fair market value of the cards at the time of donation was the domestic value used by the Customs Service pursuant to 19 U.S.C. sections 1491 ⁶ and 1559 (1988). ⁷

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⁶ Abandoned or unclaimed merchandise is to be appraised and sold by the Customs Service at public auction as prescribed by regulations. 19 U.S.C. sec. 1491.

⁷ Merchandise for which duties have not been paid and which remains warehoused after 5 years is considered abandoned to the Government and shall be sold as prescribed by regulations. 19 U.S.C. sec. 1559.

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Customs Service regulations, 19 C.F.R. sec. 127.23 (1993), provide:

╖ 127.23 Appraisement of merchandise.

Before unclaimed and abandoned merchandise is offered for sale, it shall be appraised in accordance with sections 402 and 402a, Tariff Act of 1930, as amended (19 U.S.C. 1401a, 1402). Such merchandise shall also be appraised at its actual domestic value in its condition at the time and place of examination, whether or not it has depreciated or appreciated in value since the date of exportation. The quantity of merchandise in each lot shall be reported. * * *

The Customs Service is required to establish a value for goods using one of the methods provided in 19 U.S.C. section 1401a (1988). Property is first appraised at a transaction value, which is based on the actual price paid for the merchandise when sold for exportation to the United States. 19 U.S.C. sec. 1401a(a)(1)(A)(C)(1988). If the value cannot be determined under 19 U.S.C. sec. 1401a(a)(1)(A)-(C) (1988), it is appraised at a deductive value, which is generally the price at which the merchandise is sold in the United States in the greatest aggregate quantity around the date of sale. 19 U.S.C. sec. 1401a(a)(1)(D) (1988). If property cannot be appraised under 19 U.S.C. sec. 1401a(a)(1)(D) (1988), it is appraised at a computed value, which uses a cost markup approach. 19 U.S.C. sec. 1401a(a)(1)(E) (1988). If property cannot be valued under the above methods, it is valued using a reasonable approach derived from the above methods. 19 U.S.C. sec. 1401a(a)(1)(F) (1988).

In the absence of contrary evidence, we assume that the Customs Service appraised the cards as provided by 19 U.S.C. sec. 1401a (1988). Ross Glove Co. v. Commissioner [Dec. 32,053], 60 T.C. 569, 605 (1973). Petitioners claim that the valuation methodology in 19 U.S.C. sec. 1401a (1988) is closely related to fair market value and that, in the absence of any evidence that the Customs Service erroneously or arbitrarily valued the cards, the Customs Service valuation is highly probative of their value. We disagree that application of 19 U.S.C. sec. 1401a (1988) necessarily leads to a fair market value estimate. The Customs Service value may be based on the price paid by the manufacturer or importer at the port of entry, a U.S. price, or a computed value based on the cost of the goods themselves.

Whether we consider a valuation made by the Customs Service depends on the facts of each case. Brittingham v. Commissioner [Dec. 33,856], 66 T.C. 373, 403 (1976), affd. [79-2 USTC ╤ 9499] 598 F.2d 1375 (5th Cir. 1979). We are not required to treat an estimate produced by applying 19 U.S.C. sec. 1401a (1988) as fair market value if it is not the best available evidence of value, Ross Glove Co. v. Commissioner, supra, or if the Customs Service value is unexplained and based on an erroneous assumption, Brittingham v. Commissioner, supra.

In Ross Glove Co. v. Commissioner, supra, two corporations agreed to set prices for imported gloves based generally on the methods used by the Customs Service to value the gloves. The Commissioner opposed use of the Customs Service valuation. We said:

Since Customs is directed by law to appraise imports in accordance with the provisions of 19 U.S.C. sec. 1401a, we must assume, in the absence of contrary evidence, that such duty was carried out in establishing the markups. * * * we find that the markups used by Customs in computing the value of gloves imported by Ross Glove may serve as a basis for determining an arm's-length price under section 482. Such markups may be used because they are the best available evidence * * * [ Id. at 605.]

