Estate of Darwin A. Miller, Deceased, Virginia P. Miller, Testamentary Executrix and Surviving Spouse, and Virginia P. Miller v. Commissioner., United States Tax Court - Memorandum Decision, T.C. Memo. 1991-515, Docket No. 5875-88., Filed October 9, 1991
Estate of Darwin A. Miller, Deceased, Virginia P. Miller, Testamentary Executrix and Surviving Spouse, and Virginia P. Miller v. Commissioner.
United States Tax Court - Memorandum Decision
T.C. Memo. 1991-515
Docket No. 5875-88.
Filed October 9, 1991.
Michael E. Guarisco, 650 Poydras St., New Orleans, La., David A. Aymond, and Richard K. Leefe, for the petitioners.
Stevens E. Moore, for the respondent.
Memorandum Findings of Fact and Opinion
RUWE, Judge: Respondent determined the following deficiencies and additions to tax in petitioners' Federal income taxes:
1 Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions by the parties, the issues for decision are: (1) Whether the burden of proof on certain issues is on respondent; (2) whether petitioners are entitled to a deduction for purported charitable contributions of animal trophies made to the State of Louisiana during the years in issue; and, if so, (3) what is the amount of the allowable deductions; (4) whether the charitable contribution deductions claimed by petitioners are limited to the fair market value of the animal trophies reduced by the amount of gain which would not have been long-term capital gain if the animal trophies had been sold at their fair market value; (5) whether petitioners can deduct expenses incurred in connection with hunting and mounting animal trophies that they purportedly donated to the State of Louisiana; (6) whether petitioners can deduct expenses associated with the care and maintenance of the animal trophies incurred after they purportedly donated the trophies to the State of Louisiana; (7) whether petitioners are liable for additions to tax for valuation overstatements under section 6659 for the taxable years 1981, 1983, and 1984; and (8) whether petitioners are entitled to deductions for the taxable years 1983, 1984, and 1985 for expenses incurred in connection with the operation of the Ram Head Hunting Lodge.
Findings of Fact
Some of the facts have been stipulated and are so found. The first and second stipulation of facts and the attached exhibits are incorporated herein by this reference.
Petitioners Darwin A. Miller and Virginia P. Miller were husband and wife and resided in Houma, Louisiana, at the time of filing their petition in this case. On November 26, 1989, Darwin A. Miller died. On June 1, 1990, this Court ordered that the Estate of Darwin A. Miller be substituted as a party petitioner for the deceased Darwin A. Miller. All references to petitioner in the singular shall hereinafter refer solely to Darwin A. Miller.
For the taxable years 1981 through 1985, petitioners timely filed their joint income tax returns. During the years in issue, petitioners claimed deductions for "noncash" charitable contributions which were identified as "museum donations" on Schedule A of these returns. Petitioners did not designate the recipient of the "noncash" contributions on their 1981 and 1982 tax returns. On their 1983, 1984, and 1985 tax returns, petitioners stated that the State of Louisiana received the "noncash" contributions. 2 Petitioners also claimed deductions for certain "cash" contributions for the taxable years 1981 through 1985. On their 1981, 1982, and 1983 tax returns, petitioners did not indicate the nature of these "cash" contributions. On their 1984 and 1985 tax returns, petitioners identified the "cash" contributions as "Hunts and Taxidermy," "From K-1 Entity," and "Misc. Contributions."
2 Attached hereto as appendix is a list of the items which petitioner claims he donated to the State of Louisiana. The items consist of animal trophies. The trophies are listed by the year in which petitioner claims he made the donation. Also listed is the value petitioner assigned to the individual trophies for purposes of computing the charitable contribution deduction (as determined by petitioner's appraiser Brian Gaisford), the estimated cost of acquiring the trophies (e.g., replacement cost) as determined by petitioner's expert Jack Perry, the appraisal value assigned to the individual trophies by Mr. Perry, and the appraisal value assigned to the individual trophies by respondent's expert Larry Blomquist.
Respondent disallowed all of the "noncash" contributions claimed on petitioners' 1981 through 1985 income tax returns. Respondent disallowed all of the deductions claimed as "cash" contributions, except those items identified as "Misc. Contributions," on petitioners' 1981 through 1985 tax returns. 3
3 Respondent now stipulates that petitioners made deductible cash contributions identified as "Misc. Contributions" in the amounts of $2,154 and $612 for the taxable years 1984 and 1985, respectively, and deductible cash contributions identified as "From K-1 Entity," in the amounts of $3,817 and $4,664 for the taxable years 1984 and 1985, respectively.
The following table reflects the "cash" and "noncash" contributions that petitioners reported on their 1981 through 1985 tax returns:
* Due to the maximum allowable deduction limitation, petitioners only deducted $107,453 on Schedule A of their 1984 income tax return. The excess, $93,826, was carried forward to petitioners' 1985 taxable year. As a result of the carryforward of the $93,826, petitioners only deducted $177,355 on Schedule A of their 1985 income tax return. Therefore, the total amount deducted was only $2,411,118.
Donation of the Animal Trophies
Petitioner has hunted and trapped all his life. In the 1970s, petitioner began game and sport hunting. Petitioner has hunted throughout the world including Africa, Russia, Mongolia, Iran, Canada, Australia, New Zealand, Alaska, and South America.
Sometime during the 1970s, petitioner began thinking about establishing a wildlife museum. Petitioner wanted to place full-body trophies of animals that he shot on his hunting trips in this museum. Petitioner felt that a wildlife museum would educate and benefit the children of Louisiana. Petitioner decided that the way to accomplish his goal would be to hunt the animals, have them mounted, and then hold them for the State of Louisiana (the State) until the State could build a facility to house the trophies.
In 1978, petitioner arranged a meeting with the Governor of Louisiana, Edwin W. Edwards (Governor Edwards). 4 Prior to this meeting, petitioner had never met Governor Edwards. During this meeting, petitioner explained his idea of a wildlife museum to Governor Edwards. Governor Edwards asked petitioner if he could help. Petitioner replied that an official designation by the Governor would help him gain access to hunting areas that were not otherwise accessible. Petitioner could use this access to hunt and collect animals which would later be placed in the wildlife museum. Accordingly, on June 29, 1978, Governor Edwards designated petitioner "The Official Big Game Hunter of Louisiana." Governor Edwards made the designation in order to assist petitioner in obtaining access to restricted hunting areas. The designation did not direct petitioner on when and where to hunt, nor did the State agree to pay petitioner's hunting expenses. Moreover, petitioner did not believe that he was under a legal obligation to donate the trophies he obtained with the help of the State's designation.
