                       T.C. Memo. 1999-401



                     UNITED STATES TAX COURT



                 SAMUEL JACOBSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20493-97.                  Filed December 9, 1999.




     Wallace Musoff and Michael J. Coyle, for petitioner.

     Moira L. Sullivan, Timothy V. Mulvey, and Vincenza Taverna,

for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Chief Judge:    Respondent determined deficiencies, an

addition to tax, and penalties as follows:
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                               Addition to Tax and Penalties, I.R.C.
                                         Sec.          Sec.
     Year         Deficiency          6651(a)(1)     6662(h)

     1993          $178,093            $10,734      $71,237
     1994           192,586               –-         77,034

Respondent, in the alternative, determined a negligence penalty

under section 6662(c).   Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for the

years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     The issues for decision are whether petitioner is entitled

to certain noncash charitable contribution deductions in excess

of the amounts allowed by respondent, whether petitioner is

liable for an addition to tax for failure to file timely his 1993

Federal income tax return, and whether petitioner is liable for

penalties for gross valuation misstatements on his 1993 and 1994

Federal income tax returns.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the facts set

forth in the stipulation are incorporated in our findings by this

reference.   At the time the petition in this case was filed,

Samuel Jacobson (petitioner) was a resident of New York, New

York.   He has been in the baked goods distribution business for

30 years and owns Operative Cake Corporation (Operative Cake).
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Philately

     “Philately” is the collection and study of postage stamps

(stamps) and of postal stationery that has passed through the

mail.   When a new U.S. stamp is issued by the United States

Postal Service (Postal Service), it is released on a specific day

at a specific location.    Stamp collectors refer to that day as

the “first day of issue”.    Since about 1930, a special

cancellation bearing the words “FIRST DAY OF ISSUE” along with

the date and town of issue has been applied to stamped items

furnished to the Postal Service on the first day the stamp is

issued.   This service is undertaken by the Postal Service at no

charge, other than the cost of postage.

     One of the modes of collecting first day of issue stamps is

the collection of “first day covers”.    A first day cover is an

envelope that bears a stamp postmarked with a first day of issue

cancellation.    In some instances, the envelope includes a

decorative design usually related to the subject matter of the

applied stamp.    By the 1940's, hundreds of thousands of first day

covers were routinely prepared by collectors for every newly

issued stamp, and first day covers had become an important part

of the hobby of stamp collecting.

     There is a primary market and a secondary market for first

day covers.   The primary market refers to current first day

covers (with newly issued stamps) sold directly to customers by
                                - 4 -

the manufacturer.   Prices in this market are set by the

manufacturer and vary widely depending upon the quality of the

products and the method of sale.   The secondary market refers to

those first day covers sold by traditional stamp dealers, who are

not manufacturers or publishers of first day covers.    The

secondary market operates through local shops, mail-order

catalogs, and trade shows.   This market can be either at the

retail level or wholesale level, and prices are generally

determined by the laws of supply and demand.

     In addition to first day covers, there are other “first day

of issue” collectibles, including first day pages.   First day

pages are similar to first day covers but vary slightly in size

and format.   For example, rather than using the envelope format

of a first day cover, the format of a first day page might be a

photograph, a dinner menu, a diploma reprint, or copies of

congressional minutes.    Affixed to the first day page is a first

day of issue stamp that is typically related to the subject

matter of the page.

Charitable Contribution

     Petitioner acquired 60,484 first day pages from Rita Ostrer

(Ostrer) of the Historic Philatelic Document Company.    The first

day pages (the Kesslers) were created by Seymour Kessler and

included prints, photographs, and other documentary material

depicting various events and scenes of historical significance.
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Theme-appropriate first day of issue stamps were affixed to each

page.

