                        T.C. Memo. 1998-35



                      UNITED STATES TAX COURT



ESTATE OF EMANUEL TROMPETER, DECEASED, ROBIN CAROL TROMPETER
 GONZALEZ AND JANET ILENE TROMPETER POLACHEK, CO-EXECUTORS,
 Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.



     Docket No.   11170-95.           Filed January 27, 1998.



          D died on Mar. 18, 1992, and his Federal estate
     tax return reported the value of his estate (E) on the
     alternate valuation date. R determined higher values
     for many of the reported assets, assigned values for
     unreported assets, and disallowed certain deductions.
     R also determined that E was liable for the fraud
     penalty under sec. 6663(a), I.R.C. Held: Taxable
     estate redetermined, including redeterminations of fair
     market value. Held, further, E is liable for the fraud
     penalty.
                               - 2 -


     Robert A. Levinson, Avram Salkin, Bruce I. Hochman,

 Charles P. Rettig, and Frederic J. Adam, for petitioner.

     Irene Carroll, Anne E. Daugharty, Linette Angelastro,

 and Donald E. Osteen, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   This case is before the Court pursuant to a

petition filed on behalf of the Estate of Emanuel Trompeter (the

estate) to redetermine respondent's determination of a

$22,833,693 deficiency in Federal estate tax and a $14,875,909

fraud penalty under section 6663(a).   Respondent determined, as

an alternative to the fraud penalty, that the estate is liable

for an accuracy-related penalty for negligence and gross

valuation misstatement under section 6662.

     Following concessions, the primary issue that the Court must

decide is the September 18, 1992, fair market value of the

following assets which the parties agree are included in the

gross estate of Emanuel Trompeter (the decedent):

     1.   1,533.482 shares of Sterling Holding Co. (Sterling)

series A exchangeable preferred stock (Sterling preferred stock).

We hold that the applicable value (including accrued dividends)

is $1,974,845.

     2.   Two hundred twenty seven rare gold coins.   We hold that

the applicable value is $8,129,523.
                               - 3 -


     The Court also must decide the following secondary issues:

     1.   Whether the decedent's gross estate includes $14 million

of diamonds, jewels, gems, art, and artifacts that were not

reported on his Federal estate tax return.   We hold that his

gross estate includes $4.5 million of these assets.

     2.   Whether certain other items determined by respondent to

be included in the decedent's gross estate are so included.      We

hold they are to the extent and in the amounts stated herein.

     3.   Whether Sylvia Trompeter (Ms. Trompeter) had a bona fide

claim against the estate because the decedent, her former

husband, failed to disclose the value and extent of his coin

holdings during their divorce proceeding.    We hold she did not.

     4.   Whether the estate is liable for the fraud penalty

determined by respondent under section 6663(a).   We hold it is.1

     Unless otherwise stated, all section references are to the

applicable provisions of the Internal Revenue Code, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded to the nearest dollar.     The term

"co-executors" refers collectively to the estate's coexecutors,

Robin Carol Trompeter Gonzalez (Ms. Gonzalez) and Janet Ilene

Trompeter Polachek (Ms. Polachek).




     1
       On account of this holding, we do not decide the
alternative determinations under sec. 6662.
                               - 4 -


                         FINDINGS OF FACT

I.     Overview

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

The stipulations and the exhibits submitted therewith are

incorporated herein by this reference.   The decedent was born in

New York on February 22, 1919, and he resided in Thousand Oaks,

California, when he died on March 18, 1992.    At the time of the

filing of the petition, Ms. Gonzalez resided in Florida, and

Ms. Polachek resided in California.

      The coexecutors are the decedent's sole beneficiaries and

his only surviving children.   Their mother is Ms. Trompeter.

Each coexecutor is college educated, has extensive work

experience, and knows about her obligation to file valid Federal

tax returns.   The coexecutors enjoy a close and friendly

relationship with Ms. Trompeter.

      The coexecutors are cotrustees of the Emanuel Trompeter

Trust (the Trust), a trust that holds most of the decedent's

assets.   The Trust was revocable during the decedent's life,

and the decedent was its sole trustee until Ms. Gonzalez

became cotrustee with him in September 1991.   Ms. Polachek became

a cotrustee with Ms. Gonzalez following the decedent's death.

II.   The Decedent's Sale of Trompeter Electronics, Inc. (TEI)

      In 1960, the decedent and Ms. Trompeter formed TEI.   TEI

manufactured mainly electronic components which assisted in the
                               - 5 -


guidance system of air to ground missiles.     TEI also manufactured

components used in the television industry.

     In March 1989, Sterling, a private company with a calendar

yearend, acquired all TEI stock in a leveraged transaction in

which the decedent and Ms. Trompeter received approximately

$14 million in cash and 3,000 shares of a newly issued Sterling

preferred stock.   These shares were the only shares of this type

of preferred stock that Sterling issued, and holders of these

shares were generally entitled to more rights than holders of

Sterling's other preferred shares.     Of the 3,000 shares of

Sterling preferred stock received by them, the decedent received

1,533.482 shares and Ms. Trompeter received the rest.     Holders of

Sterling preferred stock were entitled to receive "preferential

dividends" on the liquidation value of the stock, when and as the

dividends were declared by Sterling's board of directors, and

they were entitled to certain preferences in the event of

liquidation.   Preferential dividends accrued daily at the annual

rate of 8.5 percent through the end of 1989, 9.83 percent during

1990, 11.17 percent during 1991, and 12.5 percent from the

beginning of 1992 through the date on which the Sterling

preferred stock was either redeemed or exchanged.    To the extent

that the dividends were not paid on January 15 of each year,

beginning January 15, 1990, all dividends which had accrued on

each share then outstanding would be added to the liquidation
                                 - 6 -


value of that share and would remain a part thereof until the

dividends were paid.    The decedent and Ms. Trompeter were

entitled, subject to minimal restrictions, to exchange their

Sterling preferred stock for Sterling's 8-1/2 percent/12-1/2

percent subordinated debentures due December 31, 1995.

     At designated intervals, Sterling was required by the

purchase agreement (the purchase agreement) underlying the

Sterling preferred stock to redeem shares of the stock at $1,000

per share plus accrued dividends.2       Sterling had to use its "best

efforts" to redeem 1,000 shares of the Sterling preferred stock

on December 31, 1991, and another 1,000 shares on December 31,

1992.    Sterling had a mandatory obligation to redeem 1,000 shares

of the Sterling preferred stock on each December 31, 1993 through

1995.    Redemptions and payments of dividends were prohibited

during any period of default on Sterling's senior debt.

Redemptions and payments of dividends were also prohibited by

provisions set forth in Sterling's senior debt and senior

subsidiary debt agreements.    These provisions generally tied a

redemption to Sterling's profitability as shown in its

consolidated income statement.    Sterling's 1990 through 1992

     2
       The number of shares to be redeemed from each holder of
Sterling preferred stock would equal the product of the total
number of shares of Sterling preferred stock redeemed on that
date multiplied by a fraction. The fraction's numerator equaled
the total number of shares of Sterling preferred stock then held
by that holder. The fraction's denominator equaled the total
number of shares of Sterling preferred stock then outstanding.
                                      - 7 -


consolidated income statements, which were part of those years'

financial statements which were audited and discussed without

qualification by Sterling's independent auditor, listed the

following information:

                                         1990              1991         1992

Net sales                             $21,801,718     $20,528,033 $21,777,553
Cost of sales                          10,714,187      10,901,822 11,023,910
Gross profit                           11,087,531       9,626,211 10,753,643

Selling, general &
 administrative expenses               5,111,078          4,782,155   4,639,865

Amortization of goodwill &
                                                      1
 other intangible assets               3,493,354       6,089,709      1,798,837

Operating income (loss)                2,483,099      (1,245,653)     4,314,941

Other income (expense):
 Amortization of deferred
  financing costs:                      (448,855)       (448,855)   (460,522)
  interest expense                    (4,089,050)     (3,557,997) (3,003,309)
  interest and other income              157,973          45,661      26,360
Total other expense                   (4,379,932)     (3,961,191) (3,437,471)

Income (loss) before income taxes     (1,896,833)     (5,206,844)       877,470

Provision for income taxes                    - 0 -           - 0 -       - 0 -

Net income (loss)                     (1,896,833)     (5,206,844)       877,470

      1
       Includes $2,953,646 of amortization for a noncompetition agreement that
was writtenoff on account of the death of a party thereto.

      No dividends were paid on the Sterling preferred stock from

its issuance through September 18, 1992, and no shares were

redeemed during that time.          Sterling had a positive cash-flow and

was timely paying interest and principal on its senior debt.

Sterling also was paying its monthly operating expenses.

Sterling had postponed paying interest and/or principal on some
                               - 8 -


of its liabilities which otherwise were due.    These postponements

were done with the consent of the relevant creditor(s).

     When the decedent died, the Trust held 1,533.482 shares of

Sterling preferred stock.   On the decedent's Federal estate tax

return, the estate reported the applicable value of each share at

$10 and the total value at $15,335.    Approximately 13 months

after the date of valuation, Sterling informed its shareholders

that it was proposing to refinance and redeem the Sterling

preferred stock in accordance with the purchase agreement.    In

order to secure the refinancing, Sterling proposed to redeem each

share of the Sterling preferred stock at $1,000, plus, in lieu of

the accrued dividends, 5-percent interest from the time that each

share was issued until the time that it was redeemed.    On

January 17, 1994, after Ms. Trompeter and the coexecutors had

agreed to Sterling's redemption proposal, Sterling paid the

Trust $1,947,845 in redemption of the 1,533.482 shares.    Of the

$1,947,845 amount, $414,363 was for "interest".

     At the time of the leveraged transaction, the California

Franchise Tax Board (CFTB) was auditing TEI's State tax

liability.   In connection therewith, the decedent and Ms.

Trompeter agreed to indemnify Sterling equally for:    (1) Any tax,

penalty, or interest arising from the audit, and (2) any other

tax liability of TEI that related to the period ending on or

before a stated date.   Estimated amounts for these liabilities
                                - 9 -


were $3.3 million and $700,000, respectively.   In order to have

funds available to pay these liabilities, and to ensure

performance of certain noncompetition agreements, the decedent

and Ms. Trompeter agreed to place their Sterling preferred stock

and certain Government bonds into an escrow account.   On

March 17, 1989, the decedent and Ms. Trompeter transferred a

total of $4 million into an escrow account at City National Bank

(CNB).   Eleven days later, they transferred their Sterling

preferred stock into the account.   The decedent's cash of

$1,986,607 and his Sterling preferred stock were kept in a

subaccount that CNB maintained solely for his benefit, and

Ms. Trompeter's cash of $2,013,393 and her Sterling preferred

stock were kept in a separate subaccount at CNB that was

maintained for her.   The escrow agent was required to pay any

claim that was submitted to the agent upon settlement of the

aforementioned liabilities.   Ms. Trompeter could withdraw certain

amounts of the cash from her subaccount before the agent paid the

liabilities, as could the decedent with respect to the cash in

his subaccount.

