                        T.C. Memo. 2004-117



                      UNITED STATES TAX COURT



         CONRAD JANIS AND MARIA G. JANIS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

     CARROLL JANIS AND DONNA L. SELDIN JANIS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14318-01, 1344-02.   Filed May 12, 2004.



     Andrew J. Wilson, Brian D. Caplan, and Vicki G. Cheikes, for

petitioners in docket No. 14318-01.

     Michael Schlesinger, for petitioners in docket No. 1344-02.

     Lydia A. Branche and Shawna A. Early, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies in

petitioners Conrad Janis and Maria G. Janis’s (Conrad and Maria)
                                 - 2 -

Federal income taxes for 1995, 1996, and 1997 and penalties under

section 6662(a) for those years, respectively, as follows:

             Year   Deficiency     Sec. 6662(a) Penalty

             1995    $334,589            $66,918
             1996      24,739              4,948
             1997     158,356             31,671

Respondent determined deficiencies in petitioners Carroll Janis

and Donna L. Seldin Janis’s (Carroll and Donna) Federal income

taxes for 1995, 1996, and 1997 and penalties under section

6662(a) for those years, respectively, as follows:

             Year   Deficiency     Sec. 6662(a) Penalty

             1995    $532,930            $106,586
             1996      58,635              11,727
             1997     169,248              33,849

The issues for decision in these consolidated cases are:

(1) Whether petitioners, who inherited an art gallery, can

calculate the gallery’s cost of goods sold using the undiscounted

value of the gallery’s collection of artwork rather than the

discounted value as determined for estate tax purposes and

(2) whether petitioners are liable for accuracy-related penalties

under section 6662(a) for 1995, 1996, and 1997.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.
                               - 3 -

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.    At the

time that Conrad and Maria filed their petition at docket No.

14318-01, they resided in California.    At the time that Carroll

and Donna filed their petition at docket No. 1344-02, they

resided in New York.

Background

     Sidney Janis (Sidney), the father of petitioners Conrad

Janis (Conrad) and Carroll Janis (Carroll), owned and operated as

a sole proprietorship the Sidney Janis Gallery (gallery) in New

York City from 1948 until 1988.   Pursuant to a trust agreement,

Sidney transferred the gallery to an irrevocable trust in April

1988.   In the trust agreement, Sidney named himself, Conrad, and

Carroll as the trustees of the trust.    Sidney retained an income

interest in the trust for his life as well as a general power of

appointment over the trust’s assets.    At Sidney’s death, the

trust was to terminate, and any trust assets that Sidney had not

exercised his general power of appointment over were to be

distributed to Conrad and Carroll in equal shares.    Sidney died

on November 23, 1989.   In his will, Sidney named Conrad and

Carroll co-executors and sole beneficiaries of his estate.

     Carroll obtained a bachelor of science degree as well as a

master’s degree in art history from Columbia University.    Before
                                - 4 -

attending college, Carroll worked in the gallery.        Carroll

returned to the gallery in 1964 and worked there until it closed.

Conrad also worked in the gallery for a period of time.

Determining the Value of the Gallery and Its Collection for
Purposes of Sidney’s Estate Tax Return

     Sidney’s estate filed a Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, on February 28, 1991.

George J. Noumair prepared the Form 706.        On the Form 706, the

value of the gallery was reported to be $19,533,750.        This amount

included a discounted value of $12,403,207 for the 464 works of

art (the collection) that the gallery owned on the date of

Sidney’s death, cash and cash equivalents of $8,171,302, and

liabilities of $1,040,759.

     In order to determine the value of the gallery for estate

tax purposes, Sidney’s estate employed Sotheby’s to prepare an

appraisal of the collection.    Sotheby’s explained the basis for

its appraisal as follows:

           In accordance with your request, we have appraised
     the works of art owned by the Sidney Janis Gallery,
     with a view towards determining the fair market value
     thereof as of May 23, 1990, six months after the date
     of death of Sidney Janis. * * * We have valued these
     works on an item-by-item basis at fair market value.
     * * *

               *    *       *   *       *   *      *

          Despite the large number of works held by the
     Gallery, we have not taken into account any overall
     dimunition [sic] in value which might occur if the
     entire holdings were to be placed for sale in the
     ordinary course in the market at one time, which is the
                               - 5 -

     underlying basis for the attached appraisal. We have
     valued these works of art on an individual basis as of
     the relevant valuation date.

          Furthermore, we have not taken into account any
     dealer’s discount. It is common practice in the trade
     for a gallery to sell a work to another dealer at a
     discount ranging as high as 40% off the value in the
     retail market and, more commonly, in the one third
     range, so that the dealer may make a profit on resale.

          Lastly, we have not undertaken to determine the
     value of the Gallery as a whole. * * *

Based upon its review, Sotheby’s determined that the undiscounted

value of the collection was $25,876,630.

