                      T.C. Memo. 2009-212



                    UNITED STATES TAX COURT



  ESTATE OF ROGER D. MALKIN, DECEASED, JONATHAN R. MALKIN AND
       MELISSA MALKIN, EXECUTORS, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 9222-05, 9252-05,    Filed September 16, 2009.
                9253-05, 9531-05.



         As part of his estate plan, D created two family
    limited partnerships (FLPs) and four trusts. D was the
    general partner of each FLP; he and two trusts were the
    limited partners of each FLP. The beneficiaries of the
    trusts were D’s two children. To the first FLP (MFLP), D
    transferred stock. To the second FLP (CRFLP), D transferred
    stock and his interests in four LLCs.

         In the estate tax notice of deficiency, R
    determined that the value of the property D transferred
    to the FLPs should be brought back into the value of
    the gross estate under either sec. 2035(a) or

    1
      Cases of the following petitioners are consolidated
herewith: Estate of Roger D. Malkin, Donor, Deceased, Jonathan
R. Malkin and Melissa Malkin, Executors, docket Nos. 9252-05,
9253-05, and 9531-05.
                              - 2 -

     2036(a)(1) or (2), I.R.C. R also disallowed certain
     deductions. In the gift tax notices of deficiency, R,
     viewing the facts somewhat differently, determined that
     the same transferred property should be taxed (in the
     alternative) as gifts to D’s children. R also
     determined that several transfers D made during the
     last 3 years of his life were gifts to his children.

          1. Held: Because, within the meaning of sec.
     2036(a)(1), I.R.C., D retained for his life the
     possession and enjoyment of the stock he transferred to
     the FLPs and did not transfer that stock in a bona fide
     sale for an adequate and full consideration in money or
     money’s worth, the value of D’s gross estate includes
     the value of that transferred stock.

         2. Held, further, D made indirect gifts to his
    children of interests in the LLCs when he transferred
    to the trusts limited partnership interests in CRFLP
    and transferred to CRFLP interests in the LLCs.

         3. Held, further, D made various direct and
    indirect gifts to his children in the last 3 years of
    his life.

         4. Held, further, five deductions of the estate
    are disallowed (one only in part) and, pursuant to sec.
    2053(c)(2), I.R.C., all other deductions may not exceed
    the value of estate property subject to claims.


    Harvey A. Strickon, Gerald J. Fields, and Edward L. Peck,

for petitioners.

     Lydia A. Branche, Shawna A. Early, and Frederick C. Mutter,

for respondent.
                                - 3 -

               MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:    By separate notices of deficiency (the

notices), respondent determined a deficiency of $6,192,938 in the

Federal estate tax of the Estate of Roger D. Malkin (the estate

and decedent, respectively) and deficiencies in decedent’s

Federal gift taxes of $7,832,277, $232,247, and $3,434,163 for

1998, 1999, and 2000, respectively.

     Decedent created two family limited partnerships (FLPs) and

four trusts.   Decedent was the general partner of each FLP; he

and two trusts were the limited partners of each FLP.    The

beneficiaries of the trusts were decedent’s two children,

Jonathan R. Malkin (Jonathan Malkin) and Melissa Malkin.    To the

first limited partnership, the Roger D. Malkin Family Limited

Partnership (MFLP), decedent transferred stock.   To the second,

the Cotton Row Family Limited Partnership (CRFLP), decedent

transferred stock and his interests in four limited liability

companies (LLCs), which he controlled with his son, all called

“Malkin & Company, LLC”, and, after the first, denominated by

roman numerals, e.g., “Malkin & Company IV, LLC”.   We refer to

those LLCs individually as Malkin I, Malkin II, etc., and

together as the Malkin LLCs.2



     2
      Although decedent and his son controlled five LLCs called
Malkin & Co., decedent transferred to CRFLP his interests in only
four of them. See infra.
                                 - 4 -

     Unless otherwise stated, section references are to the

Internal Revenue Code in effect for the date of decedent’s death

and for the years in issue and Rule references are to the Tax

Court Rules of Practice and Procedure.   We round all dollar

amounts to the nearest dollar.

     After concessions,3 and taking into account our disposition

of certain issues, the issues for decision are as follows:

     (1)   Within the meaning of section 2036(a)(1), whether
           decedent retained for his life the possession or
           enjoyment of, or the right to the income from, the
           property he transferred to the FLPs; if so, whether
           decedent nonetheless transferred that property in a
           bona fide sale for an adequate and full consideration
           in money or money’s worth;

     (2)   in the alternative, in 1998 and 2000, whether decedent
           made a taxable gift to his children when he transferred
           property to the FLPs and transferred limited
           partnership interests in those entities to his
           children’s trusts;

     (3)   in 1998, whether decedent made a taxable gift to
           Jonathan Malkin when he paid a $64,760 debt of Malkin
           I;

     (4)   in 2000, whether decedent made taxable gifts to his
           children when he paid a $3,878,409 debt of Malkin I;



     3
      Regarding the estate tax notice, respondent concedes that
petitioners properly valued certain stock and options decedent
held at his death; petitioners concede that respondent properly
valued certain stock decedent held at his death and properly
included two bank accounts in his determination of decedent’s
gross estate. Regarding the 1998 and 2000 gift tax notices, the
parties agree that certain cash transfers decedent made to the
trusts were gifts. Regarding the 1998 and 1999 gift tax notices,
petitioners offer no evidence or argument that decedent was
entitled to a $20,000 (as opposed to $10,000) annual gift tax
exclusion. We take petitioners’ silence as their concession.
                               - 5 -

     (5)   in 2000, whether decedent made   taxable gifts to his
           children when, with respect to   Malkin IV, he paid a
           $370,061 debt, made a $177,795   capital contribution,
           and assigned a promissory note   worth approximately $1
           million;

     (6)   in 1998, 1999, and 2000, whether decedent made taxable
           gifts to Melissa Malkin when he transferred to her
           $68,000, $149,000, and $100,000, respectively;

     (7)   in 2000, whether decedent made a taxable gift to
           Jonathan Malkin when he transferred to him $830,000;
           and

     (8)   whether the estate is entitled to deductions claimed on
           Form 706, United States Estate (and Generation-Skipping
           Transfer) Tax Return, Schedule J, Schedule K, and
           Schedule O of $1,952,045, $16,085,376, and $230,925,
           respectively.

     Petitioners bear the burden of proof.    See Rule 142(a).

Petitioners have not raised the issue of section 7491(a), which

shifts the burden of proof to the Commissioner in certain

situations.   We conclude that section 7491(a) does not apply here

because petitioners have not produced any evidence that

establishes the preconditions for its application.
                                - 6 -

                           FINDINGS OF FACT4

     Some facts have been stipulated and are so found.       The

stipulation of facts, with accompanying exhibits, is incorporated

herein by this reference.    At his death, decedent resided in

Mississippi.   When the petitions were filed, Jonathan Malkin

resided in Connecticut and Melissa Malkin resided in Virginia.

Background

     Decedent died on November 22, 2000.       From 1980 until his

death, decedent served as the chairman and chief executive

officer of Delta & Pine Land Co. (D&PL).       During the course of

his employment with D&PL, decedent acquired more than 1 million

D&PL shares and options.