     Ostrer also owned an art dealership known as Nicolini’s that

rented art to movie studios.   Petitioner acquired from Nicolini’s

62 10-volume sets of “Figures of the Bible”, a painting entitled

“St. Peter as Bishop”, a painting entitled “Madonna and Christ

Child”, and a monstrance.   (Hereinafter these articles will be

referred to collectively as the religious articles, and the

religious articles and the Kesslers will be referred to as the

contributed property.)

     During the time that he owned the contributed property,

which he estimates as 20 to 30 years, petitioner never attempted

to obtain insurance on the contributed property.   He never

attempted to sell the property.   He stored the contributed

property in boxes on pallets in the Operative Cake bakery

warehouse.   The warehouse had a rodent problem and was very hot

during the summer.   Twelve to fifteen people worked in the

warehouse.   The only security was a guard at the exit of the

warehouse.

     In 1993, Bishop John Peter Walzer (Walzer) of The Anglican

Catholic Church, Diocese of Connecticut, Southern Episcopal

Church (diocese) visited petitioner seeking donations.

Petitioner met with Walzer several more times to discuss a

potential contribution.   On November 29, 1993, Gerald Malina
                                - 6 -

(Malina) prepared a document valuing the religious articles for

petitioner.   Malina, however, provided no methodology or

rationale for the values at which he arrived.

     Walzer provided to petitioner letters dated December 27,

1993, acknowledging receipt of a $7,000 cash contribution and the

religious items.   Each letter contained a sentence stating:      “We

welcome the opportunity to work with you to help maximize your

charitable contribution on your Schedule A, form 1040, and thank

you again for your generosity to our Diocesan Programs.”

     In a letter dated April 4, 1994, Walzer acknowledged receipt

of the Kesslers, stating that the donation of the Kesslers was

made on October 1, 1993.   This correspondence also included an

inventory of the Kesslers that was prepared by Donald C.

Brueggemann (Brueggemann).   The Brueggemann inventory placed a

value on each Kessler and indicated that the total value of all

of the Kesslers was $900,430.   The inventory did not contain any

valuation methodology, any rationale for the prices quoted, or

any reference to comparable sales.      It provided only a

description of the Kesslers on a lot-by-lot basis.

     Petitioner filed Federal income tax returns for 1993 and

1994 on September 30, 1994, and October 17, 1995, respectively.

On his 1993 return, petitioner reported adjusted gross income of

$1,555,648.   He claimed charitable contributions of $13,997 in

cash and $949,030 in noncash property to the diocese.        Petitioner
                                - 7 -

represented that he purchased the Kesslers on June 1, 1976, at a

cost of $135,065.    He stated “various” as the acquisition date of

each of the religious items and did not state a cost for any of

them.   Petitioner listed the fair market values of the

contributed property on Form 8283 as follows:

                                         Claimed Fair
                    Item                 Market Value

                 Kesslers                  $900,430
                 Biblical books              18,600
                 St. Peter painting          15,000
                 Madonna painting             5,000
                 Monstrance                  10,000
                 Total                     $949,030

No appraisal was attached to petitioner’s 1993 or 1994 Federal

income tax returns substantiating the fair market values claimed

by petitioner.    The charitable contribution deduction claimed for

1993 was limited to $476,700, with the remaining $486,327

attributable to noncash items being carried forward and deducted

on the 1994 Federal income tax return.

     In the statutory notice, respondent allowed only $12,973 as

the fair market value of the donated noncash property.    Thus,

respondent disallowed $449,730 of petitioner’s charitable

contributions for 1993 and all of the $486,327 charitable

contribution carryover for 1994.
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                               OPINION

Fair Market Value

     Section 170(a)(1) allows a deduction for charitable

contributions made to an organization described in section

170(c).   In general, the amount of a charitable contribution made

in property other than money is the fair market value of the

property at the time of the contribution.    See sec. 1.170A-

1(c)(1), Income Tax Regs.   Fair market value is defined as “on

the price at which the property would change hands between a

willing buyer and a willing seller, neither being under any

compulsion to buy or sell and both having reasonable knowledge of

relevant facts.”    Sec. 1.170A-1(c)(2), Income Tax Regs; United

States v. Cartwright, 411 U.S. 546 (1973).    Fair market value is

a question of fact to be determined from the entire record.     See

Skripak v. Commissioner, 84 T.C. 285, 320 (1985).

