                          T.C. Memo. 2004-27



                        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.            February 4, 2004.



     Robert A. Levinson and Avram Salkin, for petitioner.

     Irene Scott Carroll, for respondent.



                    SUPPLEMENTAL MEMORANDUM OPINION


     LARO, Judge:    This case is before the Court upon remand from

the Court of Appeals for the Ninth Circuit.       We issued our

initial report in this case on January 27, 1998, and filed that



     *This Supplemental Memorandum Opinion supplements our prior
Memorandum Opinion in Estate of Trompeter v. Commissioner, T.C.
Memo. 1998-35, supplemented by 111 T.C. 57 (1998), vacated and
remanded 279 F.3d 767 (9th Cir. 2002).
                                     -2-

report as T.C. Memo. 1998-35 (Trompeter I).       In Trompeter I, we

set forth findings of fact as to the substantive issues arising

from the notice of deficiency, and we set forth our Memorandum

Opinion with respect to those issues.       Subsequently, on

July 22, 1998, we issued a Supplemental Opinion in this case and

filed that Supplemental Opinion as 111 T.C. 57 (Trompeter II).

Our Supplemental Opinion in Trompeter II decided the parties’

disagreement over the mechanics of their computations under Rule

155.1       On March 18, 1999, we entered our decision in this case.

        Through an opinion dated January 30, 2002, and reported at

279 F.3d 767, the Court of Appeals for the Ninth Circuit vacated

our decision and remanded the case to us to “articulate

sufficiently the basis for * * * [our] ruling on omitted assets

and * * * [our] rationale with respect to the valuation of

certain stock”.       Id. at 769.   Specifically, the court directed us

to clarify:       (1) The manner in which we arrived at a $4.5 million

figure for omitted assets, including a description of the assets

and the related fair market values which were included within

that figure, (2) our reasoning and analysis behind the use of a

4-percent discount rate in valuing the series A exchangeable

preferred stock (series A preferred stock) of Sterling Holding

Co. (Sterling), and (3) the “well accepted present value


        1
       Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the applicable versions of the Internal Revenue Code.
                                    -3-

formulae” referenced and applied in our report.         Id. at 771-773.

The court also stated that, upon remand and following the

requisite clarification, we shall consider whether it is

appropriate to revisit our conclusions as to fraud.         Id. at

773-774.   The court noted that “In directing this approach, we do

not pass judgment on the Tax Court’s multiple, careful, and

well-documented findings in this arena, nor do we suggest that a

remand will necessarily result in a different outcome with

respect to fraud.”    Id. at 774.

     We divide this Supplemental Memorandum Opinion into the

following three primary sections:         (1) “Omitted Assets”,

(2) “Present Value Formulae and Discount Rate of Four Percent”,

and (3) “Determination of Fraud in Trompeter I”.         We made and set

forth in Trompeter I extensive findings of fact.         For purposes of

this Supplemental Memorandum Opinion, we repeat those findings

and find additional facts only to the extent necessary.           For

purposes of convenience and clarity, we include those findings in

our analysis.2   As we did in Trompeter I, we refer to Emanuel

Trompeter as the decedent, we refer to the decedent’s estate as

the estate, and we refer collectively to Robin Carol Trompeter

Gonzalez (Gonzalez) and Janet Ilene Trompeter Polachek (Polachek)

as the coexecutors.   The parties routinely refer to the weight of


     2
       We also in our analysis set forth various calculations
underlying our findings and our Supplemental Memorandum Opinion.
We round the results of those calculations as appropriate.
                                  -4-

gold and gemstones as karat (kt.) and carat (ct.), respectively,

and points.    We note that one point equals 1/10 of a karat (or

carat) and simply refer to the weight of gold and gemstones as

karat (or kt.) and carat (or ct.), respectively.

I.   Omitted Assets

      We determined in Trompeter I that the coexecutors failed to

include $4.5 million of assets in the estate’s taxable estate

(taxable estate).     The Court of Appeals for the Ninth Circuit has

directed us “to provide sufficiently detailed findings regarding

the assets (including their valuation)” underlying the $4.5

million.

      The decedent died on March 18, 1992.   On the Federal estate

tax return of his estate, the coexecutors valued the gross estate

at $26,422,781 and reported that the taxable estate equaled

$12,002,201.   Respondent determined in the notice of deficiency

that the coexecutors underreported the taxable estate by

$22,833,693.   As part of that determination, respondent

determined that the taxable estate had omitted $14 million of

assets.

      Respondent’s determination of the unreported assets was

based mainly on a creditor claim filed against the estate by Joe

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

decedent, and a document (finder’s fee document) dated

October 17, 1990.     Pasko’s claim alleged that he was entitled to
                                -5-

a $1.4 million commission because, he alleged, the decedent had

retained him to sell assets worth at least $14 million in return

for a 10-percent commission.   These assets, Pasko alleged,

included the decedent’s diamonds, jade and ivory collections,

ancient Chinese artifacts, and handmade unique wool rug.3     The

finder’s fee document, signed in the name of the decedent,

provided that Pasko had the authority to sell for $20 million the

decedent’s “ancient ornamental Chinese artifacts for a period

from Oct. 20 to Nov. 20, 1990 with no extension allowed.    This

lot also includes a hand made [sic] unique wool 4' x 8' rug of

Moslem theme.”   The finder’s fee document provided that Pasko

would receive a commission equal to 10 percent of the sales price

and that “Any and all commissions to be paid by the buyer as

finders [sic] fee”.4   Although diamonds were not specifically

mentioned in the finder’s fee agreement, Pasko understood this

agreement to include the decedent’s diamonds.


     3
       The estate’s Federal estate tax return did not report that
the decedent owned at his death any jewelry or loose gemstones.
Nor were either of those items reported as a gift on any of the
gift tax returns filed by or on behalf of the decedent, his
trust, or the estate. The estate’s Federal estate tax return
also did not report that the decedent owned at his death a
significant amount of jade, ivory, Chinese artifacts, or rugs.
The coexecutors reported on the estate’s Federal estate tax
return that the value of the decedent’s collection of ivory,
jade, rugs, and other collectibles totaled $39,065.
     4
       The fact that the buyer was liable for the 10-percent
commission on $20 million means that the buyer would need to pay
$22 million for the specified items in order for Pasko to collect
his $2 million commission.
                                -6-

     In addition to Pasko’s claim and the finder’s fee document,

respondent based his determination of unreported assets on

information furnished by certain individuals and on the value of

assets seized from safe deposit boxes in the name of the

decedent’s trust (Trust) during the audit of the estate’s Federal

estate tax return.   Respondent conversed primarily with four of

the decedent’s intimate friends and the decedent’s two main

suppliers of many of the assets collected by him.   The first

friend, Vivian Ballard Wong (Wong), had a personal relationship

with the decedent from February 1987 through June 1991.    Wong

described to respondent a collection of jewels in the possession

of the decedent in 1991.   The other friends, Ira and Larry

Goldberg and Robert Hesselgesser (Hesselgesser), generally

relayed to respondent facts establishing that they had personal

knowledge of the decedent’s gemstone and jewelry collections, and

they described to respondent certain gemstones and items of

jewelry which they had seen in the decedent’s possession near the

time of his death.   One of the decedent’s suppliers, Dr. Nathan

Mamiye (Mamiye) of New York, New York, confirmed selling loose

gemstones, jewelry, jade, and ivory to the decedent and provided

respondent with receipts reflecting a large dollar amount of

diamonds which he (Mamiye) had recently sold to the decedent.

The other supplier, Lloyds Fine Jewels (Lloyds) of New York, New

York, provided respondent with receipts reflecting more than $1
                                -7-

million of sales which it had recently made to the decedent, and

it informed respondent that those receipts did not necessarily

reflect all of the sales which it had made to the decedent.

Respondent’s determination of the estate’s unreported assets also

was supported by respondent’s examination of canceled checks of

the decedent payable primarily to Mamiye and Lloyds, respondent’s

comparison of the items on the receipts furnished by Mamiye and

Lloyds with the assets described by the individuals with whom

respondent conversed, and respondent’s seizure from the Trust’s

safe deposit box at Union Bank (safe deposit box) of unreported

assets consisting of various bullion coins, 41 gold coins, 14

loose gemstones, and 11 items of jewelry.

     Following our trial of this case and our detailed review of

the record, we agreed with respondent that the estate had failed

to report a significant amount of assets.     The estate conceded

that this amount was a little over $1 million.     We were persuaded

that the amount was much greater.     We also were persuaded,

however, that this amount was less than the $14 million

determined by respondent.   We proceeded to make an approximation

of the fair market value of assets omitted from the taxable

estate, recognizing that valuation is not an exact science and

that the task before us was difficult in that the coexecutors had

concealed information and assets from their accountants,

respondent, and this Court.
                                  -8-

     The assets which we find were omitted from the taxable

estate generally fall within three categories.      First, there is

approximately $1 million of assets which the estate concedes were

unreported.   Nineteen of these assets were seized by respondent

from the safe deposit box and were sold at an auction held by

Christie’s, Inc. (Christie’s).5    Second, there are six other

assets which respondent seized from the safe deposit box but

which Christie’s did not sell at auction.      The parties agree that

these six assets are includable in the taxable estate but

disagree on their applicable fair market values.      Third, there

are still other assets as to which the parties dispute both fair

market value and inclusion in the taxable estate.      The

coexecutors admit that they removed from the decedent’s home

after his death some of the assets included within this third

category, but they deny the existence of most of the other

assets.   Respondent has never recovered any of these assets, but

he has established to our satisfaction that they exist and are

includable in the taxable estate.       Respondent has done so through

the introduction of credible testimony and documentary evidence

that includes receipts and checks from purchases made by the

decedent.   We infer from this evidence that the decedent paid for

and owned the assets listed in the receipts, see, e.g., Estate of


     5
       The purchasers of the items auctioned by Christie’s bought
those items “as is”.
                                -9-

Hodgdon v. Commissioner, 11 T.C.M. (CCH) 898, 1952 T.C.M. (P-H)

par. 52,259 (1952), and that those assets, not having been shown

to have been relinquished by the decedent, were includable in the

taxable estate, see, e.g., Estate of Bograd v. Commissioner, T.C.

Memo. 1988-34, affd. 887 F.2d 1084 (5th Cir. 1989).   We also

infer from this evidence that the taxable estate includes other

assets which were not listed in the receipts but which the

decedent possessed and controlled near the time of his death and

were not shown by the estate to have been relinquished by him.

As we stated in Trompeter I, the assets in this third category

“consist mainly of gems, jewelry, furniture, and a music

collection.”   Estate of Trompeter v. Commissioner, T.C. Memo.

1998-35.   As detailed below, these assets also include cash at

home, 31 coins, rugs, jade, and ivory.

     We set forth below by these three categories the assets

which we find were omitted from the taxable estate and the fair

market values which we find as of the applicable valuation date.6

These fair market values represent our findings as to “the price


     6
       The coexecutors elected to have the estate valued as of
the alternate valuation date of sec. 2032(a). Thus, the
applicable valuation date is generally Sept. 18, 1992. See
generally sec. 20.2031-1(b), Estate Tax Regs. (“The value of
every item of property includible in a decedent’s gross estate
under sections 2031 through 2044 is its fair market value at the
time of the decedent’s death, except that if the executor elects
the alternate valuation method under section 2032, it is the fair
market value thereof at the date, and with the adjustments,
prescribed in that section.”).
                                -10-

at which the property would change hands between a [hypothetical]

willing buyer and a [hypothetical] 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 Propstra v. United States, 680 F.2d 1248,

1251-1252 (9th Cir. 1982).   See generally Bank One Corp. v.

Commissioner, 120 T.C. 174, 302-306 (2003), for a detailed

discussion of the criteria underlying a determination of fair

market value.   In deciding these fair market values, we note

that:

     The fair market value of a particular item of property
     includible in the decedent’s gross estate is not to be
     determined by a forced sale price. Nor is the fair
     market value of an item of property to be determined by
     the sale price of the item in a market other than that
     in which such item is most commonly sold to the public,
     taking into account the location of the item wherever
     appropriate. Thus, in the case of an item of property
     includible in the decedent’s gross estate, which is
     generally obtained by the public in the retail market,
     the fair market value of such an item of property is
     the price at which the item or a comparable item would
     be sold at retail. For example, the fair market value
     of an automobile (an article generally obtained by the
     public in the retail market) includible in the
     decedent’s gross estate is the price for which an
     automobile of the same or approximately the same
     description, make, model, age, condition, etc., could
     be purchased by a member of the general public and not
     the price for which the particular automobile of the
     decedent would be purchased by a dealer in used
     automobiles. * * * The value is generally to be
     determined by ascertaining as a basis the fair market
     value as of the applicable valuation date of each unit
     of property. * * *    [Sec. 20.2031-1(b), Estate Tax
     Regs.]
                              -11-

     Respondent retained an expert, Charles I. Carmona (Carmona),

Graduate Gemologist in Residence, Accredited Senior Appraiser,

who, on direct examination, testified through his written report,

see Rule 143(f)(1), that he had ascertained the applicable fair

market values of 25 of the seized assets (25 seized assets) and

that those values were as stated in that report.   (We attach

hereto as appendix A Carmona’s description of each of the 25

seized assets, its appraised value, and, in the case of 19 of the

assets sold by Christie’s at auction, its auction price.)   We

considered Carmona to be helpful to our valuations of some of the

disputed assets, and we relied on his opinion, which was credible

and without contradiction.

     Carmona examined and researched each of the 25 seized assets

and opined that the fair market value of those assets for Federal

estate tax purposes was the “average price that each item in its

current (used) condition might resell to the public in its most

common retail outlets in the Estate’s local area”.7   He opined

that the proper resale prices for jewelry were the prices

obtained at a retail jewelry store and that the proper resale

prices for loose gemstones were their wholesale prices increased

     7
       Carmona noted in his report that “the [25] items listed
have been examined and researched to the best of my ability, but
not under ideal conditions (cramped quarters, time constraints,
artificial light).” When Carmona examined the 11 items of
jewelry included within the 25 seized assets, he observed that
most of those items still had tags on them and that none of the
items showed any signs of wear.
                                 -12-

by the commissions charged by brokers on their sales of gemstones

to the public.     He opined that the public usually buys jewelry at

retail from jewelry stores that sell estate jewelry, that the

majority of buyers at public auctions are dealers, that the

lowest level of sales prices for jewelry is found at auction, and

that jewelry usually passes from the dealer to the public through

retail jewelers with a dealer-to-retail-jeweler markup of 25 to

50 percent over cost and a retail-jeweler-to-public markup of 50

to 100+ percent over cost.    He opined that the wholesale prices

paid for gemstones by brokers was best ascertained from personal

experience and comparable sales and offers to sell.    He opined

that a broker’s commission on a sale of loose gemstones to the

public was typically 15 to 25 percent of the wholesale price.