4 Edwin W. Edwards held the office of Governor for the State from May of 1972 to March of 1980 and from March of 1984 to March of 1988.
In 1979, petitioner again met with Governor Edwards. During this meeting, petitioner took Governor Edwards into a building located behind petitioner's house. The building housed trophies collected by petitioner. Petitioner told Governor Edwards: "these are your animals." The collection impressed Governor Edwards, and he told petitioner that he would try to obtain funding for a State facility to house the trophies. In a letter dated January 9, 1980, Governor Edwards accepted the donation of "the animals listed." 5
5 The copy of the letter in the record does not contain a list of animals.
During the years in issue, 1981 through 1985, petitioner continued to hunt, mount, and place animals in the building behind his house. The animals were never removed from the building.
During the years 1981, 1982, and 1983, no State official accepted the donations which petitioner claims to have made in each of those respective years. When Governor Edwards resumed being Governor in March 1984, the State had no record of the donations which petitioner claimed to have made during these years. During the period between March 1981 and March 1984, petitioner unsuccessfully attempted to contact Louisiana Governor Treen about the animal trophies which he intended to give to the State.
Sometime prior to February 16, 1984, respondent began examining petitioner's deductions for the alleged donations. Respondent requested an opinion from the Louisiana Attorney General's office on whether petitioner had made a valid donation of the trophies under Louisiana law. Respondent provided the Attorney General with a copy of the letter from Governor Edwards dated January 9, 1980. On July 6, 1984, the Attorney General informed respondent that, based on the information provided by respondent, petitioner had not made a valid donation to the State.
Governor Edwards was reelected Governor of Louisiana and took office in March 1984. On December 29, 1984, petitioner and Governor Edwards executed a notarized document entitled "Donation Inter Vivos." In this document, petitioner states, under oath, that he donated various trophies during the years 1979 through 1983 to the State and that the State accepted the donations. The document also states that because the State was unable to store the trophies, it requested that petitioner "maintain the property until appropriate facilities were acquired and made available." 6 The document lists the trophies which petitioner claims he donated to the State during the years 1979, 1981, 1982, and 1983. The document does not state how the donations were made or who accepted the donations on behalf of the State during those respective years, nor does it give specific dates on which the purported donations were made. On December 30, 1985, the same parties executed a similar "Donation Inter Vivos" which covers the trophies petitioner allegedly donated to the State in 1985. 7
6 The document also states that if the donations purportedly made in earlier years are "declared invalid, null, void or of no effect in any manner whatsoever," then the document serves to effectuate a "manual gift" as of the date of its execution. Petitioners conceded at trial and on brief that this document did not effectuate a donation in 1984.
7 The record contains no "Donation Inter Vivos" or any other document purporting to effectuate the donations which petitioner claims to have made during 1984.
On March 26, 1985, petitioner petitioned the 32d Judicial District Court (State Court) for an order declaring that the trophies which were listed in the 1984 Donation Inter Vivos were legally donated to the State. In its answer, the State denied that petitioner donated these items to it. In January 1986, petitioner moved for summary judgment and, in April 1986, his motion was granted. In holding for petitioner, the State Court did not find that a valid donation had in fact occurred. Instead, the State Court ruled in favor of petitioner on the basis of the notarial act executed on December 29, 1984. In short, the State Court ruled that if the State previously acknowledged that it had accepted an otherwise valid donation from petitioner, it was in effect estopped from denying that the donation had occurred.
On April 10, 1986, the State appealed the State Court's judgment. On August 20, 1986, petitioner's attorney sent a letter to Governor Edwards and informed him of the dispute over the trophies and requested his assistance. Governor Edwards intervened on petitioner's behalf. Subsequent to this intervention, petitioner agreed to donate the buildings behind his house to the State, and in exchange, the State agreed to drop its appeal.
Ram Head Hunting Lodge
On January 25, 1982, petitioner and Ron Hayes, a guide and outfitter in Alaska, purchased the Ram Head Hunting Lodge with the intent to operate it as a hunting lodge. However, they were never able to obtain the proper license necessary to operate the hunting lodge. Consequently, they sold the Ram Head Hunting Lodge in 1985.
On Schedule C of their 1983 income tax return, petitioners deducted various expenses under section 162 and depreciated certain recovery property under section 168. On their 1984 and 1985 income tax returns, petitioners claimed depreciation deductions similar to the ones they took in 1983, and they deducted attorneys fees as business expenses. Aside from these expenses, petitioners deducted no other expenses incurred in connection with the Ram Head Hunting Lodge for the years 1984 and 1985. Petitioners reported no gross receipts or sales from the Ram Head Hunting Lodge for any of the years in issue.
1. Burden of Proof
The first issue for decision is whether the burden of proving that valid donations of the trophies were made to the State is on respondent. Generally, the burden of proof is on the taxpayer. Welch v. Helvering [3 USTC ╤ 1164], 290 U.S. 111 (1933); Rule 142(a). Respondent bears the burden of proof, however, with "respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer." Rule 142(a). A new theory that is presented to sustain a deficiency is treated as a new matter when it increases the amount of the original deficiency or requires the presentation of different evidence. Colonnade Condominium, Inc. v. Commissioner [Dec. 45,139], 91 T.C. 793, 795 n.3 (1988); Achiro v. Commissioner [Dec. 38,351], 77 T.C. 881, 890 (1981). A new theory which merely clarifies or develops the original determination is not a new matter in respect of which respondent bears the burden of proof. Achiro v. Commissioner, supra at 890; Estate of Jayne v. Commissioner [Dec. 32,497], 61 T.C. 744, 748-749 (1974); McSpadden v. Commissioner [Dec. 28,998], 50 T.C. 478, 492-493 (1968).
In his notice of deficiency, respondent states:
The form of making a gift * * * was met, however the substance of actually making a donation * * * has not been verified. There was no verification submitted to indicate that the State of Louisiana (donee) has any plans or funds allocated to maintain this museum or of ever taking actual possession of the mounted animals at any site other than your property. For all practical purposes the trophies given to the State of Louisiana have in substance been returned to you for your control and care. There has been no verification that the State of Louisiana accounts for * * * or evidences any responsibility for the exhibit.
