Many jewelers believe that due to time spent in the industry as well as faith and trust in their vendors, they are qualified to provide professional appraisals, potentially exposing everyone working with the appraisal to liability.
At the Gem Lab, Careful methodology is employed to determine whether we’re looking at an elaborate fake or the real deal, and detailed reports are generated to evaluate and authenticate jewelry and gemstones, to provide the ultimate confidence for you and your customers.
Case Study: “Fine, Unheated Burmese Ruby”
A customer brings in a “ruby ring” for sizing. At the bench, the jeweler makes no assumptions about the “ruby” and treats it with the gold-standard of care by heat syncing the stone while soldering in the new metal. However, when the ring cools, it becomes clear that the appearance of the stone has dramatically changed. The stone shows discoloration and fracturing upon closer examination of the pavilion, visible through the table. Needless to say, this sort of transformation evokes grave concern.
Our GIA Graduate Gemologists examine the stone, and find clear cut evidence of fracture filling. Returning to the customer, who is understandably upset, she produces a receipt from another jeweler indicating that the ruby is “fine, untreated Burmese material.” Upon reaching out to the selling jeweler, he checks his records and insists that the ruby is untreated in any way based upon their receipt for the stone.
Because the client doesn’t know who to believe, the stone is sent off to a lab that uses mass spectrometry to definitively determine the make-up of the material, and it is determined that it is indeed a fracture filled stone, rendering the result a man made product. The unsuspecting jeweler who sold the client the stone now must take responsibility for replacing it with what the customer paid for–a fine, untreated ruby. The liability may extend beyond the replacement of the stone and the jeweler’s reputation with the client and the community.
This expensive mistake and the time and money needed to solve it could have been avoided entirely if the jeweler had had their gem purchases verified through proper gem identification processes.
Regardless of disclaimers and disclosures on the sales receipt or a lab report provided to the buyer after the sale, not explicitly disclosing treatments, accurate qualities, and the material being sold is a violation of FTC regulations as well as applicable state-level regulations.
Case Study: The “30,225 Carat Topaz”
This case study concerns the issue of Federal income tax liabilities, centering around incorrectly executed appraisals. It is a long case study, but an interesting one particularly for attorneys.
In 1972, a gem collector, hereafter referred to as the petitioner, purchased for $750 a colorless topaz crystal weighing approximately 19 pounds (30,225 carats). In its natural form, topaz generally is a transparent, colorless gem. In 1974, however, petitioner learned of a new treatment process involving the combined use of radiation and heat which could produce an artificial blue color in certain topaz crystals. The appearance of a colorless topaz crystal that is successfully treated by this process is similar to naturally occurring blue topaz and therefore such a crystal is more valuable than its colorless counterpart.
In 1975, petitioner’s topaz crystal was partially treated with radiation, causing it to turn a deep brown color and creating undesirable “cloudiness” in the stone. Petitioner was informed that the crystal might turn blue if treated further with heat, but he did not subject the crystal to any further treatment.
During the early months of 1977, the curator of the Minerals Department at the Smithsonian visited the petitioner in his home, and soliciting donations of gemstone and mineral specimens to the Smithsonian to increase its collections, the curator expressed an interest in acquiring the topaz crystal.
In July of 1978, petitioner placed the large topaz crystal on loan to the Smithsonian. In October of 1978, petitioner obtained an appraisal of the topaz crystal reflecting a value of $846,300. That value was based on the appraiser’s opinion that the crystal successfully could be treated with the new radiation process and would yield approximately 10,578 carats (35 percent of its total weight) of irradiated blue topaz gemstones, which were selling in retail jewelry stores in October of 1978 for approximately $80 per carat.
In November of 1978, petitioner obtained a second appraisal of the topaz crystal reflecting a value of $800,000, based on the appraiser’s opinion that the crystal, if successfully treated, would yield 10,075 carats (approximately 33 percent of its total weight) of irradiated blue topaz gemstones which were then selling in retail jewelry stores for approximately $80 per carat. The $800,000 value reflected the appraiser’s subtraction of $6,000 for cutting costs. On December 3, 1978, petitioner donated to the Smithsonian a 10-percent undivided interest in the topaz crystal.
In December of 1979, the petitioner obtained two appraisals of the topaz crystal, each of which reflected that as of December of 1979, the retail price of irradiated blue topaz gemstones had increased from $80 to $100 per carat. Accordingly, the two appraisals obtained in 1979 reflected a fair market value for the topaz crystal of $1,057,800 and 1,000,000, respectively. On December 31, 1979, the petitioner donated to the Smithsonian an additional 24.3-percent undivided interest in his topaz crystal.
In December of 1980, the petitioner again obtained an appraisal of the topaz crystal, which reflected that the retail price of irradiated blue topaz gemstones had increased from $100 to $120 per carat. Accordingly, the appraisal reflected a fair market value for the crystal of $1,269,360. On December 31, 1980, the petitioner donated to the Smithsonian an additional 23.6-percent undivided interest in his topaz crystal. At the time of trial, the petitioner continued to hold approximately a 40-percent undivided interest in the topaz crystal.