     In early 1993, settlement was reached regarding TEI's

liability to CFTB.    On April 5, 1993, Ms. Gonzalez, on behalf of

the Trust, and Ms. Trompeter directed CNB to disburse funds from

the respective subaccounts to pay CFTB the amount of the

settlement.   Ten days later, CNB paid $3,077,100 out of the
                                  - 10 -


escrow to CFTB.       Of this amount, $1,538,550 was paid on behalf of

the Trust, and $1,538,550 was paid on behalf of Ms. Trompeter.

Because the cash in Ms. Trompeter's subaccount totaled only

$1,423,772, the coexecutors authorized payment of the $115,266

shortage3 out of the decedent's subaccount.

III.       The Decedent's Coin Collection and Other Assets

       The decedent learned that he had terminal cancer sometime in

the early part of 1991.       Attempting to place his affairs in

order, the decedent initiated the sale of his most valuable

asset, a proof gold coin collection.4      The decedent had collected

gold coins for at least 20 years and, before his death, he was a

nationally known coin collector who owned many rare gold coins

and some silver coins.       The "Trompeter Collection", as it was

known in the coin world, was the decedent's premier gold coin

collection, consisting of 400 gold coins from the 19th and early

20th century.       One hundred and ninety one of these coins (the 191

coins) consisted of the following:

       1.      $5 Liberty Head gold pieces (Half Eagles)
               from 1858-1907;
       2.      $5 Indian Head gold pieces (Half Eagles) from
               1908-1915;

       3
       We recognize that $1,538,550 minus $1,423,772 equals
$114,778, and that there is a $488 discrepancy. The parties have
not explained this discrepancy. Because the parties refer to the
shortage as $115,266, we do likewise.
       4
       The term "proof" describes the special minting process for
certain coins designed to be issued as gifts to dignitaries or
sold at a premium to collectors.
                              - 11 -


     3.   $10 Liberty Head gold pieces (Eagles) from
          1858-1907;
     4.   $10 Indian Head gold pieces (Eagles) from
          1907-1915;
     5.   $20 Liberty Head gold pieces (Double Eagles)
          from 1850-1907;
     6.   $20 Saint Gaudens gold pieces (Double Eagles)
          from 1907-1915;
     7.   The Amazonian Set, consisting of six coins;
          and
     8.   Various patterns5 of $5, $10, and $20 gold
          pieces.

The remaining coins in the Trompeter Collection were primarily

$1, $2-1/2, $3, and certain pattern gold coins.

     The decedent had diligently obtained each coin in the

Trompeter Collection, often piece by piece, and his collection

was one of a kind.   The collection included a coin in every

denomination and in every year that a proof gold coin had been

minted by the U.S. Mint, with the exception of one coin, and

almost every proof coin in the Trompeter Collection was one of a

limited number of proof coins that had been minted for that year

and one of a minuscule number of proof gold coins that still were

in existence.   The decedent divided the Trompeter Collection into

two parts and consigned both parts to an auction house named

Superior Stamp & Coin Co. (Superior) with instructions to sell

the coins at auction in return for his paying it a commission of

7.5 percent of the gross proceeds.     The decedent dealt mainly


     5
       Patterns are pieces that are minted not for general
circulation, but to determine if the coin, as made, would be
acceptable for general usage.
                              - 12 -


with Ira M. Goldberg (Mr. Goldberg), who was a part owner of

Superior and its primary manager.

     In order to determine a coin's market value, the coin

generally must be graded on a scale from 1 to 70.   Uncirculated

coins are graded at between 60 and 70, and grade differences of

one point for uncirculated coins may account for percentage

differences in value of 50 percent or substantially more.    Every

increase in grade above a 62 increases the value of the coin

dramatically, and the difference in value between a coin that is

graded a 62 and a coin that is graded a 63 is material.   An

escalation in value is most apparent when the grade increases

above 63.

     Beginning in April 1991, the decedent began grading each

coin in the Trompeter Collection in preparation for the auction,

and he began assigning each coin a value and reserve price; the

reserve price is the lowest amount at which a coin may sell at

auction. The decedent was assisted in this process by Mr.

Goldberg.   Both Mr. Goldberg and the decedent were experienced in

grading and pricing gold coins.   The decedent, in particular, had

been grading gold coins for at least 20 years.   Of the 400 coins

in the Trompeter Collection, the decedent graded 174 according to

the 70 point grade scale mentioned above, and he graded each of

the remaining 226 coins as either "proof", "general proof",

"choice proof", or "general to choice proof".    The decedent did
                               - 13 -


not assign a number grade to any of the remaining 226 coins.    The

following chart shows the number of coins that received each

grade from the decedent:

             Grade                       Number of Coins

              60                                13
              63                                38
              64                                73
              65                                50
             Proof                               1
             General proof                     132
             Choice proof                       56
             General to choice proof            37
               Total                           400

     Superior proposed to sell the Trompeter Collection in two

auctions, the first of which it held on February 25, 1992.

Superior auctioned 209 of the 400 coins in the Trompeter

Collection for sale at the first auction, and there was a high

demand in response thereto.6   Two hundred and one of the 209

coins auctioned for sale sold for the total amount of $3,850,622.

Approximately $2,628,730 of the gross proceeds was attributable

to the decedent's proof coins which he had valued at $2,598,000.

     Shortly after the first auction concluded, Superior began

preparing a catalog of the 191 coins for sale at the second

auction which was scheduled for October 13, 1992.    The decedent

had graded many of these coins as either general proof, choice




     6
       The 209 coins auctioned for sale at the first auction did
not include any of the 191 coins mentioned above.
                                - 14 -


proof, or general to choice proof, and he had calculated that the

total value of these coins was $7,635,000 as of July/August 1991.

     The decedent died on March 18, 1992.      Shortly thereafter,

Mr. Goldberg asked two independent grading services, Professional

Coin Grading Service (PCGS) and Numismatic Grading Co. (NGC), to

grade the 191 coins.    Contrary to the decedent's expressed views,

Mr. Goldberg believed that the 191 coins would realize more at

auction if they were graded by an independent grading service.

In March 1992, PCGS graded all 191 coins, but for the 6-piece

Amazonian set and three other coins which PCGS refused to grade,

and PCGS encapsulated the graded coins into a tamper-proof

plastic container.   One month later, all 191 coins, but for the

6-piece Amazonian set, were graded by NGC after NGC had removed

the coins from their containers.    The following chart shows the

number of coins that received each grade from PCGS and NGC:

             Grade     Number of Coins--PCGS    Number of Coins--NGC

               60               0                         1
               61               3                         0
               62              17                        12
               63              69                        21
               64              78                        71
               65              12                        51
               66               1                        22
               67               1                         5
               68               0                         1
               69               1                         1
                 Total        182                       185

     On May 4, 1992, Superior communicated the results of the

PCGS grading to Robert A. Levinson (Mr. Levinson), the estate's
                               - 15 -


attorney, and Mr. Levinson communicated these results to the

coexecutors.    The coexecutors believed that PCGS' grades were

lower than expected and would lead to lower sale prices at the

second auction because the rare coin market was in a "recession".

On June 29, 1992, Mr. Levinson asked Mr. Goldberg to postpone the

second auction.    When Mr. Goldberg refused, the coexecutors, as

cotrustees of the Trust, sued Superior to enjoin the second

auction.    Ms. Gonzalez represented to the court in seeking the

injunction that the 191 coins were worth more than $12 million.

On September 24, 1992, the Superior Court of the State of

California for the County of Los Angeles (the superior court)

issued an order enjoining the second auction.    This was the

beginning of protracted litigation between Superior and the

estate.    This litigation was settled 2 years later with the

superior court rescinding the contract with Superior under which

Superior was entitled to auction the 191 coins in return for a

7.5 percent seller's commission, and with Superior's returning

the 191 coins to the estate.

     The estate acquired numerous appraisals of the 191 coins

immediately prior to and during the litigation with Superior.

On July 2, 1992, Julian M. Leidman (Mr. Leidman) valued the 191

coins at $8.5 million, based on the assumption that the coins

would be sold individually over an extended period of time in

other than a declining market.    The estate used this appraisal in
                              - 16 -


the litigation to enjoin the second auction.    Approximately

4 months later, Mr. Leidman appraised the 191 coins at $3.451

million.   The estate used this appraisal to value the coins at

$3,192,175 on the estate tax return; the reported value equals

the $3.451 million appraisal less an estimated 7.5 percent

seller's commission of $258,825 which would be payable to

Superior assuming that all 191 coins sold at the second auction.

Mr. Leidman also valued the 191 coins at $4.5 million as of the

date of the decedent's death, and $3.78 million as of the

alternate valuation date.

     During the litigation between Superior and the estate, the

estate recovered 36 additional coins which were owned by the

decedent, and which Mr. Goldberg had not disclosed to the estate

beforehand.   The decedent had consigned most of these coins to

Superior to sell at auctions other than the two scheduled in

1992.   It was not until Mr. Goldberg was questioned about

additional coins during the discovery process in the superior

court proceeding that he admitted that some of the decedent's

other coins were in his possession.    In or around March 1993,

Superior informed the estate that the decedent had consigned

numerous coins to Superior in 1991, and that 24 of these coins

had not yet been sold.   One month later, Superior returned these

24 coins to the estate along with two other coins.    The remaining

10 coins (out of the 36 additional coins recovered by the estate)
                              - 17 -


consisted of the 8 coins which went unsold at the February 1992

auction and two other coins for which the record does not

disclose the history.   The 36 additional coins were described on

the estate tax return as "Additional group of gold coins" and

35 of these coins were valued on the return at $275,400.    No

value was placed on the 36th coin.

      In February 1992, the decedent instructed his personal

accountant, Henry Schiffer (Mr. Schiffer), to prepare a list of

the decedent's assets and each asset's estimated value.    The

document was entitled "Ed Trompeter asset list (not including

coins) as of February 21, 1992".   The document was based on

conversations between Mr. Schiffer and the decedent, records

maintained in Mr. Schiffer's office, and his contacts with people

who maintained other records for the decedent.   Included on Mr.

Schiffer's one-page list was, among other things, a gun

collection valued at $10,000, a music collection valued at

$50,000, and diamonds and other gems totaling $500,000.    None of

these items were included on the decedent's estate tax return.

IV.   Pertinent Claims Against the Estate

      The decedent and Ms. Trompeter separated on August 8, 1984,

and 2 years later they were in the midst of a divorce proceeding.

During the pendency of this proceeding, Barry Stuppler (Mr.

Stuppler), president of a coin and appraisal store named Gold

& Silver Emporium, prepared two disclosure statements identifying
                              - 18 -


the decedent's community property coins and each coin's appraised

value.   The appraisal on the first statement totaled $5,200,673.

The appraisal on the second statement totaled $1,684,444.