     Petitioner argues that the cumulative fair market value of

the contributed property in 1993 was $949,030.    Petitioner bears

the burden of proving a higher value than that determined by

respondent.   See Rule 142(a); Welch v. Helvering, 290 U.S. 111

(1933).   Petitioner was unable to produce canceled checks, sales

receipts, or other documents that substantiated the price that he

paid or the date that he purchased the Kesslers.    Petitioner was

unable to provide records substantiating the price that he paid

or the date that he purchased the religious articles.    At trial,
                               - 9 -

petitioner was unable to remember when he purchased the

contributed property, how much he paid for it, and when he

donated it.   Petitioner’s recollection of the amounts paid was

vague and unreliable.   He claimed on his return that he purchased

the Kesslers in 1976, but he testified at trial that the correct

year was 1981.   He asserted in responses to interrogatories that

he had purchased property 20 or 30 years earlier.     An employee of

the bakery testified that the boxes were in the warehouse for “at

least 16 years”.

     Malina prepared an expert report for trial that purportedly

valued the contributed property, and petitioner relies on this

report and his own personal experience in valuing the contributed

property.   Respondent relies on the expert report of Paul T.

Schmid (Schmid) to support the fair market values determined in

the notice of deficiency.

     Opinion testimony of an expert is admissible if and because

it will assist the trier of fact to understand evidence that will

determine a fact in issue.   See Fed. R. Evid. 702.   We evaluate

the opinions of experts in light of the demonstrated

qualifications of each expert and all other evidence in the

record.   See Parker v. Commissioner, 86 T.C. 547, 561 (1986).      We

are not bound by the opinion of an expert witness, especially

when such opinion is contrary to our conclusions.     See IT&S of

Iowa, Inc. v. Commissioner, 97 T.C. 496, 508 (1991).     If experts
                               - 10 -

offer divergent estimates of fair market value, we decide the

weight to give these estimates by examining the factors they used

in arriving at their conclusions.   See Casey v. Commissioner, 38

T.C. 357, 381 (1962).    We may reject in its entirety an opinion

provided under circumstances that undermine its credibility.

See, e.g., Snyder v. Commissioner, 86 T.C. 567, 584-585 (1986);

Chiu v. Commissioner, 84 T.C. 722 (1985); Dean v. Commissioner,

83 T.C. 56, 75 (1984).

     Malina has been a member of the Appraisers Association of

America, Inc., since 1964 with a specialty in Oriental art.     His

investigation of the Kesslers consisted of telephone

conversations with Seymour Kessler, a review of trade periodicals

offering Kesslers for retail sale, and a review of the

Brueggemann inventory.   Malina erroneously referred to the

Kesslers as “covers”-–unaware of or ignoring the distinction

between covers and pages.   He also claims to have analyzed the

market for first day covers.   In his report, he listed the

Kesslers, assigning a value to each lot.    Malina’s analysis was

limited to an unsupported assertion that respondent’s examining

agent significantly undervalued the Kesslers and to his

contention that the Kesslers were valuable because they were

suitable for framing.

     With respect to the religious articles, Malina adopted the

values set forth in his 1993 valuation.    He provided only a
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limited analysis of his valuation of the “Stories of the Bible”

book sets and no analysis of his valuation of the religious

articles.

     We reject Malina’s opinion because he gave no persuasive

explanation of his methodology, made no reference to comparable

sales or a valuation rationale, and made no reference to any

experience he had that would support the values at which he

arrived.    Without any reasoned analysis, his report is useless.

His opinions are so exaggerated that his testimony is not

credible.    See Dean v. Commissioner, supra.   The record is devoid

of any evidence of actual sales of any of the Kesslers or other

objective evidence supporting the values claimed by Malina and

petitioner or any substantial values for the contributed

property.