Formation and Funding of MFLP, JRM Trust I, and MM Trust I

     In 1997, decedent asked his tax return preparer and

financial planner, Richard Moriarty (Mr. Moriarty) of the

accounting firm Arthur Andersen LLP (Andersen), to assist with

his estate planning.   Specifically, decedent wanted to transfer

some D&PL shares (worth more than $16 million) to his children,


     4
      Pursuant to Rule 151(e)(3), each party, in its answering
brief, must “set forth any objections, together with the reasons
therefor, to any proposed findings of any other party”.
Petitioners have filed an answering brief, but they have failed
to set forth objections to respondent’s proposed findings of
fact. Accordingly, we must conclude that petitioners have
conceded that respondent’s proposed findings of fact are correct
except to the extent that those findings are clearly inconsistent
with either evidence in the record or petitioners’ proposed
findings of fact. See, e.g., Jonson v. Commissioner, 118 T.C.
106, 108 n.4 (2002), affd. 353 F.3d 1181 (10th Cir. 2003).
                                - 7 -

but he did not want them to sell those shares.    Mr. Moriarty, not

being an expert in estate planning, introduced decedent to his

colleague at Andersen, Charles Ogeka (Mr. Ogeka).    Decedent, Mr.

Moriarty, and Mr. Ogeka, in addition to decedent’s attorneys,

Jerome C. Hafter (Mr. Hafter), longtime counsel to D&PL, and

Marian S. Alexander (Ms. Alexander), had a series of conference

calls to discuss decedent’s estate plan.    In the end, decedent

decided to form an FLP to hold the D&PL shares, and two trusts,

one for each of his children, to hold limited partnership

interests in the FLP.

     In 1998, Ms. Alexander organized MFLP and the two trusts;

i.e., the Jonathan R. Malkin Irrevocable Trust (JRM Trust I) and

the Melissa Malkin Irrevocable Trust (MM Trust I; with JRM Trust

I, the MFLP trusts).    In June 1998, decedent executed documents

establishing JRM Trust I and MM Trust I.    Mr. Hafter and Ms.

Alexander were the original trustees of both trusts, and they

served as trustees until shortly after decedent’s death.    Each

trust had its own bank account.

     In August 1998, an unidentified source deposited $25,000 in

the bank account of each MFLP trust.    Each trust then issued its

respective beneficiary a $25,000 demand promissory note payable

to that beneficiary.    A few days later, decedent made gifts of

$500,000 to both trusts.
                               - 8 -

     On August 31, 1998, the following occurred.   A Certificate

of Mississippi Limited Partnership was filed on behalf of MFLP

with the Mississippi secretary of state.   MFLP had 100,000

partnership units: 1,000 general partnership units and 99,000

limited partnership units.   Decedent transferred 365,371 D&PL

shares worth $16,782,120 to MFLP for 1,000 general partnership

units and 98,494 limited partnership units.   The trustees of each

MFLP trust transferred $25,000 to MFLP for 253 limited

partnership units.   The trustees of each trust then entered into

a contract with decedent for the purchase of 44,297 limited

partnership units for $442,424 in cash and a 9-year, $3,981,816

self-canceling installment note (SCIN) with interest of 7.14

percent.5   The trustees executed the SCINs and transferred the

cash to decedent, and he assigned the limited partnership

interests to the trustees.   The trustees executed security

agreements granting decedent a security interest in the limited

partnership interests.

Interest Payments From the MFLP Trusts to Decedent

     On August 31, 1999, JRM Trust I and MM Trust I both owed

decedent a $284,302 interest payment on their respective SCINs.

On November 19, 1999, both trusts transferred $50,000 to an


     5
      An SCIN is a “debt obligation that is automatically
extinguished at the creditor’s death. * * * Any remaining balance
on the note becomes uncollectible. Self-canceling notes are
typically used in estate planning.” Black’s Law Dictionary 1163
(9th ed. 2009).
                                - 9 -

unidentified source.    On March 9, 2000, an unidentified source

wired $289,000 to decedent.    The trustees of MM Trust I issued

Melissa Malkin a $289,000 demand promissory note, dated March 10,

2000, payable to her.    On March 13, 2000, decedent wired $289,000

to Jonathan Malkin.    The trustees of JRM Trust I issued Jonathan

Malkin a $289,000 demand promissory note, dated March 17, 2000,

payable to him.   On March 21, 2000, an unidentified source wired

$289,000 to decedent.

     On August 31, 2000, JRM Trust I and MM Trust I both owed

decedent a $284,302 interest payment on their respective SCINs.

On that day, the trustees of JRM Trust I issued a $284,302 demand

promissory note to Jonathan Malkin, payable to him, and the

trustees of MM Trust I issued a like note to Melissa Malkin,

payable to her.   On September 1, 2000, decedent transferred

$44,718 to the trustees of MM Trust I and $44,574 to the trustees

of JRM Trust I, and $284,292 to both Jonathan Malkin and Melissa

Malkin.   On the same day, both Jonathan Malkin and Melissa Malkin

transferred $284,292 to their respective trusts.    Also on that

day, the trustees of JRM Trust I issued Jonathan Malkin a $52,813

check and the trustees of MM Trust I issued Melissa Malkin a

$52,793 check.    On September 5, 2000, two $284,302 checks dated

August 31, 2000, and payable to decedent from the MFLP trusts

were debited from the trusts’ respective bank accounts.
                              - 10 -

Decedent’s Pledging of MFLP Assets

     On September 24, 1999, decedent and the trustees of the MFLP

trusts authorized decedent to pledge MFLP assets, without

limitation, to secure his personal debt to Bank of America (the

first resolution).   That day, decedent pledged to Bank of America

365,000 of the 365,371 D&PL shares MFLP held.   On December 7,

1999, to support the first resolution, decedent executed a

personal guaranty (the first guaranty) promising to use his

“personal assets” to repay his debt, plus interest.   The first

guaranty states that decedent agrees to pay MFLP a fee of

$32,587, 0.75 percent of the $4,345,000 required as security for

his debt.   On April 19, 2000, decedent and the trustees

authorized decedent to repledge MFLP assets, without limitation,

to secure his personal debt to Morgan Guaranty Trust Co. of New

York (the second resolution and Morgan Guaranty, respectively).

That day, decedent repledged the 365,000 D&PL shares to Morgan

Guaranty; on June 19, 2000, decedent pledged to Morgan Guaranty

the remaining 371 D&PL shares MFLP held.   On April 22, 2000, to

support the second resolution, decedent executed a second

personal guaranty (the second guaranty) again promising to use

his “personal assets” to repay his debt, plus interest.    The

second guaranty does not state a dollar amount for a fee.    On

September 1, 2000, decedent transferred $39,140 to MFLP.
                               - 11 -

The Malkin LLCs

       Decedent and his son were the initial members of the Malkin

LLCs.    Their ownership interests in the Malkin LLCs, as reported

for tax purposes, were as follows.

   Entity           Decedent     Jonathan Malkin        Other
Malkin I             30.00%             70.00%            --
Malkin II            46.25              46.25            7.5%
Malkin III             0.02             99.98             --
Malkin IV            99.98               0.02             --
Malkin V             47.50              47.50            5.0

       Malkin III and Malkin IV were the capital members of a

partnership decedent and his son controlled.     Malkin I owned

43.33 percent of the general partner of that partnership.       Malkin

II and Malkin V each had a single $500,000 investment in two

different private equity ventures.

Decedent’s Diagnosis

       In May 1999, decedent was diagnosed with pancreatic cancer.

Several months later, decedent decided to create another FLP to

hold his interests in the Malkin LLCs and another two trusts for

his children to hold limited partnership interests in that second

FLP.