     Shortly after the decedent's death, Ken Lodgen (Mr. Lodgen),

the estate's accountant, informed the coexecutors that the

decedent may not have disclosed his entire gold coin collection

to Ms. Trompeter during the divorce proceeding, and that Ms.

Trompeter may have a claim against the estate with respect

thereto.   On June 16, 1992, Mr. Lodgen, using only Mr. Stuppler's

first disclosure statement, supplied Mr. Levinson with a list

allegedly identifying community property coins that were not

disclosed to Ms. Trompeter during the divorce proceeding.    Many

of the undisclosed coins set forth on Mr. Lodgen's list were

included in Mr. Stuppler's second disclosure statement, which

Mr. Lodgen did not know about when he compiled his list.

     Based on the information provided by Mr. Lodgen, Ms.

Trompeter claimed that she was not told about the existence of

some of the decedent's gold coins acquired during their marriage,

and that these coins were community assets.   On August 13, 1992,

she filed a creditor's claim against the estate in probate court.

This claim was denied.   On or about September 24, 1992, she sued

the estate in the superior court, alleging, among other things,

that the decedent had fraudulently concealed coins valued in

excess of $10 million.   Ten months later, the parties to that
                              - 19 -


proceeding purportedly settled the case for $1,370,734; i.e.,

$1,486,000 less an offset of $115,266 in connection with the

estate's payment of the shortage.   Under the terms of the

"settlement", the estate was required to pay Ms. Trompeter the

amount stated therein by the earlier of (1) June 15, 1996, or

(2) 90 days after the estate recovered possession of the 191 gold

coins from Superior.   On or around December 4, 1996, the superior

court entered judgment against the estate for $1,370,734 plus

interest from August 1, 1993, at a rate of 3.6 percent compounded

semiannually through and including December 1, 1996.   To date,

the estate has not paid any of the judgment.   The estate deducted

$1,486,000 on the decedent's Federal estate tax return for Ms.

Trompeter's claim.

     A second claim against the estate was filed by Vivian

Ballard Wong (Ms. Wong).   She had a personal relationship with

the decedent, and they had planned to marry.   Ms. Wong filed a

creditor's claim against the estate based on the decedent's

alleged promise to transfer one-third of his estate to her.    The

claim was settled for $70,000.

     A third claim against the estate was filed by Joe Pasko

(Mr. Pasko), the son of a female former acquaintance of the

decedent.   Mr. Pasko filed a creditor's claim against the estate

on January 14, 1993, alleging that the decedent had agreed to

allow him to sell the decedent's diamonds, jade and ivory
                                - 20 -


collections, ancient Chinese artifacts, and handmade unique wool

rug.    He alleged that these goods were worth at least $14

million, and that he was due a $1.4 million commission.

Mr. Pasko's claim was denied.    On June 15, 1993, Mr. Pasko filed

suit against the estate in the superior court.     The suit was

successfully opposed by the estate on demurrer.

V.   Preparation and Filing of Estate Tax Return

       Right before the decedent died, he discussed his holdings

with Ms. Gonzalez in depth, and he introduced her to his

attorneys, accountants, financial advisers, bankers, and

acquaintances in the coin world.    Following the decedent's death,

the coexecutors fired the decedent's long-time counsel and

retained Mr. Levinson to deal with estate tax matters.     The

coexecutors also fired the decedent's long-time accountant,

Mr. Schiffer, and retained the accounting firm of Frankel,

Lodgen, Lacher, Golditch & Sardie (Frankel Lodgen) to serve as

the estate's accountants.    Ms. Gonzalez instructed Mr. Schiffer

to forward the decedent's records to Frankel Lodgen.

       Patricia L. Bates (Ms. Bates) of Frankel Lodgen prepared the

estate and 1991 gift tax returns based primarily on files

received from Mr. Schiffer.    Ms. Bates arbitrarily chose in

May 1993 to report the total value of the decedent's Sterling

preferred stock at $15,335.    She and the coexecutors were both

aware that prior valuations of his stock had been much greater
                              - 21 -


than $15,335, and that at least one recent appraisal had listed

the value of his stock in excess of $3 million.    Ms. Bates had

also valued the decedent's stock 1 month earlier at $462,000, a

value which included a 70-percent discount that she believed

applied primarily to take into account the decedent's minority

interest and the fact that the stock was not paying dividends.

Ms. Bates brought her $462,000 valuation to the attention of

Ms. Gonzalez in or about April 1993.    Ms. Bates reported the

value of the decedent's 191 coins at $3,192,175 based on Mr.

Leidman's corresponding appraisal.     Ms. Gonzalez did not inform

Ms. Bates that Mr. Leidman had valued these coins at $8.5 million

on another occasion.   Ms. Bates asked Ms. Gonzalez whether the

decedent owned any jewelry or diamonds at the time of his death.

Ms. Gonzalez answered "no", and Ms. Bates did not report any

jewelry or diamonds as assets of the decedent's estate.

     On or before June 10, 1993, Frankel Lodgen presented

Ms. Gonzalez with the decedent's estate tax return.    She reviewed

this return at length with Ms. Bates, and both Ms. Bates and

Ms. Gonzalez signed the return on that day.    Ms. Polachek signed

the return 1 day later, and 5 days after that, the coexecutors

filed the decedent's estate tax return with respondent.     The

coexecutors, on behalf of the estate, elected to value the estate

on the alternate valuation date of September 18, 1992.    The gross
                               - 22 -


estate was returned at $26,422,781.     The taxable estate was

returned at $12,002,201.

VI.    Reward Agreement

       Various sources alerted respondent that the estate may have

underpaid its estate tax.    Among other things, several

individuals supplied respondent with information regarding the

decedent's holdings and estimated values.     One of the primary

catalysts for respondent's audit of the decedent's estate tax

return was an informant's claim filed by Mr. Goldberg and his

cousin Larry Goldberg (collectively the Goldbergs).     Following

numerous discussions, respondent and the Goldbergs entered into a

reward agreement, under which the Goldbergs agreed to provide

respondent with certain information on the decedent and his

estate in exchange for a reward not to exceed $1 million.     Under

the agreement, the Goldbergs were required, if necessary, to

testify before any court, grand jury, or any other forum

investigating the decedent or his estate.     Payment of the reward

was contingent on respondent's conclusion that respondent

received valuable information from the Goldbergs which was not

previously known and which directly resulted in the collection of

taxes, additions to tax, fines, and/or penalties from the estate.

Under the reward agreement, the Goldbergs were not entitled to a

reward if the evidence furnished was of no value.

VII.    Respondent's Jeopardy Assessment
                                - 23 -


     On February 24, 1995, respondent, pursuant to a jeopardy

assessment, seized assets located in two safe deposit boxes that

were registered in the name of the Trust.    The boxes were located

respectively at First Interstate Bank and Union Bank in Encino,

California.   The safe deposit box at First Interstate Bank

contained gold coins which belonged to the Trust and which, with

one exception, were the 36 additional coins reported on the

decedent's estate tax return.    The safe deposit box at Union Bank

contained assets that were not reported on the decedent's return.

These unreported assets included gold and silver coins and a

portion of the jewelry and gems in issue.    The coexecutors

reported on the decedent's estate tax return that he neither

owned nor had access to a safe deposit box at the time of his

death.   In addition to the two safe deposit boxes at the banks,

the decedent had a safe in his house.    The coexecutors knew of

the existence and location of the safe and safe deposit boxes,

and they knew that the decedent had access to all three "safes".
                              - 24 -


                             OPINION7

     Congress has imposed a graduated estate tax on wealth

passing from one generation to another.   The decedent was a man

of considerable wealth, and his transfer of this wealth to the

objects of his bounty was subject to this tax to a significant

degree.   To the extent that his wealth could be excluded from his

taxable estate, his estate tax burden would be reduced and a

greater portion of his wealth would pass on to the coexecutors,

who were his daughters and only beneficiaries.   From the point of

view of the coexecutors, they would benefit directly by the

removal of any value from the decedent's taxable estate.

     Taxpayers may remove value from an estate, and otherwise

minimize their taxes, by employing any legitimate means.     In the

case at hand, the question is whether the means employed by the

     7
       During the trial, respondent elicited testimony from
witnesses who included Kathleen Goldberg, Ira M. Goldberg, and
Larry Goldberg. We find little of this testimony to be credible.
Much of their testimony was vague, elusive, uncorroborated,
inconsistent, and self-serving. Mr. Goldberg, in particular, is
a person of questionable veracity. He did not reveal assets held
by Superior which rightly belonged to the estate, he is a paid
informant who is biased, and he was involved in litigation with
the estate which fostered ill will between him and the estate's
representatives. Under the circumstances, we are not required
to, and we do not, rely on the testimony of these witnesses to
support respondent's positions herein. See Combs v. Plantation
Patterns, 106 F.3d 1519, 1538 (11th Cir. 1997); Henson v.
Commissioner, 887 F.2d 1520, 1526 (11th Cir. 1989), affg. T.C.
Memo. 1988-275; Ruark v. Commissioner, 449 F.2d 311, 312 (9th
Cir. 1971), affg. per curiam T.C. Memo. 1969-48; Clark v.
Commissioner, 266 F.2d 698, 708-709 (9th Cir. 1959), affg. in
part and remanding in part T.C. Memo. 1957-129; Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986).
                               - 25 -


estate were legitimate.    Respondent argues they were not.

Respondent has generally determined that the estate, acting

through its coexecutors:    (1) Attempted to conceal assets from

the Government, (2) intentionally undervalued assets, and

(3) intentionally overvalued deductions.    Respondent has adjusted

the reported values of the subject assets and deductions,

determined values for the unreported assets, and determined that

the estate committed fraud.    The estate generally argues that it

did nothing fraudulent.    According to the estate, it may have

misvalued some of the reported assets and deductions, and failed

to report some other assets, but it did not do so with the

requisite fraudulent intent.    The estate also asserts that it did

not misvalue the items to the extent determined by respondent.

     We must disentangle the proffered values of decedent's

wealth and determine whether the disputed items are adjustments

to his reported taxable estate.    We also must pass on

respondent's determination of fraud.    Fraud is a powerful

assertion that we do not take lightly.    A bright line exists

between fraudulent and negligent conduct, and an attempt to

remove value from an estate does not necessarily constitute

fraud.   One is not required to arrange his or her affairs so that

the Government will receive more tax than it is rightfully owed.

Nor is it fraudulent to construe an ambiguous law reasonably in a

manner that is adverse to the Government.    Fraud occurs, however,
                                - 26 -


when a taxpayer deliberately overvalues property with an eye

towards tax evasion, or attempts to conceal taxable assets from

the reach of the Commissioner.

     Property includable in a decedent's gross estate is included

at its fair market value on either:      (1) The date of the

decedent's death or (2) the alternate valuation date described in

section 2032.    Fair market value is "the price at which the

property would change hands between a willing buyer and a willing

seller, neither being under any compulsion to buy or to sell and

both having reasonable knowledge of relevant facts".      Sec.