     Sidney’s estate determined the discounted value of the

collection by first applying a discount totaling $4,059,540 to

account for the large number of works in the collection by Jean

Arp, Louis Michel Eilshemius, Auguste Herbin, Morris Hirshfield,

Piet Mondrian, Grandma Moses, and Kurt Schwitters.    This discount

had been recommended by Sotheby’s.     Next, a $350,000 discount was

applied to account for the gallery’s partial interest in three

works of art in the collection.   A $2,862,279 discount was then

applied to account for the portion of the collection that would

likely be sold in the dealer market (as opposed to the retail

market).   Finally, a $6,201,604 discount was applied to account

for (1) the inability to sell the gallery in the retail market

for individual works of art, (2) the gallery buyer’s not paying

the full resale price of the underlying assets acquired in the
                               - 6 -

bulk sale, and (3) the gallery buyer’s taking into account the

cost of maintaining the business for a reasonable period.

     The Form 706 was examined by the Internal Revenue Service

(IRS).   In order to determine whether the correct value had been

reported for the gallery on the Form 706, the IRS Art Advisory

Panel (Panel) examined the collection.   The Panel reviewed 227 of

the 464 works of art in the collection, which represented 95

percent of the collection’s undiscounted value as determined by

Sotheby’s.   The Panel accepted the values determined by Sotheby’s

for the remaining works of art in the collection.   Based upon

this review, the Panel determined that the undiscounted value of

the collection was $36,636,630 rather than the $25,876,630

undiscounted value that had been determined by Sotheby’s.    The

Panel determined the collection’s undiscounted value by adding

the undiscounted values that it had determined for each work of

art in the collection.

     The Panel determined that the discounted value of the

collection was $22,955,077.   In determining this value, the Panel

considered the various discounts that had been applied by

Sidney’s estate.   While the Panel did not entirely agree with the

discounts claimed by Sidney’s estate, the Panel did agree that

the application of a blockage discount was appropriate.   The

Panel gave the following explanation as to the factors that it
                              - 7 -

considered in reaching its decision to apply a blockage discount

to the undiscounted value of the collection:

          In general, a blockage discount is applied to
     property in an estate in an attempt to reflect the
     market’s response to a large number of items.
     Traditionally, as the cases of David Smith, Louisa
     Calder and Georgia O’Keeffe attest, a blockage discount
     is applicable in response to a large number of works by
     one artist, usually in an artist’s estate. The Estate
     of Sidney Janis is not an artist’s estate, and does not
     involve a large number of works by one particular
     artist, but rather works by many different artists.
     However, since it is a valuation problem involving a
     gallery inventory, some of the general principles are
     applicable.

          A number of factors have been considered in
     determining whether a blockage discount is appropriate
     and to what extent it should be applied to the subject
     properties. Consideration was given to the prominence
     of the artists; the types of works in the estate; the
     distribution of the items (for example, the number and
     types, and their quality and saleability); the number
     of similar items available in the marketplace; the
     market’s response to such works around the valuation
     date; the number of sales and the prices at which sales
     were made during the period immediately preceding and
     following death; the annual sales of the gallery;
     length of time necessary to dispose of the items; the
     works that are saleable within a relatively short
     period of time; the works that can only be marketed
     over a long period; the demonstrated earning capacity
     of the business; the tangible and intangible assets,
     including goodwill; and, the reputation of the gallery
     and the provenance.

          In addition, consideration was given to the
     possible disbursement and handling of the gallery. One
     option would be the continuation of the gallery through
     Sidney Janis’ surviving sons and the selling of the
     items in the course of business. Another option would
     be the sale of the gallery to a willing purchaser.

          Attention was given to the gallery’s annual gross
     and net receipts of the inventory since 1985.
                                - 8 -

Based upon the Panel’s consideration of these factors, it

determined that an overall weighted discount of 37 percent was

appropriate.   The value of the collection was subsequently

further discounted to $14,500,000 (i.e., a total discount of

approximately 60.42 percent).    Accordingly, the IRS determined

that the value of the gallery was $21,630,543.

     On or about January 27, 1994, Conrad and Carroll, as co-

executors of Sidney’s estate, agreed to the adjustments made by

the IRS with respect to the gallery and to the additional amount

of tax owed by Sidney’s estate by signing a Form 890, Waiver of

Restrictions on Assessment and Collection of Deficiency and

Acceptance of Overassessment--Estate, Gift, and Generation-

Skipping Transfer Tax.    The examination of the Form 706 was

concluded on or about February 2, 1994, when the IRS sent to

Conrad and Carroll an Estate Tax Closing Letter.    Under section

6501, the period of limitations for assessment against the Form

706 filed by Sidney’s estate expired on February 28, 1994, 3

years after the Form 706 was filed.

Reporting the Gallery’s Operations From 1990 Through 1997

     Conrad and Carroll operated the gallery through the trust

until November 8, 1995.    As of November 8, 1995, the trust was

terminated and its assets (including the gallery) were

distributed to Conrad and Carroll in equal shares.    Subsequently,

Conrad and Carroll contributed their interests in the gallery to
                                 - 9 -

a partnership.   The partnership continued to operate the gallery

throughout the years in issue.    Fiduciary income tax returns were

filed for the trust for 1989 through 1995.   Forms 1065, U.S.