Formation and Funding of CRFLP, JRM Trust II, and MM Trust II

       Ms. Alexander organized CRFLP and the two trusts, i.e.,

J.R.M. Irrevocable Trust (JRM Trust II) and M.M. Irrevocable

Trust (MM Trust II; with JRM Trust II, the CRFLP trusts).       In
                              - 12 -

November 1999, a Certificate of Mississippi Limited Partnership

was filed on behalf of CRFLP with the Mississippi secretary of

state.   CRFLP had 100,000 partnership units: 1,000 general

partnership units and 99,000 limited partnership units.   On

February 29, 2000, in exchange for all 100,000 CRFLP partnership

units, decedent transferred to CRFLP a 30-percent interest in

Malkin I, a 50-percent interest in Malkin II, a 99-percent

interest in Malkin IV, and a 50-percent interest in Malkin V.6

On the same day, decedent executed an agreement purporting to

assign 44,500 CRFLP limited partnership interests to each CRFLP

trust.

     On March 1, 2000, decedent executed documents establishing

the CRFLP trusts.   Mr. Hafter and Ms. Alexander were the original

trustees of both trusts, and they served as trustees until

shortly after decedent’s death.   Each trust had its own bank

account.   The trustees of both trusts entered into contracts with

decedent for the purchase of 44,500 CRFLP limited partnership

units for $400,500.   The terms of the contract for MM Trust II

provided for a 10-percent downpayment of $40,050 and a 9-year,

$360,450 promissory note with interest of 6.8 percent.    The terms

of the contract for JRM Trust II provided for a 10-percent



     6
      We note that decedent transferred percentage interests in
the Malkin LLCs different from those he had reported for tax
purposes. The parties, however, stipulated both sets of numbers
and do not discuss the discrepancy. We follow their stipulation.
                                - 13 -

downpayment of $40,500 and a 9-year, $360,000 promissory note

with interest of approximately 6.8 percent.    About a week after

the signing of the contracts, decedent transferred $40,525 to

each CRFLP trust.   Two days after those transfers, each trust

transferred $40,500 to decedent as the 10-percent downpayment for

the CRFLP limited partnership units.7    The trustees also executed

the promissory notes for the remainder of the purchase price.

The trustees executed security agreements granting decedent a

security interest in the limited partnership interests.

     In November 2000, decedent transferred 80,000 D&PL shares to

CRFLP.   Before transferring the shares, decedent had pledged them

as collateral for a personal loan from Morgan Guaranty, and the

shares remained as collateral after the transfer.

     The CRFLP trustees never paid interest on the promissory

notes; decedent died before the first payment became due, and the

estate never made any demand.

     MFLP and CRFLP constituted decedent’s entire estate plan for

transferring wealth to his two children.    Decedent, by his will,

left nothing to them, and his estate was insolvent.




     7
      We note the $450 discrepancy between the $40,050
downpayment MM Trust II owed according to its contract and the
$40,500 it in fact paid.
                              - 14 -

Decedent’s 1998 Transfers

     In November, decedent paid a $64,760 debt of Malkin I.

Throughout the year, decedent transferred $68,000 to Melissa

Malkin.

Decedent’s 1999 Transfers

     Throughout the year, decedent transferred $149,000 to

Melissa Malkin.

Decedent’s 2000 Transfers

     In May, decedent paid a $3,878,409 debt of Malkin I and a

$370,061 debt of Malkin IV.   Decedent also assigned to Malkin IV

his interest in a promissory note worth approximately $1 million.

In September, decedent paid $177,795 to Malkin IV related to a

capital call.

     In June, decedent transferred to Jonathan Malkin $730,000 in

exchange for a promissory note for that amount.   In November,

decedent wired Jonathan Malkin and Melissa Malkin both $100,000

in exchange for a promissory note from each for that amount.

Deductions of the Estate

     On March 1, 2002, decedent’s executors filed Form 706, on

which they claimed deductions of $1,961,766 for Schedule J

administration expenses,8 $16,085,376 for Schedule K debts of

decedent, and $230,925 for a Schedule O charitable contribution,



     8
      Respondent has allowed the $9,721 deduction for funeral
expenses. He has disallowed all other Schedule J deductions.
                              - 15 -

for a total of Schedule J, K, and O deductions of $18,278,067.

The two largest claims among the Schedule K debts are a

$12,936,886 loan secured by D&PL stock worth $10,475,066 and a

$2,346,724 obligation to Malkin IV.

      The Form 706 reported assets worth $15,458,411 available to

satisfy decedent’s debts.   In addition, the estate includes funds

from two accounts not reported on Schedule C worth $1,198,148 and

$51,038.

                              OPINION

I.   Introduction

      As part of his estate plan, decedent created two FLPs and

four trusts.   Decedent was the general partner of each FLP; he

and two trusts were the limited partners of each FLP.   The

beneficiaries of the trusts were decedent’s two children.     To the

first limited partnership, MFLP, decedent transferred stock.     To

the second, CRFLP, decedent transferred stock and his interests

in four LLCs, which he controlled with his son.

      In the estate tax notice, respondent determined that the

value of property decedent transferred to the FLPs should be

brought back into the value of the gross estate under either

section 2035(a) or section 2036(a)(1) or (2).   He also disallowed

certain deductions.   In the gift tax notices, respondent, viewing

the facts somewhat differently, determined that the same

transferred property should be taxed (in the alternative) as
                                  - 16 -

gifts to Jonathan Malkin and Melissa Malkin.       Respondent also

determined that several transfers decedent made during the last 3

years of his life were gifts.

II.   Inclusion in the Gross Estate: Section 2036(a)

      A.    Burden of Proof

      We have decided supra that petitioners bear the burden of

proof.     As stated in Estate of Reichardt v. Commissioner, 114

T.C. 144, 151 (2000), in the context of transactions involving

family members, that burden is “especially onerous”.

      B.    General Rules

      Section 2001(a) imposes a tax “on the transfer of the

taxable estate of every decedent who is a citizen or resident of

the United States”, and section 2051 defines the taxable estate

as “the value of the gross estate”, less applicable deductions.

Section 2031(a) specifies that the value of the gross estate

comprises the values of “all property, real or personal, tangible

or intangible, wherever situated”, to the extent provided in

sections 2033 through 2046.       Section 2033 broadly provides that

the “value of the gross estate shall include the value of all

property to the extent of the interest therein of the decedent at

the time of his death.”       Sections 2034 through 2045 then

explicitly mandate inclusion of several more narrowly defined

classes of assets.     Section 2036(a) provides the following:
                               - 17 -

     SEC. 2036.   TRANSFERS WITH RETAINED LIFE ESTATE.

          (a) General Rule.--The value of the gross estate
     shall include the value of all property to the extent
     of any interest therein of which the decedent has at
     any time made a transfer (except in case of a bona fide
     sale for an adequate and full consideration in money or
     money’s worth), by trust or otherwise, under which he
     has retained for his life or for any period not
     ascertainable without reference to his death or for any
     period which does not in fact end before his death--

               (1) the possession or enjoyment of, or
          the right to the income from, the property,
          or

               (2) the right, either alone or in
          conjunction with any person, to designate the
          persons who shall possess or enjoy the
          property or the income therefrom.