Petitioners argue that the notice of deficiency indicates that respondent did not question the validity of the donation, and that the only issue raised in the notice of deficiency was whether the State had returned the gifts to petitioner. Petitioners further argue that respondent's position that the original donation is not valid is a new theory, and that this new theory rises to the level of a new matter because it requires the presentation of new evidence.
The notice of deficiency indicates that respondent is disallowing the charitable contribution deduction because the substance of the donations had not been verified. The notice of deficiency alerted petitioner that he would have to prove that he actually made the donations. Respondent did not assert a new deficiency, raise an affirmative defense, or take a position at trial which was inconsistent with his position in his notice of deficiency or which required the presentation of different evidence. Accordingly, the burden of proof remains with petitioners.
2. Donation of Trophies
The second issue for decision is whether petitioners may claim the deduction for charitable contributions for the donation of trophies petitioner allegedly made to the State during the taxable years 1981 through 1985. Section 170(a) allows a deduction for charitable contributions to any entity described in section 170(c). The State of Louisiana is an entity described in section 170(c). A charitable contribution is made at the time that delivery is effected. Sec. 1.170A-1(b), Income Tax Regs. In determining the existence and timing of a charitable contribution, the analysis applied is the same analysis applied in determining the existence and timing of an inter vivos gift. DeJong v. Commissioner [Dec. 24,997], 36 T.C. 896, 899 (1961), affd. [62-2 USTC ╤ 9794] 309 F.2d 373 (9th Cir. 1962). This Court has consistently held that there are six essential elements to a bona fide inter vivos gift. These six elements are: (1) A donor competent to make a gift; (2) a donee capable of accepting a gift; (3) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and dominion and control of the entire gift to the donee, such that the donor can exercise no further act of dominion or control over it; (5) delivery by the donor to the donee of the subject matter of the gift or of the most effectual means of commanding dominion over it; and (6) acceptance of the gift by the donee. Guest v. Commissioner [Dec. 38,037], 77 T.C. 9, 15-16 (1981); Weil v. Commissioner [8829 BTA], 31 B.T.A. 899, 906 (1934), affd. [36-1 USTC ╤ 9183] 82 F.2d 561 (5th Cir. 1936).
A. 1981 Through 1984
For the taxable years 1981 through 1984, petitioner fails to establish the final three elements of an inter vivos gift. 8 Petitioner argues that he, acting as the State's agent, effectuated a valid donation by accepting delivery of the gifts on the State's behalf. In effect, petitioner argues that he donated the trophies in his capacity as an individual and accepted the trophies in his capacity as the State's agent.
8 Respondent acknowledged that petitioner satisfied the first element but argues that elements 2 through 6 were not satisfied. Because of our findings regarding elements 4 through 6, we will not address elements 2 and 3.
The linchpin of petitioner's position is his purported agency relationship with the State. Under Louisiana law, a donee (in this case the State) may appoint an agent to accept gifts on its behalf. La. Civ. Code Ann. art. 1542 (West 1985). 9 This agency relationship may be created orally, but proof of the agency relationship must comport with the Louisiana statutes regarding conventional obligations. La. Civ. Code Ann. art. 2992 (West 1985); 10 Savoie v. Estate of Rogers, 410 So. 2d 683, 688 (1982). The Louisiana statutes regarding conventional obligations require that petitioner prove the agency relationship with at least one credible witness and other corroborating circumstances. La. Civ. Code Ann. art. 1846 (West 1985); 11 Savoie v. Estate of Rogers, supra.
9 La. Civ. Code Ann. art. 1542 (West 1985) provides in part: "If the donee be of full age, the acceptance may be made * * * in his name by his attorney in fact having * * * a general power to accept the donations that have been or may be made."
10 La. Civ. Code Ann. art. 2992 (West 1985) provides in part: "A power of attorney may be given * * * verbally, but of this testimonial proof is admitted only conformably to the title: Of Conventional Obligations. "
11 La. Civ. Code Ann. art. 1846 (West 1985) provides in part: "If the price or value [of the subject matter of the contract] is in excess of five hundred dollars, the contract must be provided by at least one witness and other corroborating circumstances." Art. 1846 was previously codified as art. 2277, but was reenacted as art. 1846 by 1984 La. Acts 331, effective Jan. 1, 1985.
Petitioner has failed to prove that the agency relationship existed as required by La. Civ. Code Ann. arts. 2992 and 1846. Petitioner never testified that he was appointed to act as the State's agent for purposes of accepting the purported donations. Instead, he only testified that Governor Edwards asked him to store the animals until the State could provide proper facilities for them. Assuming this is what Governor Edwards told petitioner, we are unable to discern from petitioner's testimony any evidence that Governor Edwards specifically designated him to act as the State's agent and accept donations on its behalf. Even if petitioner intended to donate the animals to the State by placing them in the building behind his house, no one acting on the State's behalf accepted the donations, which is a prerequisite for a completed gift.
The only other witness called by petitioner to testify on the agency relationship was Governor Edwards. Governor Edwards' testimony does not support petitioner's agency theory. Governor Edwards never testified that he appointed petitioner to act as the State's agent to accept delivery of the donations. Governor Edwards testified that at his meeting with petitioner in 1979, he and petitioner were "lax" in establishing a mechanism for effectuating future "gifts" from petitioner to the State. His explanation of how petitioner's donations were to be accepted by the State after 1979 reflects this. He testified that he accepted the donations on behalf of the State. However, Governor Edwards was not in office from March 1980 until March 1984. We fail to see how he could have accepted gifts on behalf of the State during this period. He also testified that he asked petitioner to place the trophies in the building behind his house and a representative from the State would come by and take a formal inventory. However, no such inventory was taken during these years and, until the execution of the Donation Inter Vivos on December 29, 1984, the State did not have any record of items which petitioner purportedly donated to the State during 1981, 1982, and 1983. In fact, petitioner testified that between March 1980 and March 1984, he could not even get Governor Treen to return his phone calls, much less send someone out to take an inventory.
