                      T.C. Memo. 1997-4



                   UNITED STATES TAX COURT



  ESTATE OF EMERSON WINKLER, DECEASED, THOMAS WINKLER AND
DARRELL S. WINKLER, CO-EXECUTORS, ET AL., Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 6510-95, 6523-95,     Filed January 2, 1997.
                 6524-95.



     Robert Kopf, Jr., Jill Fisher, and R. Dell Zeigler,

for petitioners.

     Michael Bitner, for respondent.




          MEMORANDUM FINDINGS OF FACT AND OPINION


     WHALEN, Judge:   Respondent determined the following

deficiencies in, and penalties on, petitioners' taxes:
                                     - 2 -


                                                                Penalty
                              Year    Gift Tax   Estate Tax   Sec. 6662(a)

Elizabeth Winkler             1989    $58,596       --         $23,438
Estate of Emerson Winkler      --      58,596       --          23,438
Estate of Emerson Winkler      --        --      $294,333


Unless stated otherwise, all section references are to the

Internal Revenue Code as in effect during 1989 or at the

time of the decedent's death.

     Respondent determined a gift tax deficiency in the

case of Mrs. Elizabeth Winkler based on a finding that

Mrs. Winkler made taxable gifts in 1989 of one-half of

the value of a winning lottery ticket.              Respondent also

determined a gift tax deficiency in the case of her

deceased husband, Mr. Emerson Winkler, by reason of his

consent to split the gifts made by Mrs. Winkler pursuant

to section 2513(a).         Due to the increase in Mr. Winkler's

lifetime taxable gifts, respondent also determined a

deficiency in estate tax in the case of the Estate of

Emerson Winkler.

     The primary issue for decision is whether Mrs. Winkler

purchased a winning lottery ticket on her own behalf or on

the behalf of a family partnership.              If we find that

Mrs. Winkler purchased the ticket on her own behalf, then

we must also determine whether the Estate of Emerson

Winkler is entitled to increase the marital deduction
                              - 3 -


claimed for estate tax purposes by the amount of

Mr. Winkler's interest in a family partnership on the

ground that Mrs. Winkler's disclaimer of that interest was

invalid.

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so

found.     The stipulation of facts and attached exhibits are

incorporated herein by this reference.       At the time the

instant petitions were filed, Mrs. Elizabeth Winkler and

the co-executors of the Estate of Emerson Winkler were

residents of the State of Illinois, and the Estate of

Emerson Winkler was being administered in the State of

Illinois.

     Mr. and Mrs. Winkler had been married for over 50

years prior to Mr. Winkler's death on March 11, 1992.       Both

Mr. and Mrs. Winkler graduated from high school but neither

received any other formal education.       When he died,

Mr. Winkler was a retired farmer, and the couple was living

on the family farm in Armington, Illinois.

     Mr. and Mrs. Winkler had five children during their

marriage:     Ms. Charlotte Sutter, Ms. Susan Litwiller,

Ms. Sharon Swartzendruber, Mr. Thomas Winkler, and

Mr. Darrell (Steve) Winkler.     The Winklers were a very

close family.     All of the children but Steve lived within
                              - 4 -


a short distance from Mr. and Mrs. Winkler's home and

gathered at their parents' home almost every Sunday.    Steve

Winkler lived approximately 2 hours away from Mr. and

Mrs. Winkler's home and came to the family gatherings about

every other week.

     Mr. Winkler was in poor health in 1989.    His medical

condition necessitated frequent trips to the Carle Clinic

in Champaign, Illinois, and the Mayo Clinic in Rochester,

Minnesota.   The Carle Clinic is approximately 2 hours from

the Winklers' home by car, and the Mayo Clinic is

approximately 8 hours away.    Generally, Mrs. Winkler and

one or more of the Winkler children would drive Mr. Winkler

to his appointments at the clinics.    Mrs. Winkler and her

children also made frequent trips to visit Mr. Winkler when

he was hospitalized.

     During 1989, the State of Illinois operated a weekly

lottery game known as "Lotto".    Lotto tickets cost one

dollar each and contained a combination of six numbers.

Every Saturday night, the Illinois Department of the

Lottery conducted a drawing during which six numbers were

selected at random.    If the six numbers selected during the

drawing matched the six numbers on a Lotto ticket, the

holder of the ticket won the "grand prize" for the week of

the drawing.   If more than one winning ticket had been
                            - 5 -


issued during a given week, the grand prize was divided

evenly between or among the winning ticket holders.