     C.   MFLP, CRFLP, and Section 2036(a)(1)

           1.   Respondent’s Argument

     “For purposes of section 2036(a), a transferor retains the

enjoyment of property if there is an express or implied agreement

at the time of the transfer that the transferor will retain the

present economic benefits of the property, even if the retained

right is not legally enforceable.”      Estate of Reichardt v.

Commissioner, supra at 151.    Respondent contends that both an

express and an implied agreement existed between decedent and the

trustees of the MFLP and CRFLP trusts that decedent would retain

the present economic benefits of the property decedent

transferred to MFLP and CRFLP.    According to respondent, the

“actual use of all * * * MFLP’s and CRFLP’s assets to secure and
                                - 18 -

collateralize decedent’s pre- and post-death financial

obligations belies the claim that no such understanding existed.”

            2.   Petitioners’ Argument

     Petitioners deny that any express or implied agreement

allowed decedent to retain the present economic benefits of the

property he transferred to the FLPs.     As to MFLP, petitioners

assert that its partners, i.e., decedent, the general partner,

and Mr. Hafter and Ms. Alexander, trustees for the limited

partners, approved both resolutions pledging the D&PL shares.

Even though the shares served as collateral for personal loans to

decedent, to support each resolution decedent signed a guaranty

that he would use his “personal assets” to repay his debt, plus

interest.    Petitioners argue that pledging the D&PL shares was an

investment decision, made at arm’s length, in the best interests

of MFLP.9   As to CRFLP, petitioners assert that nothing in the

record indicates that decedent pledged any CRFLP asset to secure

his personal obligations, noting that decedent had pledged the

80,000 D&PL shares to Morgan Guaranty before he transferred them

to CRFLP.




     9
      Indeed, the resolutions on which petitioners rely claim as
much. The first resolution, for example, resolves “that it is in
the best interests of * * * [MFLP] for the General Partner to be
authorized to pledge Partnership assets as additional security
for an existing loan to Roger D. Malkin individually”.
                               - 19 -

          3.   Analysis

     We agree with petitioners as to the interests in the four

Malkin LLCs decedent transferred to CRFLP.    Nothing in the record

suggests that any express or implied agreement gave decedent the

right to retain the present economic benefits of those LLC

interests.10   Petitioners fail to convince us, however, with

respect to the D&PL stock.   We agree with respondent that an

implied agreement existed between decedent and the MFLP and CRFLP

trustees that decedent would retain the right to use that

transferred stock.11

     Section 20.2036-1(b)(2), Estate Tax Regs., states that a

decedent retains “[t]he ‘use, possession, right to the income, or

other enjoyment of the transferred property’ * * * to the extent

that the use, possession, right to the income, or other enjoyment

is to be applied toward the discharge of a legal obligation of

the decedent, or otherwise for his pecuniary benefit.”    Decedent

applied all the D&PL stock he transferred to the FLPs toward the

discharge of his legal obligations.     He applied the 365,371 D&PL

shares he transferred to MFLP toward the discharge of a legal



     10
      To the contrary, we find that decedent made indirect gifts
to his children when he transferred to CRFLP his interests in the
four Malkin LLCs. See infra sec. III.D.1. of this report.
     11
      Because we find an implied agreement, we do not address
whether an express agreement existed that gave decedent the
possession of, enjoyment of, or right to income from the
transferred stock.
                              - 20 -

obligation when he and the MFLP trustees pledged those shares to

secure his personal loans; he applied the 80,000 D&PL shares he

transferred to CRFLP toward the discharge of a legal obligation

before he even transferred that stock.   See Estate of Bigelow v.

Commissioner, 503 F.3d 955, 965 (9th Cir. 2007) (“A key problem

with the conveyance of the * * * property to * * * [the family

limited partnership] is, for estate tax purposes, that the * * *

debt that was secured by the property was not also transferred.

This discrepancy indicates that * * * [the family limited

partnership] repaid the debt in decedent’s stead despite no legal

obligation to do so.”), affg. T.C. Memo. 2005-65; Strangi v.

Commissioner, 417 F.3d 468, 477 (5th Cir. 2005) (“Certainly, part

of the ‘possession or enjoyment’ of one’s assets is the assurance

that they will be available to pay various debts and expenses

upon one’s death.”), affg. T.C. Memo. 2003-145.

     As to the 365,371 D&PL shares MFLP held, petitioners have

failed to show that the decision of decedent, Mr. Hafter, and Ms.

Alexander to pledge those shares to secure the personal debts of

decedent was a business decision made at arm’s length.    First,

although petitioners offer evidence that, almost 10 months after

signing the first guaranty and almost a year after signing the

first resolution, decedent transferred $39,140 to MFLP,

petitioners offer no evidence that a fee of 0.75 percent was a

reasonable fee.   See, e.g., Bissey v. Commissioner, T.C. Memo.
                                - 21 -

1994-540 (“We cannot ascertain whether a price is sufficient if

there is no evidence of what an arm’s-length price would have

been.”).    Second, petitioners argue that the decision to allow

decedent to pledge the D&PL stock to secure his personal debt was

in the best interests of MFLP.    Yet petitioners do not explain

what business purpose of MFLP that decision served.    In the

absence of any evidence bearing on that purported business

decision, we need not, and do not, attach any weight to

petitioners’ baseless assertions.    See Rule 143(b) (“[S]tatements

in briefs * * * do not constitute evidence.”); see also, e.g.,

Van Heemst v. Commissioner, T.C. Memo. 1996-305 (“Statements in

briefs * * * are not evidence, Rule 143(b), and we do not accept

petitioner’s assertion without evidence.”).    We find that

decedent retained the right to use the 365,371 D&PL shares he

transferred to MFLP.

     As to the 80,000 D&PL shares CRFLP held, petitioners argue

that nothing in the record indicates that decedent ever pledged

any CRFLP assets to secure any personal financial obligation.

Yet petitioners concede that decedent had pledged the 80,000 D&PL

shares to Morgan Guaranty before he transferred those shares to

CRFLP.     Petitioners evidently believe that timing is dispositive,

but we see no relevant distinction between CRFLP’s pledging

shares itself and receiving previously pledged shares.    See

Estate of Bigelow v. Commissioner, supra.     In either case, CRFLP
                                - 22 -

holds property pledged to discharge a personal obligation of

decedent.    Moreover, petitioners offer no business reason for

having CRFLP hold 80,000 D&PL shares pledged to secure decedent’s

personal debt.    We find that decedent retained the right to use

the 80,000 D&PL shares he transferred to CRFLP.

            4.   Conclusion

     As respondent succinctly argues:

          Decedent’s relationship to his * * * [D&PL shares]
     never changed. He controlled them before and after the
     transfer to MFLP and CRFLP. The trusts * * * had no role in
     the affairs of the partnerships. Neither the trustees nor
     decedent’s children objected to his use of the stock to
     obtain personal loans. Decedent’s unrestricted use of * * *
     [the D&PL shares] suggests that there was an implied
     agreement that the * * * transferred [D&PL shares] would be
     available for decedent’s use.

For the reasons stated, we find that decedent retained “the

possession or enjoyment of” the D&PL shares he transferred to the

FLPs within the meaning of section 2036(a)(1).