     The assets which we find were omitted from the taxable

estate and the fair market values which we find for these assets

are as follows:8

   Assets Stipulated as to Existence
     and Fair Market Value

     St. Gauden and other bullion coins
       seized by respondent from the safe
       deposit box                                         $50,000
     41 gold coins (different than the
       St. Gauden and bullion coins just
       listed) seized by respondent from
       the safe deposit box                                104,500

     8
       We provide below a brief description of the 25 seized
assets and list in parenthesis at the end of each description the
number and letter that corresponds to Carmona’s specific
description in appendix A.
                         -13-

The decedent’s gun collection                          2,085
19 assets seized by respondent and sold
  at auction:
   1. Lady’s 18-kt. yellow gold,
         sapphire, and channel-set
         diamond ring (2a)                 $1,800
   2. Lady’s 18-kt. yellow gold, ruby,
         and channel-set diamond ring (2b) 1,800
   3. Lady’s 14-kt. yellow gold and
         diamond ring (2c)                 20,000
   4. 14-kt. yellow gold and diamond tie
         tack (2f)                          4,500
   5. Lady’s 18-kt. yellow gold and
         diamond necklace (2h)             32,000
   6. Lady’s 18-kt. yellow gold, emerald
         and diamond necklace (2i)         19,000
   7. One loose round-brilliant-cut
         1.9-ct. diamond (3c)               9,600
   8. One loose round-brilliant-cut
         2.01-ct. diamond (3b)              7,500
   9. One loose emerald-cut 3.35-ct.
         diamond (3n)                      25,000
  10. One loose heart-shape 4.03-ct.
         diamond (3g)                       7,500
  11. One loose round-baratiant-cut
         4.32-ct. diamond (3m)            105,000
  12. One loose octagon-ct. 5.01-ct.
         diamond (3d)                      35,000
  13. One loose round-brilliant-cut
         6.62-ct. diamond (3f)             20,000
  14. One loose round-brilliant-cut
         6.65-ct. diamond (3j)             24,000
  15. One loose emerald-cut 7.57-ct.
         diamond (3e)                      30,000
  16. One loose round-brilliant-cut
         7.74-ct. diamond (3k)             27,000
  17. One loose square-emerald-cut
         11.13-ct. diamond (3i)            44,000
  18. One loose octagon-shape 18.28-ct.
         diamond (3l)                     210,000
  19. One loose octagon-cut 40.02-ct.
         diamond (3a)                     220,000     843,700
                                                    1,000,285
                            -14-

Six Seized Assets Disputed as to Fair
  Market Value

     1.   Lady’s 18-kt. yellow gold,
            sapphire, and diamond
            necklace (2d)                      4,400
     2.   Lady’s 18-kt. yellow gold, ruby,
            and diamond necklace (2e)          5,800
     3.   Cultured pearl necklace with
            14-kt. white gold clasp (2g)         400
     4.   Lady’s 18-kt. yellow gold,
            emerald, and diamond
            necklace (2j)                     19,000
     5.   Lady’s 18-kt. yellow and white
            gold, opal, and diamond
            pin/pendant combination with
            treated opal necklace (2k)         7,600
     6.   One loose cushion-shape-natural
            18.2-ct. sapphire (3h)             9,100   46,300

Assets Disputed as to Fair Market Value and
  Inclusion in the Taxable Estate

  Music collection                           50,000
  Sofa table                                  4,416
                       1
  Three Baker’s tables                        6,624
  “Thousand dollar” watch                     1,000
  Cash at home                               50,000
  31 coins                                  425,847
  Rugs                                       59,530
  Jade collection                           247,500
  Ivory collection                        1,500,000
  Loose gemstones:
   Emerald-cut 2.08-ct. diamond              15,510
   Emerald-cut 2.28-ct. diamond              17,010
   Round-cut 3.04-ct. diamond                47,436
   Masterpiece 4.39-ct. diamond             106,680
   Heart-shaped-baguette five-ct. diamond    75,000
   Round-cut 5.22-ct. diamond                78,150
   Round-cut 7.75-ct. diamond                35,800
   Eight-ct. emerald                         16,150
   Two other emeralds                        32,300
   Two opals                                 32,300
   18-ct. ruby                                7,500
   18-ct. sapphire                            6,000
   Genuine masterpiece 18.02-ct. sapphire     9,100
                               -15-

     Bracelets:
      18-kt. gold bracelet with 9.5-ct. diamond 12,400
      Tennis bracelet with one-ct. diamonds    108,000
      Six other diamond tennis bracelets       187,140
      Ruby bracelet                              5,800
      Sapphire bracelet                          4,400
     Necklaces:
      Diamond necklace                          13,330
      18-kt. gold necklace w/ 26.73-ct. diamond 74,000
      30.02-ct. graduated-diamond necklace      66,404
      Ruby necklace                             13,330
      Sapphire necklace                         13,330
      Turquoise necklace                        21,250
     Rings:
      Man’s diamond pinkie ring                  4,500
      Man’s three to four-ct. diamond ring      15,750
      Ruby ring                                  6,665
      Sapphire ring                              6,665
     Diamond stud earrings                       9,000
     Three to four-ct. diamond tie tack         15,750
     Pins:
       Ruby pin                                  5,800
       Sapphire pin                              4,400
     Pendants:
      18-kt. gold, ruby, and diamond pendant    18,400
      Sapphire pendant with round diamonds      15,000
     Furniture                                  26,051 3,471,218
                                                       4,517,8032

          1
            As discussed below, Polachek used the term
     “Baker’s” to describe three tables which she removed
     from the decedent’s home. We understand from this
     reference that these tables were manufactured by
     Baker’s Furniture, Inc., and refer to the tables as
     “Baker’s tables”.

           2
            We round this number to $4.5 million.
     We now discuss the specifics of our decision as to the

existence and fair market value of the disputed assets.

     A.   Seized Assets Disputed as to Fair Market Value

     Before Christie’s auctioned the 25 seized assets, it had

assigned to each of these assets a lower and upper estimated
                               -16-

value.   (We attach hereto as appendix B a list of each item’s

lower and upper estimated values, agreed reserve (i.e., the

minimum price at which an asset could be sold by Christie’s at

auction), auction price (in the case of the 19 items sold at

auction), high bid (in the case of the six items not sold at

auction), and Carmona’s appraised value.9)   These lower and upper

estimated values are estimates by Christie’s of the likely

amounts that bidders would bid at an auction for the assets.

These estimated values do not reflect the requirement of

Christie’s that buyers also pay to Christie’s on each sale a

commission equal to 15 percent of the first $50,000 of the

purchase price and 10 percent of any excess.   Nor do the

estimates (or the ultimate sales prices) include sales tax that

is payable on the sales.

     The 25 seized assets consist of 11 items of jewelry and 14

loose gemstones.   Of those assets, six items of jewelry and 13

loose gemstones were sold at the auction held by Christie’s.     The

remaining six assets (i.e., five items of jewelry and one loose

gemstone) did not sell at the auction.

     The six items of jewelry sold at auction for a total auction

price (exclusive of buyer’s commissions) of $79,100.   Christie’s


     9
       The descriptions of the assets in appendix B also are
cross-referenced to the specific descriptions in Carmona’s report
by way of the number and letter in the parenthesis following the
description.
                                -17-

estimated that these six items had a total lower estimated value

of $70,000 and a total upper estimated value of $107,500.

Carmona ascertained that the fair market value of these six items

totaled $146,200.   Carmona’s total fair market value for these

six items is 84.83 percent (($146,200 - $79,100)/$79,100) greater

than the total of their auction prices.

     The 13 loose gemstones sold at auction for a total auction

price (exclusive of buyer’s commissions) of $764,600.    Christie’s

estimated that these 13 gemstones had a total lower estimated

value of $488,000 and a total upper estimated value of $656,000.

Carmona ascertained that the fair market value of these 13

gemstones totaled $1,100,000.   Carmona’s total fair market value

for these 13 gemstones is 43.87 percent (($1,100,000 -

$764,600)/$764,600) greater than the total of their auction

prices.

     Christie’s estimated that the five items of jewelry which

did not sell at auction had a total lower estimated value of

$28,000 and a total upper estimated value of $39,500.    Carmona

ascertained that the fair market value of these five items of

jewelry totaled $37,200.   Christie’s estimated that the one loose

gemstone which did not sell at auction had a lower estimated

value of $14,000 and an upper estimated value of $16,000.

Carmona ascertained that the fair market value of this single

gemstone was $9,100.
                               -18-

     We find that, as of the applicable valuation date, the fair

market value of each of the six assets which did not sell at

auction equaled its fair market value as ascertained by Carmona.

In other words, we find that the fair market values of the five

items of jewelry which did not sell at auction totaled $37,200

and that the fair market value of the single gemstone that did

not sell at auction was $9,100.    We find that the individual

values of these six assets are as follows:

                  Jewelry

    Lady’s 18-kt. yellow gold, sapphire, and
      diamond necklace                                  $4,400
    Lady’s 18-kt. yellow gold, ruby, and
      diamond necklace                                   5,800
    Cultured pearl necklace with 14-kt. white
      gold clasp                                           400
    Lady’s 18-kt. yellow gold, emerald, and
      diamond necklace                                  19,000
    Lady’s 18-kt. yellow and white gold, opal,
      and diamond pin/pendant combination with
      treated opal necklace                              7,600
                                                        37,200
                 Gemstone

    One loose cushion-shape-natural 18.2-ct. sapphire    9,100
                                                        46,300

     We consider Carmona to be most helpful to our valuation of

each of these six assets.   Carmona testified as to jewelry in

general that the typical buyer of jewelry at auction is a dealer

and that jewelry usually passes from a dealer to the public

through retail jewelers with a dealer-to-retail-jeweler markup of

25 to 50 percent over cost and a retail-jeweler-to-public markup

of 50 to 100+ percent over cost.   As to the six items of jewelry
                              -19-
which sold at auction for a total price of $79,100, a markup of

that total price by the minimum dealer-to-retailer and retail-

jeweler-to-public markups referenced by Carmona (i.e., 25 and 50

percent, respectively) results in a total retail price of

$148,312.50 ($79,100 + ($79,100 x .25) = $98,875; $98,875 +

($98,875 x .50) = $148,312.50)),10 or, in other words,

approximately the same as the total fair market value of $146,200

ascertained by Carmona for those items.

     Carmona testified as to gemstones in general that the public

usually buys a gemstone at an amount that equals the gemstone’s

wholesale price plus 15 to 25 percent of the wholesale price.    As

to the 13 gemstones which sold at auction for a total price of

$764,600, we do not find in the record any persuasive evidence

that would indicate whether the auction price of those gemstones

represents their wholesale price.    We would imagine that,

generally speaking, the auction price of a gemstone is at least

15 percent less than its wholesale price.    Otherwise, why would a

broker/dealer pay a double digit commission at auction (15

percent of the first $50,000, 10 percent thereafter) to buy a

gemstone “as is”, when the broker/dealer could buy a “similar”

gemstone from a wholesaler without the payment of a commission?



     10
       We note that $148,312.50 is 87.5 percent greater than
$79,100 (($148,312.50 - $79,100)/$79,100) and that the 25- and
50-percent minimum markups referenced by Carmona translate into a
single 87.5-percent markup (.25 + (.50 + (.25 x .50)) = .875).
                               -20-
When we increase the $764,600 total auction price paid for the 13

gemstones by the $95,440 of commissions payable to Christie’s on

the respective sales,11 and then mark up the sum of $860,040

($764,600 + $95,440) to reflect the 15- to 25-percent commissions

referenced by Carmona, we arrive at a range of retail value for

the gemstones from $989,046 ($860,040 x 1.15) to $1,075,050

($860,040 x 1.25).   This range approximates the $1.1 million

total fair market value ascertained by Carmona for the 13

gemstones.

     We recognize that none of the six assets in question

actually sold at auction for even the lower estimated value

ascertained by Christie’s.   We do not consider any of these lower

estimated values to be a proper measure of the price at which a

hypothetical willing buyer and a hypothetical willing seller

would consummate a sale of those assets.   The auction was a

single auction that included many precious gemstones and many

valuable items of jewelry.   The mere fact that each of the six

assets offered for sale at the auction did not sell there for

even its lower estimated value does not mean under the facts

herein that its fair market value is necessarily less than its

lower estimated value.   Cf. CTUW Hollingsworth v. Commissioner,



     11
       As to the total auction price of $764,600 paid for the
13 loose gemstones, $379,600 was subject to a 15-percent
commission and $385,000 was subject to a 10-percent commission
(($379,600 x .15) + ($385,000 x .10) = $95,440).
                                 -21-
86 T.C. 91, 101 (1986) (unaccepted offer to purchase land is not

conclusive evidence of the value of the land).     We also do not

know, for example, whether the bidders at the auction consisted

of actual consumers who were willing to buy an item at its fair

market value or, as Carmona persuasively opined in the setting of

jewelry auctions, primarily dealers who bid substantially less

than fair market value in order to resell their purchases at a

fair market value price which, to them, would be inclusive of a

businessman’s profit.   In fact, we know little about the

composition or number of bidders at the auction, let alone the

tone of the actual bidding that took place.     On the record before

us, we simply cannot conclude as to any of the six items in

question that the auction market is the “market * * * in which

such item is most commonly sold to the public”.     Sec.

20.2031-1(b), Estate Tax Regs.

     We are mindful that this Court has on occasion determined

that an item’s auction price was its fair market value.     E.g.,

Estate of Scull v. Commissioner, T.C. Memo. 1994-211; Lightman v.

Commissioner, T.C. Memo. 1985-315.      In contrast with the case at

hand, the auction markets in those cases were shown to be the

appropriate retail markets for the assets under consideration,

and the sales at auction were shown to be to the ultimate

consumer.   Where as here such is not the case, the Court has

rejected equating the auction price of an item with its fair
                                 -22-
market vale.   E.g., McGuire v. Commissioner, 44 T.C. 801 (1965)

(prices paid at auction for art, furnishings, and other personal

property did not reflect fair market value in that the bidders at

auctions were generally wholesalers or dealers who were buying

for resale); cf. Stollwerck Chocolate Co. v. Commissioner,

4 B.T.A. 467, 471 (1926) (auction price determined to be fair

market value where evidence established that “There were some

twenty buyers present [at the auction], seven or eight of whom

made bids for the property.”).    We also note as to the facts at

hand that the auction by Christie’s involved assets seized by

respondent to satisfy a perceived Federal tax obligation, which,

in turn, suggests that the auction at hand had an element of a

forced sale.   A forced sale is inconsistent with the willing

seller requirement of fair market value and is not probative of

fair market value.   See, e.g., sec. 20.2031-1(b), Estate Tax

Regs.

     We also are mindful of Rev. Proc. 65-19, 1965-2 C.B. 1002.

As relevant herein, that revenue procedure applies to “certain

items of tangible personal property which, while generally

available to a member of the general public at retail

establishments, frequently are obtained by members of the general

public at a public auction”.   Under this revenue procedure, the

Commissioner presumes for purposes of section 20.2031-1(b),

Estate Tax Regs., that the auction price of an item of tangible
                               -23-
personal property is its retail sales price.   By extension of

this presumption, the fair market value of an item of tangible

personal property not sold at auction could be presumed to be no

greater than its high bid at auction.

     We do not believe that the presumption of Rev. Proc. 65-19,

supra, applies to set conclusively the fair market value of the

six assets in question.   Five of those assets are items of

jewelry.   We find pursuant to Carmona’s testimony that the public

does not frequently purchase jewelry at auction.   As to the sixth

item, a loose 18.2-ct. sapphire, we are unable to find in the

record that loose sapphires are typically sold to the public at

auction.   However, even if the presumption were to apply to one

or more of these six assets, we conclude from the record that the

high bids for those six assets are not reflective of their retail

sales price.   We bear in mind especially our findings herein as

to the much higher prices which the decedent paid to Mamiye and

Lloyds for the comparable and other items shown on the receipts.

     We recognize that respondent stipulated that the applicable

values of 19 of the 25 seized assets were the same as their

auction prices and that those prices were in most instances lower

than Carmona’s appraised values.   In valuing the assets in

dispute, we do not find in the record that respondent has

presumed under Rev. Proc. 65-19, 1965-2 C.B. 1002, that the fair

market values of the 19 assets equaled their auction prices.     In
                                 -24-
fact, given that the auction prices stipulated by respondent did

not reflect the commissions paid by the buyers, we conclude to

the contrary.    See Estate of Scull v. Commissioner, T.C. Memo.

1994-211 (when the appropriate retail market for an item is the

auction, the fair market value of an auctioned item equals its

auction price plus buyer’s commission).    See generally 2003 Fed.

Tax Coordinator 2d (RIA), vol. 21, par. P-6009, at 42,252.    More

importantly, the fact that these assets sold at auction,

presumably to dealers, suggests in this case that respondent’s

pursuance and the Court’s redetermination of a fair market value

for any of the 19 assets greater than its auction price would

have made little or any difference in the deficiency in that the

estate would have been entitled to deduct the additional value as

an administration expense.    See sec. 20.2053-3(d)(2), Estate Tax

Regs.; see also Estate of Joslyn v. Commissioner, 566 F.2d 677

(9th Cir. 1977), revg. 63 T.C. 478 (1975).

     B.    Assets Disputed as to Fair Market Value and Inclusion in
           The Taxable Estate

            1.   Overview

     The decedent was a longtime, avid collector of various

valuable items which included specially minted, limited edition

gold coins, precious gemstones, expensive jewelry, exquisite rugs

and furniture, and guns.12    He was a wealthy man who enjoyed the


     12
          The decedent’s guns (approximately 10) were not as
                                                      (continued...)
                                 -25-
finer and more expensive things in life, and he had the financial

means to fulfill his desire of collecting only the best pieces of

the items which he collected.    He was an astute and shrewd

businessman who was very knowledgeable about and proud of his

collections, and he received much enjoyment flaunting his

possessions before others when he entertained at home or was a

guest at someone else’s home.

     In early 1988, the decedent divorced Sylvia Trompeter, his

wife of 37 years.    They had separated on August 8, 1984, and the

decedent’s relationship with the coexecutors suffered as a result

of his separation and ensuing divorce.    The decedent following

his divorce began devoting most of his time to his collections

and, more specifically, to the fulfillment of his intent to own

the world’s finest pieces in the categories of items which he

collected.    The decedent at that time had various female friends,

one or more of whom lived with him on different occasions.     In

addition to his motive of investment, the decedent collected many

of the referenced assets to impress these women.

     In early 1991, the decedent learned that he had terminal

cancer, and he relayed this information to the coexecutors.     At

that time, Gonzalez, the decedent’s oldest daughter,13 began


     12
      (...continued)
valuable as the other assets which he collected.
     13
          When the decedent died, Gonzalez and Polachek were 38 and
                                                      (continued...)
                                  -26-
discussing with the decedent the specifics of the assets which he

owned.     Gonzalez, and to a lesser extent Polachek, became

knowledgeable of the specifics of the decedent’s vast wealth, and

Gonzalez in conjunction with Polachek deliberately undertook to

maximize their receipt of that wealth by, among other things,

undervaluing his assets and excluding assets from the taxable

estate.

     Receipts and canceled checks show that the decedent bought

from Mamiye and Lloyds (primarily at its Fifth Avenue store in

New York) various assets which included diamonds, rubies,

sapphires, and emeralds, either loose or as pieces of jewelry,

and ivory, jade, rugs, furniture, and Chinese artifacts.       We set

forth these receipts and checks in four categories.

                  a.   Receipts From Lloyds to the Decedent

     Lloyds gave to the decedent nine receipts reflecting

$1,421,000 of merchandise that it sold to him during 1988 and

1989.     Three of the nine receipts relate to purchases of $650,000

made on January 16, 1988.     One of the nine receipts relates to

purchases of $235,000 made on May 4, 1988.     One of the nine

receipts relates to purchases of $235,000 made on May 5, 1988.