In Brittingham v. Commissioner, supra, a Texas corporation bought tile from a related Mexican corporation at a price substantially higher than the customs value. We rejected as unreasonable the Commissioner's reliance on the customs value because it was based upon an erroneous assumption as to the value of the tile, there was no explanation for the formula used by the Customs Service, and it was not indicative of an arm's-length price of the tile. Id. at 403.

Here, the Customs Service value is not persuasive evidence of the value of the Christmas cards. As in Brittingham, we have no explanation of how the Customs Service selected the value for the cards. The Customs Service employee who set the value specialized in textiles and had not previously handled greeting cards or other similar property. As discussed below, expert opinion in the record was helpful to us in deciding the value of the cards. Thus, we are not convinced that the Customs Service value was indicative of an arm's-length price for the cards and we do not rely on it in deciding the value of the cards.

c. The Appropriate Market

Section 20.2031-1(b), Estate Tax Regs., provides that the fair market value of property is based on the market where the property is most commonly sold to the public. Petitioner contends that the appropriate market to consider here is the retail market. We disagree.

The determination of the proper market is a factual question. Lio v. Commissioner [Dec. 42,249], 85 T.C. 56, 68 (1985), affd. sub nom. Orth v. Commissioner [87-1 USTC ╤ 9215], 813 F.2d 837 (7th Cir. 1987); Anselmo v. Commissioner [Dec. 40,105], 80 T.C. 872, 882 (1983), affd. [85-1 USTC ╤ 9335] 757 F.2d 1208, 1213 (11th Cir. 1985). We believe that the cards could not be sold to a retail customer in the condition they were donated, i.e., without envelopes, in large bales, in the outer folders which named The Order of the Holy Cross of Jerusalem, and some with printing flaws. We conclude that wholesale is the appropriate market because a wholesale price (unlike a retail price) would properly recognize that significant effort would be required to prepare the cards for retail sale (e.g., remove the outer folder, provide an envelope for each card, box loose cards, and eliminate cards with printing flaws) to a retail customer. See Lampe v. Commissioner [Dec. 42,093(M)], T.C. Memo. 1985-236 (loose gem stones were valued in the wholesale market because retail jewelers were the ultimate consumer of loose gem stones).

d. Expert Testimony

The parties called expert witnesses to give opinions about the value of the Christmas cards. Expert witnesses' opinions can aid the Court in understanding an area requiring specialized training, knowledge, or judgment; however, as the trier of fact, we are not bound by the experts' opinions. Helvering v. National Grocery Co. [38-2 USTC ╤ 9312], 304 U.S. 282, 295 (1938); Silverman v. Commissioner [76-2 USTC ╤ 13,148], 538 F.2d 927, 933 (2d Cir. 1976), affg. [Dec. 32,831(M)] T.C. Memo. 1974-285. We weigh the opinions of expert witnesses according to their qualifications and other relevant evidence. Anderson v. Commissioner [58-1 USTC ╤ 9117], 250 F.2d 242, 249 (5th Cir. 1957), affg. [Dec. 21,874(M)] T.C. Memo. 1956-178.

(1) Petitioner's Expert: Maria DeSimone

Petitioners' expert, Maria DeSimone (DeSimone), has been active in both the retail and manufacturing aspects of the greeting card industry since the late 1970s. She helped develop the first alternative market greeting card stores ⁸ in New York City. She founded and developed the product line for a chain of alternative market card stores known as "Greetings" originally in New York City and later at five other locations. DeSimone was the card buyer, store designer, and general manager of Greetings. In 1983 she helped found Rohnart, Inc., which manufactures and markets alternative market greeting cards.

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⁸ Alternative card stores offer unique and nontraditional alternatives to cards produced by the major manufacturers.