Partnership Return of Income, were filed for the partnership for

1996 and 1997.

     David J. Silverman (Silverman) prepared the fiduciary income

tax returns for the trust and the Forms 1065 for the partnership

during those years.    Silverman is an accountant and has been an

enrolled agent since approximately 1974.   Silverman assisted in

the preparation of the Form 706 for Sidney’s estate and had been

a longtime tax adviser to the gallery and to Carroll and Donna

prior to preparing the tax returns for the trust and the

partnership.   Silverman has also written extensively on the

subject of taxes and has represented other art galleries in their

tax matters.

     On or about August 6, 1991, Silverman prepared the fiduciary

income tax return filed for the trust for 1990.   Attached to this

fiduciary income tax return was a Schedule C, Profit or Loss from

Business.   The Schedule C reflected the trust’s operation of the

gallery during 1990.   In order to determine the cost of goods

sold (COGS) for 1990, the gallery used the discounted value of

the collection as originally reported on Sidney’s estate tax

return, $12,403,207, as the value of the gallery’s inventory at

the beginning of that year.   The value reported for the gallery’s
                               - 10 -

inventory at the end of 1990 was $12,354,316.   Thus, the gallery

reported that its COGS for 1990 was $48,891.    After subtracting

returns and allowances, COGS, and its expenses from its amount of

gross receipts and sales, the gallery reported a net loss of

$516,223 for 1990.    This loss was carried through to the trust’s

fiduciary income tax return for 1990 and caused the trust to

report a net operating loss for that year.

     Silverman prepared the trust’s fiduciary income tax returns

for 1991 and 1992 in similar fashion.   On the Schedule C attached

to the trust’s fiduciary income tax return for 1991, the gallery

reported that its COGS was $1,235,185 and that its operations

generated a net loss of $432,229.   This loss was carried through

to the trust’s fiduciary income tax return for 1991 and, along

with the trust’s net operating loss for 1989 and a portion of the

trust’s net operating loss for 1990, offset the income that the

trust earned that year.

     On the Schedule C attached to the trust’s fiduciary income

tax return for 1992, the gallery reported that its COGS was

$35,000 and that its operations generated a net loss of $652,797.

This loss was carried through to the trust’s fiduciary income tax

return for 1992 and caused the trust to report a net operating

loss for that year.

     On or about February 19, 1994, Silverman prepared amended

fiduciary income tax returns for the trust for 1990, 1991, and
                                 - 11 -

1992 in accordance with discussions that he had with Carroll and

with Conrad’s attorney about the applicability of the reasoning

set forth in Augustus v. Commissioner, 40 B.T.A. 1201 (1939),

affd. 118 F.2d 38 (6th Cir. 1941), to petitioners’ situation.

The Schedule C that was attached to the 1990 return was amended

“per Art Advisory Panel” to reflect a beginning value for the

gallery’s inventory of $36,636,630; i.e., the collection’s

undiscounted value.    A Form 8275, Disclosure Statement, was

attached to the trust’s amended return for 1990 and gave the

following explanation for the change in the reported beginning

value for the gallery’s inventory:

     As the result of the IRS’ audit of the estate’s 706 the
     following adjustments were made:

          1. The trust’s inventory was valued at
          $36,636,630

                   *    *    *     *      *   *   *

     The adjustments to the inventory * * * required
     adjustments to previously filed returns that effected
     [sic] the cost of goods sold & the operating expenses
     for 1990 and in turn required the recomputation of the
     1990, 1991 & 1992 NOL’s

The same explanation was given on the Forms 8275 that were

attached to the amended returns for 1991 and 1992.

     By using the Panel’s undiscounted value for the collection

as its inventory value at the beginning of 1990, the gallery

increased the reported amount of its COGS for 1990, 1991, and

1992 as follows:
                                - 12 -

              Year     Original COGS        Amended COGS

              1990        $48,891              $102,000
              1991      1,235,185             1,660,000
              1992         35,000                45,000

This increase in its COGS caused the gallery to generate a larger

net loss for each of those years.       Consequently, the trust’s net

operating loss for 1990 increased, the amount of the net

operating loss from 1990 that was applied against the trust’s

income earned in 1991 decreased, and the trust’s net operating

loss for 1992 increased.

     The trust’s fiduciary income tax returns for 1993, 1994, and

1995 also reflected the gallery’s use of the collection’s

undiscounted value as the value for its inventory.         On those

returns, the gallery reported the following amounts from its

operations:

              Year             COGS                Net Loss

           1993              $235,000              $727,416
           1994               727,500               117,363
      1/1/95-11/8/95        3,365,040               804,141

The trust’s fiduciary income tax return filed for 1995 reported

the trust’s operations for the period between January 1, 1995,

and November 8, 1995 (i.e., the day on which the trust was

terminated), and was the trust’s final return.      The trust’s

fiduciary income tax return for 1995 reported that the value of

the gallery’s inventory was $31,518,850 as of November 8, 1995.
                              - 13 -

     As a result of the gallery’s operations generating net

losses in 1993, 1994, and 1995, the trust reported net operating

losses for 1993, 1994, and 1995.   Disclosure statements, which

gave the same or similar explanations as those on the Forms 8275

that were attached to the trust’s amended fiduciary income tax

returns for 1990, 1991, and 1992, were attached to each of the

trust’s returns for 1993, 1994, and 1995.

