t c memo 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 filed date d died on date and his federal estate_tax_return reported the value of his estate e on the alternate_valuation_date r determined higher values for many of the reported assets assigned values for unreported assets and disallowed certain deductions r also determined that e was liable for the fraud_penalty under sec_6663 i r c held taxable_estate redetermined including redeterminations of fair_market_value held further e is liable for the fraud_penalty robert a levinson avram salkin bruce i hochman charles p rettig and frederic j adam for petitioner irene carroll anne e daugharty linette angelastro and donald e osteen for respondent memorandum findings_of_fact and opinion laro judge this case is before the court pursuant to a petition filed on behalf of the estate of emanuel trompeter the estate to redetermine respondent's determination of a dollar_figure deficiency in federal estate_tax and a dollar_figure fraud_penalty under sec_6663 respondent determined as an alternative to the fraud_penalty that the estate is liable for an accuracy-related_penalty for negligence and gross_valuation_misstatement under sec_6662 following concessions the primary issue that the court must decide is the date fair_market_value of the following assets which the parties agree are included in the gross_estate of emanuel trompeter the decedent big_number shares of sterling holding co sterling series a exchangeable preferred_stock sterling preferred_stock we hold that the applicable_value including accrued dividends is dollar_figure two hundred twenty seven rare gold coins we hold that the applicable_value is dollar_figure the court also must decide the following secondary issues whether the decedent's gross_estate includes dollar_figure million of diamonds jewels gems art and artifacts that were not reported on his federal estate_tax_return we hold that his gross_estate includes dollar_figure million of these assets whether certain other items determined by respondent to be included in the decedent's gross_estate are so included we hold they are to the extent and in the amounts stated herein whether sylvia trompeter ms trompeter had a bona_fide claim against the estate because the decedent her former husband failed to disclose the value and extent of his coin holdings during their divorce proceeding we hold she did not whether the estate is liable for the fraud_penalty determined by respondent under sec_6663 we hold it is unless otherwise stated all section references are to the applicable provisions of the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure dollar amounts are rounded to the nearest dollar the term co-executors refers collectively to the estate's coexecutors robin carol trompeter gonzalez ms gonzalez and janet ilene trompeter polachek ms polachek on account of this holding we do not decide the alternative determinations under sec_6662 findings_of_fact i overview some of the facts have been stipulated and are so found the stipulations and the exhibits submitted therewith are incorporated herein by this reference the decedent was born in new york on date and he resided in thousand oaks california when he died on date at the time of the filing of the petition ms gonzalez resided in florida and ms polachek resided in california the coexecutors are the decedent's sole beneficiaries and his only surviving children their mother is ms trompeter each coexecutor is college educated has extensive work experience and knows about her obligation to file valid federal tax returns the coexecutors enjoy a close and friendly relationship with ms trompeter the coexecutors are cotrustees of the emanuel trompeter trust the trust a_trust that holds most of the decedent's assets the trust was revocable during the decedent's life and the decedent was its sole trustee until ms gonzalez became cotrustee with him in date ms polachek became a cotrustee with ms gonzalez following the decedent's death ii the decedent's sale of trompeter electronics inc tei in the decedent and ms trompeter formed tei tei manufactured mainly electronic components which assisted in the guidance system of air to ground missiles tei also manufactured components used in the television industry in date sterling a private company with a calendar yearend acquired all tei stock in a leveraged transaction in which the decedent and ms trompeter received approximately dollar_figure million in cash and big_number shares of a newly issued sterling preferred_stock these shares were the only shares of this type of preferred_stock that sterling issued and holders of these shares were generally entitled to more rights than holders of sterling's other preferred shares of the big_number shares of sterling preferred_stock received by them the decedent received big_number shares and ms trompeter received the rest holders of sterling preferred_stock were entitled to receive preferential dividends on the liquidation value of the stock when and as the dividends were declared by sterling's board_of directors and they were entitled to certain preferences in the event of liquidation preferential dividends accrued daily at the annual rate of percent through the end of dollar_figure percent during dollar_figure percent during and percent from the beginning of through the date on which the sterling preferred_stock was either redeemed or exchanged to the extent that the dividends were not paid on january of each year beginning date all dividends which had accrued on each share then outstanding would be added to the liquidation value of that share and would remain a part thereof until the dividends were paid the decedent and ms trompeter were entitled subject_to minimal restrictions to exchange their sterling preferred_stock for sterling's percent percent subordinated debentures due_date at designated intervals sterling was required by the purchase agreement the purchase agreement underlying the sterling preferred_stock to redeem shares of the stock at dollar_figure per share plus accrued dividends sterling had to use its best efforts to redeem big_number shares of the sterling preferred_stock on date and another big_number shares on date sterling had a mandatory obligation to redeem big_number shares of the sterling preferred_stock on each date through redemptions and payments of dividends were prohibited during any period of default on sterling's senior debt redemptions and payments of dividends were also prohibited by provisions set forth in sterling's senior debt and senior subsidiary debt agreements these provisions generally tied a redemption to sterling's profitability as shown in its consolidated income statement sterling's through the number of shares to be redeemed from each holder of sterling preferred_stock would equal the product of the total number of shares of sterling preferred_stock redeemed on that date multiplied by a fraction the fraction's numerator equaled the total number of shares of sterling preferred_stock then held by that holder the fraction's denominator equaled the total number of shares of sterling preferred_stock then outstanding consolidated income statements which were part of those years' financial statements which were audited and discussed without qualification by sterling's independent auditor listed the following information net sales cost of sales gross_profit selling general administrative expenses amortization of goodwill other intangible assets dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number operating income loss big_number big_number big_number other income expense amortization of deferred financing costs interest_expense interest and other income total other expense big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number income loss before income taxes big_number big_number big_number provision for income taxes - - - - - - net_income loss big_number big_number big_number 1includes dollar_figure of amortization for a noncompetition agreement that was writtenoff on account of the death of a party thereto no dividends were paid on the sterling preferred_stock from its issuance through date and no shares were redeemed during that time sterling had a positive cash-flow and was timely paying interest and principal on its senior debt sterling also was paying its monthly operating_expenses sterling had postponed paying interest and or principal on some of its liabilities which otherwise were due these postponements were done with the consent of the relevant creditor s when the decedent died the trust held big_number shares of sterling preferred_stock on the decedent's federal estate_tax_return the estate reported the applicable_value of each share at dollar_figure and the total value at dollar_figure approximately months after the date of valuation sterling informed its shareholders that it was proposing to refinance and redeem the sterling preferred_stock in accordance with the purchase agreement in order to secure the refinancing sterling proposed to redeem each share of the sterling preferred_stock at dollar_figure plus in lieu of the accrued dividends 5-percent interest from the time that each share was issued until the time that it was redeemed on date after ms trompeter and the coexecutors had agreed to sterling's redemption proposal sterling paid the trust dollar_figure in redemption of the big_number shares of the dollar_figure amount dollar_figure was for interest at the time of the leveraged transaction the california franchise tax board cftb was auditing tei's state tax_liability in connection therewith the decedent and ms trompeter agreed to indemnify sterling equally for any_tax penalty or interest arising from the audit and any other tax_liability of tei that related to the period ending on or before a stated date estimated amounts for these liabilities were dollar_figure million and dollar_figure respectively in order to have funds available to pay these liabilities and to ensure performance of certain noncompetition agreements the decedent and ms trompeter agreed to place their sterling preferred_stock and certain government bonds into an escrow account on date the decedent and ms trompeter transferred a total of dollar_figure million into an escrow account at city national bank cnb eleven days later they transferred their sterling preferred_stock into the account the decedent's cash of dollar_figure and his sterling preferred_stock were kept in a subaccount that cnb maintained solely for his benefit and ms trompeter's cash of dollar_figure and her sterling preferred_stock were kept in a separate subaccount at cnb that was maintained for her the escrow agent was required to pay any claim that was submitted to the agent upon settlement of the aforementioned liabilities ms trompeter could withdraw certain amounts of the cash from her subaccount before the agent paid the liabilities as could the decedent with respect to the cash in his subaccount in early settlement was reached regarding tei's liability to cftb on date ms gonzalez on behalf of the trust and ms trompeter directed cnb to disburse funds from the respective subaccounts to pay cftb the amount of the settlement ten days later cnb paid dollar_figure out of the escrow to cftb of this amount dollar_figure was paid on behalf of the trust and dollar_figure was paid on behalf of ms trompeter because the cash in ms trompeter's subaccount totaled only dollar_figure the coexecutors authorized payment of the dollar_figure shortage3 out of the decedent's subaccount iii the decedent's coin collection and other assets