     D.     The Bona Fide Sale Exception

     We now consider whether decedent’s transfers of D&PL stock

nonetheless fall within the section 2036(a) exception for “bona

fide” sales for “adequate and full consideration in money or

money’s worth”.     We find they do not.   Our analysis follows.
                              - 23 -

          1.   General Rule

     In Estate of Bongard v. Commissioner, 124 T.C. 95, 118

(2005), we stated:

          In the context of family limited partnerships, the
     bona fide sale for adequate and full consideration
     exception is met where the record establishes the
     existence of a legitimate and significant nontax reason
     for creating the family limited partnership, and the
     transferors received partnership interests
     proportionate to the value of the property transferred.
     * * * The objective evidence must indicate that the
     nontax reason was a significant factor that motivated
     the partnership’s creation. * * * A significant purpose
     must be an actual motivation, not a theoretical
     justification.

          2.   Respondent’s Argument

     Respondent argues simply that, with regard to the D&PL

stock, decedent had no legitimate and significant nontax reason

for creating either of the FLPs.

          3.   Petitioners’ Argument

     Petitioners contest respondent’s conclusion.   Petitioners

claim that decedent had many legitimate and significant nontax

reasons for creating the FLPs.   First, the FLPs allowed decedent

“to provide for his children” by “[preserving] the upside

potential value of the shares and keep[ing] that growth in his

children’s hands and not his hands”.   Second, the FLPs allowed

decedent to prevent a sale of D&PL shares, thus protecting D&PL

from a sale of shares that would “undoubtedly depress the value

of the shares” and avoiding the appearance that decedent was

“losing confidence in the upside potential” of the company.
                               - 24 -

Third, the FLPs allowed decedent “to centralize management of the

family’s wealth.”

            4.   Analysis

     We agree with respondent:   With regard to the D&PL stock,

decedent had no legitimate and significant nontax reason for

creating either of the FLPs.   We address petitioners’ arguments

in order.12

     First, petitioners state that decedent created MFLP “to

provide for his children.”   Although “[l]egitimate nontax

purposes are often inextricably interwoven with testamentary

objectives”, Estate of Bongard v. Commissioner, 124 T.C. at 121,

a “‘good faith’ transfer to a family limited partnership must

provide the transferor some potential for benefit other than the

potential estate tax advantages that might result from holding

assets in the partnership form”, Estate of Thompson v.

Commissioner, 382 F.3d 367, 383 (3d Cir. 2004), affg. T.C. Memo.

2002-246.

     Second, petitioners argue that the FLPs (in particular,

MFLP) served a business purpose by preventing a sale of any D&PL



     12
      Petitioners, in a footnote in their brief, allude to my
dissent in Estate of Bongard v. Commissioner, 124 T.C. 95, 141
(2005) (Halpern, J., dissenting). Petitioners’ reliance on that
dissent is misplaced, however, as the majority opinion, not any
dissent, represents the view of this Court with respect to the
issues in Estate of Bongard. Under the analysis in that dissent,
however, the conclusion reached in this case would be no
different.
                               - 25 -

stock.    Yet only decedent transferred D&PL stock to the FLPs.

The parties have stipulated that Jonathan Malkin owned at least

479,995 D&PL shares, which he pledged as collateral to secure his

father’s personal debt.    Had decedent wanted to prevent the sale

of any D&PL stock his family owned, he would have demanded (or at

least requested) that his son contribute his own D&PL stock.      He

did not.    Obviously, decedent did not need the FLPs to control

his own D&PL stock; he already controlled it.

     Third, petitioners argue that decedent created the FLPs to

centralize management of the family’s wealth--yet decedent

contributed all (or almost all13) the assets the FLPs held.

Because there was no pooling of the family’s assets in the FLPs,

there was no pooled wealth to manage.14   See Estate of Strangi v.

Commissioner, T.C. Memo. 2003-145 (“Decedent contributed more

than 99 percent of the total property * * * and received back an

interest the value of which derived almost exclusively from the

assets he had just assigned.”).    The property the FLPs passively

held, i.e., the D&PL stock, was simply decedent’s wealth.     See

Estate of Rosen v. Commissioner, T.C. Memo. 2006-115 (“[T]he mere

holding of an untraded portfolio of marketable securities weighs


     13
      Whether decedent or his children made the two $25,000
transfers to the MFLP trusts is unclear and irrelevant.
     14
      Melissa Malkin and Jonathan Malkin both had the means to
contribute: Petitioners offer evidence that as of Dec. 31, 1999,
Melissa Malkin had a net worth of more than $2,300,000, and
Jonathan Malkin testified he was worth more than $22 million.
                                 - 26 -

against the finding of a nontax benefit for a transfer of that

portfolio to a family entity.” (citing Estate of Thompson v.

Commissioner, supra at 380)).

             5.   Conclusion

     Favorable estate tax treatment was the aim of the change in

form.     We are unable to identify a legitimate and significant

nontax reason for the transfers.     See Estate of Thompson v.

Commissioner, supra at 380 (“Other than favorable estate tax

treatment resulting from the change in form, it is difficult to

see what benefit could be derived from holding an untraded

portfolio of securities in this family limited partnership with

no ongoing business operations.”).        We find that decedent’s

transfers of D&PL stock to the FLPs achieved nothing more than

testamentary objectives and tax benefits, and thus those

transfers do not qualify for the bona fide sale exception in

section 2036(a).

     E.     Conclusion

     We find that decedent retained “the possession or enjoyment

of” the D&PL shares he transferred to the FLPs within the meaning

of section 2036(a)(1) and that he did not transfer those shares

in “bona fide” sales for “adequate and full consideration in

money or money’s worth”.15     Therefore, under section 2036(a)(1),


     15
      For that reason, we find that, during his life, decedent
did not make indirect gifts to his children of present interests
                                                   (continued...)
                                - 27 -

the value of decedent’s gross estate includes the value of the

365,371 D&PL shares he transferred to MFLP and the value of the

80,000 D&PL shares he transferred to CRFLP.

III.    Gift Taxes: 1998, 1999, and 2000

       A.   General Rules

       Section 2501(a)(1) imposes a tax on the transfer of property

by gift.     Under section 2511(a), that gift tax applies “whether

the gift is direct or indirect”.    See Dickman v. Commissioner,

465 U.S. 330, 334 (1984) (“The language of * * * [sections

2501(a)(1) and 2511(a)] is clear and admits of but one reasonable

interpretation:     transfers of property by gift, by whatever means

effected, are subject to the federal gift tax. * * * [T]he gift

tax was designed to encompass all transfers of property”.).

       B.   Respondent’s Argument

       Respondent argues that decedent’s gifts to his children of

LLC interests and cash and cash equivalents fall into four

categories: (1) Indirect gifts involving the interests in the

Malkin LLCs decedent transferred to CRFLP; (2) simple cash

transfers; (3) cash exchanged for promissory notes, which the



       15
      (...continued)
in those shares. In sec. III.D.1., infra, of this report, we
find that decedent made indirect gifts to his children when he
transferred to CRFLP his interests in the Malkin LLCs. Because
we find for respondent with regard to all assets decedent
transferred to the FLPs (albeit under two different theories), we
do not address respondent’s alternative arguments under secs.
2035(a) and 2036(a)(2).
                              - 28 -

estate listed on Schedule C of its Form 706; and (4) indirect

gifts involving additional transfers and payments related to

Malkin I and Malkin IV.   First, respondent argues that decedent

made indirect gifts of the interests in the Malkin LLCs and not

indirect gifts of limited partnership interests.    Second and

third, respondent contends that neither the cash transfers nor

the purported loans constituted bona fide debt.    Fourth,

respondent argues the following were indirect gifts: (1) The 1998

payment of a $64,760 debt of Malkin I; (2) the 2000 payment of a

$3,878,409 debt of Malkin I; (3) the 2000 payment of a $370,061

debt of Malkin IV; (4) the 2000 assignment of a promissory note

worth approximately $1 million to Malkin IV; and (5) the 2000

payment of $177,795 related to a capital call of Malkin IV.

