                       T.C. Memo. 2002-246



                     UNITED STATES TAX COURT



   ESTATE OF THEODORE R. THOMPSON, DECEASED, BETSY T. TURNER,
                    EXECUTRIX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7578-99.              Filed September 26, 2002.


     Victor F. Keen and Thomas W. Ostrander, for petitioner.

     Joseph M. Abele, Joellyn R. Cattell, James C. Fee, Jr.,

and David A. Breen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge: Respondent determined a $707,054 deficiency in

the Federal estate tax of the Estate of Theodore R. Thompson.

Hereinafter, Theodore R. Thompson is referred to as decedent and

his estate as decedent’s estate.
                                        - 2 -

       After concessions by decedent’s estate, the issue remaining

for decision is whether decedent’s gross estate includes (1) the

value of interests in two family limited partnerships (namely, the

Thompson Turner Family Limited Partnership (the Turner Partnership)

and    the   Thompson      Family      Limited    Partnership        (the   Thompson

Partnership)), and in the respective corporate general partners of

those partnerships that decedent possessed at death or transferred

prior to death (and if so, the value of those interests), or (2)

pursuant to section 2036(a), the value of the property which

decedent transferred to the family limited partnerships and to the

respective corporate general partners of those partnerships (and if

so, the value of such property).

       All section references are to the Internal Revenue Code as

amended and in effect as of the date of decedent’s death, and all

Rule   references    are    to    the   Tax     Court   Rules   of    Practice   and

Procedure.

                                 FINDINGS OF FACT

       Some of the facts have been stipulated and are so found.                  The

stipulations    of    facts      and    exhibits    submitted        therewith   are

incorporated herein by this reference.

I.     Background

       Decedent was a resident of the State of Delaware at the time

of his death on May 15, 1995.            Decedent’s estate was administered

in Delaware.        Betsy Thompson Turner, decedent’s daughter and
                               - 3 -

executrix of his estate, resided in Kennett Square, Pennsylvania,

when the petition in this case was filed.

     A.   Decedent and His Family

     Decedent was born on January 7, 1898, in Kennett Square,

Pennsylvania.   In the 1920s, he attended college at Swarthmore

College for 2 years.   He left college to help his father start a

family rose-growing business, Thompson Roses, in Kennett Square,

Pennsylvania.   After his father’s death in 1924, decedent operated

Thompson Roses with his brother, Howard.

     Decedent and his wife, Marian, had two children, Betsy and

Robert.   Robert attended Penn State University and subsequently

enlisted in the military for 3 years.       Upon discharge from the

military, he entered Cornell University, majoring in horticulture.

Upon graduation from college, Robert began working at Thompson

Roses.

     In 1956, decedent gave his one-half interest in Thompson Roses

to Robert and to Betsy’s husband, George Turner.         Decedent’s

brother continued to own the remaining half of the business.

     Decedent retired from Thompson Roses in 1980.   After decedent

retired, he and Marian divided their time between a condominium at

Cokesbury Village (a retirement community in Hockessin, Delaware)

and a winter home in Naples, Florida.         Decedent’s retirement

activities included golf, fishing, bridge, and woodworking.
                                     - 4 -

     Marian died in 1985, after which decedent moved into an

assisted living facility at Cokesbury Village. Decedent resided in

this facility until his death in 1995.

     Robert retired from Thompson Roses in 1988 and moved to

Colorado.      George retired in 1991.

     Betsy and George1 had four children--George Clayton, Jr.

(“Clay”), William Joel (“Bill”), Phoebe, and Robert--and five

grandchildren.     Robert had four children2-–Amy, Margaret, Theodore

Robert, and John–-and four grandchildren.

     B.       Decedent’s Finances

     By   a    deed    of   trust   dated    January   16,     1969,    decedent

established a revocable trust with the Meridian Trust Co.3 (the

1969 trust).

     Decedent executed his will in 1979. The will, as subsequently

amended   by    four   codicils,    provided   for,    among    other   things,

specific bequests of $100,000 to Betsy and Robert, gifts in varying

amounts to his grandchildren, and gifts of $10,000 to each of his

great-grandchildren.        The residue of decedent’s estate went into

the 1969 trust.        In 1991, decedent executed a durable power of

     1
            George died in 1999.
     2
          Robert divorced in 1969 and remarried in 1995.                    His
children are from his first marriage.
     3
          The trustee was originally the National Bank and Trust
Co. of Kennett Square, which merged with, and became part of, the
American Bank and Trust Co. of Reading, which in turn merged with
and became Meridian Trust Co.
                                - 5 -

attorney appointing Betsy and Robert as his attorneys in fact and

granting them power to handle all of his financial affairs.

     On March 17, 1993, decedent executed an amendment to the 1969

trust.   As a consequence of this amendment, a new revocable trust

(the 1993 trust) was created.   The 1993 trust was funded with the

assets of the 1969 trust.   Betsy and Robert were the trustees of

the 1993 trust.    The assets (worth approximately $1.5 million)

transferred to the 1993 trust consisted of securities and cash held

in an account at Dean Witter Reynolds, Inc. (Dean Witter).

     From 1989 to 1993, Virginia Newnam was the account executive

of decedent’s trust’s holdings at Dean Witter. In 1993, Ms. Newnam

changed her employment to Alex Brown, Inc., and the trust portfolio

was then transferred to that brokerage firm.

     Decedent received the income from the securities held in the

1993 trust.     In addition, decedent received annual income of

approximately $8,000 from Social Security and approximately $6,000

from annuities with Cigna Insurance Co. and Provident Mutual Life

Insurance Co.   Decedent had other assets, including shares in a

mutual fund, funds in a checking account, and loans receivable owed

to him by family members. Decedent’s lifestyle was simple, and his

expenses were fairly consistent from 1993 to his death in 1995.

     Decedent often made substantial gifts of cash, bonds, or

insurance policies to his children and grandchildren. From time to

time he made loans to his grandchildren, in exchange for promissory
                               - 6 -

notes.     Decedent made the following loans to Robert’s children:

(1) On December 21, 1978, decedent made a $35,000 mortgage loan to

Theodore Robert, at 6-percent interest, payable over 20 years; (2)

on September 30, 1987, decedent made a $156,000 mortgage loan to

Amy, payable over 20 years; and (3) on June 30, 1989, decedent lent

$140,000 to Margaret. Decedent made the following loans to Betsy’s

children: (1) Decedent lent $15,000 to Phoebe on January 3, 1990;

(2) decedent lent $100,000 to William on September 11, 1992; and

(3) decedent lent $10,000 to Clay on October 9, 1992, and $15,000

on February 23, 1993.

II.   Formation of the Family Limited Partnerships and Corporations

      A.   Introduction to the Fortress Plan

      Sometime in 1992 or 1993, Betsy, Robert, and their spouses met

with Christian DeVol and William W. Warder.    Mr. DeVol was a self-

employed financial adviser.    Mr. Warder was an insurance salesman

and financial adviser with APS Financial Services, Inc. (APS). APS

was the licensee for the Fortress Financial Group, Inc., and as a

licensee APS was authorized to assist in the implementation of the

“Fortress Plan”.4


      4
          In Strangi v. Commissioner, 115 T.C. 478, 480 (2000),
affd. in part and revd. in part 293 F.3d 279 (5th Cir. 2002), we
described the Fortress Plan promoted by Fortress Financial Group,
Inc. (Fortress) as follows:

                                                     (continued...)
                                     - 7 -

     Messrs. Warder and DeVol introduced Betsy and Robert to

Charles   G.   Cheleden,    an     attorney    licensed   in   the    State   of

Pennsylvania.     Mr. Cheleden reviewed decedent’s existing trust

documents and will.

     In   February   or    March    1993,     Messrs.   Cheleden     and   Warder

described to Betsy and Robert an estate plan that used family

limited partnerships.      In a letter dated March 9, 1993, Mr. Warder

recommended using two family limited partnerships, each headed by

a corporate general partner, one for Betsy and her family and one

for Robert and his family.           In promoting this arrangement, Mr.

Warder indicated the primary advantages of the program were                   (1)

lowering the taxable value of the estate, (2) maximizing the

preservation of assets, (3) reducing income taxes by having the

corporate general partner provide medical, retirement, and “income

splitting” benefits for family members, and (4) facilitating family

and charitable giving.       In addition, he stated that “All of the


     4
      (...continued)
     Fortress trains and educates professionals on the use of
     family limited partnerships as a tool to (1) reduce
     income tax, (2) reduce the reported value of property in
     an estate, (3) preserve assets, and (4) facilitate
     charitable   giving.   The  Fortress   Plan   recommends
     contributing assets to a family limited partnership with
     a corporate general partner being created for control
     purposes. The Fortress Plan also suggests that shares of
     stock of the corporate general partner or an interest in
     the family limited partnership be donated to a charity.
     To facilitate the plan, Fortress licenses the use of
     copyrighted    limited   partnership   agreements    and
     shareholders’ agreements.
                                  - 8 -

benefits above can be achieved while total control of all assets is

retained by the directors of the Corporate General Partner.”          The

decision   to   form   the   family   limited   partnerships    was   made

approximately a week later at a meeting at Betsy and George’s home

attended by decedent, Betsy, George, Robert, and Messrs. Cheleden

and Warder.