Three of the nine receipts relate to purchases of $276,000 made




     13
      (...continued)
33 years old, respectively.
                                   -27-
on December 5, 1988.     One of the nine receipts relates to

purchases of $25,000 made on May 4, 1989.

     The writing on the receipts is not always easily readable.

We set forth below our reading of that writing.            We have been

unable to decipher one word (apparently the surname of a

collector) that appears in the receipts in four different places.

We show that word as “illegible”.         The nine receipts read as

follows:

Receipt No. 562, dated January 16, 1988
     1     ADHOXO = Masterpiece Genuine Diamond
           40 ct 2 pt. Wt. Emerald Cut

     2     Z20118 Heart Shape Baguette Diamond 5 ct Wt.
           ZHOXO 60X0X Round Cut, Diamond 5 ct 22 pt Wt.

     3     Z2014 PHOXO = Genuine Pear Shape Diamond
           8 ct 69 pt Wt. Baguette 4 ct 75 pt Wt. Necklace

     4     Z2008 H8HOX Emerald 6 ct. 48 pt. Wt.
           Baguette 32 ct. 50 pt Wt.

     5     GIA certificate, Emerald Cut 3 ct. 35 pt Wt. Clarity 1F,
           Color F, report # 5186298 POAOX = AU

     6     GIA certificate, Round 3 ct. 4 pt Wt. Clarity VVS2
           Color I # 5186303 = ALOXO

     7     Bracelet, Diamond 9 ct. 5 pt Wt. BK003
           12400-            SOXO 18 Ct. U. Gold

     8     Diamond, Heart 4 ct. 03 pt Wt. Fine Quality =
                          RHROX

     9     Diamond, Emerald Cut # 5181374
           2 ct 08 pt Wt. GVSI = RASOX =

     10    Diamond Round Emerald Cut 2 ct 28 pt Wt.
           RPOXO F VSI
                                       -28-
Receipt No. 563, dated January 16, 1988
     11      Diamond # 5175260 2 ct 01 pt. Wt. Round #
             1F-1=   RAOXO     Magnificent Diamond Round

     12      Diamond, Round 1 ct. 90 pt. Wt.
             E VS2 = ROROX

                  including Furniture
                                   Bulk for all              650,000.00

                       Ck 1 @ 250,000.00   1-16-88
                       Ck 2   200,000.00   2-28-88
                       Ck 3   200,000.00   3-15-88

Receipt No. 564, dated January 16, 1988
             9 pc    Mother of Pearl Dining Room set
     Set             W/8 chairs

             2       Curio Cabin Mother of pearl inlay
                     With Lite, Lock, Shelfs [sic]

     HOX             Black, Artwork Laqueor [sic] Desk
     AOX               “    Ming Chair
     AHO             Carved pedestal = For table

      RNO            48 inch Beveled glass 48 inch
          6          Chairs, Corner Work Mother of Pearl
         RNH         ea for table set
     LOX= 1          Sofa table for Back of couch
     RXO 1           Chair Laqueor [sic] Black

                                Complete for all                 650,000.00

                                                 Bulk

Receipt No. 596, dated May 4, 1988
     Ivory       erotic giga           RPHOX
      “          Wise Mens             RPHOX
      “          Erotic                RXOXO
      “            ”                   RSHOX
      “          40 tall 3 figure      ROXOX

           Delivered 26 items
           for Bulk Lot special                   235000

     Diamond Necklace
     Sapphire “
     Ruby      “
     Ruby      Ring
     Sapphire   “
     Masterpiece Diamond            4 ct 39 pt
     Faint Blue

                    Bulk Lot Special             235000.00
                                    -29-
Receipt No. 597, dated May 5, 1988
     Ruby     18 ct. AR00 7500- 0.60
     Sapphire   “      ” 6000     “
     Diamond    “ Necklace “
       Dia 26 ct. 73 pt.    “   74000-  PO77
     Sapphire pendant # 6886 w/ Diamonds Rd.
     KHM 55= 18 ct., 15000-
     Ruby Pendant Diamond 072 pt. Ruby
     18 ct. gold    18400- # 6885 Bagget KHM 58
     Ivory Maiden
                       Bulk for                     235000.00

          ck 812   Paid by Checks     100000- 5-5-88     100000-
             813    “                        6-10-88      67000-
             814    “                        7-12-88      67500-
                                        for am in full   235000.00
                            received 3 cks   #812-813 814

Receipt No. 565, dated December 5, 1988
     1    AHO Turquoise Necklace, 11mm 30 inch
          Wall of IVORY Art piece    NSO
               in exchange of Netsukie [sic1]

     2    YPOXO= Ivory Crab in Cage

     3    PSOOX= Magnificent pair, Genuine Jade
          Tempess Urns, Black Jade Fish Waves 32 1/2 x 12 3/4 3 in.

     4    the Royal Kingdom in Temple Urns
          APOXO = w/21 inch x 16 x 42 top 31 x 14

     5    Jade Screen Picture Hand Carved = 17 1/2 x 25 1/2
          With Wood Frame 23 x 38 pair

     6    Ivory Boat, PLHO = 22 x 16=x 15 1/2
                Hand Carved

     7    Ivory Wall 11 x 7 1/2 x 3 <NSO>

     8    Genuine Ivory, apples 5 3/4 x 3 pair

     9    Silk Hand Made [illegible] Dragon Hand Made
          4-5 x 7 feet, 93000L

     10   Round Diamond 1F 7ct. 75 pt. Wt.

     11   Diamonds graduated Necklace total wt.
          30 ct 02 pt Wt., Fine Quality
          1
           A netsuke (the plural of which is netsuke or
     netsukes, not netsukie) is “a small and often
     intricately carved toggle (as of wood, ivory, or metal)
     used to fasten a small container to a kimono sash”.
     Merriam-Webster’s Collegiate Dictionary 780 (10th ed.
     1999). We understand the decedent to have received the
                                   -30-
     referenced turquoise necklace and wall of ivory art
     piece in exchange for netsukes and not as consideration
     for any of the $276,000 purchase price related to the
     receipts of Dec. 5, 1988.

Receipt No. 566, dated December 5, 1988
     12   Ceylon[1] Sapphire –- genuine Masterpiece
          18 ct 02 pt Wt.

     13   Pair Diamond Stud Ear Ring

     14   tree of Life, Pure Silk, Hand Made
          3 x 5 feet = [illegible] Colection [sic] = 91500

     15   Silk, prayer Rug             “    91800 3 x 5 By [illegible]
          Hand Made pure Silk, Gold Mesheda

     16   Rose Wood Curio Stand 9400L = 4-piece
          2 tables 9200L

     17   Netsukie [sic] cases 9360E

     18   5 assorted Beige Hand Made, Pure Silk
          3x5 2x4 6x9 3x5 2x4

     19   Isfahan Hand Made Fine Quality Wool
          5 x 7 = feet

     20   a true Masterpiece aprox 6 x 9 feet
          Hand Made 922000 Hand Made
          Pure Silk

     21   Genuine Ivory Eagle   arrived broken

           1"Ceylon” was the former name of Sri Lanka.
     Merriam-Webster’s Collegiate Dictionary, supra at 1456,
     1516.

Receipt No. 567, dated December 5, 1988
     to 21 assorted items

            Bulk for all        276000-

                             Paid in full

          With Furniture Delivered
              with Eli Ezra [illegible]
              and Complete Order
          Jade Urns 45000- to apraisel [sic] pre
                                    -31-
Unnumbered receipt dated May 4, 1989
     Nestkies [sic] collection

                          25,000.00

     These nine receipts do not reflect all of the merchandise

which the decedent purchased from Lloyds.       Lloyds was unable to

locate all of its receipts relating to purchases by the

decedent.14

                 b.   Checks From the Decedent to Lloyds

     From 1987 through 1989, the decedent wrote Lloyds the

following 13 checks for his purchase of merchandise:

          Check Number           Check Date      Check Amount

              696           October 14, 1987       $2,000
              697           October 14, 1987       15,000
              711           October 28, 1987       80,500
              731           December 4, 1987      276,000
              765           January 16, 1988      250,000
              774           February 18, 1988     200,000
              775           April 14, 1988        200,000
              812           May 5, 1988           100,000
              813           June 10, 1988          67,000
              814           July 12, 1988          67,500
              846           August 15, 1988        27,500
              992           May 4, 1989            25,000
              4751          April 15, 1989        275,000
                                                1,585,500

Check numbers 765, 774, 775, 812, 813, and 814, totaling $884,500

in payments, are referenced in the receipts just discussed.      The




     14
       We note as to the nine referenced receipts that Lloyds
first gave the decedent receipt numbers 562, 563, and 564, then,
approximately 4 months later, gave him receipt numbers 596 and
597 and then, approximately 7 months after that, gave him receipt
numbers 565, 566, and 567.
                               -32-
other checks, representing the balance of $701,000, reference no

receipt in the record, nor are referenced in those receipts.

                c. Receipts From Mamiye to the Decedent

     Two receipts which Mamiye gave to the decedent reflect the

decedent’s purchase from Mamiye of $485,000 of diamonds in 1989.

The first receipt reflects the decedent’s February 16, 1989,

purchase from Mamiye of a round 6.62-ct. diamond with VS1

clarity, a round 6.65-ct. diamond with VS1 clarity, and a round

7.81-ct. diamond with VS1 clarity.    The receipt states that the

decedent purchased these items at the “bulk special” price of

$125,000.   The receipt states that the decedent was required to

pay $50,000 down and $75,000 in 30 days, and that the decedent

had “left as trade 7 ct. 74 pt. Round until sold, and to be set’

for sale and ownership to Ed’”.

     The second receipt reflects the decedent’s May 5, 1989,

purchase from Mamiye of a yellow 5.01-ct. diamond, an 8.53-ct.

diamond, and an 11.13-ct. diamond.    This receipt states that the

decedent purchased these items in a “Bulk Lot” for a “Special”

price of $175,000 and that the price for the diamonds, if

purchased separately, would have been $75,000, $85,000, and

$200,000, respectively.

     In 1989, the decedent made a $100,000 pledge to a charity.

In connection therewith, the decedent donated the 7.81 and

8.53-ct. diamonds to the charity during 1990 and 1991.    The other
                                    -33-
four referenced diamonds purchased from Mamiye were included in

the assets seized by respondent from the safe deposit box.

                    d.   Checks From the Decedent to Mamiye

     During 1988 and 1989, the decedent wrote Mamiye the

following checks for the purchase of merchandise:

          Check Number           Check Date       Check Amount

              764             Jan. 16, 1988         $6,000
              954             Feb. 16, 1989         50,000
              981             Apr. 6, 1989          75,000
              982             Apr. 9, 1989          45,000
              993             May 5, 1989          175,000
             1080             Sept. 7, 1989          7,000
             1183             Dec. 22, 1989         15,000
                                                   373,000

Check numbers 764, 982, 1080, and 1183 do not relate to any

receipt in the record.

                    e.   Relationship of Receipts and Checks to
                         Disputed Assets

     As to the assets whose existence the parties do not dispute,

some, but not all of these assets, are listed in these receipts.

As to the assets whose existence the parties do dispute, the

receipts reveal that 22 items which are not included in the 25

seized assets were purchased by the decedent from Lloyds but were

not reported on the estate’s Federal estate tax return.15         We




     15
       Although the two receipts from Mamiye do not list any
item the existence of which is disputed by the parties, these
receipts reflect only the sales from Mamiye to the decedent of
the six loose diamonds.
                                 -34-
find that the decedent retained ownership of these 22 assets at

his death.    These 22 assets are:

      1.   Emerald-cut 2.08-ct. diamond
      2.   Emerald-cut 2.28-ct. diamond
      3.   GIA certificate round 3.04-ct. diamond
      4.   Masterpiece 4.39-ct. diamond with faint blue color
      5.   Heart-shape-baguette five-ct. diamond
      6.   Round-cut 5.22-ct. diamond
      7.   Round 7.75-ct. diamond
      8.   18-ct. ruby
      9.   18-ct. sapphire
     10.   Ceylon genuine masterpiece 18.02-ct. sapphire
     11.   18-kt. gold bracelet with 9.05 ct. diamond
     12.   Diamond necklace
     13.   18-kt. gold necklace with 26.73-ct. diamond
     14.   30.02-ct. graduated-diamond necklace
     15.   Ruby necklace
     16.   Sapphire necklace
     17.   Turquoise necklace 11mm, 30 inches long
     18.   Ruby ring
     19.   Sapphire ring
     20.   Pair of diamond stud earrings
     21.   18 kt. gold, ruby, and diamond pendant
     22.   Sapphire pendant with round diamonds

     The checks and receipts from Lloyds also reveal that 18

items were either not reported on the estate’s Federal estate tax

return or, to the extent that they were so reported, were not

included in the taxable estate at their fair market values as of

the applicable valuation date.     We find that the decedent

retained ownership of these 18 assets at his death.     These 18

assets are:

      1.   Sofa   table with 48-inch beveled glass
      2.   Silk   handmade dragon rug, four-five x seven feet
      3.   Silk   handmade tree of life rug, three x five feet
      4.   Silk   handmade prayer rug, three x five feet
      5.   Silk   handmade beige rug, two x four feet
      6.   Silk   handmade beige rug, two x four feet
      7.   Silk   handmade beige rug, three x five feet
                                 -35-
      8.    Silk handmade beige rug, three x five feet
      9.    Silk handmade beige rug, six x nine feet
     10.    Isfahan handmade fine quality wool,
              five x seven feet
     11.    Silk handmade masterpiece rug, six x nine feet
     12.    Three items of jade
     13.    Various items of ivory
     14.    Mother-of-pearl inlay dining room set with a carved
              pedestal and 14 chairs
     15.    Two curio cabinets with mother-of-pearl inlay
     16.    Black artwork lacquer desk and chair
     17.    Black Ming chair
     18.    Four-piece, two table rosewood curio stand

     Testimony and documentary evidence also establish the

existence of other unreported assets which were includable in the

taxable estate.    Hesselgesser, who like the decedent was a

collector, testified credibly that he met with the decedent on a

few occasions to discuss and inspect the decedent’s collections

of guns, gold coins, jewelry, ivory, and music.    Hesselgesser’s

testimony persuades us that the decedent had “several”

collections of ivory and that the decedent in the summer of 1991

owned several large diamonds (e.g., 30 and 40 carats), several

tennis bracelets, and several large necklaces with emeralds and

diamonds.    Hesselgesser’s wife testified credibly that the

decedent near his death possessed several diamond necklaces and

an extensive music collection.    The decedent’s friend, Joanne

Standard (Standard), testified credibly that the decedent

possessed eight to 10 tennis bracelets, some of which had one-ct.

diamonds all around the bracelet, “fabulous” emerald necklaces,
                               -36-
and all kinds of “lovely” jewelry.16   Testimony also establishes

that the decedent owned various other items of jewelry and

numerous diamonds, emeralds, and opals.   In sum, the testimony

and documentary evidence establish that the decedent owned the

following 18 assets which were not included in either the 25

seized assets or the known receipts and that were not reported on

the estate’s Federal estate tax return:

      1.   Music collection consisting primarily of reel-to-reel
             tapes
      2.   Three Baker’s tables
      3.   “Thousand dollar” watch
      4.   Cash at home
      5.   31 coins
      6.   Various pieces of jade
      7.   Various pieces of ivory
      8.   One eight-ct. emerald and two other emeralds
      9.   Two opals
     10.   Tennis bracelet with many one-ct. diamonds
     11.   Six other diamond tennis bracelets
     12.   Ruby bracelet matching seized ruby necklace
             and ring
     13.   Sapphire bracelet matching seized sapphire
             necklace and ring
     14.   Pinkie ring with three to four-ct. diamond
     15.   Man’s three- to four-ct. diamond ring
     16.   Tie tack with three- to four-ct. diamond
     17.   Ruby pin matching seized ruby necklace and ring
     18.   Sapphire pin matching seized sapphire necklace and
             ring

We find that the decedent retained ownership of these 18 assets

at his death.




     16
       The decedent generally collected sets of jewelry that
included necklaces, earrings, brooches/pins, and bracelets.
                                 -37-
          2.   Specific Assets

               a.     Music collection

     When he died, the decedent owned a music collection

consisting of reel-to-reel tapes (and to a lesser extent records)

and three or four tape players.    The decedent had been collecting

reel-to-reel tapes for approximately three decades, and his

life’s goal was to own the best collection of reel-to-reel tapes

which money could buy.    The decedent’s music collection was

unique and of fine quality, consisting mainly of music from the

1920s and 1930s and including tapes of the famous Italian tenor

Caruso and numerous other tapes of music from Latin America

through music of the present day.       The decedent kept his tapes at

home in several rooms.    In one room, in particular, the room

where he routinely listened to his tapes on a high quality,

highly sensitive sound system, the decedent covered one wall

completely with his tapes.

     Henry Schiffer (Schiffer) was the decedent’s accountant and

a long-time friend.    Once or twice a month, Schiffer would visit

the decedent at his home to handle his accounting requirements or

simply to converse with him in his music room or in his gazebo.

