- 14 -
Accordingly, Conrad and Carroll each reported that their COGS was
$197,500 (i.e., $395,000 total) for this period. Conrad and
Carroll also reported net profits of $130,366 and $134,176,
respectively, from their interests in the gallery’s operations
during this period.
As reflected on the partnership’s Forms 1065 for 1996 and
1997, the partnership valued the gallery’s inventory in
accordance with the collection’s undiscounted value.
Accordingly, the partnership reported that the value of the
gallery’s inventory at the beginning of 1996 was $31,123,850
(i.e., an amount equal to the sum of the reported values of the
inventory comprising Conrad’s and Carroll’s one-half interests in
the gallery as of the end of 1995). The following explanation
was given on the Forms 8275 that were attached to the
partnership’s Forms 1065 for 1996 and 1997:
Value of paintings of the Sidney Janis Art Gallery
where [sic] valued at $36,636,630 by the IRS at the
decedent’s (Sidney Janis’) death. After a blockage
discount allowed by the IRS on audit the estate paid
inheritance tax on $14,500,000 (the after blockage
value of the paintings). In accordance with the
decision in Elizabeth G. Augustus, 40 BTA 1201, * * *
(ACQ), the heirs in operating the art gallery used the
individual value of the paintings prior to the blockage
discount as the basis of the paintings sold in
determining gain or loss on these sales.
The partnership reported the following amounts from its
operation of the gallery during 1996 and 1997:
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