20.2031-1(b), Estate Tax Regs.; see also secs. 2031(a), 2032(a);.

Fair market value is a factual determination, and the trier of

fact must weigh all relevant evidence of value and draw

appropriate inferences.     Commissioner v. Scottish Am. Inv. Co.,

323 U.S. 119, 123-125 (1944); Helvering v. National Grocery Co.,

304 U.S. 282, 294 (1938).    Respondent's determination of fair

market value is presumed correct, and the taxpayer must prove it

wrong.   Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).

     An actual arm's-length sale of property is most indicative

of its fair market value, assuming that the date of the sale is

close to the valuation date.    See Ward v. Commissioner, 87 T.C.

78, 101 (1986); Estate of Andrews v. Commissioner, 79 T.C. 938,

940 (1982).     If actual sales are not available, fair market value

is determined based on a hypothetical willing buyer and a
                               - 27 -


hypothetical willing seller.   These hypothetical persons are not

specific individuals or entities, and their hypothetical

characteristics may differ from the personal characteristics of

the actual seller or a particular buyer.   Estate of Watts v.

Commissioner, 823 F.2d 483, 486 (11th Cir. 1987), affg. T.C.

Memo. 1985-595; Estate of Bright v. United States, 658 F.2d 999,

1005-1006 (5th Cir. 1981); Kolom v. Commissioner, 644 F.2d 1282,

1288 (9th Cir. 1981), affg. 71 T.C. 235 (1978); Estate of

Newhouse v. Commissioner, 94 T.C. 193, 218 (1990); Estate of

Reynolds v. Commissioner, 55 T.C. 172, 195 (1970); see also

Mandelbaum v. Commissioner, T.C. Memo. 1995-255, affd. without

published opinion 91 F.3d 124 (3d Cir. 1996).

     Experts often help the Court determine fair market value.

We need not follow an expert's opinion, however, when it is

contrary to our judgment.   If we believe it appropriate, we may

adopt or reject an expert's opinion in its entirety, Helvering v.

National Grocery Co., supra at 294-295, or adopt only selective

portions of the opinion, Parker v. Commissioner, 86 T.C. 547, 562

(1986).   See Doherty v. Commissioner, 16 F.3d 338, 340 (9th Cir.

1994), affg. T.C. Memo. 1992-98.   With these basic principles in

mind, we turn to the issues in dispute.

1.   Fair Market Value of the Decedent's Sterling Preferred Stock

     Before addressing the value of the decedent's Sterling

preferred stock, we pause briefly to decide a relevancy issue
                              - 28 -


raised by the estate as to facts concerning Sterling's redemption

of the Sterling preferred stock.   Respondent argues that the

January 17, 1994, redemption of the Sterling preferred stock sets

the stock's fair market value on the applicable valuation date.

Respondent contends that the stock's fair market value totals

$1,947,845, an amount that respondent derives from adding the

redemption price of $1,533,482 to the $414,363 amount that was

paid for "interest".

     The estate argues that facts concerning the redemption are

irrelevant to our determination.   The estate claims that the

redemption was not foreseeable on the applicable valuation date

of September 18, 1992, given Sterling's questionable financial

condition and its failure to meet redemptions which were

scheduled, but not made, before that date.   The estate points to

the purchase agreement, under which Sterling could not redeem any

of the Sterling preferred stock, or pay any dividends with

respect thereto, if the redemption or payment would violate the

terms of the senior debt or occur during any period of default on

senior debt.   The estate also observes that Sterling had forgone

partial redemptions in 1991 and 1992.

     We disagree with the estate that facts concerning the

redemption are irrelevant to our determination of value.

Although these facts may not necessarily set the fair market

value of the Sterling preferred stock on the applicable valuation
                                - 29 -


date, see Estate of Scanlan v. Commissioner, T.C. Memo. 1996-331

(adjustments made to redemption price to account for passage of

time, as well as the change in the setting from the date of the

decedent’s death to the date of the redemption), affd. without

published opinion 116 F.3d 1476 (5th Cir. 1997), we believe they

are relevant to our determination of that fair market value.    See

Estate of Gilford v. Commissioner, 88 T.C. 38, 52 (1987); Estate

of Jephson v. Commissioner, 81 T.C. 999, 1002 (1983); see also

Estate of Van Horne v. Commissioner, 720 F.2d 1114, 1116 (9th

Cir. 1983), affg. 78 T.C. 728 (1982); Estate of Scanlan v.

Commissioner, supra.   That the Sterling preferred stock would be

redeemed on or before the December 31, 1995, date set forth in

the purchase agreement, at or about the price stated therein, was

foreseeable on September 18, 1992, based on the facts available

on that date.   Doherty v. Commissioner, supra at 340.   The estate

is mistaken in asserting that Sterling's financial position was

too weak on September 18, 1992, to effectuate a redemption of the

Sterling preferred stock on or after that date.   Sterling's 1990

through 1992 cash-flow was positive, and its losses for 1990 and

1991 stemmed mainly from its amortization of intangible assets

and deferred financing costs.    Sterling's loss in 1991 was also

attributable to the one-time writeoff of $2,953,646, an expense

that sprang automatically from the death of a party subject to

the underlying noncompetition agreement.   Sterling also realized
                                - 30 -


net income of $877,770 in 1992.    Although Sterling's 1992 income

statement did not report this income until after the applicable

valuation date, it is reasonable to conclude under the facts

herein that Sterling had (or could have obtained) enough

information on September 18, 1992, to ascertain that it would

report a significant amount of net income for that year.

     The fact that Sterling had not effectuated partial

redemptions in 1991 or 1992 is also not controlling.     Redemptions

during those periods were based on a "best efforts" standard, and

Sterling's failure to redeem the Sterling preferred stock during

those years under the circumstances herein does not support a

finding that Sterling would have breached its obligation to

effectuate the mandatory redemptions which were scheduled for

each December 31, 1993 through 1995.     Indeed, Sterling met its

obligation to redeem the decedent's Sterling preferred stock when

it redeemed all Sterling preferred stock on January 17, 1994.       We

will overrule the estate's relevancy objection to the

admissibility of facts concerning the redemption.

     Turning to the valuation issue, special rules govern the

valuation of corporate stock.    When stock is listed on an

established securities market, the stock's value usually equals

its listed market price.   When stock is not listed on such a

market, the stock's value may be based on arm's-length sales (if

any) that have occurred within a reasonable time of the valuation
                                - 31 -


date.    Estate of Andrews v. Commissioner, 79 T.C. 938, 940

(1982).     In the absence of arm's-length sales, the value of

unlisted stock may be based on the value of listed stock of the

subject corporation, or, if the corporation has no listed stock,

the listed stock of like corporations engaged in the same or a

similar line of business.     Sec. 2031(b); Estate of Hall v.

Commissioner, 92 T.C. 312, 336 (1989).     Unlisted stock may also

be valued indirectly by reference to the subject corporation's

net worth, its prospective earning power, its dividend-earning

capacity, its goodwill, its management, its position in the

industry, the economic outlook for its industry, the degree of

control represented by the block of its stock to be valued, and

the amount and type of its nonoperating assets if not considered

elsewhere.     See Estate of Hall v. Commissioner, supra at 335;

Estate of Andrews v. Commissioner, supra at 940; sec. 20.2031-

2(f), Estate Tax Regs.; see generally Rev. Rul. 59-60, 1959-1

C.B. 237.     In ascertaining the value of stock in a decedent's

estate, all shares of that stock are aggregated.     See Ahmanson

Found. v. United States, 674 F.2d 761 (9th Cir. 1981).

        When ascertaining the value of unlisted stock by reference

to listed stock, a discount from the listed price may be

warranted in order to reflect the unlisted stock's lack of

marketability.     Such a discount, commonly known as a

"marketability discount", reflects the absence of a recognized
                                - 32 -


market for closely held stock and accounts for the fact that

closely held stock is generally not readily transferable.      See

Mandelbaum v. Commissioner, T.C. Memo. 1995-255.     A marketability

discount also reflects the fact that a buyer may have to incur a

subsequent expense to register the unlisted stock for public

sale.   See Estate of Trenchard v. Commissioner, T.C. Memo.

1995-121.    The estate must prove the presence and amount of a

marketability discount.    Rule 142(a); Estate of Gilford v.

Commissioner, supra at 50-51.

     Respondent did not call an expert at trial to support

respondent's determination that the value of the decedent's

Sterling preferred stock was $1,947,845.    Respondent relies

mainly on Sterling's financial condition and Sterling's ability

to redeem the decedent's shares in accordance with the purchase

agreement.    The estate counters that the fair market value of the

shares was $184,018.    The estate called an expert, Herbert T.

Spiro (Mr. Spiro), to support this value, and the Court received

his report into evidence.    See Rule 143(f).   Mr. Spiro, who is

certified by the American Society of Appraisers, was a professor

of finance at California State University, Northridge,

California, from 1969 to 1988.    He currently manages a

professional consulting organization which specializes in

economic feasibility assessment and financial analysis.
                               - 33 -


     Mr. Spiro valued the Sterling preferred stock by referencing

the price-to-book values of comparable publicly traded preferred

stock issues and arriving at a percentage to apply to the

Sterling preferred stock.   He concluded that the Sterling

preferred stock was generally equivalent to a "C" and/or "D"

rated security,8 and that the Sterling preferred stock was closer

to a "D" rating because it was nonpaying and much of Sterling's

debt was "technically" in default.      He noted that, near the

applicable valuation date, Sterling had $2.8 million in accrued

but undeclared dividends on all of its stock and $3.1 million of

accrued but unpaid interest.

     Mr. Spiro identified 10 comparable preferred stock issues.

From those issues, he concluded that the following companies'

issues at the high end of the "D" rating and the low end of the

"C" rating were comparable to the Sterling preferred stock:

TransWorld Airlines (TWA), Rymer Foods (Rymer), and SPI Holding

(SPI).   TWA's preferred stock had a "D" rating and was trading

near the alternate valuation date at 11 percent of its call

price.   Rymer's preferred stock had a "C" rating and was trading

near the alternate valuation date at 10.9 percent of its call

price.   SPI's preferred stock had a "C" rating and was trading

near the alternate valuation date at 12.5 percent of its call

     8
       A "C" rated security is a nonpaying issue. A "D" rated
security is a nonpaying issue of an issuer that is in default on
its debt.
                               - 34 -


price.    Mr. Spiro used the 11, 10.9, and 12.5 percentages from

these comparable issues to derive a multiple to apply to the

redemption price of Sterling's preferred stock to arrive at its

freely traded value.    He settled on a 15-percent multiple for the

Sterling preferred stock, concluding that an upward adjustment to

the percentages derived from the comparable issues was necessary

because Sterling had a positive cash-flow and was timely paying

interest and principal on its senior debt.    He calculated that

the freely traded value of each subject share was $150 (i.e.,

15 percent of the $1,000 redemption price, exclusive of accrued

dividends), and that the freely traded value of all of the

decedent's Sterling preferred stock totaled $230,022.    Mr. Spiro

reduced this freely traded value by 20 percent to reflect the

stock's alleged lack of marketability, and opined that the fair

market value of the decedent's Sterling preferred stock on the

applicable valuation date was $184,018.