For estate tax purposes, Schiffer prepared a one-page document

entitled “ED TROMPETER ASSET LIST (NOT INCLUDING COINS) AS OF

FEBRUARY 21, 1992".    This document listed Schiffer’s

understanding of some (but not all) of the assets owned by the
                                  -38-
decedent as of that date and each asset’s estimated fair market

value.   Schiffer generally obtained these estimates by asking the

decedent his opinion as to each asset’s value.      Beforehand,

Schiffer had advised the decedent that he should be conservative

in estimating value for this purpose because the higher the

value, the greater the estate tax.       The document listed that the

decedent’s music collection had an estimated fair market value of

$50,000 as of February 21, 1992.

     Gonzalez took the decedent’s music collection to her home in

Florida after he died, and the coexecutors did not report any

value for this collection on the Federal estate tax return.       We

find on the basis of Schiffer’s document and testimony that the

fair market value of this collection was $50,000 as of the

applicable valuation date.     We are mindful that the fair market

value of this collection could be significantly higher than

$50,000 given the voluminous size of the collection, the

decedent’s earnest desire to have the finest collection of

reel-to-reel tapes which money could buy, the decedent’s

financial ability to fulfill that desire, and Schiffer’s advice

to the decedent to estimate the value of the listed assets

conservatively.

                  b.   Baker’s tables/sofa table

     By her own admission, Polachek removed three Baker’s tables

and a long sofa table from the decedent’s home after he died.
                                -39-
While Polachek suggested that these tables were of minimal dollar

value, we find it more likely that these assets had a significant

dollar value in light of the decedent’s wealth, lifestyle, and

desire to own (and be seen as owning) only the best of

everything.   In fact, the value of these four assets caused

Polachek to expend her time, effort, and money to transport them

from the decedent’s home in Southern California to her home in

Northern California.17   Given our added understanding of the

location and value of the decedent’s home,18 as well as the fact

that he was a flamboyant individual who filled his home

extensively with the finest, most beautiful, and most valuable

pieces of art, artifacts, gemstones, and jewelry (as well as a

noteworthy collection of music recordings), we simply do not see

the decedent sparing an expense when it came to furnishing his

home with tables and other furniture.   Such is especially so

given that the decedent regularly entertained at his home, that

he purchased at least some of his home’s furniture from the Fifth


     17
       The estate has not established that Polachek transported
any of these four assets to her home for sentimental reasons. In
fact, the record leads us to a contrary conclusion.
     18
       The decedent owned a four-bedroom, 3,928 square-foot
one-story home in Thousand Oaks, California. It was sited on
approximately one acre of land and, when built in 1975, had two
two-car garages and a double car port. (The decedent when he
died owned a 1992 Lexus four-door sedan and a 1991 Jeep Cherokee
four-wheel drive, the blue book values of which were $28,500 and
$19,050 as of the date of his death.) The decedent for purposes
of Schiffer’s statement had valued his home at just over $1
million.
                                -40-
Avenue location of Lloyds, and that he obviously paid a

significant amount of money to ship that furniture cross-country

to his home in California.

     We find as of the applicable valuation date that the fair

market values of the sofa table and each of the three Baker’s

tables were $4,416 and $2,208, respectively.19    Lloyds gave to

the decedent three sequentially numbered receipts for his

purchases of January 16, 1988, totaling $650,000.    Receipt number

564, the last of these three receipts, listed nine pieces of

furniture purchased by the decedent.     Neither party has suggested

that this sale was not a valid, arm’s-length sale, and we

consider it as such.20   The parties stipulated that item numbers

1, 3, 4, 5, and 8 on receipt number 562 and the only two items on

receipt number 563 had as of the applicable valuation date a

total fair market value of $320,600.21    As discussed infra pp.

56-58, 62-63, we find that the fair market values of the

remaining items on receipt number 562 totaled $245,506 as of the



     19
       We understand the sofa table to be much larger than each
of the Baker’s tables, which we understand are the same size.
Although Polachek suggested that the sofa table had a broken leg
that made it worthless, we find this suggestion incredible.
     20
       The decedent also must have considered this sale to have
been on good terms as he proceeded afterwards to frequent Lloyds
continually and to spend large sums of money there.
     21
       Those items correspond respectively to item numbers 19,
5, 6, 9, 10, 8, and 7 on our list of assets stipulated as to
existence and fair market value.
                                -41-
applicable valuation date.22   When we take into account credible

testimony in the record to the effect that the value of jewelry

and gemstones has remained virtually the same throughout the

relevant time period, we conclude that the balance of the

$650,000 sales price, i.e, $83,894 ($650,000 - ($320,600 +

$245,506)), must be attributable to the nine items of furniture

on receipt number 564.

     The nine items of furniture basically consist of:   (1) A

mother-of-pearl inlay dining room set with a carved pedestal and

14 chairs, (2) two curio cabinets with mother-of-pearl inlay,

(3) a black artwork lacquer desk and matching chair, (4) a sofa

table with 48-inch beveled glass, and (5) a black Ming chair.      On

the basis of our perception of the value of the items in these

five categories, we assign the following weights to these

categories to apportion the $83,894 amongst them:   8, 4, 4, 2,

and 1, respectively.23   In that the sum of these weights totals

19 (8 + 4 + 4 + 2 + 1 = 19), we apportion 8/19, 4/19, 4/19, 2/19,

and 1/19 of the $83,894 to the respective categories.    Our

apportionment of the $83,894 to the five categories is $35,324,


     22
       We find that the fair market values of the two diamonds
in item number 2 were $75,000 and $78,150 and that the fair
market values of the items in item numbers 6, 7, 9, and 10 were
$47,436, $12,400, $15,510, and $17,010, respectively.
     23
       In other words, we decide that the item in category 1 was
worth twice as much as each of the items in category 2 and 3,
four times as much as the item in category 4, and eight times as
much as the item in category 5.
                               -42-
$17,662, $17,662, $8,831, and $4,415, respectively.   We decide

that, as of the applicable valuation date, a date that is

approximately 5 years after this furniture was purchased, the

fair market value of each of these categories is 50 percent of

the amount which we apportion to it, or, in other words, $17,662,

$8,831, $8,831, $4,416, and $2,208, respectively.24   We decide

that the sofa table taken by Polachek is the sofa table in

category 4.   We decide that the applicable fair market value of

each of the Baker’s tables is 1/2 of the fair market value of the

sofa table, i.e., $2,208 ($4,416/2), and that the fair market

values of the three Baker’s tables on the applicable valuation

date totaled $6,624 ($2,208 x 3).

     We are mindful that the estate’s Federal estate tax return

contains an “appraisal” opining that the decedent’s home was

filled mainly with minimal value assets.   That document was

prepared by Butterfield & Butterfield (Butterfield) on or about

May 13, 1993, and purports to list the fair market values as of


     24
       We believe that a 50-percent reduction of the apportioned
amounts adequately compensates for the fact that the decedent
purchased this furniture approximately 5 years before the
applicable valuation date and that furniture in general tends to
decrease in value over time. Judging by the prices which the
decedent paid for this furniture, we conclude that it was
furniture of the highest quality. We also note that the decedent
purchased this furniture in “Bulk” at a “special” price that
apparently was less than the total retail price of that furniture
if each piece of it had been purchased separately. The decedent
also was an elderly man who tended to live either alone or with
one other person, a factor which we believe would conserve the
condition of the furniture.
                                 -43-
March 18, 1992, and September 18, 1992,25 of 161 single or groups

of assets which were viewed by Butterfield within the decedent’s

home.     The document states that only three single assets were

worth more than $1,000,26 that 87 of the 161 assets were worth

less than $100, and that 143 of the 161 assets were worth less

than $500.     The document lists, for example, that the fair market

value of a “CHINESE MOTHER-OF-PEARL INLAY ROSEWOOD DINING SET”

was $800, that the fair market value of a “PAIR OF CHINESE

MOTHER-OF-PEARL INLAY ROSEWOOD DISPLAY CABINETS” was $1,500, that

the fair market value of “SIX CHINESE MOTHER-OF-PEARL INLAY

ROSEWOOD CORNER CHAIRS” was $300, that the fair market value of a

“CHINESE BLACK LACQUER GILT DECORATED ARMCHAIR” was $50, and that

the fair market value of a “PAIR OF CHINESE CARVED ROSEWOOD

RECTANGULAR STANDS” was $800.     The document also lists that the

fair market values of 10 rugs were as follows:27




     25
       In all cases, the amount shown as fair market value is
the same on both dates.
     26
       Specifically, Butterfield appraised a “PAIR OF MASSIVE
CHINESE IVORY VENEER COVERED URNS” at $4,000, a “PAIR OF LARGE
CHINESE CARVED JADE PLAQUES” at $2,500, and a “LARGE CHINESE
CARVED IVORY TUSK ON WOOD STAND” at $1,400.
     27
        Butterfield later in 1993 sold each of these rugs at
auction. The amounts paid by the buyers for these rugs
(including applicable commission) is shown in the column to the
right. We list the amounts in that column for completeness and
do not rely on these amounts to value any of the disputed assets
herein.
                                   -44-
                                                    Appraised      Auction
      Description                                     Value         Price

     Oriental rug (Rams)                                 $200       312.50
     Chinese silk rug (Banzai Trees), 34 x 56 inches      300       200.00
     Chinese silk rug (Dragons), 49 x 86 inches           300       312.50
     Chinese silk yellow rug, 56 x 28 inches              300        37.50
     Chinese silk yellow rug, 68 x 98 inches              150       150.00
     Chinese silk yellow rug, 49 x 74 inches              300       137.50
     Chinese silk yellow rug, 56 x 28 inches              150        37.50
     Indian rug, 55 x 86 inches                           400       250.00
     Chinese silk red and yellow rug, 62 x 36 inches      300       125.00
     Chinese silk rug (Tabriz design), 72 x 106 inches    600      3725.50

     We give little regard to this “appraisal”.           We do not

believe that an astute, strong-minded, self-made multimillionaire

like the decedent, who indisputably collected only the finest and

most valuable gold coins, gemstones, and items of jewelry, and

who received enormous pleasure from flaunting his possessions

before others, would purchase assets with such minimal values as

listed by Butterfield.28     Nor does the appraisal state the

rationale underlying its low values; it merely recites a brief

general description of the asset with its proffered value.               We

also know little about the appraiser (e.g., her credentials) or

the terms or conditions underlying the appraisal.               We do know,

however, that the appraiser generally walked through the

decedent’s home, eyed most of the items in the home, and



     28
       We also find that many of Butterfield’s listed values are
considerably low when compared to the actual price for similar
assets per the receipts. Although we understand that some of the
items appraised by Butterfield ultimately sold at prices near the
appraised values, we do not know who bought the items at those
prices (e.g., dealer or consumer). Nor do we know whether
Butterfield had been instructed by the coexecutors to sell those
items for at least a set minimum value.
                                  -45-
appraised them on the spot.     We also know that Gonzalez testified

that she took three of the decedent’s rugs to her home in

Florida, that she later had those rugs appraised in Florida by

what she described as a “legitimate company”, and that the

company appraised the rugs at $4,000.     Gonzalez effectively

conceded at trial that Butterfield did not recognize the value of

those rugs and did not meaningfully appraise them.29

                  c.   Thousand dollar watch

     Schiffer testified that the decedent wore a “thousand

dollar” watch.    The coexecutors did not report any watch on the

estate’s Federal estate tax return.      On the basis of Schiffer’s

testimony, we find that the fair market value of the decedent’s

“thousand dollar” watch was $1,000 as of the applicable valuation

date.

                  d.   Cash at home

     The coexecutors reported on the estate’s Federal estate tax

return that all of his money (exclusive of coin collections) as

of the applicable valuation date was held in financial

institutions.30    The coexecutors did not report any cash that the


     29
       For similar reasons, we also give little weight to the
fact that Christie’s wrote a letter to Gonzalez stating that it
was unable to prepare an insurance appraisal of some of the
Chinese artifacts in the decedent’s home because “Most of these
items are of modern or late production. * * * I would suggest
that you either call in a local appraiser or insure at the cost
prices.”
     30
       The coexecutors reported that the decedent had at
financial institutions two money market accounts and two checking
                                                   (continued...)
                               -46-
decedent had at home.   The decedent kept cash at home in a burlap

bag secured in a large safe in his den, and he routinely went to

the safe when he needed money to spend.   The decedent was very

private about the contents of this safe, and he generally did not

tell his closest friends about its existence, nor allow them to

enter the den.

     A few days before the decedent died, he gave the combination

to his home safe to Polachek and taught her how to open the safe

by herself.   Polachek testified that the safe had cash in it at

this time but that it had no cash in it when she and Gonzalez

opened the safe together following the decedent’s death.

Gonzalez was regularly in the decedent’s home following his

death, including the period of time before she and Polachek

opened the safe together.   Gonzalez testified to the effect that

she did not know how to open the safe alone, but needed

Polachek’s assistance to do so.   We find that testimony

incredible.   Gonzalez was deeply involved with the decedent and

his wealth for approximately 1 year before his death, and we

believe it incredible that the decedent would have taught

Polachek to open the safe but not Gonzalez.   This is especially




     30
      (...continued)
accounts. They reported that the balance in the money market
accounts was approximately $412,000 and that the balance in one
of the checking accounts was $822. They reported that the other
checking account had a $109,760 deficit.
                                -47-
so given the fact that the decedent informed Gonzalez as to the

specifics of his extensive holdings.

     We find that the decedent when he died had cash of $50,000

at home.   The decedent when he died had amassed at his home

valuable assets worth hundreds of thousands of dollars, and we

believe under the facts and circumstances of this case that it is

reasonable to conclude that the decedent also kept at home a

significant amount of cash.    This is especially so given that the

decedent tended to keep his assets secreted at home rather than

in banks (e.g., he kept many of his coins hidden in his garage)

and that he had a history of giving large sums of cash (not

checks) to at least Gonzalez, Polachek, and Wong.    He gave

$16,000 in cash to Wong in or about 1987.    He gave $50,000 in

cash to Gonzalez and Polachek in 1991.    He gave to Wong in or

about 1991 cash of $77,000 and additional money to pay off

approximately $250,000 of her debts.    We also note that some of

the receipts in evidence do not relate to the decedent’s checks

in evidence, which indicates to us that the decedent on various

occasions paid large sums of cash for his purchases of the items

which he collected.

                  e. Coins

     Respondent did not recover all of the coins omitted from the

taxable estate.    Gonzales understood that the decedent had

approximately 500 coins in the possession of Superior
                               -48-
Stamp & Coin (Superior) before the auction of February 25, 1992.

Given the fact that Gonzalez was well informed as to the extent

of the decedent’s holdings, we conclude that the decedent near

the time of his death owned 500 coins.    Of these coins, 201

(209-8) were sold in the auction and 227 (191 + 36) were reported

on the estate’s Federal estate tax return.31   This leaves 72

coins (500 - (201 + 227)), 41 of which were seized and 31 of

which have not been recovered by respondent.   In light of the

tough and thorough litigation with Superior, we believe that

those of the 500 coins in Superior’s possession which were not

sold were returned to the decedent.

     We find a fair market value of $425,847 for the 31 coins

which were not recovered by respondent.   The 201 coins, which

consisted primarily of $1, $2-1/2, and $3 gold coins and certain

pattern gold coins, sold at the first auction for the total

amount of $3,850,622 (an average of $19,157 per coin).   The 191

coins, which consisted of $5, $10, and $20 gold pieces and the

Amazonian set, were valued by the Court at $7,635,000 (an average

of $39,974 per coin) as of the applicable valuation date.   The 36

     31
       The decedent consigned to Superior 209 gold proof coins
for auction on Feb. 25, 1992. Of those coins, 201 were sold and
eight were not. The coins reported on the return were those
coins held by Superior when the decedent died. The 191 coins
were at that time consigned to Superior for auction on Oct. 13,
1992. As to the 36 coins, eight of them were the unsold coins
above, and the other 28 were from other consignments made to
Superior before 1991 and for which Superior was awaiting a
written request from the decedent for their return.
                                -49-
coins, which were similar to the 191 coins, were valued by the

Court at $494,523 (an average of $13,737 per coin) as of the

applicable valuation date.    We find the applicable fair market

value of the 31 coins using the $13,737 average value (31 x

$13,737 = $425,847).32

               f.    Rugs

     By her own admission, Gonzalez removed three rugs from the

decedent’s home.    While the estate asserts that these rugs had

little dollar value, we believe that these rugs were worth a lot

of money in light of the decedent’s wealth, lifestyle, and desire

to own (and be seen as owning) only the best of everything.    In

fact, the value of these assets caused Gonzalez to expend the

time, effort, and expense to transport them cross-country from

the decedent’s home in Southern California to her home in

Florida.33

     The decedent purchased 10 handmade rugs from Lloyds on

December 5, 1988.    The receipts for that day indicate that the

decedent paid $276,000 to Lloyds for all of the items listed

therein and that the listed jade urns had been appraised at



     32
       We recognize that the parties stipulated that the value
of the 41 seized gold coins totaled $104,500 (an average of
$2,549 per coin). We do not believe that the stipulated value is
a proper measure of the value of the 31 coins.
     33
       The estate has not established that Gonzalez transported
any of these rugs to her home for sentimental reasons. In fact,
the record leads us to a contrary conclusion.
                                -50-
$45,000.   The parties stipulated that the coexecutors did not

report the Isfahan rug on the estate’s Federal estate tax return.