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DeSimone testified that, in 1982, the more expensive manufactured cards retailed for $1.75 to $4.50 and handmade cards retailed for $5 to $15. She testified that the cards at issue here could be successfully marketed either singly or in small boxed sets through stores or a specialty catalogue for $7 to $10 per card. In her opinion, the cards at issue had many features which made them ideal for the alternative card market. For example, she cited the "real gold" in the medallion, the hot foil stamping and embossing, the fact that the medallions were based on designs by Norman Sillman, the handwork in the card design and the medallion, and the fact that it was a series of six cards. She said that she would not sell cards with a typographical error, but that she did not believe that the errors on the cards would affect their value.

(2) Respondent's Expert: Richard Riggs

Respondent's expert, Richard Riggs (Riggs), is the president and owner of Barton-Cotton, Inc., which is one of the largest manufacturers of religious greeting cards in the United States. Riggs is well versed in all phases of the card industry, particularly religious cards.

Riggs stated that poor quality printing and typographical errors on the cards would lessen their value. He testified that no reputable retailer or distributor would sell Christmas cards which misspelled King Herod. Riggs said the cards donated by petitioners were not comparable to expensive cards, and that the cards at issue were in the middle to low end of the market.

Riggs stated that the average price for cards ⁹ sold in 1982 to retail customers was 52 cents. He stated that the cards donated by petitioners would have sold below this average price. Riggs also testified that the market could not absorb anywhere near 180,000 of these cards at any price. To the extent they could be sold, he said that it would take a major sales campaign lasting 10 to 15 years to sell them at a retail price of 50 cents to $1. He concluded that, absent a major marketing effort, the cards had zero market value other than for the organization for which they were designed.

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⁹ This price includes cards sold by the box and cards sold singly.

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e. Value Under the Cost Markup Method

The gold medallion contained in the donated cards is made by stamping gold foil on one side of a piece of paper and stamping copper and aluminum foil on the other side. The gold foil comes on a long roll with an acetate backing. Metal dies stamp the foil as it runs through a stamping machine, reproducing the medallion on the acetate backing.

Riggs testified that one way to arrange stamping dies to reproduce the medallions would be to use an 8 1/4-inch-width foil and stamp it with four medallions across. Two inches of gold foil would be used for four medallions. This would require 37.5 rolls of foil, 200 feet long and 8.25 inches wide. At 1992 prices, this would cost slightly more than $13,000 (7 cents per card).

Riggs testified that the total cost to manufacture the cards in 1992 would have been about $38,000 (21 cents per card). In 1982, the cost would have been about 20 cents per card because gold foil prices were less in 1982 than in 1992. Using a cost markup approach, Riggs said the cards would sell for less than 25 cents each to a wholesaler.

DeSimone received estimates of $156,645 (87 cents per card) from Karr Graphics and $174,850 (97 cents per card) from Fell Bros. to reproduce the medallions and print 180,000 cards. These estimates included approximately $7,000 for envelopes. Using these prices, DeSimone applied markups regularly used in the alternative card market and arrived at retail prices of $8.70 and $9.71 per card for the cards, which were consistent with her evaluation of the cards' market value. DeSimone concluded that the cards would have had an average retail selling price of $9.20 per card in 1982.

f. The Fair Market Value of the Christmas Cards

Petitioners argue that, because the Government was forced to sell the merchandise as soon as possible, the auction price does not indicate fair market value. McGuire v. Commissioner [Dec. 27,555], 44 T.C. 801, 808-809 (1965); Perdue v. Commissioner [Dec. 47,648(M)], T.C. Memo. 1991-478; sec. 20.2031-1(b), Estate Tax Regs. Because we base our opinion on the parties' expert reports, and not on the auction price, we do not address petitioners' contentions on this point.