     On March 26, 1993, George P. Brown, president of APS, wrote to

decedent, Betsy, and Robert.     Mr. Brown outlined the services APS

agreed to provide in implementing the Fortress Plan.           He further

explained that the fee for those services would be $32,000, which

fee would be shared with Mr. Cheleden.

     A letter of the same date from Mr. Cheleden to decedent,

Betsy, and Robert accompanied the March 26, 1993, letter from APS.

In his letter, Mr. Cheleden stated that the Fortress Plan was

designed to protect assets from third party claims, maximize the

amount that passes to heirs, and “allow the Family to maintain

control, to the extent possible, consistent with the above.”            He

advised decedent, Betsy, and Robert that the limited partnership

interests were “expected to enjoy the benefit of ‘discounting’ for

gifts and estate tax valuation purposes.”        Mr. Cheleden indicated

that a 40-percent discount was a realistic expectation.

     Decedent, Robert, Betsy, and George agreed to form two family

limited partnerships and two corporations to serve as the corporate

general partners-–the Turner Partnership and Turner Corp. for
                                            - 9 -

Betsy’s family, and the Thompson Partnership and R. P. Thompson

Corp. (Thompson Corp.) for Robert’s family. The Turner Partnership

and    Turner    Corp.    were       to    be     established     under   the      laws    of

Pennsylvania, where Betsy resided, and the Thompson Partnership and

Thompson Corp. were to be established under the laws of Colorado,

where Robert lived.

       In implementing the Fortress Plan, Mr. Cheleden prepared the

partnership and shareholder agreements for the Turner Partnership

and Turner Corp., the Pennsylvania entities.                     Because Mr. Cheleden

was not licensed outside of Pennsylvania, he arranged for the

partnership and shareholder agreements for the Thompson Partnership

and Thompson Corp. to be prepared by Frederick Meyer, an attorney

licensed to practice in Colorado.

       B.   Formation of the Turner Partnership and Turner Corp.

       On April 21, 1993, Turner Corp. and the Turner Partnership

were    formed    under        the    laws        of     Pennsylvania.      Articles       of

incorporation      for    Turner          Corp.    and    a   certificate     of   limited

partnership      for     the   Turner        Partnership       were   filed     with      the

Department of State of the Commonwealth of Pennsylvania.                                  The

registered office and place of business of both Turner entities was

Woodside Farm, Kennett Square, Pennsylvania. Woodside Farm was the

residence of Betsy and George.

       Stock certificates were issued to decedent (490 shares), Betsy

(245 shares), George (245 shares), and National Foundation, Inc.
                                     - 10 -

(20 shares), an unrelated tax-exempt entity.              Decedent, Betsy, and

George were the directors and officers of Turner Corp.                 Decedent

was the chief executive officer, Betsy was secretary, and George

was treasurer.

      An agreement of limited partnership of the Turner Partnership

was executed by all of its partners.            Decedent signed on behalf of

Turner Corp.

      Decedent,   through     the        1993   Trust,   contributed       to   the

partnership approximately $1,286,000 of his listed securities, plus

notes receivable due from Betsy’s children.              George contributed to

the partnership $1,000 in cash and real property in Vermont valued

at   $49,000.     At   the    time       of   the   formation   of   the    Turner

Partnership,    decedent     held    a    95.4-percent    limited    partnership

interest, George held a 3.54-percent limited partnership interest,

and Turner Corp., as the sole general partner of the Turner

Partnership, held the remaining 1.06 percent.5

      The assets of the Turner Partnership (and the values of those

assets) as of July 1993 were as follows:

                                                    Shares                 Value
      Decedent’s contribution

      Municipal bonds


      5
          Turner Corp. was to pay $15,000 to              the partnership for
its general partnership interest. However,               it did not pay the
$15,000 in cash for its interest; rather, the            corporation issued a
noninterest bearing promissory note in favor             of decedent for its
1.06-percent interest.
                                - 11 -

      Chester Co.                           ---          $50,180
      Madison Co.                           ---           10,327
      PA Higher Ed                          ---           50,472
      Puerto Rico                           ---            5,246
      Dela. State                            ---          52,131
                                          Shares          Value
     Stocks
      Atlantic Richfield                    100           11,575
      Coca Cola                           2,400          103,800
      GTE                                11,200          404,600
      General Electric                    1,600          157,600
      Intercap Qual Muni Inv.             2,000           32,000
      Intercap Qual Muni Inc.             1,200           18,150
      IBM                                   426           18,957
      Johnson & Johnson                     600           21,900
      Merck                                 900           27,563
      Meridian Bankcorp                   1,000           32,125
      3M                                    200           21,000
      Phila. Elec./PECO Energy              500           15,750
      Petrolite                           3,000          105,000
      Xerox                               1,800          131,400
     Mutual funds
      John Hancock                          900           15,894
     Loans receivable
      Phoebe Turner                         ---           15,000
      William Turner                        ---          100,000
      George Turner, Jr.                    ---           10,000
       Decedent’s total                                1,410,670

     Betsy/Georges’s contribution

      Cash (checking account)               ---            1,000
      Real Property
       Vermont property                     ---           49,000
       Betsy/George’s total                               50,000
        Total assets                                   1,460,670

     In 1994, after George contributed the Vermont property to the

Turner Partnership, Mr. Cheleden advised him that the initial

capitalization of the partnership might present certain investment

company issues pursuant to section 721(b) which could affect the

intended nonrecognition treatment of capital contributions to the

partnership. Accordingly, Mr. Cheleden recommended that the Turner
                                    - 12 -

Partnership limited partnership agreement be amended to allocate

the gains, losses, and distributions from the Vermont property to

George.

        By an undated amendment to the limited partnership agreement,

retroactive to April 23, 1993, the partners allocated all gains and

losses from, and distribution of real estate contributed to, the

partnership      to   the   contributing   partner.     The   amendment   was

intended to apply only to certain real property held in Vermont by

George.      In accordance with the amendment, George was entitled to

keep all net proceeds from the timber sales generated from the

Vermont property owned by the partnership.

        C.    The Thompson Partnership and Thompson Corp.

        Thompson Corp. was duly formed and organized as a Colorado

corporation on April 21, 1993.        The Thompson Partnership was duly

formed and organized as a Colorado limited partnership on April 30,

1993.        Robert was the registered agent.         His ranch in Norwood,

Colorado, was the registered office and place of business for both

the Thompson Partnership and Thompson Corp. Thompson Corp. was the

corporate general partner of the Thompson Partnership.             Decedent

and Robert each held 49 percent (490 shares) of the stock of

Thompson Corp.        Robert H. Thompson (an unrelated third party) held

the remaining 2 percent (20 shares).           Robert was the president,

Robert H. Thompson was the vice-president, and decedent was the

secretary/treasurer.        Upon formation of the Thompson Partnership,
                                     - 13 -

decedent     contributed     approximately      $1,118,500     of   his   listed

securities,    along      with   notes   receivable   from     Robert’s   family

members, to the partnership. Robert contributed to the partnership

his interest in 10 T. Rowe Price mutual funds worth approximately

$372,000,     and   his    Norwood   ranch    in    Colorado    (appraised    at

$460,000).