     On one occasion when Mr. and Mrs. Winkler and one or

more of their children stopped for fuel while returning

from the Carle Clinic, someone suggested that they purchase

Lotto tickets.   It quickly became a family routine that on

trips to or from a clinic, whichever family members were in

the car would purchase three Lotto tickets when they

stopped for fuel.   Any family member who happened to have a

dollar bill would contribute toward the purchase of the

tickets, and the driver would usually go into the store to

purchase the tickets.   After obtaining the tickets, the

driver would hand them to Mr. Winkler, who would inspect

them and comment on the numbers.    Mr. Winkler would then

give them to Mrs. Winkler for safekeeping.    Upon returning

home, Mrs. Winkler would invariably place the tickets in a

glass bowl in a china cabinet where the Winklers stored

most of their important family documents and keepsakes.      On

Saturday night or Sunday morning, Mr. and Mrs. Winkler

would check the numbers on the tickets against those

selected during the weekly drawing.

     Family members referred to the Lotto tickets purchased

in the manner described above as "family tickets", and

regarded them as being owned by the entire family.    None of
                             - 6 -


the Winklers maintained a record of exactly how much each

family member contributed toward the purchase of Lotto

tickets.    However, each of the Winkler children and Mr. and

Mrs. Winkler both paid for and went into the store to

purchase Lotto tickets on more than one occasion.    The

Winklers had no specific agreement as to how any potential

winnings would be divided among them.    However, the

Winklers often discussed what they would do with any

winnings, and each family member enjoyed describing what he

or she would do with his or her separate portion of the

winnings.   In this way, the purchase of Lotto tickets

became a diversion for the family during Mr. Winkler's

illness.

     Mrs. Winkler never purchased any Lotto tickets for

herself, and never purchased any tickets when she was

alone.   Some of the Winkler children occasionally purchased

Lotto tickets for themselves, and considered such tickets

to be their separate property.    The children always kept

Lotto tickets purchased for themselves in their separate

possession.   On the other hand, when a family member

purchased family tickets, he or she always purchased three

tickets and always gave them to Mrs. Winkler for storage in

the china cabinet.
                              - 7 -


     On Saturday, March 4, 1989, Mrs. Winkler and her

daughter Charlotte went to buy flowers for a friend who was

in the hospital.   Charlotte reminded Mrs. Winkler that they

had not purchased the family Lotto tickets on their way

home from the Mayo Clinic the night before and suggested

that they stop at a gas station to purchase tickets before

the Saturday night drawing.    Mrs. Winkler initially said

that she was too tired, but Charlotte eventually convinced

her to stop.   Mrs. Winkler purchased all three tickets with

her own money.    She selected the numbers on the tickets

using the "quick pick" option, which caused a computer to

generate a group of six random numbers on each ticket.

Mrs. Winkler then took the tickets home and placed them in

the china cabinet where she kept the family tickets.

Charlotte also purchased a Lotto ticket for herself at the

gas station, but she kept this ticket separate from the

family tickets.

     On the morning of Sunday, March 5, 1989, Mr. and

Mrs. Winkler listened when the winning numbers were

announced on the radio.    Mrs. Winkler wrote the numbers

down and later checked them against the numbers on the

tickets she had purchased the day before.    Much to the

Winklers' delight, one of the tickets bore all of the

numbers announced from the weekly drawing.    Disbelieving
                            - 8 -


that they could have won, Mrs. Winkler telephoned Charlotte

and asked her to check the numbers listed in the Sunday

newspaper.   Charlotte verified in two separate newspapers

that the Winklers had the winning ticket.    Mr. Winkler then

telephoned the other children and asked each of them to

come to the farm early that day.    As each of the children

arrived, Mr. and Mrs. Winkler announced that they had won

the grand prize.

     Later that Sunday, the Winklers contacted Mr. Darrel

Oehler, a local accountant who had grown up with the

Winkler children, and asked him to come to the house the

following morning.   On Monday, March 6, the Winkler family

met with Mr. Oehler and told him that they had won the

weekly Lotto grand prize.   Mr. Oehler advised the Winklers

to discuss the matter with an attorney.    Following this

advice, the Winklers met with a local attorney, Mr. Ralph

Turner, later that same day.

     During 1989, the Illinois Department of the Lottery

required a written partnership agreement before it would

distribute Lotto winnings to more than one individual or

entity.   If a "partnership ticket" was presented for

payment without an accompanying written partnership

agreement, the Lottery Department would provide a pro forma

agreement to the ticket holder and suggest that he or she
                            - 9 -


obtain the advice of an accountant or attorney.    Because of

this requirement, Mr. Turner advised the Winklers to enter

into a written partnership agreement to memorialize their

understanding as to how the proceeds should be divided.