Petitioners contend that Riggs lacks expertise in retail sales of Christmas cards, high-priced greeting cards, and traditional or alternative market greeting cards. We disagree. Barton-Cotton, Inc., annually sells at retail about $10 million of greeting cards through the mail and also sells cards to retailers. Riggs was well informed about current retail trends and high-quality cards. His expert report included many examples of expensive greeting cards. Petitioners argue that Riggs' expertise is solely in the religious card market. Even if this were true, we think it would not detract from his opinion because the cards at issue were religious. In short, we believe that Riggs was well qualified to evaluate the cards at issue.

We find Riggs' analysis more persuasive than DeSimone's. We believe that DeSimone's report has several flaws. She mistakenly used the manufacturer's markup in place of the manufacturing cost. Her estimates included envelopes although the cards did not include envelopes. She mistakenly believed that the medallions were gold on both sides. She erroneously assumed that the acetate window would be glued by hand when it can be done more cheaply by machine. Finally, we disagree with her statement that the Biblical misquotes and errors on the cards would not reduce their value.

Taking into account the entire record, we find that the Departure To Egypt cards have zero value because of the misspelling of King Herod and that the value of the Three Wise Men cards was 25 cents per card because of the failure to capitalize "Bethlehem" and "I". We hold that the fair market value of the remaining 120,000 cards was 50 cents per card.

2. Negligence

The next issue for decision is whether any of petitioners' underpayments of tax for taxable year 1982 were attributable to negligence or intentional disregard of rules or regulations under section 6653(a)(1) and (2).

Section 6653(a) imposes an addition to tax equal to 5 percent of the underpayment of tax if any part of the underpayment is due to negligence or intentional disregard of rules and regulations. Negligence is a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Zmuda v. Commissioner [84-1 USTC ╤ 9442], 731 F.2d 1417, 1422 (9th Cir. 1984), affg. [Dec. 39,468] 79 T.C. 714 (1982); Marcello v. Commissioner [67-2 USTC ╤ 9518], 380 F.2d 499, 506 (5th Cir. 1967), affg. in part and remanding in part [Dec. 27,043] 43 T.C. 168 (1964) and [Dec. 27,048(M)] T.C. Memo. 1964-299; Neely v. Commissioner [Dec. 42,540], 85 T.C. 934, 947 (1985).

Good faith reliance on the advice of a competent, independent tax professional may offer relief from the imposition of the negligence addition. United States v. Boyle [85-1 USTC ╤ 13,602], 469 U.S. 241, 250-251 (1985); Leonhart v. Commissioner [69-2 USTC ╤ 9597], 414 F.2d 749, 750 (4th Cir. 1969), affg. [Dec. 28,975(M)] T.C. Memo. 1968-98; Otis v. Commissioner [Dec. 36,716], 73 T.C. 671, 675 (1980). Petitioners bear the burden of proving that their reliance upon professional advice was reasonable. Rule 142(a); Freytag v. Commissioner [Dec. 44,287], 89 T.C. 849, 888 (1987), affd. [90-2 USTC ╤ 50,381] 904 F.2d 1011 (5th Cir. 1990), affd. [91-2 USTC ╤ 50,321] 501 U.S. 868 (1991).

There are two groups of petitioners for purposes of the additions to tax for negligence: (a) Petitioner-clients (clients of the Albano, Leaf firm), and (b) petitioner-accountants (accountants who worked for the Albano, Leaf firm).

a. Petitioner-Clients ¹⁰

**********

¹⁰ The parties stipulated that petitioner clients' circumstances were typified by the testimony of petitioner Frederick Wendel.