     C.   Petitioners’ Argument

     Petitioners argue that, because the trusts purchased the

limited partnership interests in bona fide sales, no asset

decedent transferred to the FLPs was a gift to his children.

Petitioners assert that all cash transfers--both those exchanged

for promissory notes and those made gratuitously--constituted

bona fide debt.   Petitioners declare:   “[T]he evidence presented

in these cases is sufficient to establish a true expectation of

repayment and intent to enforce collection of these debts.”      As

to the indirect gifts, petitioners contend that (1) decedent paid

those debts for which he was personally liable and (2) not only
                                - 29 -

was decedent contractually obligated to make the capital

contributions, but also every capital contribution he made

increased his capital account accordingly.

     D.   Analysis

     We agree with respondent.    Petitioners have failed to

present evidence sufficient to satisfy their burden with respect

to any gift respondent asserts decedent made.

            1.   Decedent’s Interests in the Malkin LLCs

     Decedent made indirect gifts to his children when he

transferred to CRFLP interests in the Malkin LLCs and

subsequently transferred to his children’s trusts limited

partnership interests in CRFLP.    The gifts were of the interests

in the Malkin LLCs, not of the limited partnership interests.

            a.   Indirect Gifts and Shepherd v. Commissioner

     The facts here are analogous to those of Shepherd v.

Commissioner, 115 T.C. 376 (2000), affd. 283 F.3d 1258 (11th Cir.

2002).    In that case, a father (the taxpayer) and his two sons

formed a partnership in which the father held a 50-percent

partnership interest and each son held a 25-percent partnership

interest.    Id. at 380.   On the same day the father signed the

partnership agreement, he executed a deed purporting to transfer

real property to the partnership.     Id. at 379, 381.     The next

day, his sons signed the partnership agreement.     Id. at 379.       We

held that, because State law did not recognize a “one-person
                               - 30 -

partnership”, the partnership was valid only after the sons

signed the partnership agreement.      Id. at 385.   For that reason,

the deed of land also was not effective until that second day.

Id.   Because the creation of the partnership preceded the

effectiveness of the deed, the sons acquired interests in the

real property by virtue of their status as partners of the

partnership.   Id. at 387.   Because the taxpayer’s contribution of

the property was allocated to his and his sons’ capital accounts

according to their respective partnership shares, we held that

the taxpayer’s transfer of real property to the partnership was

an indirect gift to each son of an undivided 25-percent interest

in that real property.   Id. at 389.

      The facts here are indistinguishable.    On February 29, 2000,

decedent and the trustees of the CRFLP trusts signed the CRFLP

partnership agreement.   That same day decedent (1) transferred

his interests in the Malkin LLCs to CRFLP in return for all

100,000 partnership units, and (2) assigned 44,500 CRFLP limited

partnership units to each CRFLP trust.     On March 1, 2000,

decedent established the CRFLP trusts.     Because Mississippi State

law does not recognize a one-person partnership, CRFLP was valid

only after the formation of the trusts.     See Miss. Code Ann. sec.

79-14-101(10) (West Supp. 2008) (“‘Limited partnership’ * * *

[means] a partnership formed by two * * * or more persons under

the laws of this state”.).   Only after CRFLP was validly formed
                              - 31 -

on March 1, 2000, could decedent transfer his interests in the

Malkin LLCs to it.   Thus, at the time of that transfer, the CRFLP

trusts were already limited partners, and they acquired interests

in the Malkin LLCs by virtue of their status as limited partners.

     There is one difference between these cases and Shepherd.

Petitioners argue that the CRFLP trusts purchased the limited

partnership interests for their fair market value and thus that

decedent made an indirect gift of neither limited partnership

interests nor interests in the Malkin LLCs.   We disagree with

petitioners because we find that decedent’s purported sale of

limited partnership interests was a sham.

          b.   The Sham Sale of CRFLP Partnership Interests

     On March 1, 2000, each CRFLP trust entered into a contract

with decedent for the purchase of 44,500 CRFLP limited

partnership units for $400,500.   The terms of the contracts were

similar; both called for a downpayment of approximately 10

percent and for a 9-year promissory note, at interest of 6.8

percent, for the balance.   About a week after the signing of the

contracts, decedent transferred $40,525 to each CRFLP trust.     Two

days after those transfers, each trust transferred $40,500 to

decedent as the 10-percent downpayment for the CRFLP limited

partnership units.   The CRFLP trusts never paid any interest on

the promissory notes; decedent died before the first payment

became due, and the estate never made any demand.
                              - 32 -

     Decedent’s purported sale of CRFLP limited partnership

interests was a sham.   At the time decedent and the trusts

executed the contracts, decedent was terminally ill.16   Decedent

provided all the money for the 10-percent downpayments; in

effect, the notes constituted the only consideration the trusts

gave decedent.   Both children, however, could have paid a $40,500

downpayment:   Petitioners offer evidence that, as of December 31,

1999, Melissa Malkin had a net worth of more than $2,300,000, and

Jonathan Malkin testified he was worth more than $22 million.

Petitioners do not explain how decedent’s actions comported with

an arm’s-length sale.   Moreover, petitioners offer no evidence,

beyond the self-serving testimony of decedent’s children, that

decedent expected the trusts (or his children) to pay the

promissory notes.   Given that decedent gave his children the

money to pay the interest on the MFLP SCINs,17 we find their

testimony as to the CRFLP promissory notes unconvincing.

Petitioners offer no explanation for decedent’s actions other

than his generosity and a donative intent.   Those are motivations

for a gift, however, not a sale.



     16
      Indeed, Mr. Ogeka, explaining the reason the CRFLP
promissory notes were not SCINs, testified: “[W]e knew that
Roger [Malkin] was ill, and * * * [using SCINs] would not [have
been] appropriate.”
     17
      Decedent gave his son the money for both interest payments
due on his trust’s SCIN and gave his daughter the money for at
least one interest payment due on her trust’s SCIN.
                                - 33 -

     Petitioners also do not explain the estate’s failure to

demand payment on the promissory notes.     Jonathan Malkin

testified that, although he expected his trust to pay the

interest and did not expect himself to pay it, he had “sufficient

business knowledge” to know that “if the interest isn’t paid, the

transaction doesn’t hold.”     We agree.

          c.   Conclusion

     We find that the purported sale of CRFLP limited partnership

interests to the CRFLP trusts was a sham and therefore find that

Shepherd controls.   Because a gift to a trust is a gift to its

beneficiary, see Helvering v. Hutchings, 312 U.S. 393, 397-398

(1941), we find that in 2000 decedent made gifts to his children

of his interests in the Malkin LLCs.

          2.   The Cash Loans

     “A purported loan between family members is always subject

to close scrutiny. * * * The presumption, for tax purposes at

least, is that a transfer between family members is a gift.”