Because petitioner has not presented "one witness and other corroborating circumstances" to prove the agency relationship as required by La. Civ. Code Ann. art. 1846 (West 1985), he has not established the requisite agency relationship upon which his theory of completed donations rests. Accordingly, we hold that petitioners may not claim deductions for petitioner's alleged charitable contributions for the taxable years 1981 through 1984.
Petitioners argue on brief that petitioner's position that he is both the donor and the agent of the donee "should not in any way vitiate the agency contract that he had with the State of Louisiana as such a dual capacity is not prohibited under Louisiana law." Although we are unaware of any statute expressly prohibiting the donor from acting as the donee's agent, such an arrangement is inconsistent with requiring a clear and unmistakable manifestation of the intent by the donor to part with legal title, dominion, and control of the subject matter of the gift. In the case where the donee has someone other than himself accept the donation on his behalf, the intent is still evidenced by the transfer of the subject matter of the gift from the donor to a third party, be it the donee or his agent.
Louisiana jurisprudence acknowledges this rationale and incorporates it in its decisions. Under Louisiana law, a donation inter vivos by manual gift accompanied by real delivery occurs only when the donor's intent to donate and actual possession of the movable property by the donee operate simultaneously. Adams v. Security Ins. Co. of Hartford, 533 So. 2d 140, 145 (La. Ct. App. 1988), affd. in part and revd. in part 543 So. 2d 480 (1989); Mitchell v. Mitchell, 489 So. 2d 483, 486 (La. Ct. App. 1986); Succession of Broussard, 306 So. 2d 399 (La. Ct. App. 1975). Hand to hand delivery from donor to donee is not required; all that is necessary is a manifestation of intent of the donor to give, accompanied by some form of real delivery. Succession of Young, 563 So. 2d 502, 507 (La. Ct. App. 1990); Succession of McCrocklin, 126 So. 2d 364, 367 (La. Ct. App. 1960), affd. 242 La. 404, 137 So. 2d 274 (1961); Succession of Moran v. Moran, 25 So. 2d 302, 303 (La. Ct. App. 1946); Ory Bros. v. Muller, 128 So. 903, 905 (La. Ct. App. 1930).
In Succession of Zacharie, 119 La. 150, 43 So. 988 (1907), the issue before the Louisiana Supreme Court was whether moneys placed by an agent on behalf of a donor into the donees' bank account was a completed manual gift. The court stated that the bank received the gift as the agent of the donee and that upon receipt, manual delivery was effectuated as the subject matter of the gift was no longer within the dominion and control of the donor. As to the delivery to the donees' agent as a means of completing the gift, the court stated: "He [the donor] wisely placed the funds * * * in a savings bank, and by so doing assured their [the donees'] future against the accidents of a business life and the contingency of his death. This object could only have been accomplished by divesting himself irrevocably of his ownership." Succession of Zacharie, 43 So. at 991.
Implicit in the Zacharie decision is the notion that delivery to a third party provides an objective manifestation of the donor's intent to divest himself of ownership of the subject matter of the gift. By contrast, where, as in the instant case, the donor purportedly also acts as the donee's agent, there is no objective manifestation of this intent. The purported transfer and acceptance occur only in the donor's mind. There is no tangible proof of the donation, and the donor is free to retain the "donated" property. In the event of the donor's death, the donee could not establish the gift.
In the instant case, the subject matter of the gift never left petitioner's possession. The State never took possession, dominion, or control of the trophies. There was never any objective manifestation of real delivery during the respective years in which the purported gifts were made. Under these circumstances, we find that petitioner has not effectuated a manual gift.
We note that there are significant practical problems with petitioner's agency theory. Foremost is the fact that no one from the State appears to have known what was purportedly being donated to the State during the years in which the donations were allegedly made. The legal effect of a completed gift is the transfer of property from the donor to the donee. Surely someone with authority to bind the State would have to know what was being donated and accept it before the gift could be completed. For example, during the years 1981, 1982, and 1983, we do not believe that the State would have accepted any attendant liabilities associated with ownership of the property. It is clear that the State was unable and unwilling to assume even the cost of maintaining and storing the trophies. If, on the other hand, petitioner or his estate had disputed the State's ownership of the property, the State would have had great difficulty proving that it owned the animals. This is because petitioner never made an objective, unequivocal manifestation of his donations which would indicate to third parties his intent to donate. The State possessed no information identifying which property petitioner claims to have donated to the State and no proof of these donations.
We also question whether Governor Edwards, just a few months before leaving office, could legally appoint someone to act as the State's agent during the next administration, especially without reducing the appointment to writing or otherwise recording the agency with the State government. Petitioner argues, without citation to any authority, that "obviously, Mr. Miller's agency relationship with the State * * * did not terminate when Governor Edwards left office * * *. Governor Edwards is not the principal in this relationship, the State of Louisiana is." Without further citation to authority, we are unable to grasp the "obviousness" of this position and consider the validity of petitioner's "appointment" an additional problem with petitioner's position.
Finally, we address the effect of the State court litigation on the issue of whether a completed gift occurred for purposes of Federal income taxes during the taxable years 1981 through 1984. As the State court decision is not a decision of the highest court in Louisiana, and we are unaware of a ruling by the Louisiana high court on this exact issue, we are only required to give the lower court decision "proper regard." Commissioner v. Estate of Bosch [67-2 USTC ╤ 12,472], 387 U.S. 456, 465 (1967).
Our review indicates that the State court did not make an independent finding of fact that petitioner completed the purported gifts in the years claimed on petitioners' tax returns. Instead, the court relied on the Donation Inter Vivos executed by the parties in 1984 to establish the facts upon which summary judgment in favor of petitioner was granted. The Donation Inter Vivos only referred to gifts allegedly made in the years 1979 through 1983. Petitioners argue that the facts stated in the Donation Inter Vivos are sufficient to establish that the donation occurred in the years claimed. However, the State court did not determine that the facts stated in the Donation Inter Vivos actually occurred. Instead, the State court decided that, for purposes of the State court litigation, the State was bound to the recitation of events it agreed to in the Donation Inter Vivos executed on December 29, 1984, regardless of whether these events in fact occurred during the years 1979 through 1983. Thus, the court's judgment was not based on its own independent factual findings. Under these circumstances, we give no weight to the State court's judgment. 12
12 The fact that we give no weight to the State court's judgment does not in any way indicate that we disagree with the court's resolution of the issues before it. The State court judge testified that he believed the State was contractually bound by Governor Edwards' signature on the 1984 Donation Inter Vivos and, therefore, was precluded from denying the facts stated therein.