     The assets of the Thompson Partnership (and the values of

those assets) as of July 1993 were as follows:

                                             Shares              Value

     Decedent’s contributions

      Municipal bonds
       Dist. Columbia                         ---              $53,685
       Dover Dela. Wtr & Swr                  ---               27,498
       Dover Dela. Wtr & Swr                  ---               22,019
       Orlando Waste                          ---                5,208
       Dela. Hlth                             ---               33,548
       Tampa Wtr & Swr                        -–-               43,713
      Stocks
       Atlantic Richfield                     100               11,575
       Coca Cola                            2,400              103,800
       GTE                                  9,200              332,350
       General Electric                     1,600              157,600
       Intercapital invest                  2,000               32,000
       Intercapital income                    800               12,100
       IBM                                    400               17,800
       Johnson & Johnson                      600               21,900
       Merck                                  900               27,563
       Meridian Bankcorp                    1,000               32,125
       3M                                     200               21,000
       Phila. Elec./PECO Energy               500               15,750
       Xerox                                1,800              131,400
      Mutual Funds
       John Hancock Freedom                   900               15,894
      Loans receivable
       Amy Thompson                           -–-              139,739
       Ted Thompson                           ---               14,064
       Margaret Thompson                      ---              140,000
       Decedent’s total                                      1,412,331
                                      - 14 -


  Robert’s contributions
                                                 Shares           Value
        Mutual Funds
         Equity income                               -–-         $64,811
         European stock                              -–-          10,673
         Intl stock                                  -–-          32,710
         Japan fund                                  -–-          35,268
         New American growth                         -–-          37,660
         New Asia                                    -–-          22,449
         Science & Technology                        -–-          58,236
         High yield                                  -–-           5,597
         Intl bond                                   -–-         103,905
         Prime Reserve-cash                          -–-           1,499
        Ranch in Norwood, CO                         ---         460,000
          Robert’s total                                         832,808
          Total assets                                         2,245,138

       At the time of the formation of the partnership, decedent held

a 62.27-percent limited partnership interest and Robert held a

36.72-percent limited partnership interest. The Thompson Corp., as

the general partner of the Thompson Partnership, held the remaining

1.01-percent interest.

III.    Operation of the Partnerships

       A.     Decedent’s   Financial  Affairs   Through             the    Turner
              Partnership and the Thompson Partnership

       Before   forming     the    partnerships      and   corporations,   Betsy,

Robert, and decedent had agreed that decedent would be taken care

of financially.       They also wanted to make sure that decedent could

access money in the partnerships in order to continue making gifts

to his children, grandchildren, and great-grandchildren.                       In a

letter      dated   April   4,    1993,   to   Mr.   Warder,   Betsy   asked    how

decedent’s access to his checking account with his broker would be

affected by the family partnerships.                   She specifically asked
                                   - 15 -

whether her father would be able to draw money from the Dean Witter

account in order to give $10,000 gifts to children, grandchildren,

and great-grandchildren each year.

     In a letter dated November 28, 1993, George wrote to Mr. DeVol

asking: “How does Betsy’s father get $40,000 to give away as

Christmas presents (with checks dated January 1994)? (Bob Thompson

has a similar question.).”

     In 1993 both the Turner Partnership and Thompson Partnership

made distributions of $40,000 to decedent in order that he could

continue his practice of giving gifts at Christmastime to family

members.    The $40,000 distributions from the partnerships were

shown on decedent’s Schedule K-1, Beneficiary’s Share of Income,

Deductions, Credits, etc., as a distribution/withdrawal for that

year and as a reduction in his capital account.

     On    January   11,   1995,   the   Thompson   Partnership   made   a

distribution of $45,500 to decedent’s checking account, in order

that decedent’s Christmas checks to Robert, his children, and his

grandchildren would not bounce.          On the same date, the Turner

Partnership made a distribution of $45,220 to decedent’s checking

account, in order that decedent’s Christmas checks to Betsy, her

children, and her grandchildren would not bounce.

     In 1994 and/or 1995, in addition to some cash gifts, decedent

made gifts of interests in the Turner Partnership and the Thompson

Partnership. Gift tax returns filed by decedent (or on his behalf)
                                  - 16 -

reported adjusted taxable gifts of $9,324 for gifts of the Turner

Partnership   interests   and    $10,000   for   gifts   of   the   Thompson

Partnership interests.

     The partnerships distributed funds to decedent to pay for his

personal expenses.     In a January 19, 1995, handwritten letter to

Robert, Betsy wrote:

          Here is a list of Dad’s 1994 expenses (The Keely
     Mgt. fee will not be repeated.) The miscellaneous will
     not be quite as high as he no longer buys lumber. But as
     you can see he will need an infusion.

          He still has, in his Alex Brown Acct. as of today
     $31,806, $5,000 of this in cash.

          C.G. Cheleden suggested we transfer securities into
     his personal Alex Brown Acct # 05312, rather than each
     partnership selling something & transferring cash.     I
     just looked at our partnership statement.      We could
     transfer a Penna. Higher Ed. Facility (50,000 shares
     worth $50,864, ½ of it worth $25,432) & Dad could sell
     these off as he needed them. Do you think $25,000 from
     each of us [is] the right amount?

          Let me know what you think. He’s okay for now, as
     there is enough cash in the account for February.

Attached to the letter was a schedule of decedent’s expenses in

1994 totaling $57,202.40.       This amount included Delaware State tax

of $7,347, Federal income tax of $23,623, and Cokesbury assisted

living center expenses of $20,072.20. The $57,202.40 total did not

include $3,000 which Betsy identified as a “Keely Mgt. (fee for

discounting partnerships)”.

     The Thompson Partnership distributed $12,500 to decedent in

March 1995.
                                   - 17 -

     B.   Operation of the Turner Partnership

            1.   Securities

     The investment strategies for decedent’s trust holdings did

not change significantly after they were transferred to the Turner

Partnership.     Ms. Newnam remained as adviser, and decedent’s

securities continued to be held in the Alex Brown account.                The

amount of activity of the Turner Partnership account was low;

indeed, at trial, Ms. Newnam could not characterize the trading

activity of the account as even “moderately” traded.

            2.   Life Insurance Policies

     The Turner Partnership owned insurance policies on the lives

of George and Betsy.    The amount of insurance on George’s life was

$237,500 with a term rider of $196,500, for which the partnership

paid an annual premium of $15,992.88.6        The amount on Betsy’s life

was $200,000, for which the partnership paid an annual premium of

$3,927.

            3.   Lewisville Properties

     In September 1993, Betsy, George, and their daughter, Phoebe,

discussed   investing   in    a   real   estate   project,   known   as   the

Lewisville Properties.       Lewisville Properties was a modular home

construction venture.    Phoebe, a real estate broker, believed that

little risk was involved in making the investment and that she



     6
          The proceeds of the life insurance policy were paid to
the Turner Partnership after George’s death in 1999.
                                  - 18 -

expected the investment could generate a profit of approximately

$30,000.   On September 22, 1993, Phoebe brokered an agreement of

sale between the sellers and “George Turner & Betsy Turner, or

their assignee”. In October 1993, George opened a checking account

in the name of “TTLP t/a Lewisville Properties” at First National

Bank of West Chester.   The account was opened with a check from the

Turner Partnership in the amount of $20,000.       George advised the

bank that Phoebe, Betsy, himself, and William Robinson (a C.P.A.),

would have signatory authority for the account.

     On October 15, 1993, Lewisville Properties was purchased by

the Turner Partnership for approximately $44,000.        The partnership

financed   the   purchase   and   construction   costs   of   Lewisville

Properties through a margin loan made on the brokerage account of

the Turner Partnership. The total investment in the property was

approximately $186,000.7

           4.    Woodlands Property

     Woodside Farm was the private residence of Betsy and George;

it was listed as the principal place of business for both the

Turner Partnership and Turner Corp. Adjacent to Woodside Farm were

22 acres known as Woodlands Property.       The property contained a

swimming pool and small pool house, trails, a pond, and a dam.       On



     7
          In Nov. 1995, Lewisville Properties was sold for a net
loss to the Turner Partnership of approximately $60,000. Phoebe
received a commission of $9,120. She applied this amount toward a
$15,000 loan borrowed from decedent.
                                       - 19 -

December 22, 1994, Betsy and George contributed Woodlands Property

to the Turner Partnership.         Before contributing Woodlands Property

to   the    partnership,     the      Turners   placed   on     the   property   a

conservation easement that prohibited the cutting or removal of

trees from the property.8

            5.   Woodside Properties Partnership Interest

     Betsy and George each held a 35-percent partnership interest

in a real estate partnership known as Woodside Properties.                  Phoebe

held the remaining 30-percent partnership interest.                     Woodside

Properties consisted of six residential apartment units in two

buildings    located    in     West    Chester,    Pennsylvania.        Woodside

Properties’ real estate was titled in the names of Phoebe and

Betsy.     Phoebe was the managing partner and listing agent for

Woodside Properties.

     In    December    1994,    Betsy    and    George   each    assigned   their

interests in Woodside Properties to the Turner Partnership.                 After

the assignment, Woodside Properties’ real estate remained titled in

the names of Phoebe and Betsy.



     8
          In 1997, Betsy and George listed Woodside Farm for sale
and included the 22-acre Woodlands Property. Woodside Farm and
Woodlands Property were sold to a single purchaser for a gross
sales price of $550,000. After reduction for settlement charges
($43,586) and the first mortgage loan ($198,274), Betsy and George
received net proceeds of $312,351. Upon the sale of the property,
Betsy and George allocated to the Turner Partnership $12,351 of the
Woodside Farm/Woodlands Property sales proceeds, which amount
equaled the partnership’s adjusted basis in the Woodlands Property.
                                  - 20 -

            6.   Loans/Notes

     The   Turner   Partnership    was   used   to   continue   decedent’s

practice of lending money to Betsy’s children and grandchildren.