     We are unpersuaded by Mr. Spiro's analysis and opinion.    The

Sterling preferred stock was a better grade than a "C" or "D"

rated security.    In addition to the fact that Sterling was paying

its monthly operating expenses, Sterling was servicing its senior

debt.    The fact that Sterling may have postponed paying interest

and/or principal on some of its liabilities is not entitled to

much weight, because any postponed payment was done with the

consent of the relevant creditor.    Mr. Spiro also relied
                              - 35 -


inappropriately on companies that were not comparable to

Sterling.   TWA, for example, had filed for bankruptcy on

January 31, 1992, and its auditor had expressed substantial doubt

concerning its ability to continue as a going concern.     Sterling,

by contrast, was not in bankruptcy.     Moreover, its 1990 through

1992 financial statements were accompanied by its auditor's

unqualified opinion on the validity of those statements.      The

auditor did not conclude that Sterling was on the verge of

bankruptcy or that its future corporate existence was in doubt.

Likewise, Rymer's financial status resembled that of TWA.      Rymer

had been told that its line of credit would not be renewed, which

raised serious concerns that, absent its recapitalization, it

would be driven into bankruptcy.   Nothing in the record persuades

us that Sterling was on the verge of bankruptcy.     To the

contrary, the record indicates that Sterling was a viable entity

that recapitalized primarily to alter its capital structure.

     Finding no help from the only expert to testify on this

issue, we are left to value the decedent's Sterling preferred

stock based on the record at hand.     We do not agree with

respondent that the redemption price of the Sterling preferred

stock equals its fair market value on September 18, 1992, a date

that preceded the redemption by 16 months.     Sterling's mandatory

obligation to redeem the stock, however, does establish a

benchmark for determining the applicable value.     We concluded
                              - 36 -


above that it was foreseeable on September 18, 1992, that

Sterling would redeem the Sterling preferred stock on or before

December 31, 1995, at or about the price stated in the purchase

agreement.   We conclude similarly that a hypothetical willing

buyer would have bought (and a hypothetical willing seller

would have sold) the decedent's Sterling preferred stock on

September 18, 1992, at a price that approximated the present

value of the amounts that a holder of the decedent's Sterling

preferred stock would have received for the mandatory

redemptions.   On each December 31 of 1993 through 1995, Sterling

was obligated to redeem approximately 511.161 shares of Sterling

preferred stock from the decedent (or a successor holder).

Taking into account the fact that dividends accrued daily under

the purchase agreement at the rates which were set forth therein,

we find that Sterling was obligated to pay the following amounts

for the redeemed shares on the respective dates:   $871,023,

$986,978, and $1,118,368.9   Applying a reasonable discount rate

of 4 percent to each amount to ascertain its present value on

September 18, 1992, we find that these payments were worth

$827,298, $900,676, and $980,562 on that date.   We conclude that


     9
       We find these amounts by using well-established present
value formulae. For purposes of our computation, we assume that
the Sterling preferred stock was issued on Mar. 15, 1989.
Although the record discloses that Sterling issued the Sterling
preferred stock in Mar. 1989, the record does not reference a
specific date.
                                    - 37 -


the applicable value of the decedent's Sterling preferred stock

was approximately $2,708,536 ($827,298 + $900,676 + $980,562) on

September 18, 1992.

     We need not pinpoint exactly the fair market value of the

decedent's Sterling preferred stock on the applicable valuation

date.     Suffice it to say that respondent determined that the

applicable value of the decedent's Sterling preferred stock

(including the accrued dividends) was $1,947,845, a value which

is approximately 28 percent less than the approximate fair market

value which we determine herein, and the estate has not persuaded

us that the actual fair market value was less than respondent's

determination.      We sustain respondent's determination on this

issue.       See Anselmo v. Commissioner, 80 T.C. 872, 886 (1983),

affd. 757 F.2d 1208 (11th Cir. 1985).

2.   Two Hundred Twenty-Seven Gold Coins

        a.   The 191 Coins

        Respondent determined that the applicable value of the

191 coins was $8.5 million.         Respondent called an expert,

Steven Conturi (Mr. Conturi), to support this determination, and

the Court received his report into evidence.         See Rule 143(f).

Mr. Conturi has been in the retail and/or wholesale rare coin

business since 1975.         He ascertained that the value of the 191

coins was $9,081,000, by referencing the price at which the coins

last traded on the open market as listed in certain numismatics
                               - 38 -


newsletters.    Mr. Conturi acknowledged that overall sale prices

in the coin market were lower toward the later part of 1992, but

concluded that this "recession" had little if any effect on

premium coin collections like the Trompeter Collection.     Mr.

Conturi did not factor in any type of discount to arrive at his

conclusion of fair market value.

     The estate argues that the applicable value of the 191 coins

was between $4.5 million and $4.8 million.    The estate relies on

two experts.    The first expert, Maurice Rosen (Mr. Rosen), is the

president of Numismatic Counseling, Inc., a rare coin company

that specializes in assembling and managing investment

portfolios.    He has been the editor of the Rosen Numismatic

Advisory (a provider of coin analysis and market commentary)

since 1976, and he was a part-time grader at NGC from 1987

through 1990.    He valued the 191 coins according to the following

methodology.    First, he assigned an unadjusted value to each

coin, based on raw price data and relevant grading factors.       In

so doing, he graded 61 percent of the coins the same as PCGS,

26 percent of the coins lower than PCGS, and 13 percent of the

coins higher than PCGS.    In the case of one set of coins (the

6-piece Amazonian Set), he did not grade the set but relied

solely on his opinion as to its fair market value.    Second, he

aggregated each coin's unadjusted value to arrive at an

unadjusted value for all coins.    Third, he adjusted his
                               - 39 -


aggregated unadjusted value to reflect four discounts and one

premium.    The first discount, he testified, was a tainted status

discount that takes into account the market's awareness that the

second grading by NGC was on the high side and that the initial

grading by PCGS was arguably the more reliable of the two

gradings.   The second discount, he testified, was a blockage

discount that takes into account his belief that the market will

react negatively to a sale of a large collection of coins at one

time.   The third discount, he testified, was a market factor

discount that takes into account his belief that the rare coin

market was in a poor state on the applicable valuation date and

that dealers were reluctant to buy gold coins except at bargain

basement prices.   The fourth discount, he testified, was a

contracts/low bids discount that takes into account his belief

that Superior's contractual right to sell the coins at auction

would have a depressing effect on their values.    Mr. Rosen

testified that the Superior contract and the sale of all coins at

one time would potentially foster a prearranged bidding scheme

whereby buyers would deliberately bid low.

     Mr. Rosen established a range for each discount:   10 to 20

percent for the tainted status discount; 10 to 25 percent for the

blockage discount; 10 to 15 percent for the market factor

discount; and zero to 15 percent for the contracts/low bids

discount.   Acknowledging that his discounts overlapped somewhat,
                               - 40 -


he concluded that it was inappropriate to take the aggregated

75-percent maximum discount.   He took the aggregated 30-percent

minimum discount and reduced the aggregated unadjusted value of

the coins by this percent.   He then increased the resulting value

by a small premium, which he concluded ranged from zero to 10

percent, to reflect the recognition of the decedent's name and

its connection to the collection.   Mr. Rosen then reduced the new

amount by 7.5 percent to reflect Superior's auction fee.    His

unadjusted total valuation for the 191 coins was $6,202,850.

After applying the aforementioned discounts, premium, and the

7.5-percent auction fee, Mr. Rosen concluded that the fair market

value of the 191 coins on the applicable valuation date was

$4,217,163.

     The estate's second expert, Julian M. Leidman (Mr. Leidman),

has dealt in rare coins full-time for over 30 years.    He is a

member of the American Numismatic Association and the

Professional Numismatists Guild.    He was retained by the estate

to prepare five different appraisals of the subject coins.    Four

of these appraisals, all of which are mentioned above in our

findings of fact, were for the 191 coins.   For purposes of this

proceeding, Mr. Leidman valued the 191 coins at $3.78 million.

In so doing, he considered the decedent's contract to sell the

coins through Superior, a declining coin market, the large number

of pieces contained in the collection, the impact of flooding the
                               - 41 -


market, and the period of time in which the coins were to be

sold.   He also assumed that the coins would be sold as a

collection and not individually.    He contended that a 20-percent

blockage discount was warranted, but did not ascertain such a

discount separately because he inherently factored this discount

into his analysis.

     Although we find the experts helpful to our understanding of

the world of numismatics, we find none of them helpful to our

determination of the fair market value of the 191 coins.     Mr.

Conturi ascertained the fair market value of the 191 coins based

on the grades assigned by NGC, and he gave no consideration to

PCGS' grades, which were the lower of the two gradings.     Mr.

Rosen failed to consider market factors in reaching his

conclusion of the coins' unadjusted value, and he took into

account novel discounts which are not recognized for Federal tax

purposes.    His tainted status discount, for example, rests on

assumptions that we do not find to be valid on the facts herein.

This is also true for his market factor and contracts/low bid

discounts.    With respect to the contract/low bid discount, in

particular, auctions are an appropriate and often used means of

presenting and selling rare coins.      We do not see how an auction

sale would have a depressing effect on the sale prices of the

decedent's coins.    As to the blockage discount, a blockage

discount typically reflects the depressing effect of placing a
                                - 42 -


large block of stock on the open market for sale at one time.

See sec. 20.2031-2(e), Estate Tax Regs.; see also Estate of

Sullivan v. Commissioner, T.C. Memo. 1983-185.    Even if we were

to assume that such a discount applied to the rare coin market,

which we do not find to be a valid assumption under the facts

herein, the discount would be inapplicable here because the

Trompeter Collection was an impressive collection with many

unique coins.   The market would have been able to handle all

191 coins, as evidenced by the fact that 96.2 percent of the

decedent's 209 coins auctioned at the first auction sold there

for an aggregate price that approximated the aggregate value

calculated by the decedent.

     Nor do we find Mr. Leidman helpful to our determination of

the coins' fair market value.    He valued the 191 coins at $3.78

million based on the assumption that the coins would be

liquidated because they had to be sold.   In making such an

assumption, Mr. Leidman admittedly disregarded the mandate of

section 20.2031-1(b), Estate Tax Regs., that "fair market value

* * * is not to be determined by a forced sale price".10   He also

assumed inappropriately that the coins would be sold as a group

and not individually.



     10
       Mr. Leidman acknowledged on cross-examination that the
191 coins would be worth $8.5 million if the compulsion aspect
was removed.
                                - 43 -


     Finding none of the experts helpful to our determination of

the coins' fair market value, we proceed to value the coins based

on the record at hand.    We are guided by the decedent's valuation

of the subject coins.    The decedent was a noted collector, with

at least 20 years' experience in collecting and grading coins.