Petitioner reported on his Federal income tax returns for 1978, 1979, 1980, a fair market value for the topaz crystal of $846,300, $1,057,800, and $1,269,360, respectively, and claimed a charitable contribution with respect to the percentage interests therein donated to the Smithsonian in each of the years, as follows:
Percentage Interest Amount of Claimed
Year in Topaz Donated Charitable Deduction
1978 ………… 10.0% $ 84,630
1979 ………… 24.3% 257,045
1980 ………… 23.6% 299,569
In his notice of deficiency, the IRS determined that the fair market value of the topaz crystal in each of the years in issue was $750 and allowed petitioners’ deductions for the percentage interests therein donated to the Smithsonian in the respective amounts of $75, $182, and $177 for 1978, 1979, and 1980.
This is a massive difference in value. What happened?
The primary issue for the decision relates to the amount of the charitable contribution deductions to which petitioners are entitled under section 170 for the contribution of the topaz crystal to the Smithsonian. If a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property as of the date the property is contributed, reduced as provided in section 170(e)(1). Sec. 1.170A-1(c)(1), Income Tax Regs. The generally accepted definition of fair market value as set forth in respondent’s regulations 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 sell and both having reasonable knowledge of relevant facts.” Sec. 1.170A-1(c)(2), Income Tax Regs. The proper market for purposes of determining the value of donated property is a question of fact to be resolved by considering all the relevant evidence in the record. Anselmo v. Commissioner, 757 F.2d 1208, 1213 (10th Cir. 1985), affg. [Dec. 40,105] 80 T.C. 872 (1983); Chiu v. Commissioner [Dec. 42,027], 84 T.C. 722 (1985).
With regard to the value of the topaz crystal donated to the Smithsonian in 1978, the petitioner argues that because the topaz crystal could have been converted into a blue topaz crystal through a process of radiation and heat treatment and cut into finished gemstones which then could have been sold in retail jewelry stores, that potential use was the highest and best use of the topaz crystal and the crystal should be valued on that basis. The price for which irradiated blue topaz gemstones sold in jewelry stores at retail was $80 per carat in 1977, $100 per carat in 1978, and $120 per carat in 1980. Thus, based on the crystal’s total asserted useable carat weight (after cutting) of approximately 10,578 carats, the petitioner alleges that the fair market value of the topaz crystal was $846,300 in 1978, $1,057,800 in 1979, and $1,269,360 in 1980.
Respondent argues successfully that the value of the topaz crystal did not exceed $750 in 1978, 1979, or 1980. First, the respondent argues that the petitioner’s valuation method for the topaz crystal is erroneous because the crystal would not have been marketable to customers of retail jewelry stores in the form in which it was donated to the Smithsonian (i.e., as a 19-pound rough topaz crystal with a brown coloring). Respondent contends that petitioner could have sold the topaz crystal only to gem cutters or collectors and that we must value the crystal according to the price it would bring in those markets, rather than in retail jewelry stores. Further, the respondent emphasizes that the topaz crystal donated by the petitioner herein was brown, not blue. Relying on the testimony of his expert witness on irradiation, the respondent argues that at the time of the donation, the prospect of successfully converting the color of the topaz crystal through further treatments of radiation and heat was too remote and speculative to have influenced the value thereof. Respondent’s expert witness appraised the value of the crystal as follows:
VALUE AS OF:
————————————————–
Dec. 3, 1978
Dealer/Cutter…………$453.75
Collectors………… $2,831.25
Dec. 31, 1979
Dealer/Cutter…………$589.88
Collectors………… $3,419.64
Dec. 31, 1980
Dealer/Cutter…………$ 766.84
Collectors………… $4,190.62
Petitioner’s experts concede that the topaz crystal would not have been sold in retail jewelry stores in the form in which it was donated, but would have been sold to gem cutters or collectors. Nevertheless, the petitioner argues that we must value the crystal as if it already had been converted to a blue topaz crystal, cut into small gemstones which then would be available for sale in retail jewelry stores. In 1977, however, the radiation and heat treatment was still in the experimental stage. Only one individual, the petitioner’s expert, actually was experimenting with the process, and he testified that during the year before he was not irradiating gemstone specimens owned by other individuals, such as the petitioner. The court was not convinced that the slight possibility of enhancing the color of the petitioner’s topaz crystal was sufficient to cause the value of the crystal to increase from $750 to over $1.2 million.
Because petitioner’s experts appraised the topaz crystal with regard only to its value as irradiated blue topaz gemstones sold at retail, those opinions are not a reliable basis from which to determine the value of the topaz crystal as it existed in 1977, 1978, and 1979 (and as it still exists today).
Needless to say, these findings will expose the petitioner to additional tax payments and penalties, as well as legal fees.
What went wrong?
The crystal should have been appraised for what it was, rather than what it could potentially become. The petitioner’s appraiser, quite simply, performed the appraisal incorrectly with disastrous consequences for the client. Our certified valuation experts would not have made this mistake.
Case study courtesy of Leagle.com.