At trial, the Court granted the estate’s request to vacate that

stipulation.   The estate had pointed to the fact that the

Lloyds’s receipts in evidence listed 10 rugs and that the

coexecutors included in the taxable estate the 10 rugs shown on

Butterfield’s appraisal.   The estate alleged that the Isfahan rug

was reported by the coexecutors as the “Indian rug, 55 x 86

inches” with a value of $400.   The Court informed the parties

that the issue of whether the coexecutors included the applicable

fair market value of the Isfahan rug in the taxable estate would

be decided on the basis of the record.

     On the basis of the record, we conclude that the Isfahan rug

was not the referenced Indian rug.     Isfahan (or Esfahan as it is

more commonly spelled) is a city in Iran.    It is not a city in

India.   We also conclude that the 10 rugs reported on the

estate’s Federal estate tax return did not represent the total

fair market value of the 10 rugs purchased from Lloyds on

December 5, 1988.   As explained below, we find that the

coexecutors failed to include within the taxable estate $59,530

for rugs owned by the decedent when he died.

     The December 5, 1988, receipts show that the decedent paid a

bulk price of $276,000 for 24 items (the 20 items shown in item

numbers 2 through 21 inclusive of five rugs shown in item number
                                 -51-
18).34    Of those 24 items, 10 are rugs, five are pieces of ivory,

three are pieces of jade, one is a 30.02-ct. graduated-diamond

necklace, one is a pair of diamond earrings, one is a 7.75 ct.

diamond, one is a genuine masterpiece 18.02 ct. sapphire, one is

netsukes, and one is two rosewood tables.    We apportion the

$276,000 sales price among these items in the following manner.

     First, we apportion $45,000 to the three items of jade to

reflect their appraised value.    Second, we apportion $18,750 to

the five pieces of ivory to reflect what we decide was a

reasonable $3,750 per piece value for ivory.    We ascertain that

per piece value taking into account the fact that Butterfield

appraised two of the decedent’s ivory urns at a per piece value

of $2,000 and that Carmona testified in the setting of jewelry

sales that the fair market value of an item purchased at auction

generally equals the auction price plus a 25 to 50 percent

dealer-to-retailer markup and a 50 to 100+ percent retailer-to-

public markup.    On the basis of the record before us, we consider

the sale of jewelry as sufficiently similar to the sale of ivory

for purposes of valuing the latter, and we conservatively apply

the lower range of the estimated markups.    In other words, we

find for purposes of our analysis that the retailer’s price for

     34
       Item 1 in receipt number 565 is the “Turquoise Necklace”
and “Wall of IVORY Art piece”. Whereas receipt 565 states that
this necklace and wall of ivory were given to the decedent in
exchange for netsukes, we do not attribute any of the $276,000 to
those two items.
                                   -52-
ivory was $2,500 per item ($2,000 + ($2,000 x .25)), and that the

retail sales price for ivory was $3,750 per item ($2,500 +

($2,500 x .50)).

     Third, we apportion $25,000 to the item of netsukes to

reflect the fact that the decedent had on May 4, 1989, paid that

amount for other netsukes.       Fourth, we apportion $4,416 to the

two rosewood tables to reflect our finding supra p. 42 that the

Baker’s tables were each worth $2,208 and our decision that the

Baker’s tables are a good measure of the value of the rosewood

tables.     Fifth, we apportion $66,404 to the diamond necklace,

$9,000 to the diamond earrings, $35,800 to the 7.75-ct. diamond,

and $9,100 to the 18.02-ct. sapphire to reflect our findings

infra pp. 58, 62, 69-70, 73, of those fair market values.       Sixth,

we apportion the remaining $62,530 of the $276,000 sales price to

the 10 rugs.35    We allow the estate credit for $3,000 of rugs

reported on its estate tax return and conclude that $59,530 of




     35
           To summarize:

          Three pieces of jade      $45,000
          Five pieces of ivory       18,750
          Netsukes                   25,000
          Rosewood tables             4,416
          Diamond necklace           66,404
          Diamond earrings            9,000
          Loose diamond              35,800
          Loose sapphire              9,100
          10 rugs                    62,530
                                    276,000
                                 -53-
value was unreported by the coexecutors primarily for the Isfahan

rug, but for other rugs as well.

                g.   Jade collection

     The Schiffer document lists the value of the decedent’s jade

collection at $250,000 as of February 21, 1992.    Schiffer

obtained this value from the decedent.    The decedent purchased

$45,000 of jade from Lloyds on December 5, 1988.    The decedent

purchased other items of jade at other times.

     The coexecutors reported on the estate’s Federal estate tax

return that the only jade included in the taxable estate was two

jade plaques with a fair market value of $2,500.    The reported

value equaled the amount on the Butterfield appraisal shown for

those items.   Taking into account the decedent’s own valuation of

his jade collection and allowing the estate credit for the

reported value of the plaques, we find the fair market value of

the remainder of the jade collection at $247,500 as of the

applicable valuation date ($250,000 - $2,500).

                h.   Ivory collection

     On May 4 and December 5, 1988, the decedent purchased from

Lloyds numerous items of ivory.    The decedent purchased other

items of ivory at other times.    On December 7, 1992, the estate’s

accountants prepared a preliminary summary of the estate which

listed the value of the decedent’s ivory collection at $1.5
                                 -54-
million as of March 18, 1992.    Gonzalez believed that the ivory

collection was worth an amount consistent with that valuation.

     We decide that the decedent had a significant ivory

collection when he died.    We find consistent with the preliminary

statement and Gonzalez’s understanding of the decedent’s ivory

holdings that the fair market value of the decedent’s ivory

collection was $1.5 million as of the applicable valuation

date.36

               i.   Loose Gemstones

                     i.    Diamonds

     The Schiffer document lists the value of the decedent’s

diamond collection at $500,000 as of February 21, 1992.      Schiffer

obtained this value from the decedent.      The decedent estimated

this value conservatively and not as an accurate gauge of the

fair market value of his diamonds.      Respondent seized 13 loose

diamonds from the safe deposit box, and those diamonds were

appraised by Carmona at a fair market value of $1.1 million and

sold at auction for a total price (exclusive of buyer’s

commissions) of $764,600.    The seized diamonds, their values as

     36
       As stated supra note 29, we give little weight to a
letter written by Christie’s stating that “most” of the
decedent’s Chinese artifacts were of modern or late production.
In addition to the fact that we do not know whether Christie’s
examined all of the decedent’s ivory collection, or actually
considered ivory to be a Chinese artifact, we note that
Christie’s acknowledged in its letter by its use of the word
“most” that some of the Chinese artifacts which it examined were
not of modern or late production.
                                -55-
appraised by Carmona, and their auction prices (exclusive of

buyer’s commission) are as follows:

           Carat            Carmona’s          Auction Price
          Weight         Appraised Value       of Christie’s

           1.9               $11,800              $9,600
           2.01               15,000               7,500
           3.35               52,300              25,000
           4.03               19,600               7,500
           4.32               97,000             105,000
           5.01               48,000              35,000
           6.62               21,500              20,000
           6.65               22,000              24,000
           7.57               48,000              30,000
           7.74               35,800              27,000
          11.13               59,000              44,000
          18.28              210,000             210,000
          40.02              460,000             220,000
                           1,100,000             764,600

     The decedent also purchased from Lloyds in 1988 seven loose

diamonds which were not reported on the Federal estate tax return

and which were not included in the 25 seized assets.       Five of

these diamonds were purchased on January 16, 1988, one was

purchased on May 4, 1988, and one was purchased on December 5,

1988.    The five diamonds purchased on January 16, 1988, are an

emerald-cut 2.08-ct. diamond, an emerald-cut 2.28-ct. diamond

with VS1 clarity, a GIA certificate round 3.04-ct. diamond with

VVS2 clarity and I color, a heart-shape-baguette 5-ct. diamond,

and a round-cut 5.22-ct. diamond.      The diamond purchased on

May 4, 1988, was a masterpiece 4.39-ct. diamond with a faint blue

color.    The diamond purchased on December 5, 1988, was a round
                                -56-
7.75-ct. diamond.   We find that the decedent retained ownership

of these seven diamonds at his death.

     We find the fair market value of these seven diamonds

through a three-step process.   First, we look to the prices at

which Mamiye sold similarly weighted diamonds.37   We consider

those arm’s-length retail prices to be the best indicia of fair

market value on the basis of the record before us.   If a diamond

sold by Mamiye was similar in weight to one of the seven diamonds

in question, we use that comparable diamond to measure the fair

market value of the diamond in question.

     By its weight, the 5.01-ct. diamond that Mamiye was selling

for $75,000, if purchased separately, is comparable to the

five-ct. and 5.22-ct. diamonds in question.   We decide that the

five-ct. diamond was for practical purposes the same weight as

the 5.01-ct. diamond sold by Mamiye and observe that the 5.22-ct.

diamond was 4.2 percent larger in weight than the 5.01-ct.

diamond ((5.22 - 5.01)/5.01 = .042).    We find on the basis of the

$75,000 price that the fair market values of the five-ct. and

5.22-ct. diamonds were $75,000 and $78,150 ($75,000 + ($75,000 x

.042)), respectively, as of the applicable valuation date.




     37
       We understand that the value of gemstones depends not
just on weight but on color, cut, and clarity as well. The
record before us generally does not allow us to factor color,
cut, or clarity into our valuations as to gemstones which are
“comparable” to the gemstones in question.
                                -57-
     We do not find in the record that Mamiye sold a diamond that

was comparable to one or more of the five remaining diamonds.     As

to these five diamonds, we turn to Carmona’s opinion as set forth

in his expert report.   If a diamond that was valued by Carmona

was similar in weight to one of the five remaining diamonds, we

use that comparable diamond to measure the fair market value of

the diamond in question, unless the record establishes that

Carmona’s appraised value was not indicative of the diamond’s

retail sales price.    Under the facts herein, we believe that

Carmona’s opinion is the second best measure of the fair market

value of four of the five remaining diamonds.

     Carmona opined that the fair market value of the 2.01-ct.

diamond was $15,000.    We decide that the 2.01-ct. diamond was the

best measure of value for the 2.08 and 2.28-ct. diamonds.    On the

basis of Carmona’s appraisal of the 2.01-ct. diamond at $15,000,

and the fact that the 2.01 diamond is 3.4 and 13.4 percent

smaller in weight than the 2.08-ct. and 2.28-ct. diamonds,

respectively ((2.08 - 2.01)/2.01 = .034; (2.28 - 2.01)/2.28 =

.134), we find that the fair market values of the 2.08 and

2.28-ct. diamonds were $15,510 ($15,000 + ($15,000 x .034) and

$17,010 ($15,000 + ($15,000 x .134)) respectively.

     Carmona opined that the fair market value of the 3.35-ct.

diamond was $52,300.    We decide that the 3.35-ct. diamond was the

best measure of value for the 3.04-ct. diamond.    On the basis of
                                -58-
the $52,300 value and the fact that the 3.04-ct. diamond was 9.3

percent smaller than the 3.35-ct. diamond ((3.35 - 3.04)/3.35 =

.093), we find that the fair market value of the 3.04-ct. diamond

was $47,436 ($52,300 - ($52,300 x .093)).

     Carmona opined that the fair market value of the 7.74-ct.

diamond was $35,800.    We decide that the 7.74-ct. diamond was the

best measure of value for the 7.75-ct. diamond.   On the basis of

the $35,800 value and the fact that the 7.74-ct. diamond was for

practical purposes the same weight as the 7.75-ct. diamond, we

find that the fair market value of the 7.75-ct. diamond was

$35,800.

     Lastly, we turn to the auction prices to find the value of

the remaining diamond.   A faint blue 4.32-ct. diamond sold at

auction for $105,000.    Whereas the 4.32 ct. diamond actually sold

at auction for more than its $97,000 value as appraised by

Carmona, we do not consider Carmona’s appraised value to be the

best measure of value for the faint blue 4.39 ct. diamond.38     On

the basis of the price at which the 4.32 ct. diamond sold at

auction and taking into account the fact that the 4.39-ct.

diamond was 1.6 percent larger than the 4.32-ct. diamond

((4.39 - 4.32)/4.32 = .016), we decide that the fair market value

of the 4.39-ct. diamond was no less than $106,680 ($105,000 +


     38
       We note that Carmona had stated in his report that his
valuations were not under ideal conditions.
                                  -59-
($105,000 x .016)) and, indeed, most likely more than that

amount.39    On the basis of the record, we find the fair market

value of the 4.39-ct. diamond at its minimum value of $106,680.

                       ii.   Emeralds

     The coexecutors did not include any loose emeralds in the

taxable estate.     When he died, the decedent owned numerous loose

emeralds including at least one that weighed eight carats.       With

the exception of the eight-ct. emerald, the record does not

establish the carat weight or specifics of any of the other loose

emeralds owned by the decedent.

     Respondent did not seize any loose emeralds from the safe

deposit box, but he did seize two 18-kt. gold, emerald, and

diamond necklaces.    One of those necklaces, item 2j in the

appendices, had a 6.07-ct. emerald and 270 small diamonds with a

total weight of 10.44 carats.     We find supra p. 18 that the

applicable fair market value of this necklace was $19,000.       The

other seized necklace, item 2i in the appendices, had a 6.48-ct.

emerald and 245 small diamonds with a total weight of 32.5

carats.     The parties stipulated that the applicable fair market

value of this necklace was $19,000.




     39
       As noted above, we do not consider the auction prices of
Christie’s to be a good gauge of the fair market value of the
related items; we generally view those prices as significantly
less than fair market value.
                               -60-
     We decide that the fair market values of the two emerald

necklaces is most probative of the fair market value of the

eight-ct. emerald.   On the basis of the $19,000 value, we find as

of the applicable valuation date that the fair market value of

the eight-ct. emerald was $16,150.    We find the $16,150 fair

market value by increasing the $19,000 by 27.5 percent ($19,000 x

.275 = $5,225) to reflect the fact that the eight-ct. emerald is

27.5 percent larger than 6.275 ((8 - 6.275)/6.275 = .275), which

is the average weight of the emeralds on the necklaces in items

2i and 2j, and then decreasing the total of $24,225 ($19,000 +

$5,225) by one-third ($24,225/3 = $8,075) to account for the fact

that the $24,445 value included a necklace that was 18-kt. gold

and had an assortment of small diamonds ($24,225 - $8,075 =

$16,150).

     We find a fair market value of $32,300 for other emeralds

owned by the decedent when he died.    Although the record does not

establish the exact number of other loose emeralds owned by the

decedent when he died, we surmise from the record that the

decedent must have then owned at least two other loose emeralds.

We decide conservatively that the decedent owned two other

emeralds when he died, that the value of each of those emeralds

was the same as the eight-ct. emerald, and that the total fair

market value of those two other emeralds was two times the fair

market value of the eight-ct. emerald ($16,150 x 2 = $32,300).
                                      -61-
                  iii.     Opals

     The coexecutors did not include any loose opals in the

taxable estate.    Testimony establishes that the decedent owned

“numerous” opals when he died.         Whereas the record does not

establish the number or specifics of any of these “numerous”

opals, we decide conservatively that the decedent owned two opals

when he died.

     We believe that it is reasonable on the basis of the facts

and circumstances at hand to conclude that the fair market value

of each of the decedent’s two opals was the same as the fair

market value of each of the decedent’s emeralds.         We find that

the fair market value of the opals totaled $32,300 (2 x $16,150).

                  iv.     Ruby

     Lloyds’s receipt number 597, dated May 5, 1988, reported

that the decedent purchased an 18-ct. ruby from Lloyds for the

price of $7,500.       We find that the decedent retained ownership of

this ruby at his death.          On the basis of the price listed on the

receipt, we find that the fair market value of the 18-ct. ruby

was $7,500 as of the applicable valuation date.

                  v.     Sapphires

     The coexecutors did not include any loose sapphires in the

taxable estate.    Respondent seized from the safe deposit box one

loose blue sapphire, 18.2 carats in size, which we valued supra

p. 18 at $9,100.       That sapphire was not the same sapphire as
                                -62-
either the Ceylon genuine masterpiece 18.02-ct. sapphire shown on

the pertinent Lloyds’s receipt of December 5, 1988, or the 18-ct.

sapphire shown on the Lloyds’s receipt of May 5, 1988.    We find

that the decedent retained ownership of the 18-ct. sapphire and

the 18.02-ct. sapphire at his death.

     We find that the fair market value of the 18-ct. sapphire

was $6,000 as of the applicable valuation date.    Lloyds listed

that amount on the May 5, 1988, receipt as the price of that

sapphire.    On the basis of our valuation of the seized 18.2-ct.

sapphire and the fact that the 18.2-ct. sapphire was for

practical purposes the same weight as the 18.02-ct. sapphire, we

find that the fair market value of the 18.02 sapphire was $9,100

as of the applicable valuation date.   We attribute the

differential between the valuations of $6,000 for the 18-ct.

sapphire and $9,100 for each of the 18-ct. and 18.02 ct.

sapphires to the fact that the two more expensive sapphires were

a “blue” sapphire and a “genuine masterpiece” “Ceylon” sapphire,

respectively.

            j.   Bracelets

                 i.   Diamond

     On January 16, 1988, the decedent purchased from Lloyds an

18-kt. gold bracelet with a 9.5-ct. diamond.   The receipt for

that item reported that its price was $12,400.    We find that the

decedent retained ownership of this bracelet at his death.   On
                                 -63-
the basis of the price listed on the receipt, we find that the

fair market value of this bracelet was $12,400 as of the

applicable valuation date.