the decedent learned that he had terminal cancer sometime in the early part of attempting to place his affairs in order the decedent initiated the sale of his most valuable asset a proof gold coin collection the decedent had collected gold coins for at least years and before his death he was a nationally known coin collector who owned many rare gold coins and some silver coins the trompeter collection as it was known in the coin world was the decedent's premier gold coin collection consisting of gold coins from the 19th and early 20th century one hundred and ninety one of these coins the coins consisted of the following dollar_figure liberty head gold pieces half eagles from dollar_figure indian head gold pieces half eagles from we recognize that dollar_figure minus dollar_figure equals dollar_figure and that there is a dollar_figure discrepancy the parties have not explained this discrepancy because the parties refer to the shortage as dollar_figure we do likewise the term proof describes the special minting process for certain coins designed to be issued as gifts to dignitaries or sold at a premium to collectors dollar_figure liberty head gold pieces eagles from dollar_figure indian head gold pieces eagles from dollar_figure liberty head gold pieces double eagles from dollar_figure saint gaudens gold pieces double eagles from the amazonian set consisting of six coins and various pattern sec_5 of dollar_figure dollar_figure and dollar_figure gold pieces the remaining coins in the trompeter collection were primarily dollar_figure dollar_figure-1 dollar_figure and certain pattern gold coins the decedent had diligently obtained each coin in the trompeter collection often piece by piece and his collection was one of a kind the collection included a coin in every denomination and in every year that a proof gold coin had been minted by the u s mint with the exception of one coin and almost every proof coin in the trompeter collection was one of a limited number of proof coins that had been minted for that year and one of a minuscule number of proof gold coins that still were in existence the decedent divided the trompeter collection into two parts and consigned both parts to an auction house named superior stamp coin co superior with instructions to sell the coins at auction in return for his paying it a commission of percent of the gross_proceeds the decedent dealt mainly patterns are pieces that are minted not for general circulation but to determine if the coin as made would be acceptable for general usage with ira m goldberg mr goldberg who was a part owner of superior and its primary manager in order to determine a coin's market_value the coin generally must be graded on a scale from to uncirculated coins are graded at between and and grade differences of one point for uncirculated coins may account for percentage differences in value of percent or substantially more every increase in grade above a increases the value of the coin dramatically and the difference in value between a coin that is graded a and a coin that is graded a is material an escalation in value is most apparent when the grade increases above beginning in date the decedent began grading each coin in the trompeter collection in preparation for the auction and he began assigning each coin a value and reserve price the reserve price is the lowest amount at which a coin may sell at auction the decedent was assisted in this process by mr goldberg both mr goldberg and the decedent were experienced in grading and pricing gold coins the decedent in particular had been grading gold coins for at least years of the coins in the trompeter collection the decedent graded according to the point grade scale mentioned above and he graded each of the remaining coins as either proof general proof choice proof or general to choice proof the decedent did not assign a number grade to any of the remaining coins the following chart shows the number of coins that received each grade from the decedent grade number of coins proof general proof choice proof general to choice proof total superior proposed to sell the trompeter collection in two auctions the first of which it held on date superior auctioned of the coins in the trompeter collection for sale at the first auction and there was a high demand in response thereto two hundred and one of the coins auctioned for sale sold for the total amount of dollar_figure approximately dollar_figure of the gross_proceeds was attributable to the decedent's proof coins which he had valued at dollar_figure shortly after the first auction concluded superior began preparing a catalog of the coins for sale at the second auction which was scheduled for date the decedent had graded many of these coins as either general proof choice the coins auctioned for sale at the first auction did not include any of the coins mentioned above proof or general to choice proof and he had calculated that the total value of these coins was dollar_figure as of july date the decedent died on date shortly thereafter mr goldberg asked two independent grading services professional coin grading service pcgs and numismatic grading co ngc to grade the coins contrary to the decedent's expressed views mr goldberg believed that the coins would realize more at auction if they were graded by an independent grading service in date pcgs graded all coins but for the 6-piece amazonian set and three other coins which pcgs refused to grade and pcgs encapsulated the graded coins into a tamper-proof plastic container one month later all coins but for the 6-piece amazonian set were graded by ngc after ngc had removed the coins from their containers the following chart shows the number of coins that received each grade from pcgs and ngc grade number of coins--pcgs number of coins--ngc total on date superior communicated the results of the pcgs grading to robert a levinson mr levinson the estate's attorney and mr levinson communicated these results to the coexecutors the coexecutors believed that pcgs' grades were lower than expected and would lead to lower sale prices at the second auction because the rare coin market was in a recession on date mr levinson asked mr goldberg to postpone the second auction when mr goldberg refused the coexecutors as cotrustees of the trust sued superior to enjoin the second auction ms gonzalez represented to the court in seeking the injunction that the coins were worth more than dollar_figure million on date the superior court of the state of california for the county of los angeles the superior court issued an order enjoining the second auction this was the beginning of protracted litigation between superior and the estate this litigation was settled years later with the superior court rescinding the contract with superior under which superior was entitled to auction the coins in return for a percent seller's commission and with superior's returning the coins to the estate the estate acquired numerous appraisals of the coins immediately prior to and during the litigation with superior on date julian m leidman mr leidman valued the coins at dollar_figure million based on the assumption that the coins would be sold individually over an extended period of time in other than a declining market the estate used this appraisal in the litigation to enjoin the second auction approximately months later mr leidman appraised the coins at dollar_figure1 million the estate used this appraisal to value the coins at dollar_figure on the estate_tax_return the reported value equals the dollar_figure1 million appraisal less an estimated percent seller's commission of dollar_figure which would be payable to superior assuming that all coins sold at the second auction mr leidman also valued the coins at dollar_figure million as of the date of the decedent's death and dollar_figure million as of the alternate_valuation_date during the litigation between superior and the estate the estate recovered additional coins which were owned by the decedent and which mr goldberg had not disclosed to the estate beforehand the decedent had consigned most of these coins to superior to sell at auctions other than the two scheduled in it was not until mr goldberg was questioned about additional coins during the discovery process in the superior court_proceeding that he admitted that some of the decedent's other coins were in his possession in or around date superior informed the estate that the decedent had consigned numerous coins to superior in and that of these coins had not yet been sold one month later superior returned these coins to the estate along with two other coins the remaining coins out of the additional coins recovered by the estate consisted of the coins which went unsold at the date auction and two other coins for which the record does not disclose the history the additional coins were described on the estate_tax_return as additional group of gold coins and of these coins were valued on the return at dollar_figure no value was placed on the 36th coin in date the decedent instructed his personal accountant henry schiffer mr schiffer to prepare a list of the decedent's assets and each asset's estimated value the document was entitled ed trompeter asset list not including coins as of date the document was based on conversations between mr schiffer and the decedent records maintained in mr schiffer's office and his contacts with people who maintained other records for the decedent included on mr schiffer's one-page list was among other things a gun collection valued at dollar_figure a music collection valued at dollar_figure and diamonds and other gems totaling dollar_figure none of these items were included on the decedent's_estate tax_return iv pertinent claims against the estate the decedent and ms trompeter separated on date and years later they were in the midst of a divorce proceeding during the pendency of this proceeding barry stuppler mr stuppler president of a coin and appraisal store named gold silver emporium prepared two disclosure statements identifying the decedent's community_property coins and each coin's appraised value the appraisal on the first statement totaled dollar_figure the appraisal on the second statement totaled dollar_figure shortly after the decedent's death ken lodgen mr lodgen the estate's accountant informed the coexecutors that the decedent may not have disclosed his entire gold coin collection to ms trompeter during the divorce proceeding and that ms trompeter may have a claim against the estate with respect thereto on date mr lodgen using only mr stuppler's first disclosure statement supplied mr levinson with a list allegedly identifying community_property coins that were not disclosed to ms trompeter during the divorce proceeding many of the undisclosed coins set forth on mr lodgen's list were included in mr stuppler's second disclosure statement which mr lodgen did not know about when he compiled his list based on the information provided by mr lodgen ms trompeter claimed that she was not told about the existence of some of the decedent's gold coins acquired during their marriage and that these coins were community assets on date she filed a creditor's claim against the estate in probate_court this claim was denied on or about date she sued the estate in the superior court alleging among other things that the decedent had fraudulently concealed coins valued in excess of dollar_figure million ten months later the parties to that proceeding purportedly settled the case for dollar_figure ie dollar_figure less an offset of dollar_figure in