     Moreover, the fair market values at which Malina arrived are

contradicted by the objective evidence in this case.    Petitioner

argues that we should rely on his representations of the value of

the Kesslers because he examined the market for Kesslers.    He

recalled no details of his alleged activity in this regard,

however.    We are not required to accept petitioner’s testimony

and, under all of the circumstances, conclude that it is unworthy

of belief.    The contributed property was stored in boxes on

pallets for many years in a bakery warehouse that only had

limited security.    The warehouse had a rodent problem and was
                                - 12 -

described as being extremely hot during the summer.       The

contributed property was not insured, nor was any special

precaution taken to preclude loss due to deterioration, theft, or

fire.     Petitioner’s contemporaneous conduct renders implausible

his claim that the property had substantial value.       See Chiu v.

Commissioner, supra at 736.     The only evidence of subsequent

handling of the contributed property suggests that it had little

value.     See Skripak v. Commissioner, 84 T.C. at 322-323.     If the

contributed property had a value of $949,030 or anything

approaching that value, as petitioner claims, petitioner would

have treated it with more care.

        Respondent’s expert, Schmid, has been involved with stamps

on a full-time basis for 32 years.       His experience includes

retail and auction sales, and he has authored two books on the

authentication of U.S. stamps.     At the time of the trial, Schmid

was the owner of Colorano, a major publisher of first day covers

in the United States.     Schmid provided a careful explanation

supporting his opinions of value.

        Schmid described the pricing structure of first day covers

within the primary and secondary markets and indicated that the

prices of first day covers were in the following ranges:

                          Primary Market       Secondary Market

         Retail           $1.00 - $3.00         $0.35 - $2.00
         Wholesale         0.65 - 1.65           0.15 - 0.35
                               - 13 -

Schmid stated that the drop in price from the primary market to

the secondary market is attributable to tremendous oversupply.

Schmid indicated, however, that these prices are not necessarily

the most accurate picture of fair market value and that many

other factors combine to determine fair market value, including

sales history and collector demand.

     Schmid attempted but was unable to identify documented sales

of the Kesslers.   Analyzing the demand for Kesslers, Schmid

pointed out that the demand for first day pages was much less

than the demand for first day covers.   Because Schmid was unable

to identify a competitive market for Kesslers within which to

ascertain an appropriate fair market value, he estimated fair

market value using the first day cover market.

     In arriving at fair market value, Schmid took into

consideration that the Kesslers do not conform to the more

popular envelope format, they only span a limited number of

years, there is no established collector following, and no past

sales history was available.   He also considered that the

Kesslers are unique first day products and would have some appeal

within the overall market for first day collectibles.

Accordingly, he stated that the Kesslers would likely trade in

secondary markets for first day covers for the same period, thus

indicating a range of $1 to $2 on an individual basis and $0.35

to $.59 in larger groups.
                               - 14 -

     He also took into consideration the salability of the

Kesslers, noting that some of the pages would not be sold.     He

proposed the following approach to valuing the Kesslers:

                                        Percent
       Sales Level        Price         of Lot      Sales

       High retail        $2.00            5      $ 6,050
       Low retail          0.35           10        2,118
       High wholesale      0.35           10        2,118
       Low wholesale       0.15           65        5,899
       Unsalable            --            10          --
         Total                                    $16,185

Schmid indicated that these estimates are for a competitive

market.   Schmid stated that a noncompetitive market would have

more “high retail” sales but would have fewer opportunities

overall for sales at all levels, resulting in a return in the

range of $15,000 to $20,000.   He suggested that the bottom of

this range was more realistic based on his experience with

established dealers.

     Schmid stated, however, that the most accurate valuation of

the Kesslers would be in the wholesale market where the Kesslers

would likely sell for $0.07 to $0.15 per page.    Under this

assumption, the value of the Kesslers would be between $4,200 and

$9,000.