The record shows that he did an excellent job in ascertaining the

value of coins.   He ascertained that the 201 coins sold at the

February 1992 auction were worth $2,598,000, and these coins sold

for approximately $2,628,730.    The actual sales price differed by

less than 2 percent from the decedent's valuation of these coins.

     The decedent valued the 191 coins at $7,635,000.   Although

the estate presented some evidence of a "buyer's market", we find

that the economic downturn would not have materially affected the

sale of the 191 coins because they were part of a premier

collection.   We also do not believe under the facts herein that a

reduction for an estimated seller's commission is warranted.

Under section 20.2053-1(b)(3), Estate Tax Regs., an item may be

deducted on an estate tax return though its exact amount is not

then known, provided it is ascertainable with reasonable

certainty and will be paid.    The superior court rescinded the

contract with Superior under which Superior would receive a

7.5-percent seller's commission, and the 191 gold coins were

returned to the estate.   We find no certainty that the estate

will sell the coins in the future under a commission arrangement,
                               - 44 -


and, even if we did, we are unable to ascertain the amount of any

future seller's commission with reasonable certainty.   We hold

that the applicable value of the 191 coins is $7,635,000.

     b.   Thirty-Six Additional Coins

     Respondent determined that the applicable value of the

36 additional coins was $816,300.   Respondent's expert, Mr.

Conturi, valued these coins using the same methodology that he

employed to value the 191 coins.    Mr. Conturi concluded that the

fair market value of the 36 coins was $609,770 on the alternate

valuation date.   Respondent concedes that the value of these

36 coins is no higher than Mr. Conturi's valuation.

     The estate asserts that the fair market value of the

36 coins was $274,650.   Mr. Leidman valued 35 of these coins, and

his analysis generally parallels his analysis for the 191 coins.

He testified that 35 of the 36 coins had a fair market value of

$274,650 on the alternate valuation date; neither he nor the

estate addressed the value of the 36th coin at trial.

     We have the same inherent problems with the experts'

valuations of the 36 additional coins, as we did with their

valuations of the 191 coins.   We reject both of their opinions.

We are uncomfortable, however, with the value ascribed to these

coins by respondent.   Accordingly, we proceed to value the coins

based on the record at hand.   Although the decedent did not value

the 36 additional coins, he did value the 191 coins mentioned
                              - 45 -


above, and the 36 coins were sufficiently similar to the 191

coins to allow us to rely on the decedent's valuation of the 191

coins for purposes of valuing the 36 additional coins.   The

decedent valued the 191 coins at $7,635,000, a figure that is

18.9 percent lower than the $9,081,000 value ascertained by

Mr. Conturi.   Based on our analysis of the 191 coins, we find

that Mr. Conturi overvalued the 36 coins by 18.9 percent.   We

conclude that the fair market value of the 36 additional coins on

the applicable valuation date was $494,523 (i.e., $609,770 less

18.9 percent).

3.   Fair Market Value of Unreported Items

      Respondent determined that the estate failed to report

$14 million in diamonds, jewelry, gems, art, and artifacts.

Respondent's determination is based primarily on Joe Pasko's

(Mr. Pasko) claim for the $1.4 million commission, wherein he

stated that the decedent retained him to sell assets that were

worth at least $14 million.   Respondent's determination is also

based on the value of the assets that were seized from the safe

deposit boxes.

      The estate has conceded that the estate failed to report

approximately $1 million of this $14 million amount.   The estate

argues that certain of the seized assets were property that the

decedent had given in September 1991 to the coexecutors, in their

individual capacities.   The estate points to the testimony of the
                             - 46 -


coexecutors to the effect that the decedent had given them most

of the seized assets, and that they had placed the assets in one

of the safe deposit boxes for safekeeping.

     We are unpersuaded by the coexecutors' testimony that the

decedent gave them some of the seized assets, and the record

shows to the contrary; e.g., several witnesses testified that

they had seen some of the seized assets in the decedent's

possession after the alleged gifts took place.   We look to the

objective facts in the record, and we find that a Federal gift

tax return was never filed reporting these items as gifts.    We

also find that these items were seized from a safe deposit box

that was in the name of the Trust.    We conclude that the seized

assets were owned by the decedent (through the Trust) when he

died, and that they were includable in his gross estate.

     We are unable to conclude, however, that the estate failed

to report $14 million in assets, as determined by respondent.

The record does not disclose all of the unreported assets that

respondent believes makes up the disputed amount of approximately

$13 million, and we conclude from the record that Mr. Pasko was

not knowledgeable on the full extent of the decedent's holdings.

Following our detailed review of the record, we find that the

estate failed to report $4.5 million of assets (inclusive of the

approximately $1 million amount conceded by the estate).    In

addition to the items which were seized from the safe deposit
                               - 47 -


boxes, the unreported assets consist mainly of gems, jewelry,

furniture, and a music collection.

4.   Other Items

      a.   The $115,266 Shortfall

      Respondent increased the decedent's adjusted taxable gifts

by $115,266 to reflect a post-death gift made to Ms. Trompeter in

connection with the $3,077,100 payment to CFTB.   Ms. Trompeter

was obligated to indemnify Sterling for half of the amount paid

to CFTB, but, because her subaccount had only $1,423,772 in cash

when the payment was due, the coexecutors authorized the escrow

agent to pay the $115,266 shortage from the decedent's

subaccount.    Respondent determined that the estate's payment of

the shortage, coupled with the later "offset" of the $115,266 in

connection with the "settlement" of Ms. Trompeter's claim, was an

adjusted taxable gift made by the coexecutors on behalf of the

estate.

      We disagree with respondent's determination.   Although

respondent is correct that Ms. Trompeter became liable to the

estate for $115,266 when its assets were used to pay a portion of

her obligation, and that she never repaid this amount to the

estate, these facts standing alone do not mean that the estate

made a $115,266 gift to her.    The value of the loaned funds was

included in the decedent's gross estate.   Thus, no further
                              - 48 -


addition to the decedent's estate is warranted on account of this

transaction.   We hold for the estate on this issue.

     b.   The Decedent's 1990 Bad Debt Deduction

     Respondent increased the decedent's adjusted taxable gifts

by $327,447 to reflect respondent's disallowance of various bad

debt deductions claimed by the decedent on his 1990 Federal

income tax return.   The decedent claimed a $327,447 short-term

capital loss, described as "loans to third parties", with respect

to the following transactions:   (1) On February 17, 1990, he gave

Ms. Wong $30,000; the underlying "note" conditions repayment of

the "loan" on Ms. Wong's sale of her residence; (2) on May 21,

1990, he gave Ms. Wong $38,000; the record contains neither a

note nor any other reliable evidence of a loan; (3) on May 26,

1990, he gave $209,447 to Ms. Wong's mortgagee; the record

contains neither a note nor any other reliable evidence of a

loan; (4) on October 17, 1990, he gave Phil Skauronski (Mr.

Skauronski) $25,000, and Mr. Skauronski gave the decedent a

"note" stating that he would repay the $25,000 with 15.5 percent

interest in 12 equal monthly payments; and (5) on October 22,

1990, the decedent gave Mr. Pasko $25,000; Mr. Pasko and the

decedent both signed a "note" that did not provide for interest,

security, collateral, or a fixed schedule of repayment.   Mr.

Pasko has never made any payments on this "loan".
                              - 49 -


     Respondent argues that these transactions were not bona fide

loans, but unreported taxable gifts.     The estate does not address

the "loans" to Mr. Skauronski and Mr. Pasko.     The estate contends

that the payments to Ms. Wong were loans, or, in the alternative,

consideration for services rendered.

     We agree with respondent.   An individual may claim a

short-term capital loss for a nonbusiness bad debt that becomes

worthless during the taxable year.     Sec. 166(d).   In order to do

so, however, the debt must be bona fide.     A bona fide debt arises

"from a debtor-creditor relationship based upon a valid and

enforceable obligation to pay a fixed or determinable sum of

money".   Sec. 1.166-1(c), Income Tax Regs.    A bona fide debt does

not include an advance to a friend solely for reasons other than

to make a profit.

     Case law establishes a two-part test for determining whether

a transfer of money qualifies as debt.     First, repayment of the

purported debt cannot be contingent upon a future event.     Second,

the transfer must be made with a reasonable expectation, belief,

and intention that it will be repaid.     See Zimmerman v. United

States, 318 F.2d 611 (9th Cir. 1963).     Whether a transfer is made

with the requisite expectation, belief, and intent is factual,

John Kelley Co. v. Commissioner, 326 U.S. 521 (1946), and the

following nonexclusive factors, none of which is controlling by

itself, are relevant to this determination:     (1) Whether a note
                               - 50 -


or other evidence of indebtedness exists; (2) whether interest is

charged; (3) whether there is a fixed schedule for repayments;

(4) whether any security or collateral is requested; (5) whether

there is any written loan agreement; (6) whether a demand for

repayment has been made; (7) whether the parties' records, if

any, reflect the transaction as a loan; (8) whether any

repayments have been made; and (9) whether the borrower was

solvent at the time of the loan, see Zimmerman v. United States,

supra at 613; Estate of Maxwell v. Commissioner, 98 T.C. 594, 604

(1992), affd. 3 F.3d 591 (2d Cir. 1993); Clark v. Commissioner,

18 T.C. 780 (1952), affd. 205 F.2d 353 (2d Cir. 1953).    These

factors focus primarily on ascertaining the intent of the parties

to the transfer through their objective and subjective

expectations.    Bauer v. Commissioner, 748 F.2d 1365, 1367-1368

(9th Cir. 1984), revg. T.C. Memo. 1983-120; A.R. Lantz Co. v.

Commissioner, 424 F.2d 1330, 1333-1334 (9th Cir. 1970).

       Applying this two part analysis to the subject transactions,

we find that the $30,000 transfer to Ms. Wong fails the first

part of this analysis.    Because the underlying note conditions

repayment of the "loan" on the sale of her house, she was under

no absolute obligation to repay the "loan".    She would never have

to repay the "loan", for example, if she never sold her home.

This transaction is not bona fide debt for purposes of section

166.
                               - 51 -


     As to the other transactions, none of these transactions

evidence a repayment contingency.    Thus, we conclude that they

meet the first part of our analysis and turn to the second part.

We divide the remaining transactions as follows:     (1) Remaining

transactions with or concerning Ms. Wong, (2) transaction with

Mr. Skauronski, and (3) transaction with Mr. Pasko.

     Ms. Wong's remaining transactions do not meet the second

part of our analysis.    We find no note or evidence of

indebtedness for the transactions.      We do not find that she was

required to pay interest on the "loaned" amounts.     We do not find

a fixed schedule of repayment, security, or collateral.     We do

not find that the decedent or his estate demanded that she repay

any part of the "loaned" amounts, or that she actually repaid any

amount.   We do not find that either she or the decedent

considered either transaction a loan.     We conclude that Ms.