Perry v. Commissioner, 92 T.C. 470, 481 (1989), affd. without

published opinion 912 F.2d 1466 (5th Cir. 1990).

          a.   1998 and 1999 Purported Loans to Melissa Malkin

     In 1998 and 1999, decedent gave his daughter $68,000 and

$149,000, respectively.     Petitioners attest that those cash

transfers were bona fide loans to Melissa Malkin, and that she

had every expectation of repaying that indebtedness.
                                - 34 -

Nevertheless, Melissa Malkin never executed any promissory note

with respect to those transfers and, by her own admission, never

repaid a dollar of the alleged debt.     The only evidence

petitioners offer to support their conclusion that those

transfers were bona fide loans is Melissa Malkin’s testimony that

“I offered to pay him back, and he said keep it in the company,

you’ll need it for operating capital.”     The “company” was Melissa

Malkin’s business in Los Angeles representing writers and

directors.    Yet moments after averring that she offered to repay

her father and immediately after confirming that she never in

fact repaid any amount, she stated:      “[In May 1999,] I closed my

company down to be with him, to take care of him.”     Melissa

Malkin did not explain the reason she did not repay her father at

that time.    Her failure to explain suggests to us that the

transfers were not truly for operating capital.     We find her

testimony unconvincing; we find much more plausible her admission

that the 1998 and 1999 transfers were part of decedent’s

attempts, after almost a decade of estrangement, to reconcile

with her.    Petitioners have failed to satisfy their burden.

            b.   2000 Purported Loans

     In 2000, in exchange for promissory notes, decedent gave his

son $830,000 and his daughter $100,000.     Decedent made two wire

transfers to Jonathan Malkin, one for $730,000 and one for

$100,000.    As to the former, Jonathan Malkin testified that he
                                 - 35 -

did not recall signing the promissory note and that decedent

never demanded payment.      As to the latter, Jonathan Malkin

testified that, as his father’s health declined, he and his

family were flying “every week to spend time with my father, and

he was trying to defray my expenses.”      As to the $100,000

transfer to Melissa Malkin, she testified that she did not make

any payments on the promissory note and did not even recall it.

     Other than the promissory notes and the self-serving

testimony of Jonathan Malkin and Melissa Malkin, petitioners

offer no evidence to support their claim that the transfers were

bona fide loans.    We need not, and do not, accept that testimony.

See Mendes v. Commissioner, 121 T.C. 308, 320 (2003) (“This Court

is not bound to accept a taxpayer’s self-serving, unverified, and

undocumented testimony.”).      Petitioners have failed to convince

us either that Jonathan Malkin and Melissa Malkin intended to

repay the transfers or that decedent (or the estate) intended to

demand repayment.    See, e.g., Estate of Rosen v. Commissioner,

T.C. Memo. 2006-115 (“Security, adequately stated interest, and

repayment arrangements (or efforts to secure the same) are

important proofs of intent, and such proofs are notably lacking

here.”).   Petitioners have failed to satisfy their burden.

           c.   Conclusion

     We find that decedent, in 1998, 1999, and 2000, made cash

gifts to Melissa Malkin of $68,000, $149,000, and $100,000,
                              - 36 -

respectively, and, in 2000, made a cash gift to Jonathan Malkin

of $830,000.   As a result, the value of the gross estate should

be decreased by the amounts of the promissory notes, and the cash

transfers should be reported as gifts on decedent’s Forms 709,

United States Gift (and Generation-Skipping Transfer) Tax Return,

for the years in issue.

          3.   The Indirect Gifts

          a.   The Debts of Malkin I and Malkin IV

     In 1998 and 2000, decedent paid debts of Malkin I of $64,760

and $3,878,409, respectively, and, in 2000, he paid a $370,061

debt of Malkin IV.   Malkin I and Malkin IV (indeed, all the

Malkin LLCs) were Delaware LLCs.    Under Delaware law, although a

member of an LLC may agree to be liable for its debts, no member

of an LLC is obligated personally for any such debt solely by

reason of being a member or acting as a manager of the LLC.    See

Del. Code Ann. tit. 6, sec. 18-303 (2005).   Citing the agreements

for Malkin I and Malkin IV, petitioners aver that decedent was

personally liable for those debts “by virtue of his having made

capital commitments to” Malkin I and Malkin IV.   Yet both LLC

agreements state that “[n]o Member shall be required to make any

Capital Contribution or loans to the Company”, other than the

payment in full of the initial capital commitment.   Moreover, the

evidence belies petitioners’ averment; for example, Jonathan

Malkin’s Schedule K-1, Partner’s Share of Income, Credits,
                                - 37 -

Deductions, etc., of the 1999 Form 1065, U.S. Partnership Return

of Income, for Malkin I shows that Jonathan Malkin had a 70-

percent share of total liabilities, making his share of the

$3,878,409 debt $2,714,886.     Petitioners have failed to satisfy

their burden; accordingly, we find that decedent made indirect

gifts to the beneficial owners of Malkin I and Malkin IV (i.e.,

his children) when he paid the debts of those LLCs.18

          b.     The Promissory Note and the Capital Contribution

     In May 2000, decedent assigned to Malkin IV a promissory

note worth approximately $1 million.     In September 2000, decedent

paid $177,795 to Malkin IV in response to a capital call from

Malkin IV.     Effective March 1, 2000, however, decedent had

transferred his entire interest in Malkin IV to CRFLP, and so he

no longer had any interest in Malkin IV at the time of those

transfers.     A transfer of property to an entity by an unrelated

person generally represents a gift to its owners to the extent of

their proportionate interests in it.     See Kincaid v. United

States, 682 F.2d 1220, 1224 (5th Cir. 1982); Tilton v.

Commissioner, 88 T.C. 590, 597 (1987) (“Where property is

gratuitously transferred by * * * a nonshareholder to a closely

held corporation, the transfer is generally an indirect gift to



     18
      To clarify: When decedent paid the $64,760 debt of Malkin
I, he made an indirect gift to his son alone; when decedent paid
the other debts, however, he made indirect gifts to both his
children.
                                 - 38 -

the shareholders.” (internal quotation marks omitted)); sec.

25.2511-1(h)(1), Gift Tax Regs.19    Petitioners offer no evidence

that the transfer of the promissory note represented anything

other than a gift and fail to explain how decedent could be

obligated to contribute capital to an LLC of which he was no

longer a member.    Petitioners have failed to satisfy their

burden; accordingly, we find that decedent made indirect gifts to

the beneficial owners of Malkin IV (i.e., his children) when he

transferred the promissory note and cash to Malkin IV.

      E.   Conclusion

      In 2000, decedent made indirect gifts to his children when

he transferred to CRFLP his interests in the Malkin LLCs.      In

1998, 1999, and 2000, decedent made direct gifts to his children

when he transferred cash to them.     In 1998 and 2000, decedent

made indirect gifts to his children when he paid debts of Malkin

I and Malkin IV and transferred cash and a promissory note to

Malkin IV.

IV.   Deductions of the Estate

      With the exception of the deduction for funeral expenses,

see supra note 8, respondent has disallowed all deductions of the



      19
      We note that decedent paid the $3,878,409 debt of Malkin I
and the $370,061 debt of Malkin IV, see supra sec. III.D.3.a. of
this report, in May 2000, months after decedent had transferred
his entire interest in both LLCs to CRFLP. For that reason, the
argument and the authority presented here apply with equal force
to decedent’s payments of those two debts.
                                 - 39 -

estate.   He has done so on the grounds that some expenses have

not been paid and that total expenses nonetheless exceed the

value of property subject to claims within the meaning of section

2053(c)(2).   Respondent objects to only two deductions on the

merits.   We now discuss those objections and the expenses that

respondent asserts have not been paid.