Petitioners concede that the 1984 Donation Inter Vivos does not effectuate a gift for any years other than 1979 through 1983. 13 Because of this explicit concession, we do not address whether the Donation Inter Vivos executed on December 29, 1984, resulted in a completed gift in that year.
13 At trial, petitioners' counsel indicated that the 1984 Donation Inter Vivos was not effective to convey property in 1984. On brief, petitioners state:
Petitioners' counsel has already conceded that the Notarial Act of Donation dated December 29, 1984 was effective only in confirming that the prior donations had been made in the years recited therein, being 1979, 1981, 1982 and 1983 (the year 1979 not being before this Court) and that this Act of Donation was not effective to cause a donation in 1984 to the animals petitioners contend were donated in prior years.
As to the claimed 1985 donation, we find that a valid donation occurred. This donation is not based on petitioner's agency theory. Instead, this donation was effectuated by an Act of Donation Inter Vivos executed on December 30, 1985. Respondent concedes that this document was properly executed. Under Louisiana law, the effect of executing the Act of Donation Inter Vivos is the present and irrevocable divestment of the subject matter of the gift from the donor in favor of the donee, who accepts it. La. Civ. Code Ann. art. 1468 (West 1985). 14 Thus, the fourth and sixth essential elements of a gift are present.
14 La. Civ. Code Ann. art. 1468 (West 1985) provides: "A donation inter vivos (between living persons) is an act by which the donor divests himself, at present and irrevocably, of the thing given, in favor of the donee who accepts it."
We also find that the fifth element, delivery, is present. The regulations do not define delivery. In order to determine whether delivery was effectuated, we look to State law. See Greer v. Commissioner [Dec. 35,162], 70 T.C. 294, 304 (1978), affd. [80-2 USTC ╤ 9802], 634 F.2d 1044 (6th Cir. 1980); see also Alioto v. Commissioner [Dec. 37,209(M)], T.C. Memo. 1980-360. Louisiana law permits parties to consent to delivery if the property is not transportable. La. Civ. Code Ann. art. 2478 (West 1985). 15 In this case, it appears that removal of the trophies was not practical, and in the notarial act executed on December 30, 1985, the parties consented to delivery. Accordingly, we find that delivery occurred. We also find that petitioner was competent to make the gift, that the State was capable of accepting the gift, and that petitioner intended to divest himself of title, dominion, and control of the subject matter of the gift. Accordingly, we hold that a valid inter vivos gift occurred in 1985 of the items listed on the notarial act executed on December 30, 1985.
15 La. Civ. Code Ann. art. 2478 (West 1985) provides in part: "The tradition or delivery of movable effects takes place *** by the bare consent of the parties, if the things can not be transported at the time of sale."
3. Valuation of 1985 Trophy Donations
The next issue for decision is the value of the property donated to the State for purposes of the section 170 deduction for charitable contributions. The value of a charitable contribution is purely a factual issue and one that this Court has traditionally admonished the parties for not deciding among themselves. Messing v. Commissioner [Dec. 28,532], 48 T.C. 502, 512 (1967). "The legal standard defining 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 reasonable knowledge of relevant facts.'" Cupler v. Commissioner [Dec. 33,397], 64 T.C. 946, 955 (1975) (citing Mauldin v. Commissioner [Dec. 32,099], 60 T.C. 749, 758 (1973)); sec. 1.170A-1(c)(1) and (2), Income Tax Regs. The fact that the property is unique and that there is no "market price" is not a barrier to valuation. Cupler v. Commissioner, supra at 955. In determining value, the use to which the donated property will be put is a relevant factor. Guggenheim v. Rasquin [41-1 USTC ╤ 10,013], 312 U.S. 254, 258 (1941). In short, valuation issues are questions of fact, and all relevant evidence is to be considered in their resolution. Skripak v. Commissioner [Dec. 41,907], 84 T.C. 285, 320 (1985); Cupler v. Commissioner, supra; Mauldin v. Commissioner, supra at 759; Kaplan v. Commissioner [Dec. 27,248], 43 T.C. 663, 665 (1965).
Both parties rely heavily on expert opinions to support their contentions as to the value of the contributions. We evaluate such opinions in light of the demonstrated qualifications of the expert and all other evidence of value. Estate of Newhouse v. Commissioner [Dec. 46,411], 94 T.C. 193, 217 (1990); Parker v. Commissioner [Dec. 42,966], 86 T.C. 547, 561 (1986); Johnson v. Commissioner [Dec. 42,383], 85 T.C. 469, 477 (1985). We are not bound, however, by the opinion of any expert witness when that opinion is contrary to our judgment, especially where the expert's opinion of value is so exaggerated that the opinion is incredible. Estate of Newhouse v. Commissioner, supra at 217; Parker v. Commissioner, supra at 561. While we may accept the opinion of an expert in its entirety, Buffalo Tool & Die Mfg. Co. v. Commissioner [Dec. 36,977], 74 T.C. 441, 452 (1980), we may be selective in the use of any portion of such an opinion. Parker v. Commissioner, supra at 562. Consequently, we will take into account expert testimony to the extent it aids us in arriving at the fair market value of the donated property.
Respondent relies primarily on the testimony of his expert, Larry C. Blomquist. Mr. Blomquist is a taxidermist who has received national recognition in his field. Mr. Blomquist has never hunted abroad, but he claims that he is aware of the costs of hunting abroad and the expenses of shipping trophies back to the United States because he has many clients who do hunt abroad. Mr. Blomquist has visited museums similar to the one that petitioner wanted to establish and states that through these visits and conversations with individuals connected with these museums, he became familiar with the needs of a museum of this type. Although Mr. Blomquist does not hold himself out as a professional appraiser, he has done appraisals on many occasions.
Mr. Blomquist's valuation is based on his finding that, although limited, a market for animal trophies exists. In cases where Mr. Blomquist knew of comparable sales, he valued petitioner's trophies at the sale price. Mr. Blomquist admits that he is unaware of comparable sales for the majority of items in the collection, and he never specifically identified the trophies for which he did find comparables.