Wong's remaining transactions were not bona fide loans.11

     As for the $25,000 transfer to Mr. Skauronski, we find

similarly.    Although the estate presented evidence of a note

issued to the decedent for the transaction, we do not find this

"note" dispositive.    We know nothing about Mr. Skauronski, but

his name.    Although the estate contends that the estate made a

demand for repayment of the "loaned proceeds", the record does


     11
       Nor do we find that the subject amounts were paid to
Vivian Ballard Wong as compensation for services rendered.
                               - 52 -


not support this contention.    We conclude that this transaction

was not a bona fide loan.

     Nor do we find that the transaction between the decedent and

Mr. Pasko was a bona fide loan.    Although the transaction is

evidenced by a "note" signed by both Mr. Pasko and the decedent,

the note provides no schedule of repayment, no interest, no

security, and no collateral.    Nor were payments actually made on

this "note".   We conclude that this transaction was not a bona

fide loan.

     Because we find that none of the bad debts claimed by the

decedent were bona fide loans, we proceed to address whether the

amounts of the purportedly worthless debts are included in the

decedent's estate tax computation as adjusted taxable gifts.      An

estate's tax liability equals (1) the tentative tax on the sum of

the taxable estate plus the adjusted taxable gifts, less (2) the

aggregate tax on all gifts made after December 31, 1976.      Sec.

2001(b).   Adjusted taxable gifts are computed by subtracting

certain deductions (none of which are applicable herein) and

exclusions from the taxable gifts that were made during the

taxable period.   Sec. 2001(b); Estate of Smith v. Commissioner,

94 T.C. 872, 874 (1990).    A taxable gift is any transaction

whereby property is passed gratuitously to another.    Sec.

25.2511-1(c), Estate Tax Regs.    The decedent is allowed to
                               - 53 -


exclude annually $10,000 of the total gifts which he made to each

person.    See sec. 2503(b).

     We hold that the decedent's transfers to or on behalf of

Ms. Wong, Mr. Skauronski, and Mr. Pasko are includable in the

decedent's estate tax computation as taxable gifts.       After

applying the annual exclusion for each donee, the decedent's

adjusted taxable gifts for 1990 are increased by $267,447,

$15,000, and $15,000, respectively, or a total of $297,447.

     c.    The $258,825 Claim Against Superior

     Respondent determined that the estate had a $258,825 claim

against Superior, and that this claim was miscellaneous property

of the estate.    The estate valued this claim at zero on the

estate tax return, identifying it as a claim against Superior for

the release of coins assigned to Superior.       The return noted that

the probability and amount of any collection of this claim was

unknown.

     We hold for the estate on this issue.       The value of this

claim was zero on the applicable valuation date, as evidenced by

the fact that the estate received only its coins back in

settlement of its dispute with Superior.    The value of the

returned coins was included in the gross estate, as discussed

above.

5.   Ms. Trompeter's Claim
                                - 54 -


     Respondent disallowed the estate's $1,486,000 deduction for

the claim of Ms. Trompeter.   Respondent argues primarily that a

genuine controversy did not exist between Ms. Trompeter and the

estate, and that the estate claimed the deduction solely to

reduce its estate tax liability.    Respondent contends that the

estate challenged the claim in probate court to create the

appearance of a valid claim, and that Ms. Trompeter's complaint

in superior court was a sham.    Respondent contends that the

superior court's consent decree approving the purported

settlement was not on the merits of her claim.    Alternatively,

respondent argues, even if the estate and Ms. Trompeter were

involved in a real controversy, the estate has not proven that

Ms. Trompeter's claim was allowable under applicable State law.

Respondent contends that the record does not show that coins were

withheld from her during the divorce proceeding, which is the

linchpin of her claim.   The estate concedes that its original

computation of the deduction for Ms. Trompeter's claim was wrong,

and that subsequent recomputations are less than the reported

amount.   The estate asserts that it is entitled to a deduction of

$682,025.

     We agree with respondent's result on this issue.   For

purposes of computing a taxable estate for Federal estate tax

purposes, an estate may deduct certain claims against it that are

allowable "by the laws of the jurisdiction * * * under which the
                               - 55 -


estate is being administered".    Sec. 2053(a).    Claims are

deductible if they are based on the personal obligation of the

decedent at the time of his or her death.      Sec. 20.2053-4, Estate

Tax Regs.    A liability arising out of tort is an example of a

claim that is deductible under section 2053(a).

     The issue here is whether Ms. Trompeter had a valid claim

against the estate under California law.      We begin our inquiry by

looking at the proceeding in the superior court, which culminated

in that court's entering a consent decree in favor of Ms.

Trompeter.    Section 20.2053-1(b)(2), Estate Tax Regs., provides

that a consent decree before a local court will be accepted as a

basis for an estate tax deduction.      Section 20.2053-1(b)(2),

Estate Tax Regs. further provides that:

     The decision of a local court as to the amount and
     allowability under local law of a claim or
     administration expense will ordinarily be accepted if
     the court passes upon the facts upon which
     deductibility depends * * * However * * * It must
     appear that the Court actually passed upon the merits
     of the claim. This will be presumed in all cases of an
     active and genuine contest. * * *

As noted by the Court of Appeals for the Ninth Circuit, "an order

of a state Court that adversely affects the tax right of the

United States and which is based upon a nonadversary proceeding,

does not foreclose the federal courts from [independently]

determining the tax liabilities".    Wolfsen v. Smyth, 223 F.2d

111, 113-114 (9th Cir. 1955) (quoting Newman v. Commissioner,

222 F.2d 131, 136 (9th Cir. 1955), affg. 19 T.C. 708 (1953)); see
                               - 56 -


also Robinson v. Commissioner, 102 T.C. 116 (1994), affd. on this

issue 70 F.3d 34 (5th Cir. 1995).

       As an initial matter, we find that the State court

proceeding did not involve a real and bona fide controversy

between adverse parties, and that the superior court's decree was

not the result of its consideration of the merits of Ms.

Trompeter's claim.    See Estate of Nilson v. Commissioner, T.C.

Memo. 1972-141.    Ms. Trompeter was the coexecutors' mother, and

the coexecutors' actions during the State court proceeding were

more akin to daughters' trying to share inherited wealth with

their parent at the expense of the tax collector, than a party

suing another in a truly adversarial proceeding in a court of

law.    As a point of fact, the coexecutors did not investigate or

legitimately challenge the validity of Ms. Trompeter's claim

before they let their mother receive a significant part of the

decedent's estate.

       Nor did Ms. Trompeter pursue payment on the "settlement" in

a meaningful manner.    She only pursued collection of the

"settlement" when the superior court informed the parties there

that they had neglected to file a dismissal in the case.     Before

this time, neither party had acted on the settlement or moved

toward final judgment in 3 years.    The estate had recovered the

191 coins from Superior in 1994, and the estate's recovery of the

coins was the prerequisite to payment under the "settlement"
                               - 57 -


agreement.   Surely, a reasonable party in an adversarial

proceeding would have pursued collection of the "settlement" once

the estate recovered the coins.   We hold that the State court

action was nonadversarial.

     We also are unpersuaded that the State court actually passed

upon the merits of Ms. Trompeter's claim, or that the claim would

have been allowed if examined on its merits.    Mr. Lodgen's

conjecture that coins in which Ms. Trompeter had a community

interest were not disclosed to her during the divorce proceeding

was specious.   He relied inappropriately on unsubstantiated

information acquired from Superior and Mr. Goldberg.    Mr. Lodgen

failed to take into account a second set of coins disclosed in

the divorce settlement negotiations.    Mr. Lodgen failed to

recognize the relevant time period for compiling the decedent's

coin holdings.12   We sustain respondent's determination on this

issue.




     12
       Ken Lodgen included all coins purchased before June 22,
1987, as coins that possibly were undisclosed by the decedent.
Under Cal. Civ. Code sec. 5118 (1983), which was in effect at the
time, "The earnings and accumulations of a spouse * * * while
living separate and apart from the other spouse, are the separate
property of the spouse". When we exclude the coins that were
acquired after the decedent and Sylvia Trompeter separated on
Aug. 8, 1984, and the coins without a proven purchase date, we
are unpersuaded that any of the decedent's coins in which Ms.
Trompeter had a community property interest were excluded from
Barry Stuppler's combined appraisal statements.
                               - 58 -


6.   Fraud Penalty

      Respondent determined that the estate is liable for the

fraud penalty under section 6663(a).    Respondent determined that

the fraud penalty applies to the underpayment of tax attributable

to the omission of assets, the undervaluation of assets, and the

deduction for Ms. Trompeter's claim.

      Section 6663(a) imposes a 75-percent penalty on an

underpayment that is attributable to fraud.    See also sec.

6664(a) (definition of "underpayment").    When respondent proves

that some part of an underpayment is attributable to fraud, the

entire underpayment is attributable to fraud unless the taxpayer

proves otherwise.    Sec. 6663(b).   Section 6663(a) does not reach

any portion of an underpayment for which there is reasonable

cause or for which the taxpayer acted in good faith.    Sec.

6664(c).

      Respondent must prove fraud by clear and convincing

evidence.   Sec. 7454; Rule 142(b); see also Castillo v.

Commissioner, 84 T.C. 405, 408 (1985).     Respondent must prove

that the estate underpaid its taxes, Lee v. United States,

466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett v. Commissioner,

465 F.2d 299, 303 (7th Cir. 1972), affg. T.C. Memo. 1970-274;

Parks v. Commissioner, 94 T.C. 654, 660-664 (1990), and that the

estate did so with the requisite fraudulent intent.    Fraud

requires an intentional wrongdoing on the part of the taxpayer
                             - 59 -


with the specific purpose of evading a tax believed to be owing.

Conforte v. Commissioner, 692 F.2d 587, 592 (9th Cir. 1982),

affg. in part, revg. in part on other grounds 74 T.C. 1160

(1980); Miller v. Commissioner, 94 T.C. 316, 332 (1990); Petzoldt

v. Commissioner, 92 T.C. 661, 698 (1989).   A fraudulent intent is

present if the estate filed a return intending to conceal,

mislead, or otherwise prevent the collection of tax.    See Spies

v. United States, 317 U.S. 492, 499 (1943); Akland v.

Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), affg. T.C. Memo.

1983-249; Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).

     With respect to the first prong, the estate concedes that it

failed to report certain assets and undervalued other assets.

The estate also concedes that the nonreporting of these assets

generated an underpayment of Federal estate tax.   We hold that

respondent has met the first prong in that the record shows

clearly and convincingly that the estate underpaid its tax

liability.13

     Turning to the second prong, a fraudulent intent may be

proven by circumstantial evidence because direct proof of a

taxpayer's intent is rarely available.   Reasonable inferences may

be drawn from the relevant facts.   Spies v. United States, supra

at 499; Akland v. Commissioner, supra at 621; Stephenson v.