     During their meeting with Mr. Turner, the Winklers

agreed among themselves that Mr. and Mrs. Winkler should

each receive 25 percent of the winnings, and that each of

the five children should receive 10 percent.    Mr. Turner

then drafted a partnership agreement for the "E & E Family

Partnership" to reflect this understanding.    The partner-

ship agreement provides as follows:

                    PARTNERSHIP AGREEMENT

          This agreement is entered into on March 4,
     1989, by EMERSON WINKLER, ELIZABETH WINKLER,
     THOMAS WINKLER, CHARLOTTE SUTTER, SHARON
     SWARTZENDRUBER, SUSAN LITWILLER, and DARRELL
     WINKLER, collectively referred to as "partners"
     and individually as "partner".

          1. Name and Purpose. The partnership shall
     be carried on under the name of E & E FAMILY
     PARTNERSHIP. The partnership has been formed to
     memorialize the family's understanding concerning
     the purchase of lottery tickets. Tickets
     purchased were for the benefit of the family
     rather than the individual who purchased the
     ticket.

          2.   Mailing Address.   * * *

          3. Winnings. In the event a ticket
     purchased shall win, the payee shall be the
     partnership and the partnership's income and
     capital shall be distributed as follows:
                          - 10 -


               Emerson Winkler         25%
               Elizabeth Winkler       25%
               Thomas Winkler          10%
               Charlotte Sutter        10%
               Sharon Swartzendruber   10%
               Susan Litwiller         10%
               Darrell Winkler         10%


          4. Death of a Partner. In the event that
     a partner should die, the partner's share of
     partnership distributions shall be paid to his
     or her estate.

          5. Binding Affect [sic]. This agreement
     shall inure to the benefit of, and be binding
     upon the parties hereto and their respective
     heirs, legatees, administrators, executors, legal
     representatives, successors and permitted
     assigns.

          6. Amendments. Amendments to this agree-
     ment shall become effective only if in writing,
     signed by all the partners.


Although the partnership agreement is dated March 4, 1989,

the agreement was not executed until March 8, 1989.

     On March 10, 1989, the E & E Family Partnership

claimed the proceeds of the Lotto drawing.   On or about

March 16, 1989, the Illinois Department of the Lottery

approved the E & E Family Partnership agreement and

authorized payment of the proceeds to the partnership.     The

Winklers were the sole winners of the weekly grand prize of

$6,463,166, which was to be paid in 20 annual installments.

     On February 12, 1990, Mr. and Mrs. Winkler each filed

a United States Gift (and Generation-Skipping Transfer) Tax
                            - 11 -


Return on Form 709.    Both returns were prepared by a tax

advisor.   Mrs. Winkler's return reported total gifts of

$50,000.50.   This included a gift of $.10 to each of her

five children that was labeled "Illinois Lottery Ticket

#0634-8455-9267 dated March 4, 1989".     It also included

a gift of $10,000 in cash to each of the children.

Mrs. Winkler's return reports that these cash gifts had

been made on December 16, 1989.      Mr. Winkler reported total

gifts of $51,861.    This included a gift of $10,002 in cash

to each of his five children, and a gift of the value of a

trip to Florida to four of the children.     Mr. Winkler's

return reports that these gifts had been made on

December 23, 1989.

     Mr. and Mrs. Winkler each consented to split the gifts

of the other, (i.e., to treat all of the gifts as having

been made one-half by each of them) pursuant to section

2513.   After excluding $10,000 of gifts to each donee

pursuant to section 2503(b), Mr. and Mrs. Winkler each

reported taxable gifts of $930.75.

     Mr. Winkler died on March 11, 1992.     Mr. Winkler's

will was filed with the Tazewell County Circuit Clerk of

the Tenth Judicial Circuit of Illinois on November 3, 1992.

In his will, Mr. Winkler left all of his tangible personal

property to his wife provided that she survive his death.
                            - 12 -


In the event that Mrs. Winkler failed to survive him,

Mr. Winkler left all of his tangible personal property to

his children per stirpes.   Mr. Winkler left the residue of

his estate to the "Trustee of the Trust Estate", naming

Mrs. Elizabeth Winkler as the Trustee.   He directed the

Trustee to create two separate trusts:   A marital trust and

a residuary trust.