In April 1994, the Turner Partnership lent $35,000 to Betsy’s son

Robert and his wife.     In October 1994, the principal of the loan

was increased to $45,000 and subsequently increased to $50,000. In

October 1994, the Turner Partnership lent $15,000 to Betsy’s son

Bill; it lent an additional $8,000 to Bill in May 1995.         The Turner

Partnership maintained records of the amounts that were owed and

paid on the loans.

     Each partnership determined the current rate of interest to be

charged on the loans.      Although monthly interest payments were

provided as a term on the loans held by the partnerships, those

interest payments were often either late or not paid at all.           The

principal of such loans was payable on demand.          When a principal

payment was made, often the loan was reamortized and subsequent

interest payments reduced. No enforcement action was taken against

any family member/borrower when payment on the loans was not made.

No loans were made to anyone outside the Turner/Thompson family.

     C.    Operation of the Thompson Partnership

     Robert lived on the 312-acre Norwood Ranch in Colorado both

before and after it was contributed to the partnership.           After he

contributed the ranch to the partnership, he entered into a lease
                                  - 21 -

with the partnership.      Under the terms of the lease, Robert was

required to pay rent of $12,000 per year.

     Before contributing the ranch to the partnership, Robert did

not treat the ranch as a business.         He maintained the ranch in the

same manner both before and after its transfer.        Robert raised and

trained mules on the ranch.       Any income from the sale of the mules

went to Robert individually, not to the partnership.                On the

Thompson Partnership tax returns for the years 1993 through 1996,

however, the partnership claimed losses from the operation of the

ranch.

     On   several    occasions,   the   partnership   paid   the   rent    it

received from Robert to Thompson Corp. as a management fee.               For

the years 1993, 1994, and 1995, management fees were paid by the

Thompson Partnership to Thompson Corp. in the amounts of $23,625,

$45,000, and $47,500, respectively.9

     Robert was paid an annual salary of $32,001 as president of

Thompson Corp.      Robert’s wife, Karen, was paid a salary of $350 a

month for assisting with recordkeeping. She used the money to fund

her retirement account.

     Thompson Corp. carried workman’s compensation insurance on

Robert and Karen that covered any injury or accident they suffered

in their home.      In addition, the corporation paid the following


     9
          For the years 1996 and 1997, management fees were paid by
the Thompson Partnership to Thompson Corp. in the amounts of
$52,800 and $48,000, respectively.
                                    - 22 -

personal    expenses:     Robert’s    American      Association     of    Retired

Persons (AARP) supplemental insurance of $63 month, Karen’s health

insurance of $987 per quarter, and a subscription to the Wall

Street Journal.      In addition, the corporation paid Robert $200 a

month for use of his truck in maintaining the ranch.

IV.   Decedent’s Estate

      A.     Transactions With the Partnerships

      Decedent died on May 15, 1995, at the age of 97.                       Upon

decedent’s death, the 1993 trust was to terminate and the entire

trust balance was to be paid and distributed to decedent’s then-

living     lineal   descendants,    per    stirpes.        The   trustees    were

empowered to transfer money from the trust to decedent’s estate to

permit the funding of any monetary bequests made in decedent’s will

and the payment of any expenses.

      At the time of his death, decedent held a majority interest in

the Turner and Thompson Partnerships, as well as stock in their

corporate    general    partners.     He     also   held   an    interest   in   a

brokerage account of approximately $56,000, an interest in a mutual

fund of approximately $25,000, a checking account of approximately

$8,000, and a promissory note in the amount of $9,300.

      The assets of the Turner Partnership (and the values of those

assets) as of decedent’s date of death were as follows:

      Assets                                                      Value
      First National Bank
       General                               $3,404
       Lewisville                             1,479
                        - 23 -

Assets                                         Value
   Total                                      $4,883
Marketable securities
 Municipal bonds
  Chester Co                     15,118
  Madison Co                     12,000
  PA Higher Ed                    5,020
  Puerto Rico                     5,016
Stocks
  Atlantic Richfield            11,475
  Coca Cola                    138,900
  GTE                          383,600
  General Electric             184,400
  Intercap Qual Muni            42,775
  IBM                           40,470
  Johnson & Johnson             38,175
  Merck                         38,025
  Meridian Bankcorp             33,625
  3M                            24,550
  PECO Energy                   13,375
  Petrolite                     93,000
  Xerox                        217,575
 Mutual funds--John Hancock     19,710
 Margin loan                  (208,056)
   Total                                   1,108,753
Real Property
  Vermont property              49,000
  Lewisville property          154,500
  Woodlands                    110,000
  Woodside Properties1         102,416
   Total                                     415,916
Loans receivable
  Phoebe Turner                  14,961
  William Turner                 98,519
  George Turner, Jr.              9,843
  William Turner, IV             13,171
  Robert & Lorraine Turner       48,275
  Bill’s Bloom, Inc.              8,000
  Total                                      192,769
Accrued Int. & Div.                            3,032
Cash value life insurance
  George                                       8,907
  Betsy                                        1,821
Unearned premium                              15,905
  Total2                                   1,751,986
 1   Decedent’s estate valued Woodside Properties at $15,786.
                                - 24 -
      2
          The estate’s total value ascribed to the assets was
     $1,655,356.

     The assets of the Thompson Partnership (and the value of those

assets) as of decedent’s date of death were as follows:

     Assets                                            Value

     Cash                                              $57,096
     Marketable securities
      Municipal bonds
       Dist. Columbia                    50,141
       Dover Dela. Wtr. & Swr            20,813
       Dela. Hlth                        26,880
       Intercapital invest               36,975
       Intercapital income               13,375
      Stocks
       Atlantic Richfield             11,475
       Barrick Gold                   16,363
       Coca Cola                     138,900
       Fluor Corp.                    15,188
       GTE                           315,100
       General Electric              184,400
       Glaxo Wellcome PLC             20,813
       IBM                            38,000
       Johnson & Johnson              38,175
       Merck                          38,025
       Meridian Bankcorp              33,625
       3M                             24,550
       PECO Energy                    13,375
       Xerox                         217,575
     Mutual Funds
      John Hancock Freedom            19,710
      Equity income                   61,486
      Intl Stock                      40,348
      Latin America                   18,444
      Mid-cap growth                  45,953
      New Asia                        12,495
      Science & Technology            68,912
      Intl bond                      128,903
      U.S. Treasury                   43,926
       Total1                                         1,693,925
     Loans receivable
      Amy Thompson                   103,451
      Ted Thompson                     9,348
      Margaret Thompson              116,852
       Total                                              229,651
                                     - 25 -

       Assets                                                         Value

       Accrued interest & dividends                                    $4,066
       Ranch in Norwood, CO                                           595,000
         Total2                                                     2,579,738

         1  Decedent’s estate valued marketable securities at
       $1,693,922.
         2
            Decedent’s estate’s total value ascribed to the assets
       was $2,579,734.

       On May 27, 1995, the Turner Partnership sold over $347,000 of

securities it held through the Alex Brown account.                 Around the same

time,    the     Thompson    Partnership    sold     more    than    $350,000     in

securities.        On October 8, 1995, distributions were made from the

1993    trust,    in   partial   satisfaction      of    specific    bequests     in

decedent’s will, as follows:

       Betsy’s children:

                   George Turner Jr.               $15,000
                   Phoebe Turner                     4,000
                   Robert J. Turner                 20,000

       Robert’s children:

                   Amy Thompson                    $20,000
                   Margaret Thompson                14,000
                   John W. Thompson                 20,000
                   Theodore R. Thompson             20,000

       In January 1996, the Turner Partnership and the Thompson

Partnership each paid $246,500, or a total of $493,000, to a

checking account        to   fund   the   specific      bequests    set   forth   in

decedent’s will; these distributions reduced the estate’s interests

in the partnerships’ assets.          Likewise, the partnerships provided

funds to pay decedent’s estate taxes.
                                   - 26 -

     On August 7, 1996, because the estate contained insufficient

assets to fund all bequests in decedent’s will, an assignment of

partnership interest in the Turner Partnership was executed between

decedent’s estate and Betsy’s five grandchildren, transferring

partial interests in the Turner Partnership to them.

     B.     Estate Tax Return

     A Form 706, United States Estate (and Generation-Skipping

Transfer)   Tax   Return,    was   filed    on   February    21,    1996.   A

supplemental estate tax return was filed on December 10, 1996.

