Conrad Janis and Maria G. Janis - Page 14

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          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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