connection with the estate's payment of the shortage under the terms of the settlement the estate was required to pay ms trompeter the amount stated therein by the earlier of date or days after the estate recovered possession of the gold coins from superior on or around date the superior court entered judgment against the estate for dollar_figure plus interest from date at a rate of percent compounded semiannually through and including date to date the estate has not paid any of the judgment the estate deducted dollar_figure on the decedent's federal estate_tax_return for ms trompeter's claim a second claim against the estate was filed by vivian ballard wong ms wong she had a personal relationship with the decedent and they had planned to marry ms wong filed a creditor's claim against the estate based on the decedent's alleged promise to transfer one-third of his estate to her the claim was settled for dollar_figure a third claim against the estate was filed by joe pasko mr pasko the son of a female former acquaintance of the decedent mr pasko filed a creditor's claim against the estate on date alleging that the decedent had agreed to allow him to sell the decedent's diamonds jade and ivory collections ancient chinese artifacts and handmade unique wool rug he alleged that these goods were worth at least dollar_figure million and that he was due a dollar_figure million commission mr pasko's claim was denied on date mr pasko filed suit against the estate in the superior court the suit was successfully opposed by the estate on demurrer v preparation and filing of estate_tax_return right before the decedent died he discussed his holdings with ms gonzalez in depth and he introduced her to his attorneys accountants financial advisers bankers and acquaintances in the coin world following the decedent's death the coexecutors fired the decedent's long-time counsel and retained mr levinson to deal with estate_tax matters the coexecutors also fired the decedent's long-time accountant mr schiffer and retained the accounting firm of frankel lodgen lacher golditch sardie frankel lodgen to serve as the estate's accountants ms gonzalez instructed mr schiffer to forward the decedent's records to frankel lodgen patricia l bates ms bates of frankel lodgen prepared the estate and gift_tax returns based primarily on files received from mr schiffer ms bates arbitrarily chose in date to report the total value of the decedent's sterling preferred_stock at dollar_figure she and the coexecutors were both aware that prior valuations of his stock had been much greater than dollar_figure and that at least one recent appraisal had listed the value of his stock in excess of dollar_figure million ms bates had also valued the decedent's stock month earlier at dollar_figure a value which included a 70-percent discount that she believed applied primarily to take into account the decedent's minority interest and the fact that the stock was not paying dividends ms bates brought her dollar_figure valuation to the attention of ms gonzalez in or about date ms bates reported the value of the decedent' sec_191 coins at dollar_figure based on mr leidman's corresponding appraisal ms gonzalez did not inform ms bates that mr leidman had valued these coins at dollar_figure million on another occasion ms bates asked ms gonzalez whether the decedent owned any jewelry or diamonds at the time of his death ms gonzalez answered no and ms bates did not report any jewelry or diamonds as assets of the decedent's_estate on or before date frankel lodgen presented ms gonzalez with the decedent's_estate tax_return she reviewed this return at length with ms bates and both ms bates and ms gonzalez signed the return on that day ms polachek signed the return day later and days after that the coexecutors filed the decedent's_estate tax_return with respondent the coexecutors on behalf of the estate elected to value the estate on the alternate_valuation_date of date the gross_estate was returned at dollar_figure the taxable_estate was returned at dollar_figure vi reward agreement various sources alerted respondent that the estate may have underpaid its estate_tax among other things several individuals supplied respondent with information regarding the decedent's holdings and estimated values one of the primary catalysts for respondent's audit of the decedent's_estate tax_return was an informant's claim filed by mr goldberg and his cousin larry goldberg collectively the goldbergs following numerous discussions respondent and the goldbergs entered into a reward agreement under which the goldbergs agreed to provide respondent with certain information on the decedent and his estate in exchange for a reward not to exceed dollar_figure million under the agreement the goldbergs were required if necessary to testify before any court grand jury or any other forum investigating the decedent or his estate payment of the reward was contingent on respondent's conclusion that respondent received valuable information from the goldbergs which was not previously known and which directly resulted in the collection_of_taxes additions to tax fines and or penalties from the estate under the reward agreement the goldbergs were not entitled to a reward if the evidence furnished was of no value vii respondent's jeopardy_assessment on date respondent pursuant to a jeopardy_assessment seized assets located in two safe deposit boxes that were registered in the name of the trust the boxes were located respectively at first interstate bank and union bank in encino california the safe deposit box at first interstate bank contained gold coins which belonged to the trust and which with one exception were the additional coins reported on the decedent's_estate tax_return the safe deposit box at union bank contained assets that were not reported on the decedent's_return these unreported assets included gold and silver coins and a portion of the jewelry and gems in issue the coexecutors reported on the decedent's_estate tax_return that he neither owned nor had access to a safe deposit box at the time of his death in addition to the two safe deposit boxes at the banks the decedent had a safe in his house the coexecutors knew of the existence and location of the safe and safe deposit boxes and they knew that the decedent had access to all three safes opinion7 congress has imposed a graduated estate_tax on wealth passing from one generation to another the decedent was a man of considerable wealth and his transfer of this wealth to the objects of his bounty was subject_to this tax to a significant degree to the extent that his wealth could be excluded from his taxable_estate his estate_tax burden would be reduced and a greater portion of his wealth would pass on to the coexecutors who were his daughters and only beneficiaries from the point of view of the coexecutors they would benefit directly by the removal of any value from the decedent's taxable_estate taxpayers may remove value from an estate and otherwise minimize their taxes by employing any legitimate means in the case at hand the question is whether the means employed by the during the trial respondent elicited testimony from witnesses who included kathleen goldberg ira m goldberg and larry goldberg we find little of this testimony to be credible much of their testimony was vague elusive uncorroborated inconsistent and self-serving mr goldberg in particular is a person of questionable veracity he did not reveal assets held by superior which rightly belonged to the estate he is a paid informant who is biased and he was involved in litigation with the estate which fostered ill will between him and the estate's representatives under the circumstances we are not required to and we do not rely on the testimony of these witnesses to support respondent's positions herein see 106_f3d_1519 11th cir 887_f2d_1520 11th cir affg tcmemo_1988_275 449_f2d_311 9th cir affg per curiam tcmemo_1969_48 266_f2d_698 9th cir affg in part and remanding in part tcmemo_1957_129 87_tc_74 estate were legitimate respondent argues they were not respondent has generally determined that the estate acting through its coexecutors attempted to conceal assets from the government intentionally undervalued assets and intentionally overvalued deductions respondent has adjusted the reported values of the subject assets and deductions determined values for the unreported assets and determined that the estate committed fraud the estate generally argues that it did nothing fraudulent according to the estate it may have misvalued some of the reported assets and deductions and failed to report some other assets but it did not do so with the requisite fraudulent intent the estate also asserts that it did not misvalue the items to the extent determined by respondent we must disentangle the proffered values of decedent's wealth and determine whether the disputed items are adjustments to his reported taxable_estate we also must pass on respondent's determination of fraud fraud is a powerful assertion that we do not take lightly a bright line exists between fraudulent and negligent conduct and an attempt to remove value from an estate does not necessarily constitute fraud one is not required to arrange his or her affairs so that the government will receive more tax than it is rightfully owed nor is it fraudulent to construe an ambiguous law reasonably in a manner that is adverse to the government fraud occurs however when a taxpayer deliberately overvalues property with an eye towards tax_evasion or attempts to conceal taxable assets from the reach of the commissioner property includable in a decedent's gross_estate is included at its fair_market_value on either the date of the decedent's death or the alternate_valuation_date described in sec_2032 fair_market_value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts sec_20_2031-1 estate_tax regs see also sec_2031 sec_2032 fair_market_value is a factual determination and the trier of fact must weigh all relevant evidence of value and draw appropriate inferences 323_us_119 304_us_282 respondent's determination of fair_market_value is presumed correct and the taxpayer must prove it wrong rule a 290_us_111 an actual arm's-length sale of property is most indicative of its fair_market_value assuming that the date of the sale is close to the valuation_date see 87_tc_78 79_tc_938 if actual sales are not available fair_market_value is determined based on a hypothetical willing buyer and a hypothetical willing seller these hypothetical persons are not specific individuals or entities and their hypothetical characteristics may differ from the personal characteristics of the actual seller or a particular buyer 823_f2d_483 11th cir affg tcmemo_1985_595 658_f2d_999 5th cir 644_f2d_1282 9th cir affg 71_tc_235 94_tc_193 55_tc_172 see also mandelbaum v commissioner tcmemo_1995_255 affd without published opinion 91_f3d_124 3d cir experts often help the court determine fair_market_value we need not follow an expert's opinion however when it is contrary to our judgment if we believe it appropriate we may adopt or reject an expert's opinion in its entirety helvering v national grocery co supra pincite or adopt only selective portions of the opinion 86_tc_547 see 16_f3d_338 9th cir affg tcmemo_1992_98 with these basic principles in mind we turn to the issues in dispute fair_market_value of the decedent's sterling preferred_stock before addressing the value of the decedent's sterling preferred_stock we pause briefly to decide a relevancy issue raised by the estate as to facts concerning