     On the return, decedent’s estate reported that decedent held

an 87.65-percent interest in the Turner Partnership (with a value

of   $875,811)    and   a   54.12-percent    interest   in    the    Thompson

Partnership (with a value of $837,691).          The return reported that

decedent held 490 shares of Turner Corp. stock valued at $5,190 and

490 shares of Thompson Corp. stock valued at $7,888.               The values

reported on the return were determined by applying a 40-percent

combined discount for minority interest and lack of marketability

to the net asset value of the assets of the partnerships.

     The estate tax return reported $19,324 as prior adjusted

taxable gifts pursuant to section 2001(b) related to decedent’s

gifts of the partnership interests in the Turner Partnership and

the Thompson Partnership.       The value of the prior gifts had also

been determined by applying a 40-percent combined discount for

minority interest and lack of marketability.
                                  - 27 -

     C.     Notice of Deficiency

     Respondent    issued   a   notice   of   deficiency    determining   a

$707,054 deficiency in Federal estate tax.             In the notice of

deficiency, respondent increased the values of decedent’s interests

in the limited partnerships and increased the amount of taxable

gifts related to decedent’s lifetime gifts of partnership interests

in those partnerships.

     Respondent determined that the value of decedent’s interest in

the Thompson Partnership was $1,396,152, rather than $837,691, and

the value of his interest in the Turner Partnership was $1,717,977,

rather than    $875,811.    As   a   result   of   those   determinations,

respondent increased decedent’s taxable estate by $1,400,627.

     Respondent also determined that the value of decedent’s 490

shares of Thompson Corp. was $13,977, rather than $7,888, and the

value of his 490 shares of Turner Corp. was $4,094, rather than

$5,190.    As a result of those determinations, respondent increased

decedent’s taxable estate by $4,993.

     Respondent’s notice of deficiency also proposed to increase

the prior taxable gifts from $19,324 to $166,167.

                                 OPINION

     As a general rule, section 2001(a) of the Internal Revenue

Code imposes a Federal tax “on the transfer of the taxable estate

of every decedent who is a citizen or resident of the United

States.”    Section 2001(b) provides that the estate tax is based
                                            - 28 -

upon the value of the taxable estate, plus taxable gifts made after

1976 and not includable in the gross estate, less gift taxes

payable on post-1976 taxable gifts. A decedent’s taxable estate is

determined by determining the value of the decedent’s gross estate

and   by   deducting      therefrom         those    deductions         provided       for   in

sections 2053 through 2056.                 Sec. 2051.

      The parties in this case disagree as to whether decedent’s

gross estate includes (1) the value of interests in family limited

partnerships      and     in    the    corporate       general      partner       of    those

partnerships that decedent possessed at death or transferred prior

to death (and if so, the value of such interests), or (2) pursuant

to section 2036(a), the value of the property which decedent

transferred       to    the    family        limited       partnerships     and    related

corporate general partners.

      Decedent’s       estate       maintains       that    decedent’s     gross       estate

includes    the    value       of     his    interests       in   the    family    limited

partnerships (not the value of the property transferred by him to

the partnerships) and that the value of each of his partnership

interests at the date of transfer (that is, the date of the gift or

the date of decedent’s death) is decedent’s proportionate share of

the fair market value of the assets of the partnership at the date

of transfer, discounted by 40 percent to reflect lack of control as

well as a lack of marketability.

      On   the    other       hand,    asserting       two    alternative      theories,
                                   - 29 -

respondent contends that the full fair market value of the assets

decedent   contributed     to    the   partnerships   is   includable     in

decedent’s gross estate.

     Respondent argues first that the partnerships lacked economic

substance and thus should be disregarded for transfer tax purposes.

Alternatively, respondent argues because decedent retained the

economic benefit and control of the transferred assets, section

2036(a) applies so that the date-of-death value of the assets

decedent   transferred     to    the   partnerships   is   includable     in

decedent’s gross estate.        Finally, respondent asserts that if the

partnerships are recognized for estate tax purposes and if section

2036(a) does not apply, then the amount of the combined minority

and lack of marketability discounts to apply in valuing decedent’s

interests in the partnerships is less than 40 percent, as claimed

by decedent’s estate.

I.   Burden of Proof

     As a preliminary matter, decedent’s estate maintains that the

issues of (1) whether the partnerships are to be recognized for

estate tax purposes, and (2) the applicability of section 2036 are

new matters which were not raised in the notice of deficiency.            The

estate thus concludes that the burden of proof as to those issues

is placed upon respondent.       We agree.

     Generally,   except    as     otherwise   provided    by   statute    or
                                - 30 -

determined by the Court, the burden of proof is on the taxpayer.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).10       The

burden of proof is on the Commissioner, however, in respect of any

new matter not raised in the notice of deficiency, increases in

deficiency, and affirmative defenses raised by the Commissioner in

an answer.    Rule 142(a).

      A notice of deficiency must “describe the basis” for the tax

deficiency.    Sec. 7522.    In some situations, failure to describe

the basis for the tax deficiency in the notice of deficiency

results in a new matter being raised under Rule 142(a).       Shea v.

Commissioner, 112 T.C. 183, 197 (1999); Wayne Bolt & Nut Co. v.

Commissioner, 93 T.C. 500, 507 (1989); Estate of Ballantyne v.

Commissioner, T.C. Memo. 2002-160. A new matter is raised when the

basis or theory on which the Commissioner relies is not stated or

described in the notice of deficiency and the new theory or basis

requires the presentation of different evidence.      Wayne Bolt & Nut

Co. v. Commissioner, supra at 507.       In such situation, the burden

of proof is placed on the Commissioner with respect to that issue.

Id.



      10
          In certain circumstances, if the taxpayer introduces
credible evidence with respect to any factual issue relevant to
ascertaining the proper tax liability, sec. 7491 places the burden
of proof on the Commissioner.      Sec. 7491(a); Rule 142(a)(2).
Decedent’s estate does not contend that sec. 7491 applies in this
case.
                                      - 31 -



      In   the     case   herein,     respondent’s      notice      of    deficiency

increased     the    value    of    decedent’s    interest         in    the   Turner

Partnership      from     $875,811,    as    reported       on   the     return,     to

$1,717,977, and increased the value of decedent’s interest in the

Thompson Partnership from $837,691, as reported on the return, to

$1,396,152.      Respondent explained the changes to the value of his

partnership interests as follows: “The 20% minority discount and

20% lack of marketability discount has been disallowed on each of

the above limited partnerships.” In addition, respondent decreased

the value of decedent’s Turner Corp. stock from $5,190, as reported

on the return, to $4,094, and increased the value of his Thompson

Corp. stock from $7,888, as reported on the return, to $13,977.

      In an amendment to the answer, respondent asserted that the

limited partnerships and the two family corporations should be

disregarded for Federal estate tax purposes and that the property

includable    in    decedent’s      gross    estate    is    his    share      of   the

underlying assets owned by the partnerships as of the date of his

death. In the alternative, respondent asserted in the amendment to

the answer that with respect to the assets transferred by decedent

to   the   partnerships,     decedent       retained   control      and    enjoyment

sufficient to include the date-of-death value of those assets in

the gross estate pursuant to section 2036(a).

      The adjustments made by respondent in the notice of deficiency

resulted    from    respondent’s      disallowance      of   any    discounts       for
                                  - 32 -

minority interest or lack of marketability.         The disallowance of

those discounts did not call into question the economic substance

of the partnerships or raise the applicability of section 2036.

Moreover,   the    amount   of   discount   for   lack   of   control    and

marketability requires different evidence than that required for

the   matters   first   raised   in   the   amendment    to   the    answer.

Entitlement to the discounts requires proof that a willing buyer

would pay less for decedent’s interest in the partnerships than net

asset value because the interests did not have control over the

partnership and because there was no ready market for the sale of

the partnership interests. Evidence required to establish that the

entities should be respected for estate and gift tax purposes

includes evidence that the entities were properly established under

State law and that other formalities have been followed.            Evidence

required to prove that section 2036(a) does not apply includes

evidence that decedent did not retain the enjoyment of the property

or control over who has the enjoyment of the property or that

decedent transferred the property for adequate consideration.            See

infra pp. 33-49.    These are new matters raised in the amendment to

the answer.

II.   Whether the Turner Partnership and the Thompson Partnership
      Will Be Recognized for Federal Estate Tax Purposes

      Respondent contends that the Thompson Partnership and the

Turner Partnership should be disregarded for Federal tax purposes

because they lack economic substance and business purpose.            “Mere
                                     - 33 -

suspicion and speculation about a decedent’s estate planning and

testamentary      objectives   are    not     sufficient   to   disregard   an

agreement in the absence of persuasive evidence that the agreement

is not susceptible of enforcement or would not be enforced by

parties to the agreement.”      Estate of Strangi v. Commissioner, 115

T.C. 478, 485 (2000), affd. on this issue, revd., and remanded 293

F.3d 279, 282 (5th Cir. 2002); Hall v. Commissioner, 92 T.C. 312,

335 (1989).