     13
       Our disallowance of Ms. Trompeter's claim also generates
an underpayment.
                                - 60 -


Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th

Cir. 1984).     The fraudulent intent of an executor is treated as

that of the estate.    See Estate of Pittard v. Commissioner,

69 T.C. 391 (1977); see also Estate of Fox v. Commissioner,

T.C. Memo. 1995-30, affd. without published opinion 100 F.3d 945

(2d Cir. 1996); Estate of Edens v. Commissioner, T.C. Memo. 1981-

557, affd. without published opinion 696 F.2d 989 (4th Cir.

1982).

       Courts have relied on certain indicia of fraud in deciding

whether a taxpayer had the requisite fraudulent intent.    Indicia

of fraud include:    (1) Understating income, (2) maintaining

inadequate records, (3) failing to file tax returns, (4) giving

implausible or inconsistent explanations of behavior,

(5) concealing assets, (6) failing to cooperate with tax

authorities, (7) engaging in illegal activities, (8) attempting

to conceal illegal activities, and (9) dealing in cash.

Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); see also

Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986),

affg. T.C. Memo. 1984-601; Lee v. Commissioner, T.C. Memo. 1995-

597.    These "badges of fraud" are nonexclusive.   Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992).     The taxpayer's education

and business background are also relevant to the determination of

fraud.    Id.   Bearing these general principles in mind, we turn to

the indicia of fraud that are relevant to the instant case.
                              - 61 -


     a.   Undervaluation of Assets

     Respondent argues that the estate intentionally undervalued

the decedent's gold coins and Sterling preferred stock, and that

this undervaluation evidences fraud.   We agree.   When we view the

record as a whole, we conclude, clearly and convincingly, that

the estate intentionally undervalued the decedent's taxable

estate, and that the estate did so with the specific intent of

evading tax.

     Numerous facts evidence that the estate filed the decedent's

Federal estate tax return intending to evade Federal estate tax

by undervaluing assets and overvaluing deductions.   First, the

estate's undervaluation of decedent's Sterling preferred stock

was significant.   The estate reported that the applicable value

was $15,335, and we have determined that the applicable value was

approximately $2,708,536.   The difference between these two

values is $2,693,201, or, in other words, the reported value was

less than 1 percent of our determined value.   Although the estate

attempts to place the blame for the undervalued Sterling

preferred stock on Ms. Bates, the fact of the matter is that

Ms. Gonzalez obviously knew that Ms. Bates' valuation of $15,335

was wrong and reported Ms. Bates' $15,335 value aiming solely to

evade tax.   Ms. Gonzalez knew of a prior valuation of the

Sterling preferred stock in excess of $3 million, and she knew

that Ms. Bates arbitrarily chose the $15,335 figure reported on
                              - 62 -


the estate tax return as the stock's value.   Ms. Gonzalez also

knew that Ms. Bates had valued the stock at $462,000 1 month

before she valued it at $15,335.   Given Ms. Gonzalez's education

and business acumen, as well as her knowledge that the preferred

stock was entitled to certain preferences, that the preferred

stock was accruing dividends daily at a substantial rate, that

the preferred stock was soon going to be subject to a mandatory

redemption, and that a redemption of the preferred stock would

result in the holder(s) thereof receiving millions of dollars in

proceeds, we are hard pressed to conclude, as requested by the

estate, that Ms. Gonzalez was ignorant of the approximate value

of the decedent's Sterling preferred stock, or that she thought

that the stock was worth only $15,335.   We conclude the contrary.

     Second, the estate undervalued decedent's gold coins by a

significant amount.   The estate reported that the applicable

value of the 191 coins was $3,192,175, and that the applicable

value of the additional coins was $275,400.   We have determined

that the applicable values were $7,635,000 and $494,523,

respectively.   The total value that we have determined for the

coins is $4,661,948 more than the total value reported by the

estate, or, in other words, the reported total value was

approximately 42.7 percent of the determined total value.

Ms. Gonzalez knew that the 191 coins had been appraised at a

significantly higher amount than the value reported on the
                              - 63 -


return, and she secreted Mr. Leidman's $8.5 million appraisal

from Ms. Bates.   Given the additional fact that Ms. Gonzalez and

the decedent had discussed his coin holdings at a time close to

his death, and that she had represented to the court in the

Superior litigation that the 191 coins were worth more than

$12 million, we find that Ms. Gonzalez was well aware that the

$3,467,575 total value reported on the return was wrong.

     Third, the estate failed to report any value for the assets

in the safe deposit box at Union Bank, and, in an attempt to

conceal the existence of this box, the coexecutors stated on the

estate tax return that decedent did not own or have access to a

safe deposit box at the time of his death.   In a further attempt

to conceal the existence of the safe deposit box at Union Bank,

the coexecutors failed to report the existence of the safe

deposit box at First Interstate Bank, choosing only to report a

value for 35 of the coins which were found therein.14   In yet

another attempt to conceal the contents of the safe deposit box

at Union Bank, Ms. Gonzalez falsely answered in the negative when

Ms. Bates asked her whether the decedent owned any jewelry or

diamonds when he died.   The decedent did own jewelry and diamonds

     14
       The estate would have reported the existence of the safe
deposit box at First Interstate Bank by stating on the decedent's
estate tax return that he had access to a safe deposit box when
he died. Such a statement would most likely have led respondent
to investigate further the circumstances of the box, which could
have led respondent to discover the safe deposit box at Union
Bank.
                               - 64 -


at that time, and these assets were kept in the safe deposit box

at Union Bank.

     Fourth, the estate chose to report no value for the $4.5

million of assets which we have determined were includable in

the decedent's gross estate.   The coexecutors knew about these

assets, as evidenced by the fact that the decedent informed

Ms. Gonzalez of his holdings at about the time of his death.       The

decedent also introduced Ms. Gonzalez to the persons who would

know most about his holdings, and he had Mr. Schiffer schedule a

list of the decedent's assets as of February 21, 1992.   Mr.

Schiffer's list included the decedent's gun collection, music

collection, and various diamonds and other gems, none of which

were included in the decedent's gross estate.

     Fifth, the coexecutors fabricated (and deducted on the

estate tax return) a $1,486,000 "claim" by Ms. Trompeter.     As

mentioned above, we find that the coexecutors devised this claim

attempting to transfer some of the decedent's property to their

mother at the expense of the tax collector.   In fact, the estate

has conceded in this proceeding that it overstated its deduction

for the "claim" by $803,975.

     We conclude that this factor evidences fraud.

     b.   Implausible and Inconsistent Explanations of Behavior

     Respondent argues that Ms. Gonzalez offered numerous

implausible and inconsistent explanations of her behavior, and
                              - 65 -


that these "explanations" evidence fraud.   We agree.   We find

much of Ms. Gonzalez' testimony incredible and inconsistent with

reliable evidence in the record.   For example, Ms. Gonzalez

testified that the decedent gave her some of the disputed

jewelry, and that she placed this jewelry in the safe deposit box

unbeknownst to him.   This testimony was pointedly rebutted by the

credible testimony of independent witnesses to the effect that

the decedent possessed this jewelry after the time when the gift

was allegedly made.   Ms. Gonzalez also equivocated on when the

decedent purportedly gave her the assets seized from the safe

deposit box.   In one breath, Ms. Gonzalez stated that she

received the assets at one time, while, in another breath, she

stated that she received the assets at a different time.

     Ms. Gonzalez also testified that she intentionally kept

documents from Ms. Bates, the estate's tax preparer, testifying

with respect to Mr. Leidman's $8.5 million appraisal, that she

did not think the appraisal was relevant to the estate's

valuation of the 191 coins.   The appraisal was relevant to Ms.

Bates' reporting of that value, and Ms. Gonzalez' secretion of

that and other documents from Ms. Bates is an example of

implausible behavior under the facts herein.   Ms. Gonzalez also

testified incredibly that she did not know that she had signed

the decedent's estate tax return under the penalties of perjury.

Ms. Gonzalez is college educated, and she has prior work
                                - 66 -


experience.    She also is knowledgeable on, and has experience

with, her personal income tax returns which are filed under

penalties of perjury.

     We conclude that this factor evidences fraud.

     c.   Omission or Concealment of Assets

     Respondent argues that the estate omitted and concealed

assets, and that these actions evidence fraud.     Respondent points

to the fact that the estate failed to report a large amount of

assets.   The estate concedes that certain items were wrongly

omitted from the decedent's estate tax return, but argues that

the estate did not fail to report these items intending to

conceal them.    The estate contends that the items seized from the

safe deposit boxes were given to the coexecutors in September

1991, and that the coexecutors believed that the assets were not

includable in the estate.

     We agree with respondent that the presence of unreported

assets in this case is evidence of fraud.     The decedent had

advised Ms. Gonzalez of his holdings at a point in time that was

close to his death, and he had introduced her to all of his

advisers.     The coexecutors simply did not include all of the

decedent's assets in his gross estate.     Even if we were to assume

arguendo (and contrary to the record) that the decedent gave some

items to the coexecutors in September 1991, this does not explain

why several other items were omitted from the decedent's estate
                                 - 67 -


tax return.   This also does not explain the fact that the estate

attempted to conceal the safe deposit boxes from the Government

by reporting on the decedent's estate tax return that he neither

owned nor had access to a safe deposit box when he died.      The

coexecutors knew that the decedent owned the safe deposit boxes

at the banks, or at least that he had access to them.    The

coexecutors also knew that the decedent owned and had access to

the safe in his house.

     We conclude that this factor evidences fraud.

     d.   Failure To Cooperate

     Respondent argues that fraud is seen from Ms. Gonzalez'

failure to include any diamonds in the estate, and her failure to

disclose all of the decedent's records revealing purchases of

jewelry, gems, art, and other artifacts when originally

requested.

     We agree.   Ms. Gonzalez failed initially to provide

respondent with all of the decedent's canceled checks which

evidenced the purchase of jewelry, gems, art, and other

artifacts.    Ms. Bates also asked Ms. Gonzalez whether the

decedent owned any jewelry or diamonds when he died, and Ms.

Gonzalez answered in the negative.

     We conclude that this factor evidences fraud.
                                 - 68 -


     e.   Other Considerations

     Each coexecutor is college educated, and both have extensive

work experience.   Each knows about her obligation to file valid

Federal tax returns.

     f.   Conclusion

     After our detailed review of the facts and circumstances of

this case, in conjunction with our analysis of the factors

mentioned above, we conclude that respondent has clearly and

convincingly proven that the coexecutors filed the decedent's

estate tax return intending to conceal, mislead, or otherwise

prevent the collection of tax.     We also conclude that section

6664(c) does not insulate the estate from this penalty; we find

no reasonable cause for the underpayment, nor that the estate

acted in good faith with respect to the underpayment.     We sustain

respondent's determination of fraud.

     We have considered all arguments made by the parties, and,

to the extent not addressed above, find them to be irrelevant or

without merit.

     To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.