     Two Schedules K-1 (Form 1041), Beneficiary’s Share of

Income, Deductions, Credits, etc., were attached to the trust’s

fiduciary income tax return for 1995.   These Schedules K-1

reported that the net operating losses that had been generated by

the trust’s operations, which were reported to total $3,500,960,

were distributed to Conrad and Carroll in equal share (i.e.,

$1,750,480 each).

     For the period between the trust’s termination and

December 31, 1995, Conrad and Carroll separately reported their

one-half interests in the gallery’s operations on Schedules C

that were attached to their Forms 1040, U.S. Individual Income

Tax Return, for 1995.   On these Schedules C, Conrad and Carroll

reported that their one-half interests in the gallery’s inventory

had a beginning value of $15,759,425 (i.e., a value equal to one-

half of the ending inventory value reported on the trust’s final

return).   They reported that their one-half interests in the

gallery’s inventory had an ending value of $15,561,925.
                             - 14 -

Accordingly, Conrad and Carroll each reported that their COGS was

$197,500 (i.e., $395,000 total) for this period.   Conrad and

Carroll also reported net profits of $130,366 and $134,176,

respectively, from their interests in the gallery’s operations

during this period.

     As reflected on the partnership’s Forms 1065 for 1996 and

1997, the partnership valued the gallery’s inventory in

accordance with the collection’s undiscounted value.

Accordingly, the partnership reported that the value of the

gallery’s inventory at the beginning of 1996 was $31,123,850

(i.e., an amount equal to the sum of the reported values of the

inventory comprising Conrad’s and Carroll’s one-half interests in

the gallery as of the end of 1995).   The following explanation

was given on the Forms 8275 that were attached to the

partnership’s Forms 1065 for 1996 and 1997:

     Value of paintings of the Sidney Janis Art Gallery
     where [sic] valued at $36,636,630 by the IRS at the
     decedent’s (Sidney Janis’) death. After a blockage
     discount allowed by the IRS on audit the estate paid
     inheritance tax on $14,500,000 (the after blockage
     value of the paintings). In accordance with the
     decision in Elizabeth G. Augustus, 40 BTA 1201, * * *
     (ACQ), the heirs in operating the art gallery used the
     individual value of the paintings prior to the blockage
     discount as the basis of the paintings sold in
     determining gain or loss on these sales.

     The partnership reported the following amounts from its

operation of the gallery during 1996 and 1997:
                                 - 15 -

             Year         COGS            Ordinary Loss

             1996        $985,000           $512,916
             1997       1,277,000            546,466

The Schedules K-1 (Form 1065), Partner’s Share of Income,

Credits, Deductions, etc., attached to the partnership’s Forms

1065 for 1996 and 1997 indicate that the partnership’s ordinary

losses were distributed equally between Conrad and Carroll.

Petitioners’ Income Tax Returns for 1995, 1996, and 1997

       Dean A. Avedon, C.P.A., prepared Conrad and Maria’s joint

income tax returns for 1995, 1996, and 1997.    Silverman prepared

the Schedules K-1 (Form 1065) that were attached to those

returns.    On each of those joint income tax returns, Conrad and

Maria reported that they had no taxable income and owed no income

tax.    On their joint income tax return for 1995, Conrad and Maria

reported the net operating loss carryover of $1,750,480 that had

been distributed to them from the trust.    The following

explanation was given on this Form 8275 for the existence of the

claimed net operating loss carryover:

       Value of paintings of an art gallery (Sidney Janis
       Gallery) transferred to a trust were valued at
       $36636630 by the IRS at the decedent’s (Sidney Janis)
       death. After a blockage discount allowed by the IRS on
       audit the estate paid inheritance tax on an amount of
       $14500000 after the blockage discout [sic] reported on
       Form 706. In accordance with the decision in
       Elizabeth G. Augustus, 40 BTA 1201, 12/10/31 (ACQ) the
       trust used the individual value of the paintings prior
       to the blockage discount for the paintings sold by
       trust and for the one (1) painting sold by the heirs as
       reported on Schedule C.
                                - 16 -

On their joint income tax returns for 1996 and 1997, Conrad and

Maria reported net operating loss carryovers of $714,627 and

$847,645, respectively.   Neither of these returns contained a

Form 8275 or similar disclosure statement.