sterling's redemption of the sterling preferred_stock respondent argues that the date redemption of the sterling preferred_stock sets the stock's fair_market_value on the applicable_valuation_date respondent contends that the stock's fair_market_value totals dollar_figure an amount that respondent derives from adding the redemption price of dollar_figure to the dollar_figure amount that was paid for interest the estate argues that facts concerning the redemption are irrelevant to our determination the estate claims that the redemption was not foreseeable on the applicable_valuation_date of date given sterling's questionable financial condition and its failure to meet redemptions which were scheduled but not made before that date the estate points to the purchase agreement under which sterling could not redeem any of the sterling preferred_stock or pay any dividends with respect thereto if the redemption or payment would violate the terms of the senior debt or occur during any period of default on senior debt the estate also observes that sterling had forgone partial redemptions in and we disagree with the estate that facts concerning the redemption are irrelevant to our determination of value although these facts may not necessarily set the fair_market_value of the sterling preferred_stock on the applicable_valuation_date see estate of scanlan v commissioner tcmemo_1996_331 adjustments made to redemption price to account for passage of time as well as the change in the setting from the date of the decedent’s death to the date of the redemption affd without published opinion 116_f3d_1476 5th cir we believe they are relevant to our determination of that fair_market_value see 88_tc_38 81_tc_999 see also 720_f2d_1114 9th cir affg 78_tc_728 estate of scanlan v commissioner supra that the sterling preferred_stock would be redeemed on or before the date date set forth in the purchase agreement at or about the price stated therein was foreseeable on date based on the facts available on that date doherty v commissioner supra pincite the estate is mistaken in asserting that sterling's financial position was too weak on date to effectuate a redemption of the sterling preferred_stock on or after that date sterling's through cash-flow was positive and its losses for and stemmed mainly from its amortization of intangible assets and deferred financing costs sterling's loss in was also attributable to the one-time writeoff of dollar_figure an expense that sprang automatically from the death of a party subject_to the underlying noncompetition agreement sterling also realized net_income of dollar_figure in although sterling's income statement did not report this income until after the applicable_valuation_date it is reasonable to conclude under the facts herein that sterling had or could have obtained enough information on date to ascertain that it would report a significant amount of net_income for that year the fact that sterling had not effectuated partial redemptions in or is also not controlling redemptions during those periods were based on a best efforts standard and sterling's failure to redeem the sterling preferred_stock during those years under the circumstances herein does not support a finding that sterling would have breached its obligation to effectuate the mandatory redemptions which were scheduled for each date through indeed sterling met its obligation to redeem the decedent's sterling preferred_stock when it redeemed all sterling preferred_stock on date we will overrule the estate's relevancy objection to the admissibility of facts concerning the redemption turning to the valuation issue special rules govern the valuation of corporate stock when stock is listed on an established_securities_market the stock's value usually equals its listed market price when stock is not listed on such a market the stock's value may be based on arm's-length sales if any that have occurred within a reasonable_time of the valuation_date 79_tc_938 in the absence of arm's-length sales the value of unlisted stock may be based on the value of listed stock of the subject corporation or if the corporation has no listed stock the listed stock of like corporations engaged in the same or a similar line_of_business sec_2031 92_tc_312 unlisted stock may also be valued indirectly by reference to the subject corporation's net_worth its prospective earning power its dividend-earning capacity its goodwill its management its position in the industry the economic outlook for its industry the degree of control represented by the block of its stock to be valued and the amount and type of its nonoperating assets if not considered elsewhere see estate of hall v commissioner supra pincite estate of andrews v commissioner supra pincite sec f estate_tax regs see generally revrul_59_60 1959_1_cb_237 in ascertaining the value of stock in a decedent's_estate all shares of that stock are aggregated see 674_f2d_761 9th cir when ascertaining the value of unlisted stock by reference to listed stock a discount from the listed price may be warranted in order to reflect the unlisted stock's lack of marketability such a discount commonly known as a marketability discount reflects the absence of a recognized market for closely held stock and accounts for the fact that closely held stock is generally not readily transferable see mandelbaum v commissioner tcmemo_1995_255 a marketability discount also reflects the fact that a buyer may have to incur a subsequent expense to register the unlisted stock for public sale see estate of trenchard v commissioner tcmemo_1995_121 the estate must prove the presence and amount of a marketability discount rule a estate of gilford v commissioner supra pincite respondent did not call an expert at trial to support respondent's determination that the value of the decedent's sterling preferred_stock was dollar_figure respondent relies mainly on sterling's financial condition and sterling's ability to redeem the decedent's shares in accordance with the purchase agreement the estate counters that the fair_market_value of the shares was dollar_figure the estate called an expert herbert t spiro mr spiro to support this value and the court received his report into evidence see rule f mr spiro who is certified by the american society of appraisers was a professor of finance at california state university northridge california from to he currently manages a professional consulting organization which specializes in economic feasibility assessment and financial analysis mr spiro valued the sterling preferred_stock by referencing the price-to-book values of comparable publicly traded preferred_stock issues and arriving at a percentage to apply to the sterling preferred_stock he concluded that the sterling preferred_stock was generally equivalent to a c and or d rated security and that the sterling preferred_stock was closer to a d rating because it was nonpaying and much of sterling's debt was technically in default he noted that near the applicable_valuation_date sterling had dollar_figure million in accrued but undeclared dividends on all of its stock and dollar_figure million of accrued but unpaid interest mr spiro identified comparable preferred_stock issues from those issues he concluded that the following companies' issues at the high end of the d rating and the low end of the c rating were comparable to the sterling preferred_stock transworld airlines twa rymer foods rymer and spi holding spi twa's preferred_stock had a d rating and was trading near the alternate_valuation_date pincite percent of its call price rymer's preferred_stock had a c rating and was trading near the alternate_valuation_date pincite percent of its call price spi's preferred_stock had a c rating and was trading near the alternate_valuation_date pincite percent of its call a c rated security is a nonpaying issue a d rated security is a nonpaying issue of an issuer that is in default on its debt price mr spiro used the and percentages from these comparable issues to derive a multiple to apply to the redemption price of sterling's preferred_stock to arrive at its freely traded value he settled on a 15-percent multiple for the sterling preferred_stock concluding that an upward adjustment to the percentages derived from the comparable issues was necessary because sterling had a positive cash-flow and was timely paying interest and principal on its senior debt he calculated that the freely traded value of each subject share was dollar_figure ie percent of the dollar_figure redemption price exclusive of accrued dividends and that the freely traded value of all of the decedent's sterling preferred_stock totaled dollar_figure mr spiro reduced this freely traded value by percent to reflect the stock's alleged lack of marketability and opined that the fair_market_value of the decedent's sterling preferred_stock on the applicable_valuation_date was dollar_figure we are unpersuaded by mr spiro's analysis and opinion the sterling preferred_stock was a better grade than a c or d rated security in addition to the fact that sterling was paying its monthly operating_expenses sterling was servicing its senior debt the fact that sterling may have postponed paying interest and or principal on some of its liabilities is not entitled to much weight because any postponed payment was done with the consent of the relevant creditor mr spiro also relied inappropriately on companies that were not comparable to sterling twa for example had filed for bankruptcy on date and its auditor had expressed substantial doubt concerning its ability to continue as a going concern sterling by contrast was not in bankruptcy moreover its through financial statements were accompanied by its auditor's unqualified opinion on the validity of those statements the auditor did not conclude that sterling was on the verge of bankruptcy or that its future corporate existence was in doubt likewise rymer's financial status resembled that of twa rymer had been told that its line of credit would not be renewed which raised serious concerns that absent its recapitalization it would be driven into bankruptcy nothing in the record persuades us that sterling was on the verge of bankruptcy to the contrary the record indicates that sterling was a viable entity that recapitalized primarily to alter its capital structure finding no help from the only expert to testify on this issue we are left to value the decedent's sterling preferred_stock based on the record at hand we do not agree with respondent that the redemption price of the sterling preferred_stock equals its fair_market_value on date a date that preceded the redemption by months sterling's mandatory obligation to redeem the stock however does establish a benchmark for determining the applicable_value we concluded above that it was foreseeable on date that sterling would redeem the sterling preferred_stock on or before date at or about the price stated in the purchase agreement we conclude similarly that a hypothetical willing buyer would have bought and a hypothetical willing seller would have sold the decedent's sterling preferred_stock on date at a price that approximated the present_value of the amounts that a holder of the decedent's sterling preferred_stock would have received for the mandatory redemptions on each december of through sterling was obligated to redeem approximately shares of sterling preferred_stock from the decedent or a successor holder taking into account the fact that dividends accrued daily under the purchase agreement at the rates which were set forth therein