     Mr. Winkler's will directs the Trustee to fund the

marital trust as follows:


          A. If my wife is living at my death, then
     as of the date of my death the Trustee shall set
     out of the trust estate a separate trust, herein
     called the marital trust, and shall allocate to
     such trust that amount of eligible trust property
     which will result in the least federal estate tax
     being payable because of my death but not more
     than the smallest amount that will result in no
     such tax. The Trustee shall determine this
     amount after giving effect to the exercise or
     proposed exercise of tax elections and shall take
     into account prior taxable gifts of the testator
     and the federal credit for state death taxes only
     to the extent that state death taxes are not
     thereby incurred or increased.


The will instructs the Trustee to distribute property from

this trust as follows:


          (1) Commencing with the date of my death,
     all of the income from this marital trust shall
     be paid to my wife, W. ELIZABETH WINKLER, in
     convenient installments, but at least as often
     as annually, during her lifetime.
                             - 13 -


          (2) During the life of my said wife, the
     trustee shall distribute all or any portion of
     the principal of the marital trust to any
     persons, including herself, whom my said wife
     may from time to time appoint by instrument
     in writing and deliver to the Trustee in her
     lifetime. Any appointment by my wife may be of
     such estates and interests and upon such terms,
     trusts and conditions as my wife shall determine.

           *     *       *     *      *   *     *

          (5) If my wife survives me but disclaims
     any part or all of the property which would
     otherwise be held in the marital trust, I give
     such disclaimed property to the Trustee of the
     residuary trust to be administered as part
     thereof for the benefit of those persons,
     including my wife, referred to thereunder.


     Mr. Winkler's will further directs that the balance of

the Trust Estate (i.e., the portion not allocated to the

marital trust) be held in a separate trust which he termed

the "residuary trust".   The residuary trust is governed by

the following provisions:


          A. Commencing with the date of my death,
     the Trustee shall pay to my wife, W. ELIZABETH
     WINKLER, the net income of the residuary trust in
     convenient installments during the remainder of
     her lifetime, at least as often as annually. If,
     at any time, or from time to time, in the sole
     opinion of the Trustee, the income payable to my
     wife, together with such other funds available to
     her from other sources, and known to the Trustee,
     is insufficient for the following purposes, the
     Trustee may pay to her from principal such
     amounts as the Trustee, in the Trustee's
     discretion, deems necessary for her needs for
     support, maintenance and health, including
     hospital and institutional care.
                          - 14 -


          B. Upon the death of my wife (or upon my
     death if she shall predecease me), the residuary
     trust shall terminate, whereupon the Trustee
     shall distribute all accrued or undistributed
     net income of the residuary trust to the estate
     of my wife. The Trustee shall distribute the
     then principal of the trust per stirpes to my
     descendants then living, except as provided in
     Section IV [which creates separate trusts for
     minor beneficiaries].


     Mr. Winkler's will further clarifies his intent

concerning the interaction between the marital and

residuary trust as follows:


          I intend that the gift to the marital trust
     qualify under the marital deduction provisions
     of the federal estate tax law applicable to my
     estate (except to the extent not elected by my
     Executor under the powers given to my Executor
     herein), and all provisions of this Will shall,
     accordingly, be construed to carry out that
     intent. More specifically, if any provision of
     my Will or any power (other than the powers to
     which reference is made in the preceding
     sentence), right, direction or discretion granted
     to the Trustee or my Executor hereunder shall
     cause the loss of the marital deduction, then
     such provision or grant shall be void and of no
     effect as to the marital trust.


     On or about December 10, 1992, the Estate of Emerson

Winkler filed a United States Estate (and Generation-

Skipping Transfer) Tax Return, Form 706.   The return

reported a total gross estate of $1,519,156.55 consisting

primarily of farm land and associated buildings located in

Tazewell County, Illinois, valued at $685,060, and
                                    - 15 -


Mr. Winkler's 25-percent interest in the E & E Family

Partnership, valued at $714,750.55.