     Silverman prepared Carroll and Donna’s joint income tax

returns for 1995, 1996, and 1997.    On their joint income tax

return for 1995, Carroll and Donna reported the net operating

loss carryover of $1,750,480 that had been distributed to them

from the trust.   In addition, they reported that they had no

taxable income for that year.    On their joint income tax returns

for 1996 and 1997, Carroll and Donna reported net operating loss

carryovers of $123,985 and $202,381, respectively.    They also

reported that they had no taxable income and owed no income tax

for 1996 and $15,312 of taxable income and owed $1,531 for 1997.

Neither a Form 8275 nor a similar disclosure statement was

attached to Carroll and Donna’s joint income tax returns for

1995, 1996, or 1997.

Examination of Petitioners’ Income Tax Returns for 1995, 1996,
and 1997

     Petitioners’ 1995, 1996, and 1997 income tax returns were

examined by the IRS.   As a part of this examination, the trust’s

fiduciary income tax returns for the years 1990 through 1995 and

the partnership’s Forms 1065 for 1996 and 1997 were also

examined.   Respondent determined that, for purposes of

calculating the gallery’s COGS for the years 1990 through 1997,
                                - 17 -

the gallery’s basis in the collection should have been reported

in accordance with the discounted value that had been determined

by the Panel and agreed to by Conrad and Carroll for estate tax

purposes (i.e., $14,500,000) rather than the undiscounted value

(i.e., $36,636,630).    Consequently, adjustments were made to the

gallery’s reported COGS as follows:

            Year           COGS Per Return    COGS As Adjusted

           1990                $102,000             $40,369
           1991               1,660,000           1,055,779
           1992                  45,000              17,180
           1993                 235,000              98,008
           1994                 727,500             287,929
      1/1/95-11/8/95          3,365,040           1,331,811
     11/9/95-12/31/95           395,000             156,333
           1996                 985,000             389,842
           1997               1,277,000             505,410

These adjustments to the gallery’s COGS caused a corresponding

adjustment to the gallery’s reported profits or losses for those

years.   Accordingly, respondent determined that the trust should

have reported that net operating losses totaling only $193,144

were distributed to Conrad and Carroll on its 1995 fiduciary

income tax return.     Respondent also determined that the

partnership should have reported income rather than losses from

its operation of the gallery during 1996 and 1997.

     Based upon these adjustments, respondent determined that

adjustments to petitioners’ joint income tax returns for 1995,

1996, and 1997 were appropriate.     With respect to their joint

income tax returns for 1995, respondent determined that
                              - 18 -

petitioners should have reported that a net operating loss

carryover of only $96,572 had been distributed to each of them

from the trust.   Moreover, respondent determined that Conrad and

Carroll should have reported larger profits on the Schedules C

that reflected their operation of the gallery for the period

between the trust’s termination and December 31, 1995.     With

respect to their joint income tax returns for 1996 and 1997,

respondent disallowed petitioners’ claimed net operating loss

carryovers.

                              OPINION

Petitioners’ Basis in the Collection for Purposes of Determining
the Gallery’s Cost of Goods Sold

     Section 1014 provides the rules for determining the basis of

property acquired from a decedent.     The general purpose of

section 1014 is to provide a basis for property acquired from a

decedent that is equal to the value placed upon such property for

purposes of the Federal estate tax.     Sec. 1.1014-1(a), Income Tax

Regs.   Accordingly, section 1014 provides that the basis of

property acquired from a decedent is the fair market value of the

property at the date of the decedent’s death or on the alternate

valuation date.   Sec. 1014(a); sec. 1.1014-1(a), Income Tax Regs.

The fair market value of the property as of the date of the

decedent’s death or as of the alternate valuation date is deemed

to be the value of the property as appraised for purposes of the

Federal estate tax.   Sec. 1.1014-3(a), Income Tax Regs.
                             - 19 -

     Petitioners contend that they are not liable for the

deficiencies asserted against them for 1995, 1996, and 1997

because their basis in each work of art in the collection, as

provided under section 1014, is the undiscounted fair market

value that the Panel determined for that work.   Essentially,

petitioners contend that if the Panel determined that the

undiscounted value of an individual work of art was $100,000,

that value is their basis in that work under section 1014.

Consequently, petitioners contend that the gallery should have

been allowed to use that undiscounted value in calculating its

gain or loss on the subsequent sale of that work of art, not

$39,580 (i.e., $100,000 discounted by 60.42 percent).

     Respondent contends that the basis of the individual works

of art in the collection is the proportionate amount of the

discounted value that was agreed to for estate tax purposes,

which should be used to calculate the gallery’s COGS.   Respondent

further contends that petitioners are estopped under the duty of

consistency from claiming that the collection’s discounted value,

as determined for estate tax purposes, is only a presumptive

value that may be rebutted for income tax purposes.   We address

each of these contentions in turn.
                                - 20 -

     1.   Whether The Basis of Each Work of Art in the Collection
          Is the Work’s Undiscounted Fair Market Value as
          Determined by the Panel

     Petitioners argue that (1) Augustus v. Commissioner, 40

B.T.A. 1201 (1939), has facts that are identical to this case

and, therefore, is controlling and (2) the “appraised value”

contemplated by section 1.1014-3(a), Income Tax Regs., is the

undiscounted fair market value that was determined by the Panel

for each work of art in the collection.   For the reasons set

forth below, petitioners’ arguments are unpersuasive.