     The decedent typically purchased diamond bracelets with

one-ct. diamonds set all the way around each bracelet.

Hesselgesser and his wife saw decedent with “several” bracelets,

and Standard saw 8 or 10 diamond tennis bracelets and believed

that at least 1 of those bracelets had an assortment of diamonds

which were 1 carat each.   The decedent gave Wong two diamond

tennis bracelets, one with 10.5 carats of diamonds and the other

with approximately seven carats of diamonds.    The decedent bought

one of the bracelets given to Wong at a coin show, and he bought

the other bracelet given to Wong from Mamiye.   We decide that the

taxable estate included seven unreported diamond tennis bracelets

(average of nine bracelets seen by Standard less the two

bracelets given to Wong), and that one of these seven bracelets

had one-ct. diamonds all around it.

     For the diamond tennis bracelet with one-ct. diamonds all

around it, we find that its fair market value was $108,000 as of

the applicable valuation date.    The parties stipulated that the

tie tack with a one-ct. diamond had an applicable fair market

value of $4,500.   On the basis of our review of the pictures and

descriptions of the items displayed in the auction catalogue of

Christie’s in evidence (auction catalogue), we decide that this
                               -64-
tennis bracelet was 6 1/2 inches long and contained 24 one-ct.

diamonds.   We use the tie tack as a measure of the minimum value

for each one-ct. diamond (24 x $4,500 = $108,000).40

     As to the six other diamond tennis bracelets, we find that

their total fair market value was $191,568 as of the applicable

valuation date.   Item number 293 in the auction catalogue is a 6

5/8 inch bracelet with 44 rectangular-cut diamonds weighing

approximately 17.5 carats in total.   Christie’s estimated that

the value of this bracelet was $20,000 to $25,000.     We decide on

the basis of the record at hand that this bracelet is the best

measure of the fair market value of the six diamond tennis

bracelets in question.

     As to the 11 seized items of jewelry, Christie’s had

ascertained that their lower and upper estimated values totaled

$98,000 ($70,000 of sold items + $28,000 of unsold items) and

$147,000 ($107,500 of sold items + $39,500 of unsold items),

respectively.   Carmona ascertained that their fair market values

totaled $183,400 ($146,200 of sold items + $37,200 of unsold

items).   The total value ascertained by Carmona is 24.76 percent

greater than the total upper estimated value for these 11 items

(($183,400 -$147,000)/$147,000 = .2476)).   Consistent with

Carmona’s valuation of the 11 items of jewelry vis-a-vis their

     40
       As discussed supra pp. 20-24, we consider the auction
prices, and hence the stipulated values, to be less than fair
market value.
                                 -65-
total upper estimated values as ascertained by Christie’s, we

find that the fair market value of each of the six bracelets was

$31,190 as of the applicable valuation date; i.e., 24.76 percent

greater than the higher estimated value of $25,000 for item

number 293 ($25,000 + ($25,000 x .2519) = $31,190).   We find

accordingly that the fair market values of these six diamond

tennis bracelets totaled $187,140 as of the applicable valuation

date ($31,190 x 6 = $187,140).

                 ii.   Ruby/Sapphire

     The decedent owned a sapphire bracelet that was part of the

set that included the seized sapphire necklace and the seized

sapphire ring.   The decedent owned a ruby bracelet that was part

of the set that included the seized ruby necklace and the seized

ruby ring.    We find that the decedent retained ownership of these

bracelets at his death.

     We decide that the fair market value of each of these

bracelets was the same as the fair market value of the matching

necklace.41   Thus, we find that the fair market value of the

sapphire bracelet was $4,400 as of the applicable valuation date;

i.e., the same fair market value that we find for the sapphire

necklace listed as item 2d in the appendices.   We find that the

fair market value of the ruby bracelet was $5,800 as of the


     41
       We decide that a bracelet is more similar in size to a
necklace than to a ring.
                                  -66-
applicable valuation date; i.e., the same fair market value that

we find for the ruby necklace listed as item 2e in the

appendices.

             k.   Necklaces

     Respondent seized seven necklaces from the safe deposit box.

The receipts from Lloyds establish that the decedent purchased

six other necklaces which were not seized by respondent.    The

May 4, 1988, receipt indicates that the decedent purchased on

that date a diamond necklace, a sapphire necklace, and a ruby

necklace.    Testimony establishes that the diamonds on the diamond

necklace were all the same size and were set in yellow gold.      The

May 5, 1988, receipt indicates that the decedent purchased on

that date a necklace with a 26.73-ct. diamond.     The December 5,

1988, receipt indicates that the decedent purchased on that date

an 11-millimeter-wide, 30-inch-long turquoise necklace and a

necklace with graduated diamonds weighing 30.02 carats.

Testimony establishes that the diamonds on the graduated necklace

sloped down in size to one carat on the front stones and were set

in white gold with yellow gold on the bottom.     We find that the

decedent retained ownership of these six unseized necklaces at

his death.

                  i.   Diamond Necklaces of May 4, 1988

     As to the three necklaces purchased on May 4, 1988, the

May 4, 1988, receipt shows that the decedent paid a bulk price of
                               -67-
$235,000 for 26 items.   Included in those items are ivory, a

diamond necklace, a sapphire necklace, a ruby necklace, a ruby

ring, a sapphire ring, and a faint blue masterpiece 4.39-ct.

diamond.   We apportion the $235,000 sales price among these

categories in the following manner.

     First, we apportion $75,000 to the ivory.   Exclusive of the

ivory, the May 4, 1988, receipt lists six items.   We conclude

that the remaining 20 items referenced in the receipt were pieces

of ivory that are included within the ivory shown on the receipt

in the categories “erotic giga”, “Wise mens”, “Erotic”, or “40

tall 3 figure”.   On the basis of our decision supra pp. 51-52

that $3,750 was a reasonable amount to attribute to each piece of

ivory, we conclude that the fair market value of the ivory

referenced in this receipt totals $75,000 (20 x $3,750).   Second,

we apportion $106,680 to the 4.39-ct. diamond to reflect our

valuation of that diamond supra pp. 58-59.   Third, we decide that

the balance of $53,320 ($235,000 - ($75,000 + $106,680)) was

attributable to the remaining three necklaces and two rings.     We

apportion the $53,320 to those items using a weighing process

under which we decide (following, in part, our examination and

comparison of the appraised values of the necklaces and rings

shown in appendix A) that each of the necklaces was worth the

same amount and that each of the rings was worth 1/2 of the value
                                   -68-
of a necklace.42    As we did similarly above, we assign a weight

of two to each of the three necklaces and a weight of one to each

of the two rings.       In that the sum of these weights totals eight

(2 + 2 + 2 + 1 + 1 = 8), we apportion 2/8 of $53,320 to each of

the three necklaces (2/8 x $53,320 = $13,330) and 1/8 of $53,320

to each of the two rings (1/8 x $53,320 = $6,665).43        We find

accordingly that the fair market value of each of the three

necklaces shown on the May 4, 1988, receipt was $13,330 as of the

applicable valuation date.

                  ii.    Diamond Necklaces of May 5, 1988

     On May 5, 1988, the decedent purchased from Lloyds an 18-kt.

gold necklace with a 26.73-ct. diamond.      The receipt for that

item reported that its price was $74,000.      We find that the fair

market value of this necklace was the same as of the applicable

valuation date.




     42
       The May 4, 1988, receipt states no specific information
on these necklaces and rings, but for the gemstones.
     43
           To summarize:

          Ivory                    $75,000
          4.39-ct. diamond         106,680
          Diamond necklace          13,330
          Sapphire necklace         13,330
          Ruby necklace             13,330
          Ruby ring                  6,665
          Sapphire ring              6,665
                                   235,000
                               -69-
               iii.   Turquoise and Diamond Necklaces of
                      December 5, 1988

     We find that the fair market value of the turquoise necklace

was $21,250 as of the applicable valuation date.   Lloyds gave the

turquoise necklace and a wall of ivory art piece to the decedent

in exchange for netsukes.   The May 4, 1989, Lloyds’s receipt

reports that the decedent on that date bought from Lloyds other

netsukes worth $25,000,44 and we find supra p. 52 that the

decedent also paid $25,000 for still other netsukes on

December 5, 1988.   We decide on the basis of these receipts that

the value of the exchanged netsukes referenced as item one on the

December 5, 1988, receipt also was $25,000.    Having decided above

that the value of each ivory item was $3,750, we apportion the

$21,250 difference between $25,000 and $3,750 to the turquoise

necklace.

     As to the necklace with graduated diamonds weighing 30.02

carats, we find that the fair market value of this necklace was

$66,404 as of the applicable valuation date.   On the basis of our

review of the pictures and descriptions of items displayed in the

auction catalogue, we decide that item numbers 295 and 299 shown

therein were proper measures of the fair market value of the

graduated-diamond necklace in question.   Item number 295 was a

16 3/4-inch platinum necklace set with 55 graduated heart-shape

     44
       Whereas this receipt lists the only purchased item as
“Nestkies”, we understand this description to refer to netsukes.
                               -70-
diamonds with a total weight of approximately 60.5 carats.

Christie’s estimated that this necklace would sell at auction for

$120,000 to $150,000.   Item number 299 was a 16-inch platinum

necklace set with 80 graduated oval-cut diamonds with a total

weight of approximately 48 carats.    Christie’s estimated that

this necklace would sell at auction for $70,000 to $90,000.    We

valued the six seized assets which did not sell at auction at the

values as appraised by Carmona.   Carmona’s total appraised value

for the five items of jewelry which did not sell at auction was

approximately the same as the total of the upper estimated values

for those items as ascertained by Christie’s.    We decide in the

case of the graduated-diamond necklace in question that its

applicable fair market value equals the average of the estimated

highest values of item numbers 295 and 299, as adjusted to

reflect the fact that the graduated-diamond necklace in question

had only 30.02 carats of diamonds.    In other words, we average

the two highest estimated values (($150,000 + $90,000)/2 =

$120,000), divide the average value by the average carat weight

of item numbers 295 and 299 ((60.5 + 48)/2 = 54.25;

$120,000/54.25 = $2,211.9816), and multiply the resulting amount

by 30.02 ($2,211.9816 x 30.02 = $66,404).
                                   -71-
           l.   Rings

                i.      Man’s Diamond Pinkie Ring

     The decedent wore a “pinkie ring” with a noticeable diamond

in it.   We find that the decedent retained ownership of this

pinkie ring at his death.      The receipts from Lloyds and Mamiye do

not list any diamond that was purchased by the decedent that was

less than one carat.      We decide that the decedent’s pinkie ring

had a diamond weighing at least one carat and value that ring as

if it had a one-ct. diamond in it.        Consistent with our valuation

of the one-ct. diamonds in the decedent’s diamond tennis bracelet

that we valued supra pp. 63-64 at $108,000, we decide that the

one-ct. diamond in the pinkie ring had an applicable fair market

value of $4,500.     We find that the fair market value of the

decedent’s pinkie ring was $4,500 as of the applicable valuation

date.

                ii.      Other High Quality Man’s Diamond Ring

     The decedent owned a man’s ring with a high quality three-

to four-ct. diamond in it.      We find that the decedent retained

ownership of this ring at his death.       On the basis of the average

of the range of the size of the diamond (i.e., we view the

diamond as weighing 3.5 carats), and the fact that a 3.5-ct.

diamond weighs 250 percent more than a 1-ct. diamond ((3.5 - 1)/1

= 2.5), we find that the fair market value of the decedent’s

three- to four-ct. diamond ring was 250 percent more than the
                                   -72-
value of the 1-ct. pinkie ring.      In other words, we find that the

fair market value of the decedent’s three- to four-ct. diamond

ring was $15,750 as of the applicable valuation date ($4,500 +

($4,500 x 2.5) = $15,750).

               iii.    Ruby Ring

     As discussed above, the May 4, 1988, receipt from Lloyds

shows that the decedent purchased a ruby ring as one of 26 items

purchased for a bulk price of $235,000.     We find that the

decedent retained ownership of this ruby ring at his death.     On

the basis of our finding supra p. 68 that $6,665 of that price

was attributable to the ruby ring, we find that the fair market

value of that ring was $6,665 as of the applicable valuation

date.

               iv.    Sapphire Ring

     As discussed above, the May 4, 1988, receipt from Lloyds

shows that the decedent purchased a sapphire ring as one of 26

items purchased for a bulk price of $235,000.     We find that the

decedent retained ownership of this ring at his death.     On the

basis of our finding supra p. 68 that $6,665 of that price was

attributable to the sapphire ring, we find that the fair market

value of that ring was $6,665 as of the applicable valuation

date.
                                 -73-
             m.   Earrings

       Respondent did not seize any earrings from the safe deposit

box.    The December 5, 1988, receipt from Lloyds shows that the

decedent had purchased on that day a pair of diamond stud

earrings.    We find that the decedent retained ownership of these

earrings at his death.

       Consistent with our valuation of the decedent’s pinkie ring,

we decide that each of the earrings had a one-ct. diamond and

that each of these diamonds had an applicable fair market value

of $4,500.    We find that the fair market value of the earrings

was $9,000 as of the applicable valuation date.

            n.    Tie Tack

       In addition to the 1-ct. diamond tie tack that was seized by

respondent from the safe deposit box, the decedent owned a tie

tack with a three to four-ct. diamond.    We find that the decedent

retained ownership of this tie tack at his death.    On the basis

of our finding that the decedent’s man’s ring with a three to

four-ct. diamond had a fair market value of $15,750 as of the

applicable valuation date, we find that this tie tack, which had

a similar size diamond, had a fair market value of $15,750 as of

the applicable valuation date.

            o.    Pins

       The decedent owned a sapphire pin that matched the sapphire

bracelet valued above and the seized items consisting of the
                               -74-
sapphire necklace and the sapphire ring.    The decedent owned a

ruby pin that matched the ruby bracelet valued above and the

seized items consisting of the ruby necklace and the ruby ring.

We find that the decedent retained ownership of these pins at his

death.

     We decide that the fair market values of these sapphire and

ruby pins were the same as the fair market values of the sapphire

bracelet and the ruby bracelet, respectively.45   We find supra

p. 65 that the fair market value of the sapphire bracelet was

$4,400 as of the applicable valuation date.    We find supra pp.

65-66 that the fair market value of the ruby bracelet was $5,800

as of the applicable valuation date.   Accordingly, we find that

the fair market values of the sapphire and ruby pins were $4,400

and $5,800, respectively, as of the applicable valuation date.

          p.   Pendants

     The May 5, 1988, receipt from Lloyds shows that the decedent

purchased six items from Lloyds at a cost of $235,000.    Two of

these items were a sapphire pendant with round diamonds and an

18-kt. gold, ruby, and diamond pendant.    The receipt indicates

that the prices of those pendants were $15,000 and $18,400,




     45
       We decide that the pins are more similar in size to the
bracelets than to the rings.
                                -75-
respectively.46   We find that the decedent retained ownership of

these pendants at his death.

     We find that the fair market values of the sapphire and

diamond pendant, on the one hand, and the 18 kt. gold, ruby, and

diamond pendant, on the other hand, were $15,000 and $18,400,

respectively, as of the applicable valuation date.

          q.   Furniture

     The coexecutors valued the decedent’s dining room set at

$1,100 ($800 + $300).   We value it supra pp. 41-42 at $17,662.

They valued his curio cabinets at $1,500.   We value these

cabinets supra pp. 41-42 at $8,831.    They valued his Ming chair

at $50.   We value it supra pp. 41-42 at $2,208.   The sum of these

three items as valued by us, on the one hand, and by the

coexecutors, on the other hand, is $28,701 ($17,662 + $8,831 +

$2,208) and $2,650 ($1,100 + $1,500 + $50), respectively.    We

find as to these items that the coexecutors failed to report

value of $26,051 ($28,701 - $2,650).




     46
       Of the items listed on the May 5, 1988, receipt, the only
item that did not have a listed price was the “Ivory Maiden”.
The listed prices of the other items on that receipt totaled
$120,900 ($7,500 + $6,000 + $74,000 + $15,000 + $18,400 =
$120,900). We decide that the difference between $235,000 and
$120,900 ($114,100) was paid for the ivory maiden. We decide in
this regard that the ivory maiden was either significantly more
valuable than the other pieces of ivory which we valued at $3,750
apiece or that it was not one piece of ivory but was a multipiece
collection.
                                 -76-
II.   Present Value Formulae and Discount Rate of Four Percent

      A.   Overview

      In Trompeter I, we decided the applicable fair market value

of the series A preferred stock includable in the taxable estate.

We detailed our valuation methodology but did not identify with

specificity the present value formulae which were a part thereof.

Nor did we state with specificity the reasons behind our use of a

4-percent discount rate.    The Court of Appeals for the Ninth

Circuit remanded this case to us to specify that formulae and to

document the reasons for using the 4-percent rate.

      B.   Present Value Formulae

            1.   Redemption Value of Series A Preferred Stock

      The certificate of designation underlying the series A

preferred stock (certificate of designation)47 required that

Sterling redeem 1,000 shares of that stock on each December 31,

1993 through 1995.    For each of those dates, we calculated in

Trompeter I the amount of the redemption payment payable under

the certificate of designation for the decedent’s series A

preferred stock using the following formula:    P x (1 + i/n)y.