     The Thompson Partnership and Thompson Corp. were validly

formed pursuant to Colorado law, and the Turner Partnership and

Turner Corp. were validly formed pursuant to Pennsylvania law.

Potential purchasers of decedent’s assets would not disregard the

partnership. Thus, the partnerships had sufficient substance to be

recognized for Federal estate and gift tax purposes.               Knight v.

Commissioner, 115 T.C. 506, 513-515 (2000); Estate of Strangi v.

Commissioner, supra; Dailey v. Commissioner, T.C. Memo. 2001-263.

III. Whether the Assets Decedent Transferred to the Partnerships
     Should Be Included in Decedent’s Gross Estate Under Section
     2036(a)

     Section 2051 defines the “taxable estate” as “the value of the

gross   estate,    less   applicable    deductions.”        Section   2031(a)

specifies that the gross estate comprises “all property, real or

personal, tangible or intangible, wherever situated”. Section 2033

broadly states that “The value of the gross estate shall include

the value of all property to the extent of the interest therein of
                                     - 34 -

the decedent at the time of his death.”         Sections 2034 through 2045

include in the gross estate several narrowly defined classes of

assets. Among these specific sections is section 2036, which reads

in pertinent part as follows:

       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.

       Section 2036(a) effectively includes in the gross estate the

full fair market value, at the date of death, of all property

transferred in which the decedent had retained an interest, rather

than    the    value    of   only   the   retained   interest.      Fidelity-

Philadelphia Trust Co. v. Rothensies, 324 U.S. 108 (1945).               This

furthers the legislative policy to “include in a decedent’s gross

estate transfers that are essentially testamentary--i.e., transfers

which leave the transferor a significant interest in or control

over the property transferred during his lifetime.”              United States

v. Estate of Grace, 395 U.S. 316, 320 (1969).               Thus, an asset
                                     - 35 -

transferred by a decedent while he was alive cannot be excluded

from   his   gross     estate    unless    he   “absolutely,         unequivocally,

irrevocably, and without possible reservations, parts with all of

his title and all of his possession and all of his enjoyment of the

transferred property.”          Commissioner v. Estate of Church, 335 U.S.

632, 645 (1949).         Application of section 2036(a) depends upon

practical    considerations;       its    effects   are   not    dependent       upon

“‘various niceties of the art of conveyancing’”.                        Id. at 642

(quoting Klein v. United States, 283 U.S. 231, 234 (1931)).

       A.    Whether Decedent Retained Possession, Enjoyment, or the
             Right to the Income From the Transferred Property During
             His Lifetime; Section 2036(a)(1)

       For purposes of section 2036(a)(1), 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.           See Guynn v. United States, 437

F.2d    1148,   1150     (4th     Cir.    1971);    Estate      of    McNichol     v.

Commissioner, 265 F.2d 667, 671 (3d Cir. 1959), affg. 29 T.C. 1179

(1958); Estate of Reichardt v. Commissioner, 114 T.C. 144, 151

(2000); see also sec. 20.2036-1(a) Estate Tax Regs.                   The existence

of such an implied agreement or understanding can be inferred from

the facts and circumstances surrounding both the transfer itself

and the subsequent use of the property.              Estate of Reichardt v.

Commissioner, supra; Estate of Spruill v. Commissioner, 88 T.C.
                                        - 36 -

1197, 1225 (1987); Estate of Rapelje v. Commissioner, 73 T.C. 82,

86 (1979).

      In this case, the circumstances surrounding establishment of

the partnerships show that, at the time of the transfer, there was

an implied agreement or understanding that decedent would retain

the   enjoyment     and    economic      benefit    of   the    property     he   had

transferred.      Before the partnerships were formed, Betsy sought

assurances from the financial advisers that decedent would be able

to withdraw assets from the partnerships in order to make cash

gifts    each    year     to   his    children,    grandchildren,      and     great

grandchildren.       In late November 1993 after the partnerships were

formed, George asked the advisers how decedent could get $40,000

out of the partnerships to give as Christmas presents.                The implied

agreement among decedent, Robert, Betsy, and George that decedent

would retain the enjoyment and economic benefit of the transferred

property is      reflected      also    by   the   distributions     made    by   the

partnerships to decedent.            Late in 1993 and again in 1994, both the

Turner Partnership and the Thompson Partnership made distributions

to decedent of $40,000 so that he could continue his practice of

giving substantial gifts at Christmastime to his family members.

        The   circumstances     also    demonstrate      an    understanding      that

decedent’s interest in the transferred property would last until

his death. When the partnerships were established, decedent parted

with almost all of his wealth, retaining enough to support himself
                                 - 37 -

for less than 2 years.      Betsy’s correspondence in early 1995 to

Robert shows that the amount decedent retained was insufficient–-

his original holdings had diminished to $31,806, while his expenses

for the prior year totaled $57,202.       Betsy informed Robert that

decedent would need “an infusion” of funds to cover the balance of

decedent’s anticipated 1995 expenses. She proposed that the Turner

Partnership and the Thompson Partnership transfer assets of equal

value to their father.       In March 1995 the Thompson Partnership

distributed $12,500 to decedent.

        We are not persuaded otherwise by the insistence of decedent’s

estate that decedent always asked Betsy and Robert, in their

respective capacity as officers of the corporate general partners

of their partnerships, for the cash decedent needed to provide

Christmas gifts.11 The fact that decedent requested those sums does

not vitiate the existence of an understanding that he would receive

them.

     Here, decedent’s outright transfer of the vast bulk of his

assets to the partnerships would have deprived him of the assets


     11
          Further, sec. 2036(a) applies when the decedent has “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.” Sec. 2036(a)(2). (Emphasis added.) The parties have
limited their arguments to the application of sec. 2036(a)(1).
Since we find that decedent retained enjoyment of the property
within the meaning of sec. 2036(a)(1), we leave to another day the
application of sec. 2036(a)(2) to family limited partnerships such
as those existing in this case.
                                     - 38 -

needed   for   his    own   support.     Thus,     the    transfers    from   the

partnerships to decedent can only be explained if decedent had at

least an implied understanding that his children would agree to his

requests   for    money     from   the   assets     he   contributed    to    the

partnerships, and that they would do so for as long as he lived.

     While we acknowledge that, as a result of the creation of the

partnerships, prior to decedent’s death some change ensued in the

formal relationship of decedent to the assets he contributed to the

partnerships, we are satisfied that the practical effect of these

changes during decedent’s life was minimal.              Decedent continued to

be the principal economic beneficiary of the contributed property

after the partnerships were created.               Based on these facts, we

conclude that nothing but legal title changed in the decedent’s

relationship     to   his   assets   after    he   transferred   them    to   the

partnerships.         Estate of Reichardt v. Commissioner, supra at

152-153.

     Any control over management and distributions by Betsy and

Robert is likewise of little import.           Documents in the record show

that the composition of the portfolio changed little prior to

decedent’s death.       We place little weight on averments concerning

change, during decedent’s life, in the partners’ relationships to

the contributed property.

     In Mahoney v. United States, 831 F.2d 641, 646-647 (6th Cir.

1987) the court explained:
                              - 39 -

     “The general purpose of the statute was to include in a
     decedent’s gross estate transfers that are essentially
     testamentary--i.e., transfers which leave the transferor
     a significant interest in or control over the property
     transferred during his lifetime.” * * * By taxing
     essentially testamentary transactions, section 2036(a)
     prevents “circumvention of federal estate tax by use of
     schemes which do not significantly alter lifetime
     beneficial enjoyment of property supposedly transferred
     by a decedent.” * * * The applicability of section
     2036(a), therefore, is not controlled by the “various
     niceties of the art of conveyancing,” * * * but is
     instead dependent upon “the nature and operative effect
     of the transfer,” * * *. As such, the statute operates
     to tax transfers of property “that are too much akin to
     testamentary dispositions not to be subjected to the same
     excise.” * * *

     We have applied the aforementioned principles to the creation

of family partnerships.   We have often held that section 2036(a)

applies to return to the estate the assets of an elderly and

wealthy individual who had placed the bulk of his or her assets

into a partnership that is controlled by that individual and his

family, while the individual possessed continued use of the assets

so transferred.   See Estate of Reichardt v. Commissioner, 114 T.C.

144 (2000); Estate of Harper v. Commissioner, T.C. Memo. 2002-121;

Estate of Schauerhamer v. Commissioner, T.C. Memo. 1997-242.