we find that sterling was obligated to pay the following amounts for the redeemed shares on the respective dates dollar_figure dollar_figure and dollar_figure applying a reasonable discount rate of percent to each amount to ascertain its present_value on date we find that these payments were worth dollar_figure dollar_figure and dollar_figure on that date we conclude that we find these amounts by using well-established present_value formulae for purposes of our computation we assume that the sterling preferred_stock was issued on date although the record discloses that sterling issued the sterling preferred_stock in date the record does not reference a specific date the applicable_value of the decedent's sterling preferred_stock was approximately dollar_figure dollar_figure dollar_figure dollar_figure on date we need not pinpoint exactly the fair_market_value of the decedent's sterling preferred_stock on the applicable_valuation_date suffice it to say that respondent determined that the applicable_value of the decedent's sterling preferred_stock including the accrued dividends was dollar_figure a value which is approximately percent less than the approximate fair_market_value which we determine herein and the estate has not persuaded us that the actual fair_market_value was less than respondent's determination we sustain respondent's determination on this issue see 80_tc_872 affd 757_f2d_1208 11th cir two hundred twenty-seven gold coins a the coins respondent determined that the applicable_value of the coins was dollar_figure million respondent called an expert steven conturi mr conturi to support this determination and the court received his report into evidence see rule f mr conturi has been in the retail and or wholesale rare coin business since he ascertained that the value of the coins was dollar_figure by referencing the price at which the coins last traded on the open market as listed in certain numismatics newsletters mr conturi acknowledged that overall sale prices in the coin market were lower toward the later part of but concluded that this recession had little if any effect on premium coin collections like the trompeter collection mr conturi did not factor in any type of discount to arrive at his conclusion of fair_market_value the estate argues that the applicable_value of the coins was between dollar_figure million and dollar_figure million the estate relies on two experts the first expert maurice rosen mr rosen is the president of numismatic counseling inc a rare coin company that specializes in assembling and managing investment portfolios he has been the editor of the rosen numismatic advisory a provider of coin analysis and market commentary since and he was a part-time grader at ngc from through he valued the coins according to the following methodology first he assigned an unadjusted value to each coin based on raw price data and relevant grading factors in so doing he graded percent of the coins the same as pcgs percent of the coins lower than pcgs and percent of the coins higher than pcgs in the case of one set of coins the 6-piece amazonian set he did not grade the set but relied solely on his opinion as to its fair_market_value second he aggregated each coin's unadjusted value to arrive at an unadjusted value for all coins third he adjusted his aggregated unadjusted value to reflect four discounts and one premium the first discount he testified was a tainted status discount that takes into account the market's awareness that the second grading by ngc was on the high side and that the initial grading by pcgs was arguably the more reliable of the two gradings the second discount he testified was a blockage discount that takes into account his belief that the market will react negatively to a sale of a large collection of coins at one time the third discount he testified was a market factor discount that takes into account his belief that the rare coin market was in a poor state on the applicable_valuation_date and that dealers were reluctant to buy gold coins except at bargain basement prices the fourth discount he testified was a contracts low bids discount that takes into account his belief that superior's contractual right to sell the coins at auction would have a depressing effect on their values mr rosen testified that the superior contract and the sale of all coins at one time would potentially foster a prearranged bidding scheme whereby buyers would deliberately bid low mr rosen established a range for each discount to percent for the tainted status discount to percent for the blockage discount to percent for the market factor discount and zero to percent for the contracts low bids discount acknowledging that his discounts overlapped somewhat he concluded that it was inappropriate to take the aggregated 75-percent maximum discount he took the aggregated 30-percent minimum discount and reduced the aggregated unadjusted value of the coins by this percent he then increased the resulting value by a small premium which he concluded ranged from zero to percent to reflect the recognition of the decedent's name and its connection to the collection mr rosen then reduced the new amount by percent to reflect superior's auction fee his unadjusted total valuation for the coins was dollar_figure after applying the aforementioned discounts premium and the 5-percent auction fee mr rosen concluded that the fair_market_value of the coins on the applicable_valuation_date was dollar_figure the estate's second expert julian m leidman mr leidman has dealt in rare coins full-time for over years he is a member of the american numismatic association and the professional numismatists guild he was retained by the estate to prepare five different appraisals of the subject coins four of these appraisals all of which are mentioned above in our findings_of_fact were for the coins for purposes of this proceeding mr leidman valued the coins at dollar_figure million in so doing he considered the decedent's contract to sell the coins through superior a declining coin market the large number of pieces contained in the collection the impact of flooding the market and the period of time in which the coins were to be sold he also assumed that the coins would be sold as a collection and not individually he contended that a 20-percent blockage discount was warranted but did not ascertain such a discount separately because he inherently factored this discount into his analysis although we find the experts helpful to our understanding of the world of numismatics we find none of them helpful to our determination of the fair_market_value of the coins mr conturi ascertained the fair_market_value of the coins based on the grades assigned by ngc and he gave no consideration to pcgs' grades which were the lower_of the two gradings mr rosen failed to consider market factors in reaching his conclusion of the coins' unadjusted value and he took into account novel discounts which are not recognized for federal tax purposes his tainted status discount for example rests on assumptions that we do not find to be valid on the facts herein this is also true for his market factor and contracts low bid discounts with respect to the contract low bid discount in particular auctions are an appropriate and often used means of presenting and selling rare coins we do not see how an auction sale would have a depressing effect on the sale prices of the decedent's coins as to the blockage discount a blockage discount typically reflects the depressing effect of placing a large block of stock on the open market for sale at one time see sec_20_2031-2 estate_tax regs see also estate of sullivan v commissioner tcmemo_1983_185 even if we were to assume that such a discount applied to the rare coin market which we do not find to be a valid assumption under the facts herein the discount would be inapplicable here because the trompeter collection was an impressive collection with many unique coins the market would have been able to handle all coins as evidenced by the fact that percent of the decedent's coins auctioned at the first auction sold there for an aggregate price that approximated the aggregate value calculated by the decedent nor do we find mr leidman helpful to our determination of the coins' fair_market_value he valued the coins at dollar_figure million based on the assumption that the coins would be liquidated because they had to be sold in making such an assumption mr leidman admittedly disregarded the mandate of sec_20_2031-1 estate_tax regs that fair_market_value is not to be determined by a forced sale price dollar_figure he also assumed inappropriately that the coins would be sold as a group and not individually mr leidman acknowledged on cross-examination that the coins would be worth dollar_figure million if the compulsion aspect was removed finding none of the experts helpful to our determination of the coins' fair_market_value we proceed to value the coins based on the record at hand we are guided by the decedent's valuation of the subject coins the decedent was a noted collector with at least years' experience in collecting and grading coins the record shows that he did an excellent job in ascertaining the value of coins he ascertained that the coins sold at the date auction were worth dollar_figure and these coins sold for approximately dollar_figure the actual sales_price differed by less than percent from the decedent's valuation of these coins the decedent valued the coins at dollar_figure although the estate presented some evidence of a buyer's market we find that the economic downturn would not have materially affected the sale of the coins because they were part of a premier collection we also do not believe under the facts herein that a reduction for an estimated seller's commission is warranted under sec_20_2053-1 estate_tax regs an item may be deducted on an estate_tax_return though its exact amount is not then known provided it is ascertainable with reasonable certainty and will be paid the superior court rescinded the contract with superior under which superior would receive a 5-percent seller's commission and the gold coins were returned to the estate we find no certainty that the estate will sell the coins in the future under a commission arrangement and even if we did we are unable to ascertain the amount of any future seller's commission with reasonable certainty we hold that the applicable_value of the coins is dollar_figure b thirty-six additional coins respondent determined that the applicable_value of the additional coins was dollar_figure respondent's expert mr conturi valued these coins using the same methodology that he employed to value the coins mr conturi concluded that the fair_market_value of the coins was dollar_figure on the alternate_valuation_date respondent concedes that the value of these coins is no higher than mr conturi's valuation the estate asserts that the fair_market_value of the coins was dollar_figure mr leidman valued of these coins and his analysis generally parallels his analysis for the coins he testified that of the coins had a fair_market_value of dollar_figure on the alternate_valuation_date neither he nor the estate addressed the value of the 36th coin at trial we have the same inherent problems with the experts' valuations of the additional coins as we did with their valuations of the coins we reject both of their opinions we are uncomfortable however with the value ascribed to these coins by respondent accordingly we proceed to value the coins based on the record at hand although the decedent did