In this context, “P” equals the 511.161 shares of the decedent’s

series A preferred stock required to be redeemed on December 31,

      47
       In Trompeter I, we referred to the certificate of
designation as a “purchase agreement”. In that we now broaden
our findings of fact to address the specific attributes of that
stock, and not simply to address the fact that the stock was
redeemed, we herein refer to that document by its given title.
                                -77-
1993, 1994, or 1995, multiplied by the liquidation value of each

redeemed share at the beginning of the applicable year; “i”

equals the annual dividend rate; “n” equals the total number of

days in the year; and “y” equals the number of days in a year

over which dividends were compounded.48   Preferential dividends

accrued daily on each share of series A preferred stock at the

annual rate of 8.5 percent during 1989, 9.83 percent during 1990,

11.17 percent during 1991, and 12.5 percent during 1992 and at

all times thereafter until the share was either redeemed or

exchanged.49   Our methodology in Trompeter I reflected our

finding that holders of series A preferred stock were entitled to

receive dividends not simply at an annual rate of 8.5-, 9.83-,

11.17-, or 12.5-percent, but at those rates as adjusted to

reflect daily compounding.

     Upon remand, we have redetermined that dividends were

payable at the annual rates without compounding.   In other words,

the amount of dividends payable on a share of series A preferred

stock was ascertained for each year simply by multiplying the

     48
       In other words, we used the basic formula for computing
future value in the case of interest that is compounded annually,
see generally Thorndike’s Compound Interest and Annuity Tables 7
(1982), and adjusted that formula to reflect our finding in
Trompeter I that the preferential dividends payable on the series
A preferred stock compounded daily.
     49
       Holders of series A preferred stock were entitled,
subject to minimal restrictions, to exchange their series A
preferred stock for Sterling’s series B subordinated debentures
due Dec. 31, 1995. See appendix C.
                               -78-
applicable dividend rate by that share’s liquidation value.50    As

of each December 31, the liquidation value of a share of series A

preferred stock equaled its face value ($1,000) plus all

preferential dividends that had not been paid as of the most

recent January 15.   Thus, assuming as we did in Trompeter I that

the series A preferred stock was issued on March 15, 1989, the

liquidation values of each share of that stock on Dec. 31, 1989,

1990, 1991, 1992, 1993, 1994, and 1995 (assuming that the share

had not been redeemed, exchanged, or had dividends paid with

respect thereto) were $1,000, $1,071.8068, $1,170.9871,

$1,302.4101, $1,512.0629, $1,701.0708, and $1,913.7047,

respectively.   The following accrued dividends which were not

included in the liquidation value were also payable on each of

those shares as of those respective dates:   $67.7671, $94.2603,

$125.424, $156.1291, $181.2404, $203.8955, and $229.3824.    Thus,

as of December 31, 1993, 1994, and 1995, respectively, the




     50
       The certificate of designation provides that “dividends
on each share of the Series A Preferred Stock * * * will accrue
on a daily basis at the rates per annum computed with respect to
the Redemption Price thereof” and that Sterling “will be
obligated on the Redemption Date to pay to the holder * * * [of
each share to be redeemed] an amount in immediate available funds
equal to the Liquidation Value thereof (the “Redemption Price”).”
The certificate of designation also provides that “all dividends
which have accrued on each Share outstanding during the
twelve-month period * * * ending upon each * * * [Jan. 15] will
be added to the Liquidation Value of such Share and will remain a
part thereof until such dividends are paid.”
                                  -79-
redemption payments payable under the certificate of designation

for the decedent’s series A preferred stock were as follows:

        ($1,512.0629 + $181.2404) x 511.161 =   $865,550.60

        ($1,701.0708 + $203.8955) x 511.161 =   $973,744.47

        ($1,913.7047 + $229.3824) x 511.161 = $1,095,462.50

             2.   Discounted Amounts

     In Trompeter I, we used the following formula to discount

each of the redemption payments as of the applicable valuation

date:    P x (1 + i/n)-y.   In this context, “P” equals the value of

the series A preferred stock at the time of redemption (i.e., its

liquidation value plus any unpaid accrued dividends not included

in the liquidation value); “i” equals the discount rate; “n”

equals the total number of days in the year; and “y” equals the

total number of days over which the discount is compounded.     In

other words, we used in Trompeter I the basic formula for

computing present value in the case of interest that is

compounded annually, see generally Thorndike’s Compound Interest

and Annuity Tables 19 (1982), as adjusted to reflect our belief

that the discount rate should be compounded daily consistent with

our determination of the redemption payments.     Now, consistent

with our redetermination that the payment of dividends is

compounded annually rather than daily, we modify our discount

formula by deleting the “n” and using “y” to refer to a fraction
                                -80-
the numerator of which is the total number of days over which the

discount is compounded and the denominator of which is 365.

     C.    4 Percent Discount Rate

     In Trompeter I, we applied in our methodology a 4-percent

discount rate to ascertain the discounted value on September 18,

1992, of each of the redemption payments which Sterling was

obligated to pay as of the three referenced dates after

September 18, 1992.    The Court of Appeals for the Ninth Circuit

questioned whether a 4-percent discount rate accurately reflects

the risk that Sterling would not have redeemed its series A

preferred stock as required by the certificate of designation.

According to the Court of Appeals for the Ninth Circuit: “it

seems a bit of a stretch to conclude that a buyer would have

accepted a discount rate of only four percent to account for the

time value of money and the risk that Sterling would not meet its

contractual obligations.”    Estate of Trompeter v. Commissioner,

279 F.3d 767, 773 (9th Cir. 2002) (emphasis added), vacating and

remanding T.C. Memo. 1998-35, supplemented by 111 T.C. 57 (1998).

     Our 4-percent discount rate did not reflect the risk that

Sterling would fail to meet its contractual obligations but

reflected only the time value of money; i.e., the fact that one

dollar to be received in the future is not worth one dollar

today.    We believe that a 4-percent rate is a reasonable

indicator of the time value of money as of the applicable
                               -81-
valuation date.   The T-bill rate was 2.954 for the week of

September 14, 1992, and it was 2.9740 for the week of

September 21, 1992.   The annualized inflation rate was 2.99

percent for September 1992.

     As to the risk that Sterling would not meet its contractual

obligation to redeem its series A preferred stock, we believe

that a hypothetical buyer would have demanded minimal additional

compensation to accept such a risk under the facts herein.

Pursuant to the certificate of designation, the hypothetical

buyer was already entitled to compensation for that risk in that,

in the event of a default, dividends would continue to accrue

daily at the annual rate of 12.5 percent on any share of series A

preferred stock that was not redeemed.   The hypothetical buyer

also was deemed to know on the applicable valuation date that

Sterling and its subsidiaries, with the consent of their

creditors, had recently restructured certain of their debt and

had issued additional equity so as not to default on debt and so

that Sterling could redeem some of its other shares of stock.51

Specifically, on June 29, 1989, Sterling replaced $1.5 million of


     51
       Sterling’s consolidated group included itself and its
wholly owned subsidiaries Trompeter Electronics, Inc. (TEI),
Quality Components, Inc. (QCI), and TQ Management Company (TQM).
TEI, QCI, and Sterling were incorporated on Nov. 22, 1988, to
facilitate the March 1989 leveraged transaction described in
Trompeter I. TQM was formed on Apr. 25, 1989, to perform
managerial services for Sterling in relation to the operations of
TEI and QCI.
                               -82-
senior subordinated notes with $2,450,000 of senior subordinated

notes, TEI and QCI replaced $9 million of subordinated notes with

$9 million of subordinated notes, and Sterling issued $181,452 of

1-year promissory notes.   Sterling also on that date had issued

840,055 shares of class A common stock and 1,209,945 shares of

class B common stock for an aggregate amount of $200,000 and had

redeemed 550 shares of series S convertible preferred stock

(series S preferred stock) and 1,500 shares of series T

convertible preferred stock (series T preferred stock) at stated

liquidation values totaling $102,500.    We believe that a

hypothetical buyer would have concluded on the applicable

valuation date that Sterling was mindful of its contractual

obligations both as to debt and as to equity and that Sterling

would go to great lengths not to breach its contractual

obligations, including its obligation to redeem its series A

preferred stock timely.

     The decedent’s shares of series A preferred stock also were

part of Sterling’s senior class of stock.    Sterling had issued

3,000 shares of that stock to the decedent and his former wife in

March 1989 in acquisition of TEI.     The 3,000 shares were the only

shares of series A preferred stock issued by Sterling, and

holders of those share were generally entitled to more rights

than holders of Sterling’s other stock.    As of the applicable

valuation date, Sterling’s other outstanding preferred shares
                               -83-
consisted of 25,000 shares of series C exchangeable preferred

stock, 5,450 shares of series S preferred stock, and 1,000 shares

of series T preferred stock.   Each share of these other classes

of preferred stock accrued dividends whether or not declared, but

holders of those shares (as well as holders of Sterling common

shares) were generally precluded from receiving dividends or

distributions as to their shares before the vested rights of the

holders of series A preferred stock were satisfied in full.

Accordingly, after the dates of the scheduled redemptions for the

series A preferred stock, Sterling would need first to honor its

redemption obligation before it could satisfy the requirements of

its other shareholders.

     Although Sterling was prohibited by its senior debt and

senior subsidiary debt agreements from redeeming any of its stock

or paying any dividends on its stock in certain circumstances, we

do not believe that a hypothetical buyer would have considered

these agreements to have prevented Sterling from redeeming its

series A preferred stock timely.   In appendix C, we list on a

consolidated basis Sterling’s debt as of December 31, 1989

through 1992.   The relevant provisions underlying this debt

generally tied a redemption to Sterling’s profitability.   As of

the applicable valuation date, Sterling was a viable entity that

had a positive cashflow for that and the previous 2 years.

Although it had reported losses for 1991 and 1992, those losses
                              -84-
were attributable primarily to its amortization of intangible

assets and deferred financing costs (the 1992 loss also was

attributable to a one-time writeoff of $2,953,646), and it had

reported significant net income for 1992.    It also was timely

paying interest and principal on its senior debt, and it had

recently restructured its debt and equity as discussed supra pp.

81-82 so as not to default on debt and to redeem other preferred

shares.

     In addition to the risk that Sterling would not redeem its

series A preferred stock timely, however, is the risk that

Sterling would not redeem its series A preferred stock for the

contractual amount referenced in the certificate of designation

but would redeem those shares at a lesser amount.52   We did not

take this risk into account in Trompeter I.    Upon remand, we now

believe that our 4-percent discount rate undercompensated the

hypothetical buyer for this risk.    In lieu of the 4-percent

discount rate that we applied in Trompeter I, we now believe on

the basis of the record before us that the more appropriate rate

is an annual rate of 12.5 percent.    This 12.5-percent rate is


     52
       We note but do not rely upon the fact that Sterling
eventually did such a thing when, after the applicable valuation
date, it agreed to redeem its series A preferred stock at
approximately $1,270.21 per share ($1,947,845 redemption price
paid to the Trust/1,533.482 redeemed shares). We also note but
do not rely upon the fact that this lesser amount reflected the
payment of 5 percent interest in lieu of the accrued dividends
which were payable under the certificate of designation.
                                -85-
approximately three times the 4-percent rate that we believe

reflects the time value of money and, as discussed above, is the

same rate at which a holder of series A preferred stock would be

compensated following an untimely redemption.   A 12.5-percent

rate also approximates the rate that as of the applicable

valuation date was payable on the series B subordinated

debentures, the debt into which the series A preferred stock was

convertible, and is 5 percentage points greater than the rate

that was payable on the senior term notes as of December 31,

1992.53

     The estate asserts on remand that we should determine the

fair market value of the series A preferred stock by applying a

20-percent discount rate to the $1,947,845 actually paid to

redeem the decedent’s shares.   We disagree.   In addition to the

fact that the estate’s proffered rate does not take into account

our finding that a holder of series A preferred stock would

following a missed redemption be entitled to daily dividends at a

12.5-percent annual rate, the estate’s rate ignores the solid

history of Sterling in honoring its contractual obligations.     We

also are unpersuaded by the record before us that a rate

approximately seven times the referenced T-bill and inflation

rates is appropriate in this case, let alone that we should apply

     53
       We recognize that Dec. 31, 1992, postdates the applicable
valuation date. We believe that a hypothetical buyer on the
applicable valuation date could have ascertained this rate.
                                 -86-
the discount rate to the amount actually paid for the stock after

the applicable valuation date.

     Nor do we agree with the estate’s assertion on remand that

we should discount our redetermined value to take into account a

lack of marketability for the series A preferred stock.     The

estate relies upon its expert, Herbert T. Spiro (Spiro), who

testified in Trompeter I that the freely traded value of the

decedent’s series A preferred stock should be adjusted for lack

of marketability.     The estate’s reliance on this testimony is

misplaced.   Spiro opined that the “freely traded value” of the

decedent’s shares should be discounted for lack of marketability,

and our methodology does not determine the freely traded value of

those shares.   Where as here the value determined for shares of

stock is not the freely traded value of those shares, a lack of

marketability discount is inappropriate.     As we noted in Estate

of Cloutier v. Commissioner, T.C. Memo. 1996-49, in rejecting a

similar assertion, a marketability discount generally represents

the additional price that an unlisted share would command if it

were freely traded.    We held in Estate of Cloutier that a

marketability discount did not apply to the stipulated value of

the company in question because that value was not representative

of the company’s freely traded value.     Id.
                                   -87-
       We use our modified formula with the 12.5-percent discount

rate to calculate the discounted values of the December 31, 1993,

1994, and 1995, payments as follows:

            $865,550.60 x (1 + .125)-470/365 = $743,746.32

            $973,744.47 x (1 + .125)-835/365 = $743,746.36

        $1,095,462.50 x (1 + .125)-1200/365 = $743,746.53

We conclude that the sum of these discounted values,

$2,231,239.21, is the applicable fair market value of the

decedent’s series A preferred stock.54

III.    Determination of Fraud in Trompeter I

       Pursuant to the direction of the Court of Appeals for the

Ninth Circuit, we have set forth in detail our findings as to the

omitted assets.      Our ultimate finding that the value of these

assets totals $4.5 million is the same as in Trompeter I.        We

also have clarified our reasoning as to the valuation methodology

that we applied in Trompeter I.       We continue to adhere to that

methodology.      Although we have now slightly modified it to

compound the dividends annually, rather than daily, and to

recognize the need for an increase in the discount rate to an

amount greater than 4 percent, neither of these modifications

changes the decision that we entered on March 18, 1999.


       54
       For completeness, we note that a discount rate of 19.45
percent would under our methodology result in a fair market value
approximately equal to the fair market value of $1,947,845
determined by respondent.
                              -88-
     Pursuant to the direction of the Court of Appeals for the

Ninth Circuit, we now consider whether it is appropriate to

revisit our conclusions as to fraud.   We do not believe it is.

Although the Court of Appeals for the Ninth Circuit has not asked

us to restate the legal basis for our finding of fraud, and thus

we do not, we emphasize our belief that the coexecutors’ willing

and conscious failure to disclose to respondent the assets of the

estate, coupled with their deliberate undervaluation of some of

the assets which were disclosed to respondent, constitutes clear

and convincing evidence of fraud deserving of the section 6663

penalty.