If there was not a comparable sale, Mr. Blomquist assigned a value based on the sale of a trophy which had a comparable replacement cost. For instance, if there was a trophy for which no comparable sale existed, that trophy received the same value as a trophy which had approximately the same replacement cost and for which there was a comparable sale. Mr. Blomquist testified that by using the term "replacement cost," he meant the cost of obtaining the skin, horns, and other parts domestically, mounting these parts to create a trophy, and adding an additional amount to cover the cost of bringing these elements together. On cross-examination, Mr. Blomquist admitted that it would be difficult to obtain the parts necessary to replace the majority of the trophies in petitioner's collection and that it would be necessary to incur the cost of going into the field in order to replace these trophies. Nevertheless, Mr. Blomquist's report states that he did not include the cost of hunting in his computation of replacement cost because the skins could be obtained from other sources.
If the trophy's replacement cost was not the same as a trophy for which Mr. Blomquist had a comparable sale, he would assign a value to the trophy based on his experience and general knowledge of sales of wildlife trophies. Mr. Blomquist considered aspects such as popularity of the species, position and style of mount, availability of the mount, and scarcity of the specimen when determining fair market value.
Once Mr. Blomquist established a value for each trophy in the collection, he totaled all of the values and then reduced this total to arrive at a value for the whole collection. Mr. Blomquist reduced the total value because he felt that a volume purchaser would expect a discount and also to reflect the limitations which may be imposed by law on the sale of certain trophies in certain States. 16
16 The parties have not addressed on brief whether these limitations apply to donations as opposed to sales.
Mr. Blomquist admits that he did not have time to identify several subspecies during his inspection, that he was rushed for time, and that he was forced to identify (and presumably evaluate) some of the trophies based on photographs. Mr. Blomquist also admits that he did not have time to value the trophies as of the day donated, and that instead, he determined the value of the trophies as of December 31, 1988. Finally, Mr. Blomquist admits that he did not increase the value assigned to the trophies which were Safari Club International (SCI) records, even though he admits that this status could increase the value of the trophies from 50 to 500 percent.
Petitioner relies primarily on the testimony of Jack B. Perry. 17 Mr. Perry is a taxidermist, president of the World Wildlife Museum, SCI measurer, and an SCI recertification measurer. Mr. Perry has also been employed by respondent to appraise animal collections. Of all the experts who testified at trial, Mr. Perry has the most experience appraising trophies. Mr. Perry examined petitioner's trophies for 4 days in preparation of his evaluation.
17 Petitioners also presented the testimony of Brian Gaisford. On brief, petitioners argue that Mr. Gaisford did not employ a reliable method of valuation for the years 1982 through 1985. Petitioners maintain that Mr. Gaisford accurately determined the cost of replacing the trophies donated in 1981, and in many instances, these determinations are consistent with Mr. Perry's.
Mr. Perry began his evaluation by first determining the cost of replacing the trophy. He included the cost of the safari, trophy fees, taxidermy, and shipping in the replacement cost. Mr. Perry recognized that more than one specimen may be taken in a safari and therefore did not include the total cost of a safari in each trophy's replacement cost. Once the replacement cost was established, Mr. Perry adjusted the cost upward to reflect the specimen's rarity, world record class standing, artistic value, and current restrictions on hunting the species. With respect to the premium that he attached to a trophy because of its world class status, Mr. Perry testified that a significant element of this factor represented the increased cost of replacing the trophy caused by the fact that it could take several trips to replace a world class trophy. He then totaled the appraisal value assigned to each trophy to arrive at a total value for the entire collection.
Respondent argues on brief that Mr. Perry's reliance on replacement costs in his evaluation is improper because a probative correlation between replacement costs and fair market value has not been demonstrated as required by Rev. Proc. 66-49, 1966-2 C.B. 1257, 1258. We find that petitioner has demonstrated a probative correlation between replacement costs and fair market value. As this Court has noted in the past, a correlation between replacement costs and fair market value is generally demonstrated when the property is unusual in nature and other methods of valuation, such as comparable sales or income capitalization, are not applicable due to the property's uniqueness and non-income-producing use. 18 Moreover, the experts agree that a museum could not purchase many of the trophies in petitioner's collection and, instead, would go into the field to collect it. Thus, replacement costs indicate the amount of money that a willing buyer would pay to obtain a trophy. Finally, respondent's own expert admitted that he used replacement value in his evaluation. This also indicates that the probative correlation exists.
18 See Provitola v. Commissioner [Dec. 46,908(M)], T.C. Memo. 1990-523 n.10, 60 T.C.M. 939, 943 n.10, 59 P-H Memo T.C. ╤ 90,523 at 90-2559, and cases cited therein, on appeal (11th Cir. May 7, 1991).
We find that it is appropriate to consider replacement costs in arriving at fair market value. We do not believe that respondent has shown that the reconstructed "market" created by Mr. Blomquist accurately indicates the price at which petitioner's trophies would sell. However, we do agree with Mr. Blomquist that a purchaser of an entire collection would expect some type of volume discount and that a museum would not pay petitioner full replacement value for a trophy, because for that amount of money, a museum would go into the field and replace the trophy itself. Finally, we find that Mr. Perry's adjustment for world record status is too generous. The testimony of other witnesses for petitioner indicates that, although a museum would display world class mounts, it would not reject other mounts of the same species. Based on the entire record, we find the total value of the trophies contributed to the State in 1985 to be $71,000.
4. Limits on Amount of Deduction for Donation of Trophies
The next issue for decision is whether the charitable contribution deductions claimed by petitioners are limited to the fair market value of the animal trophies reduced by the amount of gain which would not have been long-term capital gain if the animal trophies had been sold at their fair market value. See sec. 170(e). On brief, respondent acknowledges that he raised this issue for the first time after trial. Respondent has not sought to amend his answer to include this additional ground for his deficiency determination as required by Rule 41. Therefore, the issue is not properly before us. However, even if respondent had moved to amend his pleadings under Rule 41, it appears that such an amendment would prejudice petitioner, who did not have an opportunity to present evidence on this issue at trial. Under these circumstances, we would be inclined to deny such a motion. See Law v. Commissioner [Dec. 42,106], 84 T.C. 985, 991 (1985). Finally, if the issue were properly before us, respondent would bear the burden of proof as this issue constitutes a new matter. 19 Rule 142(a). Respondent is unable to satisfy his burden of proof. He failed to present any evidence on petitioner's basis in the trophies. Moreover, we value petitioner's trophies at a value which is less than the replacement costs which Jack Perry determined. 20 This indicates that petitioner's cost basis in the trophies may have exceeded their fair market value. In that case, the exclusion of built-in ordinary income from the deduction for charitable contributions does not apply. Accordingly, we hold for petitioner on this issue.