not value the additional coins he did value the coins mentioned above and the coins were sufficiently similar to the coins to allow us to rely on the decedent's valuation of the coins for purposes of valuing the additional coins the decedent valued the coins at dollar_figure a figure that is percent lower than the dollar_figure value ascertained by mr conturi based on our analysis of the coins we find that mr conturi overvalued the coins by percent we conclude that the fair_market_value of the additional coins on the applicable_valuation_date was dollar_figure ie dollar_figure less percent fair_market_value of unreported items respondent determined that the estate failed to report dollar_figure million in diamonds jewelry gems art and artifacts respondent's determination is based primarily on joe pasko's mr pasko claim for the dollar_figure million commission wherein he stated that the decedent retained him to sell assets that were worth at least dollar_figure million respondent's determination is also based on the value of the assets that were seized from the safe deposit boxes the estate has conceded that the estate failed to report approximately dollar_figure million of this dollar_figure million amount the estate argues that certain of the seized assets were property that the decedent had given in date to the coexecutors in their individual capacities the estate points to the testimony of the coexecutors to the effect that the decedent had given them most of the seized assets and that they had placed the assets in one of the safe deposit boxes for safekeeping we are unpersuaded by the coexecutors' testimony that the decedent gave them some of the seized assets and the record shows to the contrary eg several witnesses testified that they had seen some of the seized assets in the decedent's possession after the alleged gifts took place we look to the objective facts in the record and we find that a federal gift_tax_return was never filed reporting these items as gifts we also find that these items were seized from a safe deposit box that was in the name of the trust we conclude that the seized assets were owned by the decedent through the trust when he died and that they were includable in his gross_estate we are unable to conclude however that the estate failed to report dollar_figure million in assets as determined by respondent the record does not disclose all of the unreported assets that respondent believes makes up the disputed amount of approximately dollar_figure million and we conclude from the record that mr pasko was not knowledgeable on the full extent of the decedent's holdings following our detailed review of the record we find that the estate failed to report dollar_figure million of assets inclusive of the approximately dollar_figure million amount conceded by the estate in addition to the items which were seized from the safe deposit boxes the unreported assets consist mainly of gems jewelry furniture and a music collection other items a the dollar_figure shortfall respondent increased the decedent's adjusted_taxable_gifts by dollar_figure to reflect a post-death gift made to ms trompeter in connection with the dollar_figure payment to cftb ms trompeter was obligated to indemnify sterling for half of the amount_paid to cftb but because her subaccount had only dollar_figure in cash when the payment was due the coexecutors authorized the escrow agent to pay the dollar_figure shortage from the decedent's subaccount respondent determined that the estate's payment of the shortage coupled with the later offset of the dollar_figure in connection with the settlement of ms trompeter's claim was an adjusted taxable gift made by the coexecutors on behalf of the estate we disagree with respondent's determination although respondent is correct that ms trompeter became liable to the estate for dollar_figure when its assets were used to pay a portion of her obligation and that she never repaid this amount to the estate these facts standing alone do not mean that the estate made a dollar_figure gift to her the value of the loaned funds was included in the decedent's gross_estate thus no further addition to the decedent's_estate is warranted on account of this transaction we hold for the estate on this issue b the decedent's bad_debt deduction respondent increased the decedent's adjusted_taxable_gifts by dollar_figure to reflect respondent's disallowance of various bad_debt deductions claimed by the decedent on his federal_income_tax return the decedent claimed a dollar_figure short-term_capital_loss described as loans to third parties with respect to the following transactions on date he gave ms wong dollar_figure the underlying note conditions repayment of the loan on ms wong's sale of her residence on date he gave ms wong dollar_figure the record contains neither a note nor any other reliable evidence of a loan on date he gave dollar_figure to ms wong's mortgagee the record contains neither a note nor any other reliable evidence of a loan on date he gave phil skauronski mr skauronski dollar_figure and mr skauronski gave the decedent a note stating that he would repay the dollar_figure with percent interest in equal monthly payments and on date the decedent gave mr pasko dollar_figure mr pasko and the decedent both signed a note that did not provide for interest security collateral or a fixed schedule of repayment mr pasko has never made any payments on this loan respondent argues that these transactions were not bona_fide loans but unreported taxable_gifts the estate does not address the loans to mr skauronski and mr pasko the estate contends that the payments to ms wong were loans or in the alternative consideration for services rendered we agree with respondent an individual may claim a short-term_capital_loss for a nonbusiness_bad_debt that becomes worthless during the taxable_year sec_166 in order to do so however the debt must be bona_fide a bona_fide debt arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money sec_1_166-1 income_tax regs a bona_fide debt does not include an advance to a friend solely for reasons other than to make a profit case law establishes a two-part test for determining whether a transfer of money qualifies as debt first repayment of the purported debt cannot be contingent upon a future event second the transfer must be made with a reasonable expectation belief and intention that it will be repaid see 318_f2d_611 9th cir whether a transfer is made with the requisite expectation belief and intent is factual 326_us_521 and the following nonexclusive factors none of which is controlling by itself are relevant to this determination whether a note or other evidence_of_indebtedness exists whether interest is charged whether there is a fixed schedule for repayments whether any security or collateral is requested whether there is any written loan agreement whether a demand for repayment has been made whether the parties' records if any reflect the transaction as a loan whether any repayments have been made and whether the borrower was solvent at the time of the loan see zimmerman v united_states supra pincite 98_tc_594 affd 3_f3d_591 2d cir 18_tc_780 affd 205_f2d_353 2d cir these factors focus primarily on ascertaining the intent of the parties to the transfer through their objective and subjective expectations 748_f2d_1365 9th cir revg tcmemo_1983_120 a r l424_f2d_1330 9th cir applying this two part analysis to the subject transactions we find that the dollar_figure transfer to ms wong fails the first part of this analysis because the underlying note conditions repayment of the loan on the sale of her house she was under no absolute obligation to repay the loan she would never have to repay the loan for example if she never sold her home this transaction is not bona_fide debt for purposes of sec_166 as to the other transactions none of these transactions evidence a repayment contingency thus we conclude that they meet the first part of our analysis and turn to the second part we divide the remaining transactions as follows remaining transactions with or concerning ms wong transaction with mr skauronski and transaction with mr pasko ms wong's remaining transactions do not meet the second part of our analysis we find no note or evidence_of_indebtedness for the transactions we do not find that she was required to pay interest on the loaned amounts we do not find a fixed schedule of repayment security or collateral we do not find that the decedent or his estate demanded that she repay any part of the loaned amounts or that she actually repaid any amount we do not find that either she or the decedent considered either transaction a loan we conclude that ms wong's remaining transactions were not bona_fide loansdollar_figure as for the dollar_figure transfer to mr skauronski we find similarly although the estate presented evidence of a note issued to the decedent for the transaction we do not find this note dispositive we know nothing about mr skauronski but his name although the estate contends that the estate made a demand for repayment of the loaned proceeds the record doe sec_11 nor do we find that the subject amounts were paid to vivian ballard wong as compensation_for services rendered not support this contention we conclude that this transaction was not a bona_fide loan nor do we find that the transaction between the decedent and mr pasko was a bona_fide loan although the transaction is evidenced by a note signed by both mr pasko and the decedent the note provides no schedule of repayment no interest no security and no collateral nor were payments actually made on this note we conclude that this transaction was not a bona_fide loan because we find that none of the bad_debts claimed by the decedent were bona_fide loans we proceed to address whether the amounts of the purportedly worthless debts are included in the decedent's_estate tax computation as adjusted_taxable_gifts an estate's tax_liability equals the tentative_tax on the sum of the taxable_estate plus the adjusted_taxable_gifts less the aggregate tax on all gifts made after date sec_2001 adjusted_taxable_gifts are computed by subtracting certain deductions none of which are applicable herein and exclusions from the taxable_gifts that were made during the taxable_period sec_2001 94_tc_872 a taxable gift is any transaction whereby property is passed gratuitously to another sec_25_2511-1 estate_tax regs the decedent is allowed to exclude annually dollar_figure of the total gifts which he made to each person see sec_2503 we hold that the decedent's transfers to or on behalf of ms wong mr skauronski and mr pasko are includable in the decedent's_estate tax computation as taxable_gifts after applying the annual exclusion for each donee the decedent's adjusted_taxable_gifts for are increased by dollar_figure dollar_figure and dollar_figure respectively or a total of dollar_figure c the dollar_figure claim against superior respondent determined that the estate had a dollar_figure claim against superior and that this claim was miscellaneous property of the estate the estate valued this claim at zero on the estate_tax_return identifying it as a claim against superior for the release of coins assigned to superior the return noted that the probability and amount of any collection of this claim was unknown we hold for the estate on this issue the value of this claim was zero on the applicable_valuation_date as evidenced by the fact that the estate received only its coins back in settlement of its dispute with superior the value of the returned