                                              Decision will be

                                         entered as previously

                                         entered on Mar. 18, 1999.
                                 -89-
                                 APPENDIX A

                                              Appraised   Auction
        Description of Jewelry                  Value      Price

     2a. Lady’s 18 kt. yellow gold,
sapphire and diamond ring: The ring
weighs 7.7 grams and has 27 2.5 to 3 mm.
square cut natural sapphires, total
weight (TW) approx. 3.1 ct., medium-dark
slightly grayish-blue, flawless to the
unaided eye, and 18 2 mm. square cut
diamonds, TW apx. .7 ct., “F-G” color
range, “VS” clarity range, good cuts.
The sapphires are invisibly set in three
rows across the center of the ring with
one row of channel set diamonds on each
edge.                                            $1,500   $1,800

     2b. Woman’s 18 kt. yellow gold,
ruby, and diamond ring (same mounting as
in 2a, but with rubies instead of
sapphires): The ring weighs 7.6 grams
and has 27 2.5 to 3 mm. square cut
natural rubies, TW apx. 3.1 ct., medium
red, lightly included to the unaided eye,
and 18 2 mm. square cut diamonds, TW apx.
.70 ct., F-G/VS (avg.), good cuts. The
rubies are invisibly set in three rows
across the center of the ring with one
row of channel set diamonds on each edge.         1,800    1,800

     2c. Man’s 14 kt. yellow gold and
diamond ring: The geometric ribbed
design ring weighs 13.1 grams and has
(set in 4 posts in the center) one round
brilliant cut (RBC) diamond, apx. 3.6 ct.
(apx. 10 x 5.8 mm.), “E-F-G” color range,
“VS” clarity range (based on a cluster of
included crystals in the center of the
table), depth apx. 58%, table apx. 66%,
good symmetry and polish. Channel set on
each side of the center are 4 full cut
round diamonds (total of 8), apx. .06 to
.07 ct. each, TW apx. .50ct., G-H/SI-I1
(avg.), good cuts.                               37,500   20,000
                              -90-
     2d. Woman’s 18 kt. yellow gold,
sapphire, and diamond necklace: The
panther link chain with inverted leaf
center is 16" long by 6.3 mm. wide and
weighs 44.8 grams, clasp stamped 18K
PATPEND milor”, back of leaf stamped
18kt”. The leaf has 100 square and
custom cut natural sapphires (62 are apx.
2.5 mm. square), TW apx. 10.0 ct.,
medium-dark slightly grayish-blue,
flawless to the unaided eye, and 65 full
cut round (FC) diamonds, TW apx. 1.5 ct.,
F-G/VS (avg.). The sapphires are
invisibly set in the center with a border
of channel set diamonds and a stem of
bead set diamonds.                          4,400   ---

     2e. Woman’s 18 kt. yellow gold,
ruby, and diamond necklace: The panther
link chain with inverted leaf center is
16" long by 6.3mm. wide and weighs 42.5
grams, clasp stamped “18KTPATPEND milor”.
The leaf has 141 square and custom cut
natural Rubies (118 are apx. 2.5 mm.
square), TW apx. 15.5 ct., medium
slightly purplish-red, lightly included
to the unaided eye, and 18 square cut
diamonds, TW apx. .72 ct., F-G/VS (avg.).
The rubies are invisibly set with a
central stem of channel set diamonds.       5,800   ---

     2f. One 14 kt. yellow gold and
diamond tie tack: The 6-prong mounting
weighs .9 grams and has one RBC diamond,
apx. 1.02 ct., E-F-G/VS, good symmetry
and polish.                                 5,400   4,500

     2g. One cultured pearl necklace
with 14 kt. white gold clasp: The 24"
uniform strand has 75 7 to 7.5 mm. round
cultured pearls, cream white color, low
luster, slightly blemished, with a
fishhook clasp.                               400   ---
                              -91-
     2h. Woman’s 18 kt. yellow gold and
diamond necklace: The drop necklace is
18" long, weighs 93.6 grams, is stamped
“18kt” with a <small “D” inside a large
“L”> hallmark, and has one pear shape
brilliant cut diamond, apx. 8.69 ct.
(19.5 x 12.5 x 7.2 mm.), light brown
color, “I-1" clarity (feather on lower
left), 61 baguette diamonds, TW apx. 4.75
ct., F-G-H/VS-SI (avg.), good cuts, and
440 FC diamonds, TW apx. 13.02 ct. F-G-
H/VS-SI (avg.), good cuts. The pear
shape diamond is bezel set in the drop
and surrounded by channel set baguette
and bead set round diamonds. The
necklace portion also has channel set
baguette and bead set round diamonds.       44,000   32,000

     2i. Woman’s 18 kt. yellow gold,
emerald and diamond necklace: The
necklace is 16-1/2" long, weighs 93.6
grams, is stamped “18k” with the “LD”
hallmark, and has one emerald cut natural
emerald, apx. 6.48 ct. (13.7 x 9.8 x 6.8
mm.), medium slightly bluish-green,
moderately included, and 245 baguette cut
diamonds, apx. .08 to .25 ct. each, TW
apx. 32.50 ct., F-G-H/VVS-VS (avg.), good
cuts. The emerald is 4-prong set in the
center with pairs and single diamonds
prong set in fringe style links.            56,000   19,000

     2j. Woman’s 18 kt. yellow gold,
emerald, and diamond necklace: The
necklace is 17" long, weighs 97.5 grams,
is stamped “18ktK” with the “LD”
hallmark, and has one heart shape natural
emerald, apx. 6.07 ct. (13.5 x 12.5 x 6.4
mm.), medium slightly bluish-green,
moderately included, 176 diamonds, TW
apx. 5.22 ct., and 94 baguette cut
diamonds, TW apx. 5.22 ct., F-G-H/VVS-VS
(avg.), good cuts. The emerald is bezel
set in the center and surrounded by
channel set baguette diamonds and bead
set round diamonds.                         19,000    ---
                                 -92-
     2k. Woman’s 18 kt. yellow and white
gold, opal, and diamond pin/pendant
combination with treated opal necklace:
The necklace is 23" long with 42 - 10.3
mm. round very dark brown color opal
beads and six 11 to 11.5 mm. round white
opal beads with faint play of color. The
dark beads have been treated by an
impregnation process to give them the
appearance of black opals. The drop has
a leafy design yellow gold frame around a
center removable white gold frame with
one oval cabochon cut natural semi-black
opal with moderate green/blue pay-of-
color, apx. 30 ct. (38 x 26 x 5.5 mm.),
20 marquise cut diamonds, TW apx. 1.8
ct., H-M/VS (avg.), and 28 baguette cut
diamonds, TW apx. 1.1 ct., H-I-J/VS
(avg.). The opal is multi-prong set in
the center and surrounded by prong set
diamonds.                                     7,600      —--

    Total for 11 jewelry items              183,400   79,100

     Description of Loose Gemstones

     3a. One loose octagon cut diamond:
The diamond weighs apx. 40.02 ct and
measures apx. 21.3 x 17.7 x 11.85 mm.,
fair to good symmetry and polish. The
diamond was subsequently graded on GIA
report #8812646 as fancy yellow natural
color, VS2 clarity.                         460,000   220,000

     3b. One loose round brilliant cut
diamond: The diamond weighs apx. 2.01
ct. and measure apx. 7.98-8.1 x 5.02 mm.,
good symmetry and polish. The diamond is
accompanied by a note of “I/IF”
color/clarity and a notation of “GIA
#517260". The stone appears to match
this grading.                                15,000    7,500
                              -93-
     3c. One loose round brilliant cut
diamond: The diamond weighs apx. 1.9 ct.
and measures apx. 7.72-7.81 x 5.01 mm.,
good symmetry and polish. The diamond is
accompanied by a note of “E/VS2"
color/clarity and a notation of “GIA
#5172800". The stone appears to match
this grading.                               11,800   9,600

     3d. One loose octagon shape
diamond: The diamond weighs apx. 5.01
ct. and measures apx. 9.6 x 8.61 x 6.22
mm., good symmetry and polish. The
diamond is accompanied by an altered note
of “Intense Yellow/VS-2" and a notation
of “GIA #5234002". The diamond was
subsequently graded on GIA report
#8812648 as fancy yellow natural color,
VS2 clarity.                                48,000   35,000

     3e. One loose emerald cut diamond:
The diamond weighs apx. 7.57 ct and
measures apx. 13.12 x 9.46 x 6.65 mm.,
good symmetry and polish. The diamond
has a note of “VVS-J(?)”, but appears to
have a color grade in the range of “J-K”
and in the clarity range of “VS”.           48,000   30,000

     3f. One loose round brilliant cut
diamond: The diamond weighs apx. 6.62 ct
and measures apx. 12.18-12.2 x 7.28 mm.,
good symmetry and polish. The diamond
has a note of “VS-1/N”, but appears to
have a color grade in the range of “R-V”
and in the clarity range of “VS”.           21,500   20,000

     3g. One loose heart shape diamond:
The diamond weighs apx. 4.03 ct. and
measures apx. 11.1 x 10.78 x 5.27 mm.,
good symmetry and polish. The diamond
has a note of “SI-1/K”, but appears to
have a color grade in the range of “J-K”
and a clarity grade of “SI-1".              19,600   7,500
                              -94-
     3h. One loose cushion shape natural
sapphire: The sapphire weighs apx. 18.2
ct. and measures apx. 17.15 x 13.5 x 8.32
mm., good symmetry and polish. The color
is medium-dark blue to violetish-blue and
the clarity is lightly included to the
unaided eye.                                  9,100     ---

     3i. One loose square emerald cut
diamond: The diamond weighs apx. 11.13
ct. and measures apx. 12.63 x 12.32 x 8.3
mm., good symmetry and polish. The
diamond has a note of “VVS-1/K”, but
appears to have a color grade in the
range of “K-L” and in the clarity grade
of “VS”.                                     59,000   44,000

     3j. One loose round brilliant cut
diamond: The diamond weighs apx. 6.65
ct. and measures apx. 12.5-12.59 x 7.13
mm., good symmetry and polish. The
diamond has a note of “VS-1/N”, but
appears to have a color grade in the
range of “Q-U” and in the clarity range
of “VS”.                                     22,000   24,000

     3k. One loose round brilliant cut
diamond: The diamond weighs apx. 7.74
ct. and measures apx. 13.42-13.45 x 7.28
mm., good symmetry and polish. The
diamond has a note of “I-1/I-J” and it
appears to match this grading.               35,800   27,000

     3l. One loose octagon shape
diamond: The diamond weighs apx. 18.28
ct and measures apx. 15.67 x 15.66 x 8.65
mm., good symmetry and polish. The
diamond is accompanied by a note of
“Fancy Yellow/IF” color/clarity and “GIA
#7085087.” The stone appears to match
this grading.                               210,000   210,000
                              -95-
     3m. One loose round brilliant cut
diamond: The diamond weighs apx. 4.32
ct. and measures aprx. 10.41-10.51 x 6.3
mm., good symmetry and polish. The
diamond is accompanied by a note of
“Faint Blue/IF” color/clarity and “GIA
#5117323.” The diamond was subsequently
graded on GIA report #8812982 as “E”
color, “VVS1" clarity (and marked
potentially flawless).                        97,000   105,000

     3n. One loose emerald cut diamond:
The diamond weighs apx. 3.35 ct. and
measures apx. 10.01 x 7.5 x 4.84 mm.,
good symmetry and polish. The diamond
has a note of “F/IF” color/clarity “GIA
#5186298". The stone appears to match
this grading.                                 52,300    25,000

     Total for 14 loose gemstones          1,109,100   764,600

Total                                      1,292,500   843,700
                                  -96-
                              APPENDIX B
                                                                     Carmona’s
                              Estimated Value    Agreed    Auction   Appraised
Property Description           Lower   Upper     Reserve    Price      Value

Sold at Auction

   Jewelry

Lady’s 18-kt. yellow gold,
  invisibly-set sapphire,
  and channel-set diamond
  ring (2a)                   $2,000   $3,000    $1,800    $1,800     $1,500

Lady’s 18-kt. yellow gold,
  invisibly-set ruby, and
  channel-set diamond ring
  (2b)                        2,000      3,000    1,800     1,800      1,800

Lady’s 14-kt. yellow gold
  and diamond ring (2c)       15,000   20,000    13,500    20,000     37,500

14-kt. yellow gold and
  diamond tie tack (2f)       1,000      1,500      900     4,500      5,400

Lady’s 18-kt. yellow gold
  and diamond necklace (2h)   30,000   50,000    27,000    32,000     44,000

Lady’s 18-kt. yellow gold,
  emerald, and diamond
  necklace (2i)               20,000    30,000   18,000    19,000     56,000
                              70,000   107,500   63,000    79,100    146,200

   Loose Gemstones

Loose round brilliant-cut
  diamond weighing
  approximately 1.9 carats
  (3c)                        8,000    10,000     7,200     9,600     11,800

Loose round brilliant-cut
  diamond weighing
  approximately 2.01 carats
  (3b)                        8,000    10,000     7,200     7,500     15,000

Loose emerald-cut diamond
  weighing approximately
  3.35 carats (3n)            25,000   35,000    22,500    25,000     52,300

Loose heart-shaped diamond
  weighing approximately
  4.03 carats (3g)            8,000    10,000     7,200     7,500     19,600

Loose round brilliant-cut
  diamond weighing
  approximately 4.32 carats
  (3m)                        35,000   45,000    31,500    105,000    97,000
                                    -97-
Loose octagon-shaped yellow
  diamond weighing
  approximately 5.01 carats
  (3d)                         30,000    50,000    27,000    35,000       48,000

Loose round brilliant-cut
  diamond weighing
  approximately 6.62 carats
  (3f)                         18,000    22,000    16,200    20,000       21,500

Loose round brilliant-cut
  diamond weighing
  approximately 6.65 carats
  (3j)                         18,000    22,000    16,200    24,000       22,000

Loose emerald diamond
  weighing approximately
  7.57 carats (3e)             28,000    32,000    25,200    30,000       48,000

Loose round brilliant-cut
  diamond weighing
  approximately 7.74 carats
  (3k)                         30,000    50,000    27,000    27,000       35,800

Loose square emerald-cut
  diamond weighing
  approximately 11.13 carats
  (3i)                         40,000    60,000    36,000    44,000       59,000

Loose octagon-shaped
  diamond weighing
  approximately 18.28 carats
  (3l)                         100,000   150,000   90,000    210,000     210,000

Loose modified rectangular-
  cut light fancy yellow
  diamond weighing
  approximately 40.02 carats
  (3a)                         140,000   160,000   126,000   220,000      460,000
                               488,000   656,000   439,200   764,600    1,100,000

                               558,000   763,500   502,200   843,700    1,246,200

Not Sold At Auction

                                                             High Bid

   Jewelry

Lady’s 18-kt. yellow gold,
  sapphire, and diamond
  leaf necklace (2d)            4,000      6,000    3,600    $2,800        4,400

Lady’s 18-kt. yellow gold,
  ruby, and diamond leaf
  necklace (2e)                 5,000      7,000    4,500     3,800        5,800

Cultured pearl necklace
  with 14-kt. white gold
  fishhook clasp (2g)           1,000      1,500      900       650          400
                                    -98-
Lady’s 18-kt. yellow gold,
  heart-shaped emerald,
                                                               1
  and diamond necklace (2j)    15,000    20,000    13,500      -0-    19,000

Treated opal necklace with
  18-kt. yellow and white
  gold, opal, and diamond
  pin/pendant (2k)              3,000     5,000     2,700    2,600     7,600
                               28,000    39,500    25,200    9,850    37,200

   Loose Gemstone

Loose cushion-shaped natural
  sapphire weighing
  approximately 18.2 carats
  (3h)                         14,000    16,000    12,600    10,000    9,100
                               42,000    55,500    37,800    19,850   46,300

Totals                         600,000   819,000   540,000    —–-       ---

            1
             This item was withdrawn from the auction.
                                              -99-
                                          APPENDIX C
       Consolidated Debt Outstanding1            1989          1990           1991           1992


        Senior term notes, due in quarterly
installments through Dec. 28, 1995 at
lender’s reference rate plus 1 1/2 percent
(12%, 11.5%, 8%, and 7.5% at Dec. 31 of the
respective years). Payment is secured by
Sterling’s assets (Dec. 31, 1991, book
value of $25,683,252) and prepayments may
be required if sufficient cashflow.2          $20,075,000   $17,450,000    $14,075,000    $10,575,000

        Senior subordinated notes, due in
two equal installments at Dec. 15, 1998 and
1999. Interest payments at 14 percent are
due annually. Payment is unsecured and
subject to the noted requirements of the
senior term notes.                              2,450,000     2,450,000      2,450,000      2,450,000

        Subordinated notes, due in three
installments at Mar. 15, 1996, 1997, and
1998. Interest payments vary from 13.5 to
14.5 percent (14%, 14%, 13,5%, and 13.5% at
December 31 of the respective years) and
are due quarterly. Payment is unsecured
and subject to the noted requirements of
the senior term notes. The additional
$175,000 of notes shown for 1992 were
issued on Oct. 23, 1992, as consideration
for the holders of the subordinated notes
waiving and amending certain covenants.         9,000,000     9,000,000      9,000,000      9,175,000

        Series B subordinated debentures,
due in three equal installments at Dec. 31,
1993, 1994, and 1995. Interest payments
are due annually at incremental rates,
increasing from 8 percent in 1989 to 12
percent in 1992 and thereafter. Payment is
subject to the noted requirements of the
senior term notes.                              1,428,000     1,428,000      1,428,000      1,428,000

        Unsecured notes, due June 29, 1990.
Interest at 14 percent increasing to 18
percent past the due date. Payment is
subject to the noted requirements of the
senior debt.                                      181,452       181,452        181,452        181,452

        Contractual obligation, discounted,
secured by $400,000 series B subordinated
debentures.                                       400,000       400,000        400,000        400,000

        Unsecured notes payable, interest
rates range from 11.25 to 12.5 percent, due
in monthly installments through Nov. 1994.         18,853        22,013         15,770          -0-

       Obligations under capital leases           509,866       140,722         21,084          -0-

       Other                                         —0-          -0-            -0-            8,716

  Total long-term debt                         34,063,171     31,072,187     27,571,306    24,218,168

  Less current portion                          2,942,325      3,671,964      3,709,589     3,921,015

  Long-term debt less current portion          31,120,846     27,400,223     23,861,717    20,297,153
                            -100-
     1
      The specific debtors on the consolidated debt
listed below are: (1) Sterling–-senior subordinated
notes; series B subordinated debentures; unsecured
notes, (2) TEI–-senior term notes (jointly with QCI);
subordinated notes (jointly with QCI); obligations
under capital lease, and (3) QCI–-contractual
obligations; unsecured notes payable; obligations under
capital leases.

     2
       Sterling’s other debt was all subordinate to the
senior term notes and was restricted as to payment
unless Sterling met certain financial criteria. In
that this criteria had not been met as of the
applicable valuation date, the restrictions had in
previous years prevented Sterling from making any
payment on the senior subordinated notes, subordinated
notes, series B subordinated debentures, and unsecured
notes. As of Jan. 15, 1991, and Dec. 31, 1991 and
1992, the amount of accrued interest due but restricted
from payment was as follows:

                                 Jan. 15,   Dec. 31,    Dec. 31,
     Class of Debt                 1991       1991        1992

 Senior subordinated notes       $347,765    $744,820   $1,194,431
 Subordinated notes                  -0-      309,241    1,071,628
 Series B subordinated debentures 291,132     488,889      711,294
 Unsecured notes                   48,645      82,936      129,198
                                  687,542   1,625,886    3,106,551