     A.   Morgan Guaranty Debt

     An estate may deduct the value of a claim based on a

decedent’s promise to pay only if the liability was “contracted

bona fide and for an adequate and full consideration in money or

money’s worth”.   Sec. 2053(c)(1)(A); see, e.g., Estate of Scholl

v. Commissioner, 88 T.C. 1265, 1280 (1987) (“[T]he estate may

deduct only that amount which represents a binding legal

obligation against the estate.”).     A taxpayer may not reduce his

taxable estate through transactions that are in substance gifts.

See, e.g., Estate of Hughes v. Commissioner, T.C. Memo. 2005-296.

     With respect to the $12,936,886 debt of decedent to Morgan

Guaranty, respondent allowed a deduction of $10,475,066 but

disallowed the remainder on the ground that the debt exceeded the

value of the collateral securing it.20    In effect, respondent


     20
      Although petitioners allege that respondent first
challenged the estate’s deduction of the Morgan Guaranty debt in
his pretrial memorandum, which might affect who bears the burden
of proof on that issue, see Rule 142(a)(1), that is incorrect.
In par. (y) of the Explanation of Adjustments, the amended estate
tax notice states that “the deduction of $12,936,886 for the
                                                   (continued...)
                               - 40 -

argues that the debt is nonrecourse.    See sec. 20.2053-4, Estate

Tax Regs. (“The amounts that may be deducted as claims against a

decedent’s estate are such only as represent personal obligations

of the decedent existing at the time of his death”.).

Petitioners contend that “the stipulated and uncontroverted

evidence shows * * * [the Morgan Guaranty debt] to be a valid and

enforceable debt of Decedent”, and that respondent “failed to

introduce any evidence that * * * [the] debt was anything other

than the obligation of the Decedent.”    Petitioners miss the

point.    Respondent does not deny that the Morgan Guaranty debt

was a valid and enforceable debt of decedent; respondent denies

only that the debt was enforceable against decedent personally.

The several exhibits petitioners cite relating to the debt fail

to show that decedent was personally liable for it.    Petitioners

have failed to satisfy their burden, and we deny the deduction to

the extent the debt was unsecured by collateral.

     B.    Malkin IV Capital Contribution

     Respondent disallowed the entire deduction with respect to

the $2,346,724 claimed obligation of decedent to Malkin IV.

Petitioners object, and, citing the agreement governing Malkin

IV, argue that decedent was contractually obligated to pay for

all 4,999 LLC units to which he initially subscribed.    That


     20
      (...continued)
indebtedness to Morgan Guaranty * * * is limited to $10,475,066,
the fair market value of the collateral securing the debt.”
                                - 41 -

agreement, however, suggests the opposite is true.    An Amended

Schedule of Units of Membership attached to the agreement shows

that as of March 3, 2000, decedent was no longer a member of

Malkin IV:    Jonathan Malkin held 1 unit, and CRFLP held 4,999

units.    Petitioners have failed to show that decedent was, at his

death, contractually obligated to pay Malkin IV for LLC units to

which CRFLP was entitled as decedent’s successor-in-interest.21

     Decedent’s will states that if, at decedent’s death, “there

remains any unfunded capital commitment” of Malkin IV, the estate

“shall fund” that “obligation”.    Nevertheless, “the will of the

decedent cannot be allowed to define what is an ‘obligation’ or a

‘claim’”.    United States v. Stapf, 375 U.S. 118, 132 (1963).

Rather, as respondent observes, decedent’s “request is indicative

of a donative intent.”    Petitioners have failed to satisfy their

burden, and we deny the deduction.

     C.     Executors’ Commission, Attorney’s Fees, Accounting Fees

     Respondent disallowed deductions of $177,421, $200,000, and

$200,000 for the executors’ commission, attorney’s fees, and

accounting fees, respectively.    Petitioners offer no evidence




     21
      Citing the report in which Andersen valued assets of the
estate, petitioners observe that Andersen listed the $2,346,724
receivable as an asset of Malkin IV. To the extent petitioners
suggest that decedent was personally liable for the $2,346,724
because “Malkin IV anticipated * * * such capital commitment”, we
disagree.
                                - 42 -

that those amounts were paid and, therefore, have failed to prove

that the estate is entitled to the claimed deductions.

      D.    Conclusion

      We deny the estate any deduction for (1) the Morgan Guaranty

debt above the value of the collateral, (2) the claimed

obligation of decedent to Malkin IV, and (3) the executors’

commission, attorney’s fees, and accounting fees.     The sum of all

deductions of the estate may not exceed the value of property

includable in the estate for Federal estate tax purposes.22     See

sec. 2053(c)(2).

V.   Conclusion

      In summary, our holdings in these cases are as follows.

      (1)    Because, within the meaning of section 2036(a)(1),
             decedent retained for his life the possession and
             enjoyment of the 365,371 D&PL shares and the 80,000
             D&PL shares he transferred to MFLP and CRFLP,
             respectively, and did not transfer those shares in a
             bona fide sale for an adequate and full consideration
             in money or money’s worth, the value of decedent’s
             gross estate includes the value of that transferred
             stock.

      (2)    In 2000, decedent made gifts to his children of
             interests in the Malkin LLCs when he transferred to his
             children’s trusts limited partnership interests in
             CRFLP and transferred to CRFLP interests in those LLCs.

      (3)    In 1998, decedent made a gift to Jonathan Malkin when
             he paid a $64,760 debt of Malkin I.



      22
      Petitioners assert that certain deductions respondent
disallowed involve expenses of the estate that petitioners paid
on its behalf. The parties have agreed to consider the
deductibility of those expenses during the Rule 155 computation.
                              - 43 -

     (4)   In 2000, decedent made gifts to his children when he
           paid a $3,878,409 debt of Malkin I.

     (5)   In 2000, decedent made gifts to his children when, with
           respect to Malkin IV, he paid a $370,061 debt, made a
           $177,795 capital contribution, and assigned a
           promissory note worth approximately $1 million.

     (6)   In 1998, 1999, and 2000, decedent made gifts to Melissa
           Malkin when he transferred to her $68,000, $149,000,
           and $100,000, respectively.

     (7)   In 2000, decedent made a gift to Jonathan Malkin when
           he transferred to him $830,000.

     (8)   The estate assets subject to claims are Form 706
           Schedule A real estate of $153,600, Schedule B stocks
           and bonds of $10,762,398, Schedule C cash of
           $1,289,579, Schedule D insurance proceeds of $162,500,
           and Schedule F property of $337,858 plus the value of
           the 11-percent interest in CRFLP decedent held at his
           death.23

     (9)   The estate is entitled to Form 706 Schedule J, Schedule
           K, and Schedule O deductions of up to $1,338,404,
           $11,276,832, and $230,925, to the extent the claimed
           expenses were paid and total deductions do not exceed
           the value of property in the estate subject to claims.


                                         Decisions will be entered

                                    under Rule 155.




     23
      During the Rule 155 computation, the parties will need to
recalculate the value of decedent’s 11-percent interest in CRFLP
and to adjust the value of the estate’s Schedule F property
accordingly. Because we hold that the 80,000 D&PL shares are
sec. 2036(a)(1) property, see supra sec. II.C.3. of this report,
the value of that stock is properly included under Schedule G.
For that reason, for purposes of valuing decedent’s 11-percent
interest in CRFLP, CRFLP holds only interests in the Malkin LLCs
(the values of which the parties will also need to recalculate in
the light of our holdings, see, e.g., supra sec. IV.B. of this
report).