coins was included in the gross_estate as discussed above ms trompeter's claim respondent disallowed the estate's dollar_figure deduction for the claim of ms trompeter respondent argues primarily that a genuine controversy did not exist between ms trompeter and the estate and that the estate claimed the deduction solely to reduce its estate_tax liability respondent contends that the estate challenged the claim in probate_court to create the appearance of a valid claim and that ms trompeter's complaint in superior court was a sham respondent contends that the superior court's consent decree approving the purported settlement was not on the merits of her claim alternatively respondent argues even if the estate and ms trompeter were involved in a real controversy the estate has not proven that ms trompeter's claim was allowable under applicable state law respondent contends that the record does not show that coins were withheld from her during the divorce proceeding which is the linchpin of her claim the estate concedes that its original computation of the deduction for ms trompeter's claim was wrong and that subsequent recomputations are less than the reported amount the estate asserts that it is entitled to a deduction of dollar_figure we agree with respondent's result on this issue for purposes of computing a taxable_estate for federal estate_tax purposes an estate may deduct certain claims against it that are allowable by the laws of the jurisdiction under which the estate is being administered sec_2053 claims are deductible if they are based on the personal obligation of the decedent at the time of his or her death sec_20_2053-4 estate_tax regs a liability arising out of tort is an example of a claim that is deductible under sec_2053 the issue here is whether ms trompeter had a valid claim against the estate under california law we begin our inquiry by looking at the proceeding in the superior court which culminated in that court's entering a consent decree in favor of ms trompeter sec_20_2053-1 estate_tax regs provides that a consent decree before a local court will be accepted as a basis for an estate_tax deduction sec_20_2053-1 estate_tax regs further provides that the decision of a local court as to the amount and allowability under local law of a claim or administration expense will ordinarily be accepted if the court passes upon the facts upon which deductibility depends however it must appear that the court actually passed upon the merits of the claim this will be presumed in all cases of an active and genuine contest as noted by the court_of_appeals for the ninth circuit an order of a state court that adversely affects the tax right of the united_states and which is based upon a nonadversary proceeding does not foreclose the federal courts from independently determining the tax_liabilities 223_f2d_111 9th cir quoting 222_f2d_131 9th cir affg 19_tc_708 see also 102_tc_116 affd on this issue 70_f3d_34 5th cir as an initial matter we find that the state court_proceeding did not involve a real and bona_fide controversy between adverse parties and that the superior court's decree was not the result of its consideration of the merits of ms trompeter's claim see estate of nilson v commissioner tcmemo_1972_141 ms trompeter was the coexecutors' mother and the coexecutors' actions during the state court_proceeding were more akin to daughters' trying to share inherited wealth with their parent at the expense of the tax collector than a party suing another in a truly adversarial proceeding in a court of law as a point of fact the coexecutors did not investigate or legitimately challenge the validity of ms trompeter's claim before they let their mother receive a significant part of the decedent's_estate nor did ms trompeter pursue payment on the settlement in a meaningful manner she only pursued collection of the settlement when the superior court informed the parties there that they had neglected to file a dismissal in the case before this time neither party had acted on the settlement or moved toward final judgment in years the estate had recovered the coins from superior in and the estate's recovery_of the coins was the prerequisite to payment under the settlement agreement surely a reasonable party in an adversarial proceeding would have pursued collection of the settlement once the estate recovered the coins we hold that the state court action was nonadversarial we also are unpersuaded that the state court actually passed upon the merits of ms trompeter's claim or that the claim would have been allowed if examined on its merits mr lodgen's conjecture that coins in which ms trompeter had a community interest were not disclosed to her during the divorce proceeding was specious he relied inappropriately on unsubstantiated information acquired from superior and mr goldberg mr lodgen failed to take into account a second set of coins disclosed in the divorce settlement negotiations mr lodgen failed to recognize the relevant time period for compiling the decedent's coin holdingsdollar_figure we sustain respondent's determination on this issue ken lodgen included all coins purchased before date as coins that possibly were undisclosed by the decedent under cal civ code sec which was in effect at the time the earnings and accumulations of a spouse while living separate and apart from the other spouse are the separate_property of the spouse when we exclude the coins that were acquired after the decedent and sylvia trompeter separated on date and the coins without a proven purchase date we are unpersuaded that any of the decedent's coins in which ms trompeter had a community_property interest were excluded from barry stuppler's combined appraisal statements fraud_penalty respondent determined that the estate is liable for the fraud_penalty under sec_6663 respondent determined that the fraud_penalty applies to the underpayment_of_tax attributable to the omission of assets the undervaluation of assets and the deduction for ms trompeter's claim sec_6663 imposes a 75-percent penalty on an underpayment that is attributable to fraud see also sec_6664 definition of underpayment when respondent proves that some part of an underpayment is attributable to fraud the entire underpayment is attributable to fraud unless the taxpayer proves otherwise sec_6663 sec_6663 does not reach any portion of an underpayment for which there is reasonable_cause or for which the taxpayer acted in good_faith sec_6664 respondent must prove fraud by clear_and_convincing evidence sec_7454 rule b see also 84_tc_405 respondent must prove that the estate underpaid its taxes 466_f2d_11 5th cir 465_f2d_299 7th cir affg tcmemo_1970_274 94_tc_654 and that the estate did so with the requisite fraudulent intent fraud requires an intentional wrongdoing on the part of the taxpayer with the specific purpose of evading a tax believed to be owing 692_f2d_587 9th cir affg in part revg in part on other grounds 74_tc_1160 94_tc_316 92_tc_661 a fraudulent intent is present if the estate filed a return intending to conceal mislead or otherwise prevent the collection of tax see 317_us_492 767_f2d_618 9th cir affg tcmemo_1983_249 80_tc_1111 with respect to the first prong the estate concedes that it failed to report certain assets and undervalued other assets the estate also concedes that the nonreporting of these assets generated an underpayment of federal estate_tax we hold that respondent has met the first prong in that the record shows clearly and convincingly that the estate underpaid its tax liabilitydollar_figure turning to the second prong a fraudulent intent may be proven by circumstantial evidence because direct proof of a taxpayer's intent is rarely available reasonable inferences may be drawn from the relevant facts spies v united_states supra pincite akland v commissioner supra pincite stephenson v our disallowance of ms trompeter's claim also generates an underpayment commissioner 79_tc_995 affd 748_f2d_331 6th cir the fraudulent intent of an executor is treated as that of the estate see 69_tc_391 see also estate of fox v commissioner tcmemo_1995_30 affd without published opinion 100_f3d_945 2d cir estate of edens v commissioner tcmemo_1981_ affd without published opinion 696_f2d_989 4th cir courts have relied on certain indicia of fraud in deciding whether a taxpayer had the requisite fraudulent intent indicia of fraud include understating income maintaining inadequate records failing to file tax returns giving implausible or inconsistent explanations of behavior concealing assets failing to cooperate with tax authorities engaging in illegal activities attempting to conceal illegal activities and dealing in cash 91_tc_874 see also 796_f2d_303 9th cir affg tcmemo_1984_601 lee v commissioner tcmemo_1995_ these badges_of_fraud are nonexclusive 99_tc_202 the taxpayer's education and business background are also relevant to the determination of fraud id bearing these general principles in mind we turn to the indicia of fraud that are relevant to the instant case a undervaluation of assets respondent argues that the estate intentionally undervalued the decedent's gold coins and sterling preferred_stock and that this undervaluation evidences fraud we agree when we view the record as a whole we conclude clearly and convincingly that the estate intentionally undervalued the decedent's taxable_estate and that the estate did so with the specific intent of evading tax numerous facts evidence that the estate filed the decedent's federal estate_tax_return intending to evade federal estate_tax by undervaluing assets and overvaluing deductions first the estate's undervaluation of decedent's sterling preferred_stock was significant the estate reported that the applicable_value was dollar_figure and we have determined that the applicable_value was approximately dollar_figure the difference between these two values is dollar_figure or in other words the reported value was less than percent of our determined value although the estate attempts to place the blame for the undervalued sterling preferred_stock on ms bates the fact of the matter is that ms gonzalez obviously knew that ms bates' valuation of dollar_figure was wrong and reported ms bates' dollar_figure value aiming solely to evade tax ms gonzalez knew of a prior valuation of the sterling preferred_stock in excess of dollar_figure million and she knew that ms bates arbitrarily chose the dollar_figure figure reported on the estate_tax_return as the stock's value ms gonzalez also knew that ms bates had valued the stock at dollar_figure month before she valued it at dollar_figure given ms gonzalez's education and business acumen as well as her knowledge that the preferred_stock was entitled to certain preferences that the preferred_stock was accruing dividends daily at a substantial rate that the preferred_stock was soon going to be subject_to a mandatory redemption and that a redemption of the preferred_stock would result in the holder s thereof receiving millions of dollars in proceeds we are hard pressed to conclude as requested by the estate that ms gonzalez was ignorant of the approximate value of the decedent's sterling preferred_stock or that she thought that the stock was worth only dollar_figure we conclude the contrary second the estate undervalued decedent's gold coins by a significant amount the estate reported that the applicable_value of the coins was dollar_figure and that the applicable_value of the additional coins was dollar_figure we have determined that the applicable values were dollar_figure and dollar_figure