**********

Petitioner-clients argue that they are not liable for the addition to tax for negligence because they reasonably relied on the advice of knowledgeable professionals in the Albano, Leaf accounting firm and the Spengler, Carlson law firm. Petitioners cite Heasley v. Commissioner [90-1 USTC ╤ 50,314], 902 F.2d 380, 383-384 (5th Cir. 1990) (unsophisticated taxpayers were not negligent in relying on advice of accountant), revg. [Dec. 45,025(M)] T.C. Memo. 1988-408. Petitioners point out that: (a) Petitioner-clients had no tax or accounting background; (b) they were longtime clients of the Albano, Leaf firm, which contacted them to recommend that they buy and donate the Christmas cards; (c) Saltzman told petitioner-clients that accountants at the Albano, Leaf firm and lawyers at Spengler, Carlson were buying an interest in the cards, that the attorneys believed the clients could base their deduction on the Customs Service value, and that the Christmas card donation arrangement was like the medical equipment donation transaction, but that the IRS was less likely to challenge the Customs Service value because the Customs Service is an agency in the Treasury Department; (d) petitioner-clients heard a description of the cards, saw sample cards, and knew Adler had received information from the Customs Service before claiming their charitable deduction; and (e) they were not aware of the typographical errors on the cards. Petitioners contend that, under the circumstances, petitioner-clients had no reason to question their accountants about the Christmas cards contribution arrangement.

Petitioner-clients knew they paid $30,000 for the cards, but that the Customs Service valued them for $1,890,000. They should have known that deducting 63 times the cost of the cards was too good to be true. LaVerne v. Commissioner [Dec. 46,544], 94 T.C. 637, 652-653 (1990), affd. without published opinion 956 F.2d 274 (9th Cir. 1992), affd. without published opinion sub nom. Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991) (11-to-1 writeoff "should have raised serious questions in the minds of ordinarily prudent investors"); Weitz v. Commissioner [Dec. 45,526(M)], T.C. Memo. 1989-99 (deduction of medical goods for 10 times auction price was "too good to be true"). When a transaction involves tax benefits even less fantastic than the 63-to-1 writeoff here, blind reliance on professional advisers is not in keeping with the standard of the ordinarily prudent person. See LaVerne v. Commissioner, supra; Horn v. Commissioner [Dec. 44,767], 90 T.C. 908, 942 (1988) (taxpayers' reliance on advice of accountants who were not independent of gold mining shelter promoter was negligent). Since petitioners expected to receive tax benefits substantially larger than their cash investments, they should have been on notice that something was amiss. See Allen v. Commissioner [Dec. 45,401], 92 T.C. 1, 11-12 (1989) (tax benefits in excess of cash investment should have put the taxpayers on notice that transaction was suspect), affd. [91-1 USTC ╤ 50,080], 925 F.2d 348 (9th Cir. 1991).

Petitioner-clients' reliance on their accountants and lawyers regarding the value of the cards was not reasonable because neither the accountants nor the lawyers were experts in valuing Christmas cards and neither investigated the appropriateness of using, or the legitimacy of, the Customs Service valuation of the cards. Freytag v. Commissioner, supra at 888. In Freytag, the taxpayers invested in straddle transactions involving forward contracts for Government mortgage-backed securities. The taxpayers contended that they relied on their investment advisers. However, their advisers had no expertise in forward contracts. We stated that the taxpayers were not negligent in relying on the advice of attorneys and C.P.A.'s regarding the tax consequences of the alleged transactions, but found the taxpayers negligent in claiming huge tax deductions because they did not consult experts regarding the financial aspects of the transactions. Id. at 888.

Several factors are present which should have led petitioner-clients to question the value of the cards. For example: (a) Booker's worksheet showed no analysis; (b) petitioner-clients had no expertise in buying cards; (c) they did not question the high value placed on the cards; and (d) they bought 180,000 cards sight unseen (except Adler). We conclude that petitioner-clients' failure to investigate the appropriateness of using the Customs Service value, their blind reliance on their accountants, and their substantial overstatement of their charitable contribution deductions were negligent.

b. Petitioner-Accountants

Petitioner-accountants argue that they were not negligent, but instead had a good faith misunderstanding of the law as it applies to the charitable contribution involved here. We disagree for the reasons applicable to petitioner-clients, and also for the following reasons.