     In Augustus v. Commissioner, supra at 1202, 1203, the Board

of Tax Appeals was presented with a question regarding the basis

of 2,525 shares of F.W. Woolworth Co. stock that the taxpayer

sold in 1935 for $149,203.99.    These shares had been acquired by

the taxpayer from the intestate estate of her mother and were

appraised as of the date of her mother’s death, November 9, 1928,

for Federal estate tax purposes.    Id. at 1203-1204.   After

applying a blockage discount, respondent determined that the

shares of stock had a value equal to $207,050 (i.e., $82 per

share), and the Federal estate tax liability of the estate of the

taxpayer’s mother was determined on that basis.    Id. at 1204.

The average selling price of shares of F.W. Woolworth Co. stock

on November 9, 1928, as determined from sales made on the New

York Stock Exchange, was $86.70 per share.    Id. at 1208.
                             - 21 -

     The taxpayer argued that the determination of value for

purposes of the estate tax did not conclusively establish fair

market value and that her gain or loss upon the sale of the stock

should have been computed upon the basis of the stock’s actual

fair market value on the date of her mother’s death, if it was

established that that value was different from the value at which

the stock was included for estate tax purposes.   Respondent

contended that the value at which the stock was appraised for

Federal estate tax purposes, and upon which value that tax was

paid, established the fair market value of the stock received by

the taxpayer from her mother’s estate.   The Board of Tax Appeals

agreed with the taxpayer and provided the following reasoning for

its decision:

          Whether the petitioner has established that value
     is a question of fact. No evidence supporting the
     application of the blockage rule appears in the record.
     However, the facts stipulated disclose that the volume
     of trading in this particular stock at or about the
     date of death of petitioner’s mother was not only very
     large, compared with the block of stock to be valued,
     but that the price trend was upward. In our judgment,
     this record thus overcomes the presumption of
     correctness attaching to respondent’s determination of
     basis. We find that on November 9, 1928, the fair
     market value of the 2,525 shares of stock sold by
     petitioner in 1935 was $86.70 per share. [Id.;
     citation omitted and emphasis added.]

     Contrary to petitioners’ understanding of Augustus, the

Board of Tax Appeals concluded that the taxpayer could use the

undiscounted fair market value of the F.W. Woolworth Co. stock as

of November 9, 1928, as her basis for income tax purposes because
                               - 22 -

there was no evidence in the record that established that a

blockage discount should have ever been applied to the value of

that stock for estate tax purposes.     Thus, the correct fair

market value was the actual trading price on the date of death.

In the case at hand, however, there is evidence from petitioners

and respondent that sets forth the reasoning for applying a

blockage discount to the collection’s value for estate tax

purposes.    Moreover, unlike the taxpayer in Augustus, petitioners

do not contend that the application of a blockage discount was

inappropriate in determining the value of the collection for

estate tax purposes.   Because there is no indication as to how

the Board of Tax Appeals might have held if the application of

the blockage discount had been proper or undisputed in Augustus,

we conclude that the application of its reasoning to this case is

unwarranted and that petitioners’ reliance on the case is

misplaced.

     Section 1.1014-3(a), Income Tax Regs., provides that the

fair market value of the property acquired from a decedent as of

the date of the decedent’s death or as of the alternate valuation

date is deemed to be the value of the property as appraised for

purposes of the Federal estate tax.     This regulation has been

construed to mean that the value arrived at by such an evaluation

is only prima facie correct and may be shown to be erroneous.

Plaut v. Munford, 188 F.2d 543, 545 (2d Cir. 1951); Delone v.
                              - 23 -

Commissioner, 6 T.C. 1188, 1192 (1946); Kirsch v. Commissioner,

T.C. Memo. 1985-114, affd. without published opinion 786 F.2d

1170 (8th Cir. 1986); Hawkinson v. Commissioner, T.C. Memo. 1972-

32; McIntosh v. Commissioner, T.C. Memo. 1967-230.     Petitioners,

however, do not contend that the discounted value of the

collection is erroneous.   Instead, petitioners contend that the

discount determined by the Panel was attributable to the

collection as a whole and does not apply in determining the value

of each work of art that sold separately.     Thus, petitioners

argue that the “appraised value” contemplated by section 1.1014-

3(a), Income Tax Regs., is the undiscounted fair market value

determined by the Panel for each work of art in the collection.

     A blockage discount was applied in determining the value of

the collection because of the collection’s size and nature.       In

determining the blockage discount, the Panel took into account,

inter alia, the possibility that the market might be flooded if

the individual works of art were put up for sale at the same time

or, alternatively, the possibility that the collection would be

disposed of over time in order to realize each work’s full value.