     Petitioner challenges Schmid’s valuation of the Kesslers on

a wholesale basis because, he asserts, trade periodicals

indicated that a retail market existed for the Kesslers.

Petitioner’s reliance on trade periodicals to establish a market
                              - 15 -

for the Kesslers is misplaced.    There is no evidence that any

sales took place at the prices listed in those periodicals.    We

are convinced that 60,484 Kesslers would likely be sold, if at

all, only in a wholesale market.

     Based on Schmid’s experience in stamp collecting and in the

first day cover market, his valuation of the Kesslers is the best

evidence we have of fair market value, and it supports

respondent’s determination.

     Respondent presented no expert evidence of fair market value

for the religious articles, offering only evidence that they were

not treated as valuable by subsequent possessors of the articles.

Petitioner, however, failed to establish a fair market value in

excess of $12,973 for all of the contributed property.

Accordingly, we conclude that petitioner is not entitled to

deductions in excess of the amounts allowed by respondent.

Section 6651(a) Addition to Tax

     Respondent determined that petitioner is liable for the

section 6651(a)(1) addition to tax for 1993.    Section 6651(a)(1)

imposes an addition to tax for failure to file timely a return,

unless the taxpayer establishes that the failure did not result

from “willful neglect” and that the failure was due to

“reasonable cause”.

     Petitioner failed to offer any evidence or explanation

regarding the late filing of his 1993 return.    Thus, respondent’s
                                - 16 -

determination that petitioner is liable for the section

6651(a)(1) addition to tax for 1993 is sustained.

Section 6662(h) Penalty

     Respondent determined that petitioner is liable for the

accuracy-related penalty under section 6662(h) for 1993 and 1994.

Petitioner argues that he reasonably relied on the Brueggemann

inventory and Malina’s appraisal and that he substantially

complied with applicable requirements.

     Taxpayers are liable for a penalty equal to 40 percent of

the portion of an underpayment of tax attributable to a gross

valuation misstatement.   See sec. 6662(a), (h).   Section

6662(h)(2)(A) provides that there is a gross valuation

misstatement if the value of any property claimed on a tax return

is 400 percent or more of the amount determined to be the correct

value.   See also sec. 6662(h)(2)(A), (e)(1)(A).   In this case,

the value of the contributed property that was claimed on

petitioner’s Federal income tax return, $949,030, exceeds 400

percent of the value determined to be correct, $12,973.

     The accuracy-related penalty under section 6662(h) does not

apply to any portion of an underpayment if the taxpayer shows

that there was reasonable cause for such portion and that the

taxpayer acted in good faith.    See sec. 6664(c)(1).   However, the

good faith exception applies only to a section 170 deduction if

(1) the claimed value of the property was based on a “qualified
                               - 17 -

appraisal” made by a “qualified appraiser” and (2) in addition to

obtaining such an appraisal, the taxpayer made a good faith

investigation of the value of the contributed property.    See sec.

6664(c)(2) and (3).

     Qualified appraisers and qualified appraisals are defined

under the regulations in section 170(a)(1).    See sec. 6664(c)(3);

sec. 1.170A-13(c)(3), Income Tax Regs.    Among the items of

information to be included on a qualified appraisal is the method

of valuation used to determine fair market value and the specific

basis for the valuation, such as comparable sales or statistical

samples.    See sec. 1.170A-13(c)(3)(ii)(J) and (K), Income Tax

Regs.    As we indicated above, neither the Brueggemann inventory

nor Malina’s 1993 appraisal set forth a methodology or any

meaningful analysis of fair market values expressed in each

report.    Moreover, we are not persuaded that petitioner acted in

good faith, because his conduct with respect to the contributed

property was not consistent with a belief that it had substantial

value.    Thus, the reasonable cause exception does not apply, and

petitioner is liable for the accuracy-related penalty of section

6662(h) for a gross valuation misstatement.

     To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.