     In light of decedent’s personal situation, the fact that the

contributed property constituted the majority of decedent’s assets,

including nearly all of his investments, the establishment of the

partnerships is far more consistent with an estate plan than with

any sort of arm’s-length joint enterprise between partners.      In

summary, we are satisfied that the partnerships were created
                                    - 40 -

principally as an alternate vehicle through which decedent would

provide for his children at his death.              Estate of Schauerhamer v.

Commissioner, supra.      We conclude that decedent retained enjoyment

of    the   contributed    property       within    the    meaning    of   section

2036(a)(1).

       B.      Whether Decedent Transferred Property to the Partnership
               in a Bona Fide Sale for Full and Adequate Consideration

       Section 2036(a) does not apply to a transfer that is “a bona

fide sale for an adequate and full consideration in money or

money’s     worth”.     Decedent’s    estate        contends   that    decedent’s

transfer of his assets to the partnerships falls within that

exception.       We disagree.    We believe that decedent’s transfer of

his property to the partnerships does not constitute “a bona fide

sale for an adequate and full consideration”, within the meaning of

section 2036(a).

       The exemption under section 2036(a) is limited to those

transfers where the transferor has received full consideration in

a    genuine    arm’s-length    transaction.         Estate    of    Goetchius   v.

Commissioner, 17 T.C. 495, 503 (1951).                    The exemption is not

allowed where there is only contractual consideration but not

“adequate and full consideration in money or money’s worth.”                     Id.

       When a family partnership is only a vehicle for changing the

form in which the decedent held his property--a mere “recycling of

value”--the      decedent’s     receipt    of   a    partnership      interest   in
                                      - 41 -

exchange for his testamentary assets is not full and adequate

consideration within the meaning of section 2036.                  In Estate of

Harper v. Commissioner, supra, we rejected the taxpayer’s argument

that the decedent’s receipt of a partnership interest, in exchange

for his trust assets, was a “bona fide sale for an adequate and

full consideration in money or money’s worth”.            We observe therein

that in reality, the assets were not invested in a business

enterprise, they were only “recycled”.               And where a transaction

involves only the genre of value “recycling” and does not appear to

be motivated primarily by legitimate business concerns, no transfer

for consideration within the meaning of section 2036(a) has taken

place.    Id.

     In   Estate   of    Harper    v.    Commissioner,    supra,    we   further

observed that our interpretation of “adequate consideration” for

transfers to family partnerships was consistent with and supported

by our holdings in other cases, including Estate of Reichardt v.

Commissioner, supra, and Estate of Schauerhamer v. Commissioner,

supra.

     In    contrast     to    those     situations   involving     “alternative

testamentary vehicles”, we have also addressed cases wherein a

decedent has transferred his or her assets into a valid functioning

business enterprise.         In those cases, we generally have found that

the transfer was made for full and adequate consideration.                   As

such, the decedent’s receipt of income from the enterprise will not
                                        - 42 -

cause the value of the property he contributed to the enterprise to

be returned to his estate.                  See, e.g., Estate of Harrison v.

Commissioner,      T.C.      Memo.      1987-8;     Estate        of    Michelson       v.

Commissioner, T.C. Memo. 1978-371.                In those cases, there was no

expressed    or    implied       agreement      between    the     partners      in    the

partnerships that the decedents could continue to use, possess, or

enjoy partnership property, within the meaning of section 2036(a).

     In the case before us, however, the transactions were not

motivated    by    the    type    of    legitimate       business       concerns      that

furnished   “adequate      consideration”         as   described        in    Estate    of

Harrison    v.    Commissioner,        supra,    and   Estate      of    Michelson      v.

Commissioner, supra.          Further, we have found that in the case

before us, the partners did, in fact, have an expressed or implied

understanding that decedent could continue to use the assets he

transferred to the partnerships.

     A number of factors influence our finding. Initially, we note

that none of the individual partners in either of the partnerships

was involved in the conduct of an active business.                      Additionally,

it is clear that Robert, Betsy, and George did not actually pool

their   assets     with    those       of    decedent.       To    the       extent    the

partnerships could have generated income resulting from their

separate activities, they arranged matters so that any such income

went to them directly, and not to the partnerships.                      For example,

in Robert’s case, any income from the sale of the mules went to him
                                       - 43 -

individually, not to the partnership.               In the case of Betsy and

George, their partnership agreement was amended in 1994 so that

George, and not the partnership, received all income from the sale

of timber on the Vermont property that prior to the amendment

George had contributed to the partnership.             Thus, although each of

decedent’s      children    (and/or     their     spouses)    invested     in   the

partnerships, they kept their own assets, as well as any income

those assets may have generated, effectively separate from those of

decedent.    They, like decedent, merely “recycled” their property

through the partnership form.12

     Moreover, although decedent’s stocks and bonds formed the

principal assets of both partnerships, no substantial change in

investment strategy or activity took place from the date decedent

transferred the assets to the partnerships to the date of his

death.

     In   the    final     analysis,    neither    decedent    nor   his   family

conducted the partnerships in a businesslike manner.                 None of the

parties involved in the partnerships joined together with the

intent to either form business enterprises or otherwise to conduct


     12
          The practice continued after decedent’s death.       When
Betsy and George sold their private residence, Woodside Farm, they
included the 22 acres of Woodlands Property adjacent to their home
in the same sale. After the sale, they allocated to the Turner
Partnership an amount of the Woodside Farm/Woodlands Property sales
proceeds that exactly equaled the partnership’s basis in the
Woodlands Property. In so doing, they effectively eliminated any
partnership gain or loss from the sale for Federal tax purposes.
                                     - 44 -

any    trade   or   business.      The   partnerships     did    not   engage   in

transactions with anyone outside the family; loans and gifts were

made to family members only.              The lending activities of the

partnerships        lacked   any    semblance       of   legitimate     business

transactions. This exclusivity might be consistent with decedent’s

generosity towards his family members, but it was inconsistent with

any valid business operation.13          In reality, these loans continued

to be testamentary in nature, using decedent’s money as a source of

financing for the needs of individual family members, not for

business purposes.

       In conclusion, we find that there was no bona fide sale for

adequate and full consideration.           Consequently, we hold that the

full date-of-death value of the assets that decedent transferred

from    his    trusts   to   the   Thompson   and    Turner     Partnerships    is

includable in his gross estate pursuant to section 2036(a).




       13
          After decedent’s death, the Turner Partnership and
Thompson Partnership continued making loans to family members.
Some of these loans included underwriting Phoebe’s $40,000 loss in
the construction of Lewisville Properties, an auto loan of $15,000
to Phoebe (since partially repaid), and a loan to Betsy’s 17-year
old grandson to purchase a lobster boat. In addition, the Turner
Partnership made loans to Betsy’s son, William, to start a rose-
growing business, and made additional loans for his business,
despite the ultimate failure of the business venture. There is
nothing to support that either Robert or Betsy made partnership
investment decisions in their children’s and grandchildren’s
ventures with the same careful consideration one would expect to be
exercised by a managing partner of a partnership having a valid
business purpose.
                                       - 45 -

     C.    Amount Included          in    Decedent’s   Estate   Under    Section
           2036(a)

     We now turn to the issue of which assets are to be included in

decedent’s gross estate, bearing in mind that the burden of proof

is on respondent.

     The assets of the Turner Partnership (and the values of those

assets) as of July 1993 (upon contribution to the partnership) and

May 15, 1995 (decedent’s date of death), were as follows:

                                       7/93                 5/15/95
                              Shares          Value    Shares       Value
Decedent’s contribution
 Municipal bonds
  Chester Co                 ---          $50,180        ---       15,118
  Madison Co                 ---           10,327        ---       12,000
  PA Higher Ed               ---           50,472        ---        5,020
  Puerto Rico                ---            5,246        ---        5,016
  Dela. State                ---           52,131        ---         ---
 Stocks
  Atlantic Richfield         100           11,575         100       11,475
  Coca Cola                2,400          103,800       2,400      138,900
  GTE                     11,200          404,600      11,200      383,600
  General Electric         1,600          157,600       3,200      184,400
  Intercap Qual Muni Inv. 2,000            32,000       2,950       42,775
  Intercap Qual Muni Inc. 1,200            18,150         -–-         ---
  IBM                        426           18,957         426       40,470
  Johnson & Johnson          600           21,900         600       38,175
  Merck                      900           27,563         900       38,025
  Meridian Bankcorp        1,000           32,125       1,000       33,625
  3M                         200           21,000         400       24,550
  Phila. Elec./PECO Energy   500           15,750         500       13,375
  Petrolite                3,000          105,000       3,000       93,000
  Xerox                    1,800          131,400       1,800      217,575
 Mutual funds
  John Hancock               900           15,894        900        19,710
 Margin loan                 ---             ---         ---      (208,056)
 Loans receivable
  Phoebe Turner              ---            15,000       ---        14,961
  William Turner             ---           100,000       ---        98,519
  George Turner, Jr.         ---            10,000       ---         9,843
    Decedent’s total                     1,410,670               1,232,076