See, e.g., Calder v. Commissioner, 85 T.C. 713, 721-726 (1985);

Estate of Smith v. Commissioner, 57 T.C. 650, 658-659 (1972),

affd. 510 F.2d 479 (2d Cir. 1975).     Because the substantive

effect of the blockage discount was to establish a proportionate

value for each work of art in the collection that reflected these
                               - 24 -

possibilities, it follows that the “appraised value” contemplated

by section 1.1014-3(a), Income Tax Regs., for each work of art in

the collection is a value that includes the blockage discount

determined by the Panel.    Accordingly, under section 1014 and

section 1.1014-3(a), Income Tax Regs., petitioners’ basis in each

work of art in the collection is equal to the work’s

proportionately discounted value as determined for estate tax

purposes.

     2.     Whether Respondent Has Established That Petitioners Are
            Estopped by the Duty of Consistency

     The “duty of consistency”, sometimes referred to as quasi-

estoppel, applies in this Court.    E.g., Estate of Letts v.

Commissioner, 109 T.C. 290, 296-301 (1997); Cluck v.

Commissioner, 105 T.C. 324, 331-336 (1995); LeFever v.

Commissioner, 103 T.C. 525, 541-545 (1994), affd. 100 F.3d 778

(10th Cir. 1996); Unvert v. Commissioner, 72 T.C. 807, 814-818

(1979), affd. 656 F.2d 483 (9th Cir. 1981); Mayfair Minerals,

Inc. v. Commissioner, 56 T.C. 82, 89-94 (1971), affd. 456 F.2d

622 (5th Cir. 1972).    The duty of consistency is based on the

theory that a taxpayer has a duty to be consistent in the tax

treatment of items and will not be permitted to benefit from the

taxpayer’s own prior error or omission.    LeFever v. Commissioner,

supra at 541.   The duty of consistency doctrine prevents a

taxpayer from taking one position one year and a contrary

position in a later year after the limitations period has run for
                               - 25 -

the first year.    Id. at 541-542.   A taxpayer gaining governmental

benefits on the basis of a representation or an asserted position

is thereafter estopped from taking a contrary position in an

effort to avoid taxes.    Id. at 542.   Respondent has the burden of

proof on this issue because the duty of consistency is an

affirmative defense.    Rule 142(a)(1); see Cluck v. Commissioner,

supra at 331 n.11.

       The taxpayer’s duty of consistency applies if:   (1) The

taxpayer made a representation of fact or reported an item for

tax purposes in one tax year; (2) the Commissioner acquiesced in

or relied on that fact for that year; and (3) the taxpayer

desires to change the representation previously made in a later

tax year after the earlier year has been closed by the statute of

limitations.    LeFever v. Commissioner, supra at 543; see also

Kielmar v. Commissioner, 884 F.2d 959, 965 (7th Cir. 1989);

Herrington v. Commissioner, 854 F.2d 755, 758 (5th Cir. 1988),

affg. Glass v. Commissioner, 87 T.C. 1087 (1986); Shook v. United

States, 713 F.2d 662, 667 (11th Cir. 1983); Hess v. United

States, 210 Ct. Cl. 483, 537 F.2d 457, 463 (1976); Beltzer v.

United States, 495 F.2d 211, 212 (8th Cir. 1974); Estate of Letts

v. Commissioner, supra at 297; Cluck v. Commissioner, supra at

332.    When these requirements are met, respondent may act as if

the previous representation is true, even if it is not, and the
                               - 26 -

taxpayer may not successfully assert the contrary.    Herrington v.

Commissioner, supra at 758.

       The three elements of the duty of consistency refer to

conflicting representations that are made by a taxpayer.    The

duty of consistency, however, can also bind a beneficiary of an

estate to a representation made on an estate tax return if the

beneficiary was a fiduciary of the estate.    Beltzer v. United

States, supra; see also Hess v. United States, supra; Estate of

Letts v. Commissioner, supra at 298; Cluck v. Commissioner, supra

at 333; LeFever v. Commissioner, supra at 543-544; Griffith v.

United States, 27 AFTR 2d 71-754, 71-1 USTC par. 9280 (N.D. Tex.

1971); McMillan v. United States, 14 AFTR 2d 5704, at 5706-5707,

64-2 USTC par. 9720, at 93,839 (S.D. W. Va. 1964).    Whether there

is sufficient identity of interests between the parties to apply

the duty of consistency in such a situation depends on the facts

and circumstances of each case.    Cluck v. Commissioner, supra at

335.    In this case, there is a sufficiently close relationship

between petitioners and Sidney’s estate because Conrad and

Carroll were co-executors and beneficiaries of Sidney’s estate as

well as cotrustees and beneficiaries of the trust to which the

gallery had been transferred prior to Sidney’s death.    See, e.g.,

Hess v. United States, supra at 464; Estate of Letts v.

Commissioner, supra at 298-299; LeFever v. Commissioner, supra at

543-544; Griffith v. United States, supra; McMillan v. United
                              - 27 -

States, supra.   Accordingly, petitioners and Sidney’s estate are

sufficiently related to be treated as one taxpayer for purposes

of the duty of consistency.