19 On brief, respondent concedes that he first raised this issue after trial, and he properly assumes that he has the burden of proof.
20 Jack Perry was the only expert to properly include cost of hunt in his replacement costs determination for the taxable year 1985.
5. Hunting and Mounting Expenses
The next issue for decision is whether petitioners can deduct the "cash contributions" that they allegedly made to the State. The cash contributions represent payment of expenses which petitioner allegedly incurred while hunting and mounting the trophies that he claims he contributed to the State. Section 1.170A-1(g), Income Tax Regs., provides in part: "unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution." There is no argument that petitioner was not reimbursed for his alleged expenses and that payment of expenses incident to rendering services to the State would constitute a deductible contribution. The parties disagree on whether petitioner was rendering services to the State when he incurred the expenses.
Petitioner argues that, pursuant to his commission as the Official Big Game Hunter for the State, he was required to travel the world and obtain trophies to be placed in the State's wildlife museum. In executing his commission, petitioner incurred expenses for which he was not reimbursed. These expenses form the basis for petitioners' claimed deduction for the "cash contributions."
Respondent argues that the expenses incurred by petitioner on his hunting trips were not incident to the rendition of services to the State as required by section 1.170A-1(g), Income Tax Regs. Instead, respondent argues that these expenses were incurred while petitioner was on personal trips during which he acquired personal property. Respondent further argues that petitioner was designated as the Official Big Game Hunter for the State in order to assist him in obtaining access to certain hunting areas and that the designation did not create an agency relationship under which the trophies taken became the State's property. We agree with respondent.
Petitioner testified that the trophies he acquired were his own personal property, and that he was under no legal obligation to donate them to the State. If petitioner were on the hunting trips as the State's agent, then the property he acquired would belong to the State. This is because, under agency law, the benefits derived from the agent's efforts inure to the principal. La Civ. Code Ann. art. 3005 (West 1985); 21 Neal v. Daniels, 217 La. 679, 47 So. 2d 44, 45 (1950); Restatement, Agency 2d, sec. 388 (1957). Petitioner considered the trophies to be his property. The trips to acquire them were also personal to petitioner and not incident to the rendition of services for the State. Thus, the expenses are not deductible.
21 La. Civ. Code Ann. art. 3005 (West 1985) provides in part that an agent "is bound to restore to his principal whatever he has received by virtue of his procuration."
Moreover, if we permitted petitioners to deduct both the expenses for the "cash contributions" and the fair market value of the property that petitioner contributed to the State, we would in effect permit petitioners to take a double deduction. Petitioners could first deduct their acquisition cost, and then they could deduct the fair market value of the property computed on the basis of replacement costs. Not only is this illogical, it is not permitted under the regulations, which require that a taxpayer incur the expenses incident to the rendition of services to the State. If the services are rendered on behalf of the State, then the property is the State's property, and petitioner could not subsequently contribute the property and claim a deduction. If petitioner acquires the property on his own behalf, then he is not rendering services to the State and, therefore, may not deduct the expenses incurred in connection with the acquisition.
Petitioners cite Cupler v. Commissioner [Dec. 33,397], 64 T.C. 946 (1975); LaGarde v. United States, 37 AFTR 2d 76-556, 76-1 USTC ╤ 9248 (N.D. Ala. 1975); and Jersig v. United States, 27 AFTR 2d 71-1102, 69-1 USTC ╤ 9311 (W.D. Tex. 1969), for the proposition that they may deduct both the expense of acquiring the trophies and the fair market value of the trophies. Petitioners' reliance on these cases is misplaced. None of these cases establish whether the taxpayers obtained the property on behalf of the charitable organization or for themselves. Because this factual issue is not established, these cases are distinguishable. 22
22 We note that in Cupler v. Commissioner [Dec. 33,397], 64 T.C. 946 (1975), respondent conceded that both the out-of-pocket expenses and the value of the donated property were deductible. Cupler v. Commissioner, supra at 954 n.3. Thus, not only is the specific factual issue of whether the taxpayer rendered services to the charitable entity when he incurred his expenses not resolved, but it appears that the parties did not even argue this issue.
6. Expenses for Maintenance of Trophies
The next issue for decision is whether petitioners may deduct expenses incurred in connection with the care and maintenance of the trophies that petitioner donated to the State. Since we find that petitioner did not donate the trophies that he claims he donated in the years 1981 through 1984, the expenses incurred in connection with the care and maintenance of these trophies are nondeductible personal expenses. Because we find that petitioner donated trophies in 1985, we will consider whether the expenses incurred in connection with the care and maintenance of these trophies are deductible.
At trial, the only evidence petitioner presented on this issue was his own testimony. Petitioner presented no other evidence to substantiate his claim that he incurred the expenses he deducted. We find that petitioner has failed to satisfy his burden of proving that he actually incurred the expenses which he deducted. Accordingly, we hold for respondent on this issue. 23
23 We note that even if petitioner had substantiated his expenses, his deduction would not amount to more than a few dollars. This is because petitioner could only deduct those expenses incurred in connection with the care and maintenance of the animals donated in 1985 as that is the only year in which we found a valid donation. Moreover, because this donation occurred on December 30, 1985, petitioner could only deduct the expenses which were incurred on December 31, 1985.
7. Addition to Tax for Overvaluation
The next issue for decision is whether petitioners are liable for additions to tax for valuation overstatements of property under section 6659 for the taxable years 1981, 1983, and 1984. 24 Section 6659 imposes a graduated addition to tax on individuals whose underpayment of tax equals or exceeds $1,000 and is attributable to a valuation overstatement. Sec. 6659(d). A valuation overstatement exists if "the value of any property, or the adjusted basis of any property, claimed on any return is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be)." Sec. 6659(c)(1).
