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the gallery’s basis in the collection should have been reported
in accordance with the discounted value that had been determined
by the Panel and agreed to by Conrad and Carroll for estate tax
purposes (i.e., $14,500,000) rather than the undiscounted value
(i.e., $36,636,630). Consequently, adjustments were made to the
gallery’s reported COGS as follows:
Year COGS Per Return COGS As Adjusted
1990 $102,000 $40,369
1991 1,660,000 1,055,779
1992 45,000 17,180
1993 235,000 98,008
1994 727,500 287,929
1/1/95-11/8/95 3,365,040 1,331,811
11/9/95-12/31/95 395,000 156,333
1996 985,000 389,842
1997 1,277,000 505,410
These adjustments to the gallery’s COGS caused a corresponding
adjustment to the gallery’s reported profits or losses for those
years. Accordingly, respondent determined that the trust should
have reported that net operating losses totaling only $193,144
were distributed to Conrad and Carroll on its 1995 fiduciary
income tax return. Respondent also determined that the
partnership should have reported income rather than losses from
its operation of the gallery during 1996 and 1997.
Based upon these adjustments, respondent determined that
adjustments to petitioners’ joint income tax returns for 1995,
1996, and 1997 were appropriate. With respect to their joint
income tax returns for 1995, respondent determined that
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