     Respondent has established that all three elements of the

duty of consistency are present in this case.   Conrad and Carroll

agreed that the discounted value of the collection was

$14,500,000, and the Commissioner relied upon that value in

assessing the estate tax owed by Sidney’s estate.   Once the

period for assessment against Sidney’s estate had closed,

however, petitioners claimed that the collection’s undiscounted

value should be used to calculate the gallery’s COGS.    Because

all three elements of the duty of consistency are satisfied, we

hold that petitioners are bound to use the collection’s

discounted value as their basis for purposes of calculating the

gallery’s COGS for 1990 through 1997.

Section 6662 Accuracy-Related Penalties

     In petitioners’ statutory notices of deficiency, respondent

asserted accuracy-related penalties under section 6662(a) for

(1) negligence or disregard of rules or regulations,

(2) substantial understatement of income tax, or (3) substantial

valuation overstatement.   On brief, however, respondent abandons

the negligence ground and asserts only that petitioners are

liable for the accuracy-related penalties under section 6662(a)

for a substantial understatement of tax under section 6662(b)(2).
                                - 28 -

      A taxpayer may be liable for a penalty under section 6662(a)

on the portion of an underpayment due to a substantial

understatement of income tax.    Sec. 6662(b)(2).     An

understatement of income tax is “substantial” if it exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000.   Sec. 6662(d)(1)(A).      An “understatement” is

defined as the excess of the tax required to be shown on the

return over the tax actually shown on the return, less any

rebate.   Sec. 6662(d)(2)(A).   Respondent has the burden of

production under section 7491(c) and must come forward with

sufficient evidence indicating that it is appropriate to impose

the penalty.   See Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001).   In this case, the understatement on each of petitioners’

returns satisfies the definition of “substantial”, so respondent

has met that burden of production.       Once respondent meets the

burden of production, the taxpayer must come forward with

persuasive evidence that respondent’s determination is incorrect.

Id.

      The section 6662(a) penalty will not be imposed with respect

to any portion of the underpayment as to which the taxpayer acted

with reasonable cause and in good faith.       Sec. 6664(c)(1); Higbee

v. Commissioner, supra at 448-449.       The decision as to whether a

taxpayer acted with reasonable cause and in good faith is made by

taking into account all of the pertinent facts and circumstances.
                                - 29 -

Sec. 1.6664-4(b)(1), Income Tax Regs.       Relevant factors include

the taxpayer’s efforts to assess his proper tax liability,

including the taxpayer’s reasonable and good faith reliance on

the advice of a tax professional.    See id.; see also sec.

1.6664-4(c), Income Tax Regs.

     The evidence in this case shows that Carroll and Donna

reasonably and in good faith relied on Silverman’s advice as to

using the collection’s undiscounted value to calculate the

gallery’s COGS.   Silverman had had a long relationship with

Carroll and Donna and with the gallery.      Carroll, although well

educated, testified that he did not have any special training or

knowledge with respect to the subject of Federal income taxes.

Moreover, Carroll trusted Silverman with the gallery’s books and

records and his personal financial matters.      Accordingly, we

believe that Carroll respected Silverman’s judgment when it came

to tax matters and that this trust extended to Silverman’s

explanation of the applicability of the reasoning of Augustus v.

Commissioner, 40 B.T.A. 1201 (1939), to petitioners’ situation.

Therefore, the imposition of a section 6662(a) penalty is not

warranted with respect to Carroll and Donna.

     Neither Conrad nor Maria was present at trial, and the

record does not establish whether either of them spoke with

Silverman directly about Augustus.       There is evidence, however,

that Silverman met with Conrad’s attorney and discussed the
                                - 30 -

applicability of the reasoning of that case to petitioners’

situation.    Carroll testified that he and Conrad had reached a

mutual decision to rely on Silverman with respect to the

gallery’s tax matters.    Conrad and Maria’s reliance on Augustus

is reflected on the Form 8275 that was attached to the joint

income tax return that they filed for 1995.    While Conrad and

Maria did not rely on Silverman to prepare their personal income

tax returns, they relied on the position that he advanced for

calculating the gallery’s COGS.    Accordingly, because their

reliance on Silverman’s advice caused the underpayments on their

joint income tax returns for the years in issue, respondent’s

imposition of section 6662(a) penalties against Conrad and Maria

will not be sustained.

Conclusion

     We hold that petitioners are liable for deficiencies in

their income taxes for 1995, 1996, and 1997.    We also hold that

the accuracy-related penalties under section 6662(a) are

unwarranted because of petitioners’ reasonable and good faith

reliance on Silverman’s advice.    We have considered the arguments

of the parties that were not specifically addressed in this

opinion.     Those arguments are either without merit or irrelevant

to our decision.
                        - 31 -

To reflect the foregoing,


                                 Decisions will be entered for

                            respondent with respect to the

                            deficiencies and for petitioners

                            with respect to the penalties.