respectively the total value that we have determined for the coins is dollar_figure more than the total value reported by the estate or in other words the reported total value was approximately percent of the determined total value ms gonzalez knew that the coins had been appraised at a significantly higher amount than the value reported on the return and she secreted mr leidman's dollar_figure million appraisal from ms bates given the additional fact that ms gonzalez and the decedent had discussed his coin holdings at a time close to his death and that she had represented to the court in the superior litigation that the coins were worth more than dollar_figure million we find that ms gonzalez was well aware that the dollar_figure total value reported on the return was wrong third the estate failed to report any value for the assets in the safe deposit box at union bank and in an attempt to conceal the existence of this box the coexecutors stated on the estate_tax_return that decedent did not own or have access to a safe deposit box at the time of his death in a further attempt to conceal the existence of the safe deposit box at union bank the coexecutors failed to report the existence of the safe deposit box at first interstate bank choosing only to report a value for of the coins which were found thereindollar_figure in yet another attempt to conceal the contents of the safe deposit box at union bank ms gonzalez falsely answered in the negative when ms bates asked her whether the decedent owned any jewelry or diamonds when he died the decedent did own jewelry and diamonds the estate would have reported the existence of the safe deposit box at first interstate bank by stating on the decedent's_estate tax_return that he had access to a safe deposit box when he died such a statement would most likely have led respondent to investigate further the circumstances of the box which could have led respondent to discover the safe deposit box at union bank at that time and these assets were kept in the safe deposit box at union bank fourth the estate chose to report no value for the dollar_figure million of assets which we have determined were includable in the decedent's gross_estate the coexecutors knew about these assets as evidenced by the fact that the decedent informed ms gonzalez of his holdings at about the time of his death the decedent also introduced ms gonzalez to the persons who would know most about his holdings and he had mr schiffer schedule a list of the decedent's assets as of date mr schiffer's list included the decedent's gun collection music collection and various diamonds and other gems none of which were included in the decedent's gross_estate fifth the coexecutors fabricated and deducted on the estate_tax_return a dollar_figure claim by ms trompeter as mentioned above we find that the coexecutors devised this claim attempting to transfer some of the decedent's property to their mother at the expense of the tax collector in fact the estate has conceded in this proceeding that it overstated its deduction for the claim by dollar_figure we conclude that this factor evidences fraud b implausible and inconsistent explanations of behavior respondent argues that ms gonzalez offered numerous implausible and inconsistent explanations of her behavior and that these explanations evidence fraud we agree we find much of ms gonzalez' testimony incredible and inconsistent with reliable evidence in the record for example ms gonzalez testified that the decedent gave her some of the disputed jewelry and that she placed this jewelry in the safe deposit box unbeknownst to him this testimony was pointedly rebutted by the credible testimony of independent witnesses to the effect that the decedent possessed this jewelry after the time when the gift was allegedly made ms gonzalez also equivocated on when the decedent purportedly gave her the assets seized from the safe deposit box in one breath ms gonzalez stated that she received the assets at one time while in another breath she stated that she received the assets at a different time ms gonzalez also testified that she intentionally kept documents from ms bates the estate's tax preparer testifying with respect to mr leidman's dollar_figure million appraisal that she did not think the appraisal was relevant to the estate's valuation of the coins the appraisal was relevant to ms bates' reporting of that value and ms gonzalez' secretion of that and other documents from ms bates is an example of implausible behavior under the facts herein ms gonzalez also testified incredibly that she did not know that she had signed the decedent's_estate tax_return under the penalties of perjury ms gonzalez is college educated and she has prior work experience she also is knowledgeable on and has experience with her personal income_tax returns which are filed under penalties of perjury we conclude that this factor evidences fraud c omission or concealment of assets respondent argues that the estate omitted and concealed assets and that these actions evidence fraud respondent points to the fact that the estate failed to report a large amount of assets the estate concedes that certain items were wrongly omitted from the decedent's_estate tax_return but argues that the estate did not fail to report these items intending to conceal them the estate contends that the items seized from the safe deposit boxes were given to the coexecutors in date and that the coexecutors believed that the assets were not includable in the estate we agree with respondent that the presence of unreported assets in this case is evidence of fraud the decedent had advised ms gonzalez of his holdings at a point in time that was close to his death and he had introduced her to all of his advisers the coexecutors simply did not include all of the decedent's assets in his gross_estate even if we were to assume arguendo and contrary to the record that the decedent gave some items to the coexecutors in date this does not explain why several other items were omitted from the decedent's_estate tax_return this also does not explain the fact that the estate attempted to conceal the safe deposit boxes from the government by reporting on the decedent's_estate tax_return that he neither owned nor had access to a safe deposit box when he died the coexecutors knew that the decedent owned the safe deposit boxes at the banks or at least that he had access to them the coexecutors also knew that the decedent owned and had access to the safe in his house we conclude that this factor evidences fraud d failure to cooperate respondent argues that fraud is seen from ms gonzalez' failure to include any diamonds in the estate and her failure to disclose all of the decedent's records revealing purchases of jewelry gems art and other artifacts when originally requested we agree ms gonzalez failed initially to provide respondent with all of the decedent's canceled checks which evidenced the purchase of jewelry gems art and other artifacts ms bates also asked ms gonzalez whether the decedent owned any jewelry or diamonds when he died and ms gonzalez answered in the negative we conclude that this factor evidences fraud e other considerations each coexecutor is college educated and both have extensive work experience each knows about her obligation to file valid federal tax returns f conclusion after our detailed review of the facts and circumstances of this case in conjunction with our analysis of the factors mentioned above we conclude that respondent has clearly and convincingly proven that the coexecutors filed the decedent's_estate tax_return intending to conceal mislead or otherwise prevent the collection of tax we also conclude that sec_6664 does not insulate the estate from this penalty we find no reasonable_cause for the underpayment nor that the estate acted in good_faith with respect to the underpayment we sustain respondent's determination of fraud we have considered all arguments made by the parties and to the extent not addressed above find them to be irrelevant or without merit to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division sep uniform issue list legend taxpayer ira x iray amount a amount amountc financial_institution a financial_institution financial_institution c dear this is in response to your request dated date supplemented by correspondence dated date and date in which your authorized representative on your behalf requested a waiver of the 60-day rollover requirement _contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer represents that she received a distribution of amount a from ira x she further represents that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to the medical_condition of her husband for whom she was the primary caregiver and who had always managed their financial affairs taxpayer further represents that the amount distributed has not been used for any purpose at the time of the distribution on date and during the rollover period taxpayer was preoccupied with the care of her husband her husband required frequent doctor visits and constant attention at home taxpayer has provided documentation from her husband's attending physician attesting to his medical_condition additionally taxpayer had never been involved with the couple's financial affairs taxpayer's intent was to move the ira to a bank that was closer to her home on date taxpayer deposited amount a to her savings account with financial_institution b taxpayer represents that she believed the account was an ira on date taxpayer met with her financial adviser and on his advice withdrew amount b from her account at financial_institution b she deposited this amount into her savings account with financial_institution c on date taxpayer learned that the distribution from ira x had not been properly rolled over on date taxpayer transferred amount c to ira y on april15 taxpayer transferred amount b from her savings account at financial_institution c to ira y based on the facts and representations you request a ruling that the internal_revenue_service the service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount a sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other eroperty is paid into an ira for the benefit of such individual not later than the h day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible retirement rlan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 or sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 i r s date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer including documentation from her husband's attending physician are consistent with her assertion that her failure to accomplish a timely rollover was caused by a medical_condition of her husband and her duties as his primary caregiver taxpayer has provided documentation from her husband's attending physician attesting to his medical_condition therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira x provided all the other requirements of code sec_408 except the 60-day requirement are met with respect to such contribution the transfer of amount a to ira y will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 a of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable this letter is directed only to the taxpayer who requested it sec_611 o k of the code provides that it may not be used or cited as precedent a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file with this office if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t2 ne manager ans technical group enclosures deleted copy of letter_ruling notice of intention to disclose cc