Taxpayers who have specialized expertise in the subject matter may be held to a higher standard. The fact that petitioner-accountants were C.P.A.'s is relevant in deciding whether they were negligent. See Johnson v. Commissioner [Dec. 48,072(M)], T.C. Memo. 1992-151 (the fact that the taxpayer was a C.P.A. was relevant in finding him negligent). Had petitioner-accountants investigated the validity of the Customs Service value, they would have found authority for rejecting a Customs Service valuation if it is unexplained or not probative of value. Brittingham v. Commissioner [Dec. 33,856], 66 T.C. 373, 400-403 (1976), affd. [79-2 USTC ╤ 9499] 598 F.2d 1375 (5th Cir. 1979). Their duty to look carefully into the matter is enhanced by the fact that, before the 1982 returns were filed, the Commissioner was auditing the deduction for donated medical equipment for at least one or two of the Albano, Leaf clients.

Petitioner-accountants recommended that their clients invest in the Christmas cards shelter. This gives petitioner-accountants a higher duty to investigate this arrangement. See Johnson v. Commissioner, supra.

We hold that petitioner-accountants' overstatement of the charitable contribution deduction was negligent.

3. Valuation Overstatement

Respondent determined that some of petitioners' underpayment of tax was attributable to a valuation overstatement under section 6659. That section provides for an addition to tax of up to 30 percent of the underpayment of tax attributable to a valuation overstatement. Sec. 6659(a) and (b). A valuation overstatement occurs where the claimed value or adjusted basis of property is 150 percent or more of the value or adjusted basis that is "determined to be the correct amount." Sec. 6659(c).

The Secretary may waive this addition if the taxpayer shows that there was a reasonable basis for the valuation claimed, and the claim was made in good faith. Sec. 6659(e). The Court reviews this determination only for abuse of discretion. Krause v. Commissioner [Dec. 48,383], 99 T.C. 132, 179 (1992).

Petitioners assert that respondent's failure to waive the valuation overstatement addition was an abuse of discretion. We disagree. Petitioners valued the Christmas cards for charitable contributions purposes at $1,890,000, and we held that their fair market value was $67,500. Petitioners claimed charitable contribution deductions that were 63 times the amount they invested. We hold that respondent's refusal to waive the section 6659 additions to tax was not an abuse of discretion.

4. Substantial Understatement of Income Tax

In the alternative to additions under section 6659, respondent determined additions to tax for a substantial understatement of income tax under section 6661. Since we have held that petitioners are liable for additions to tax under section 6659, we need not decide whether they are liable under section 6661. Sec. 6661(b)(3).

5. Additional Interest for a Substantial Underpayment Related to a Tax-Motivated Transaction

Section 6621(c) (formerly section 6621(d)) provides for an increase in the interest rate where there is a "substantial underpayment" (an underpayment greater than $1,000) in any taxable year "attributable to 1 or more tax motivated transactions." Section 6621(c)(3) defines certain transactions as tax motivated. The increased rate of interest applies to interest which accrues after December 31, 1984 (the date of enactment of section 6621(d)), even though the tax-motivated transaction was entered into before that date and "regardless of the date the return was filed." H. Conf. Rept. 98-861 (1984), 1984-3 C.B. (Vol. 2) 1, 239; Solowiejczyk v. Commissioner [Dec. 42,433], 85 T.C. 552, 556 (1985), affd. without published opinion 795 F.2d 1005 (2d Cir. 1986).

A valuation overstatement under section 6659 is a "tax-motivated transaction." Sec. 6621(c)(3)(A)(i). We have held that there is a valuation overstatement in this case to which section 6659 applies. Thus, the increased rate of interest under section 6621(c) automatically applies to underpayments of tax attributable to the charitable contributions in this case.

Decisions will be entered under Rule 155.

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¹ Fifty percent of the interest due on the portion of the underpayment attributable to negligence.

² One hundred twenty percent of the regular interest due on the deficiency.

³ Sec. 6661 is asserted in the alternative to sec. 6659. [/AP]

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