24 Respondent concedes that petitioners did not overvalue the property purportedly donated in 1982 and 1985.
Where a determination that a taxpayer is not entitled to the claimed deductions is upheld without regard to any claim of basis or without findings with respect to fair market value, the addition to tax under section 6659 may be inapplicable because the resulting underpayment of tax may be attributable solely to the disallowed deductions, not to a valuation overstatement. Todd v. Commissioner [89-1 USTC ╤ 9116], 862 F.2d 540 (5th Cir. 1988), affg. [Dec. 44,294], 89 T.C. 912 (1987); McCrary v. Commissioner [Dec. 45,615], 92 T.C. 827, 851-855 (1989); Suna v. Commissioner [Dec. 45,185(M)], T.C. Memo. 1988-541, affd. [90-1 USTC ╤ 50,021], 893 F.2d 133 (6th Cir. 1990).
In this case, the deductions for charitable contributions for the years 1981, 1983, and 1984 were disallowed because the contributions were not completed. However, we made no findings of fact as to the correct value of the trophies that petitioner purportedly donated to the State during these years. Thus, the valuation overstatements, if any, regarding the trophies were not integral to, and inseparable from, our disallowance of the deductions for the charitable contributions. The underpayments, therefore, were not "attributable to" valuation overstatements. Under these circumstances, the additions to tax under section 6659 are not applicable. Todd v. Commissioner, supra. Accordingly, we hold for petitioners on this issue.
8. Deduction Related to Hunting Lodge
The final issue for decision is whether petitioners are entitled to business expenses and depreciation deductions for the taxable years 1983 through 1985 for expenses allegedly incurred in connection with the operation of the Ram Head Hunting Lodge.
Petitioners deducted business expenses under section 162 on Schedule C of their 1983, 1984, and 1985 income tax returns. In order to deduct expenses under section 162, the expenses must be paid or incurred in connection with an active trade or business. Thus, petitioners must demonstrate that they actively engaged in the trade or business of operating a hunting lodge. Rule 142(a).
Petitioners argue that the expenses "were directly related to the operation of the business." Respondent, on the other hand, argues that the expenses are not deductible because the Ram Head Hunting Lodge was not operated as a trade or business.
We find that petitioners were not engaged in an active trade or business. The record clearly indicates that petitioner never obtained the license necessary to operate the hunting lodge. The record also indicates that no revenues were ever generated by this activity. Petitioner acknowledges that he could not operate the hunting lodge business without the license, and that he was unable to obtain that license. Under these circumstances, we do not believe it was possible for petitioners to have engaged in a trade or business as required by section 162.
The expenses which petitioners purportedly incurred are at best preoperating expenses. These expenses are clearly not deductible. Richmond Television Corp. v. United States [65-1 USTC ╤ 9395], 345 F.2d 901, 907 (4th Cir. 1965), vacated and remanded on other issues [65-2 USTC ╤ 9724], 382 U.S. 68 (1965), original holding on this issue reaffd. [66-1 USTC ╤ 9133], 354 F.2d 410, 411 (4th Cir. 1965), overruled on other grounds NCNB v. United States [82-2 USTC ╤ 9469], 684 F.2d 285, 289 (4th Cir. 1982); Hardy v. Commissioner [Dec. 46,203], 93 T.C. 684 (1989); Bennett Paper Corp. v. Commissioner [Dec. 38,886], 78 T.C. 458 (1982), affd. [83-1 USTC ╤ 9208], 699 F.2d 450 (8th Cir. 1983). The instant case is analogous to Richmond Television Corp. v. United States, supra. In Richmond Television Corp., the taxpayer incurred expenses in connection with training its employees prior to obtaining a broadcast license from the Federal Communications Commission (FCC). The taxpayer deducted these expenses in the year incurred and prior to obtaining the FCC license or broadcasting television signals. The Fourth Circuit held that the expenses were incurred before the taxpayer obtained the proper licensing to engage in the business of television broadcasting. Therefore, the expenses were preoperating expenses and not deductible under section 162 as that section requires that the taxpayer actively engage in the trade or business in order to deduct expenses. In the instant case, petitioner lacked the proper licensing to engage in the trade or business of operating a hunting lodge. As a result of his inability to obtain this license, he abandoned his pursuit of this activity. Because petitioner never engaged in the trade or business of operating a hunting lodge, expenses incurred in connection with the Ram Head Hunting Lodge are not deductible under section 162.
Petitioners also claimed depreciation deductions under section 168. Section 168(c) allows for accelerated cost recovery of property which is "of a character subject to the allowance for depreciation." Sec. 168(c). Thus, section 168(c) imposes the same limitations on deductions as section 167. In order to depreciate property under section 167, the property must be used in a trade or business or held for the production of income within the meaning of section 167(a). Porreca v. Commissioner [Dec. 43,022], 86 T.C. 821, 843 (1986); Flowers v. Commissioner [Dec. 40,112], 80 T.C. 914, 931-932 (1983). The trade or business and production of income requirements under section 167 are the same as those under sections 162 and 212. Lemmen v. Commissioner [Dec. 38,510], 77 T.C. 1326, 1340 n.16 (1981). Because section 168 recovery property must be of the same character as depreciable property under section 167, the property must meet either the trade or business or production of income requirements of either section 162 or section 212.
We have already held that petitioners were not engaged in a trade or business for purposes of section 162. Accordingly, the property they depreciated in connection with the same activity does not satisfy the trade or business requirement of section 162 for purposes of section 168. As to the held-for-production-of-income requirement under section 212, this Court has held that the preoperating expense doctrine applies to deductions claimed under section 212 and that section 212 requires that the taxpayer actually enter into the income-producing activity in order for the property to be considered held for the production of income. Hardy v. Commissioner, supra at 693. As with the costs of starting up a new trade or business, the cost of starting up a new income-producing activity is inherently capital as such expenses are incurred in creating or acquiring a capital asset. Hardy v. Commissioner, supra at 690. Capital expenses are not deductible under section 212. Sec. 1.212-1(n), Income Tax Regs. Because petitioners failed to prove that they satisfied the trade or business requirement of either section 162 or the held-for production-of-income requirement of section 212, we hold for respondent on this issue.
Decision will be entered under Rule 155.
* ≈ Did not value.
** ≈ Appraised as a group.
* ≈ Did not value.
* ≈ Did not value.
* ≈ Did not value.
* ≈ Did not value.