Betsy/George’s Contribution
 Cash (checking account)      ---             1,000      ---            ---
 Real Property
  Vermont property            ---          49,000        ---        49,000
  Woodlands                   ---            ---         ---       110,000
  Woodside Properties         ---            ---         ---       102,416
    Betsy’s total                          50,000                  261,416
                                     - 46 -
                                     7/93                 5/15/95
                           Shares           Value    Shares       Value

New assets
 First National Bank account
  General                      ---          ---          ---        3,404
  Lewisville                   ---          ---          ---        1,479
 Real Property
  Lewisville property          ---          ---          ---    154,500
 Cash value life insurance
  George                       ---          ---          ---         8,907
  Betsy                        ---          ---          ---         1,821
    Total                                                           10,728
 Unearned premium--
     life insurance            ---          ---          ---        15,905
 Loans receivable
  William Turner, IV           ---          ---          ---      13,171
  Robert & Lorraine Turner     ---          ---          ---     $48,275
  Bill’s Bloom, Inc.           ---          ---          ---       8,000
Accrued int. & div.            ---          ---          ---       3,032
   Unattributed total                                            258,494
   Total assets                      1,460,670                 1,751,986

      The securities totaling $1,232,076 were assets transferred to

the   Turner   Partnership      by   decedent.      In   addition    to   those

securities, new assets that derived from assets transferred by

decedent are included in decedent’s taxable estate under section

2036(a).   The Lewisville Property was funded with the margin loan

attributable to the securities contributed by decedent.                None of

the real estate contributed by George to the partnership produced

any income.      At most, the $1,479 in the Lewisville Properties

account could be attributed to the $1,000 contributed by George on

the formation of the partnership. The remaining $257,015 ($258,494

- $1,479) of the new assets held by the partnership at decedent’s

death must have derived from the assets contributed by decedent.

We find, therefore, that assets totaling $1,489,091 ($1,232,076 +

$257,015) held by the Turner Partnership at the date of decedent’s

death are included in the taxable estate under section 2036(a).
                                       - 47 -

     The assets of the Thompson Partnership (and the values of

those   assets)    as    of    July     1993     (upon   contribution     to     the

partnership) and May 15, 1995 (decedent’s date of death), were as

follows:


                                       7/93                     5/15/95
                              Shares          Value       Shares       Value
Decedent’s contributions
 Municipal bonds
  Dist. Columbia               ---            $53,685       ---      $50,141
  Dover Dela. Wtr & Swr        ---             27,498       ---         ---
  Dover Dela. Wtr & Swr        ---             22,019       ---       20,813
  Orlando Waste                ---              5,208       ---         ---
  Dela. Hlth                   ---             33,548       ---       26,880
  Tampa Wtr & Swr              -–-             43,713       -–-         -–-
   Total                                      185,671                 97,834
 Stocks
  Atlantic Richfield            100            11,575        100      11,475
  Coca Cola                   2,400           103,800      2,400     138,900
  GTE                         9,200           332,350      9,200     315,100
  General Electric            1,600           157,600      3,200     184,400
  Intercapital invest         2,000            32,000      2,550      36,975
  Intercapital income           800            12,100      1,000      13,375
  IBM                           400            17,800        400      38,000
  Johnson & Johnson             600            21,900        600      38,175
  Merck                         900            27,563        900      38,025
  Meridian Bankcorp           1,000            32,125      1,000      33,625
  3M                            200            21,000        400      24,550
  Phila. Elec./PECO Energy      500            15,750        500      13,375
  Xerox                       1,800           131,400      1,800     217,575
   Total                                      916,963              1,103,550
 Mutual Funds
  John Hancock Freedom         900            15,894        900         19,710
 Loans receivable
  Amy Thompson                 -–-         139,739          ---      103,451
  Ted Thompson                 ---          14,064          ---        9,348
  Margaret Thompson            ---         140,000          ---      116,852
   Total                                   293,803                   229,651
    Decedent’s total                     1,412,331                 1,450,745

Robert’s contributions
 Mutual Funds
  Equity income                -–-             64,811       ---       61,486
  European stock               -–-             10,673       -–-         ---
  Intl stock                   -–-             32,710       -–-       40,348
  Japan fund                   -–-             35,268       -–-         ---
  New American growth          -–-             37,660       -–-         ---
  New Asia                     -–-             22,449       -–-       12,495
  Science & Technology         -–-             58,236       ---       68,912
  High yield                   -–-              5,597       ---         ---
  Intl bond                    -–-            103,905       ---      128,903
  Prime Reserve-cash           -–-              1,499       -–-         ---
   Total                                      372,808                312,144
                                       - 48 -

                                       7/93                     5/15/95
                              Shares           Value      Shares       Value

 Ranch in Norwood, CO          ---            460,000       ---      595,000
   Robert’s total                             832,808                907,144

New Assets
 Cash                          ---             ---          ---          57,097
 Stock
  Barrick Gold                 -–-             ---          700          16,363
  Fluor Corp.                  ---             ---          300          15,188
  Glaxo Wellcome PLC           ---             ---          ---          20,813
 Mutual Funds
  Latin America                -–-             -–-          ---        18,444
  Mid-cap growth               -–-             -–-          -–-        45,953
 U.S. Treasury                 -–-             -–-          -–-        43,926
 Accrued int & div             ---             ---          ---         4,066
  Total Unattributed assets                                           221,850
  Total Assets                           2,245,138                  2,579,739

     The new assets held by the Thompson Partnership on the date of

decedent’s death could have derived from mutual funds contributed

to the partnership by Robert.           We are not persuaded that any of the

new assets derived from the assets contributed by decedent.                       We

find, therefore, that assets totaling $1,450,745 held by the

Thompson Partnership at the date of decedent’s death are included

in the taxable estate under section 2036(a).

     The   record    establishes        that     George   and   Robert    retained

enjoyment and control over the property they contributed to the

partnership. Decedent’s interests in the partnerships had no value

attributable to the property contributed by George and Robert to

the partnerships.       We find, therefore, that no additional value

attributable to the partnerships over the value of the property

included in decedent’s estate under section 2036(a) is included in

decedent’s taxable estate.
                                         - 49 -

      Further, decedent’s stock in Turner Corp. and Thompson Corp.

had   no    value    apart      from   the   corporations’     interests     in    the

partnerships. The value of decedent’s stock in the corporations is

included in the value of the assets included in his estate under

section 2036(a).          We find, therefore, that no additional value

attributable to such stock is included in computing decedent’s

taxable estate.

      D.      Adjusted Taxable Gifts

      Decedent’s estate’s estate tax return included, as part of the

gross estate, $19,324 as “adjusted taxable gifts” pursuant to

section 2001(b) for lifetime transfers of decedent’s interest in

the partnerships.         Respondent’s notice of deficiency proposed to

increase this amount to $166,167.

      Neither party addresses the impact of the application of

section 2036(a) on the value of the prior gifts of partnership

interests.          We   have    found   that     pursuant   to   section   2036(a)

decedent’s taxable estate includes the full value as of decedent’s

death of assets transferred by him to the partnerships and held by

the partnerships at decedent’s death.                  We have also found that

decedent’s interests in the partnerships had no value apart from

the assets he contributed to the partnerships because Betsy and

Robert maintained control over the property they transferred to

their      respective     partnerships.           Therefore,   we   hold    that    in

computing the proper estate tax due, it is not appropriate to
                                     - 50 -

include   a    separate    value   attributable    to    decedent’s    lifetime

transfers     of   partnership     interests.    See    Estate   of   Harper   v.

Commissioner, T.C. Memo. 2002-121.

     E.       Conclusion

     The value of decedent’s interests in the partnerships as

reported on decedent’s estate tax return and as determined by

respondent in the notice of deficiency and the value of the assets

that we have found are to be included in the estate under section

2036(a) are as follows:



                               Estate Tax        Notice of          Sec.
                                 Return         Deficiency          2036
Thompson Partnership            $837,691        $1,396,152       $1,450,745
Turner Partnership               875,811          1,717,977       1,489,091
Thompson Corp.                     7,888             13,977               0
Turner Corp.                       5,190              4,094               0
Prior taxable gifts               19,324            166,167               0
  Total                        1,745,904          3,335,177       2,939,836

     To reflect the foregoing,



                                                  Decision will be entered

                                          under Rule 155.