     Attached to the estate tax return is a Schedule F--

Other Miscellaneous Property Not Reportable Under Any Other

Schedule, which reports the following property:

     9.     25% INTEREST IN E & E PARTNERSHIP - LOTTERY WINNINGS

            A.     25% OF LOTTERY WINNINGS VALUED PER ATTACHED $714,750.55
            B.     25% OF TAZEWELL COUNTY NATIONAL BANK ACCOUNT       8.59
                     NUMBER 448-56-7
            C.     25% OF ACCOUNTS PAYABLE - TAX WORK               (75.94)



Schedule F is accompanied by a pleading which was filed on

December 8, 1992, in the Circuit Court for Tazewell County,

Illinois, In the Matter of the Estate of Emerson Winkler,

Deceased.    This pleading states as follows:


            DISCLAIMER OF DECEDENT'S 25% INTEREST IN
                        E & E PARTNERSHIP

          The undersigned, W. ELIZABETH WINKLER,
     hereby exercises her right pursuant to Ill. Rev.
     Stat. Chap. 110½, Sec. 2-7(a) to disclaim any
     claim and interest to the following property
     interest, to-wit:

            Twenty-five percent (25%) interest of
            Decedent, EMERSON WINKLER, in E & E
            PARTNERSHIP, an Illinois partnership.

          The undersigned has received no benefits
     in connection with the disclaimed asset.

          This disclaimer is irrevocable and is
     binding upon the disclaimant and all persons
     claiming by, through and under the disclaimant.

            This disclaimer is not barred by:
                            - 16 -


          1. a Judicial sale of the property, part or
     interest thereof;

          2. an assignment, conveyance, encumbrance,
     pledge, sale or other transfer of the property by
     the disclaimant;

          3. a written waiver of the right to
     disclaim of the undersigned; or an acceptance of
     the property by the disclaimant.

           *      *     *     *      *    *     *

          This disclaimer only covers the Twenty-Five
     percent (25%) partnership interest of Decedent,
     EMERSON WINKLER, and in no way affects W.
     ELIZABETH WINKLER's individual Twenty-Five
     percent (25%) interest in said partnership.


     Schedule M--Bequests, etc., to Surviving Spouse, filed

with the decedent's estate tax return, claimed a marital

deduction in the amount of $754,153.07, consisting

principally of the property which was distributed to the

marital trust.   The property distributed to the marital

trust includes the farm and farm machinery, but does not

include Mr. Winkler's 25-percent interest in the E & E

Family Partnership.

     On Part 2 of Schedule M, the executors of the Estate

made the following protective QTIP election:


          The executors elect a specific portion of
     the residuary trust created under paragraph III
     of decedent's will. The portion elected shall
     be represented by a fractional share of up to
     100% of the combined residue of decedent's estate
     and any property disclaimed by the surviving
     spouse per paragraph II E(5) of the will that is
                             - 17 -


     required to reduce the federal estate tax on the
     decedent's federal estate tax return to the
     smallest amount possible based upon finally
     determined federal estate tax values, after
     taking into consideration all other items
     deducted on the federal estate tax return,
     administrative expenses deducted on the estate's
     fiduciary income tax returns, other property
     passing to the surviving spouse, prior taxable
     gifts, the allowable state death tax credit (to
     the extent that it does not increase the amount
     of death taxes payable to any state), and the
     unified credit.


The executors determined that "based on the return as

filed," the value of the QTIP property that was needed to

reduce the estate tax to the smallest amount was "0.00".

     On February 2, 1995, respondent issued separate

notices of deficiency to Mrs. Elizabeth Winkler and the

Estate of Emerson Winkler.    Respondent determined

deficiencies in Mr. and Mrs. Winkler's gift tax for 1989 in

the amount of $58,596 each.    This determination is based on

respondent's findings that Mrs. Winkler made gifts to her

children of 50 percent of the winning Lotto ticket, and

that Mr. Winkler consented to split the gifts pursuant to

section 2513.   Respondent determined the value of 50

percent of the winning ticket to be $1,514,014.35 and

therefore increased the value of the total taxable gifts

made by both Mr. and Mrs. Winkler by one-half that amount,

$757,007.17.
                           - 18 -


     Respondent also determined a deficiency of $281,038

in the Estate of Emerson Winkler's estate tax.   Respondent

reached this determination by increasing the value of

Mr. Winkler's lifetime taxable gifts by $757,007, and by

making adjustments to the marital deduction that are not

disputed.   Respondent did not recognize the Estate's

protective QTIP election, and did not increase the marital

deduction for any portion of the residuary trust.


                           OPINION

     Respondent determined that Mrs. Winkler purchased the

value of the winning Lotto ticket on her own behalf and

made a gift of a 10-percent interest in the ticket to each

of her five children.   As mentioned above, respondent

asserts that the aggregate value of these gifts, totaling

50 percent of the value of the winning ticket, is

$1,514,014.35.

     Petitioners argue that Mrs. Winkler purchased the

winning ticket on behalf of a pre-existing family partner-

ship.   Petitioners contend that although the written E & E

Family Partnership agreement was not executed until after

the winning numbers were announced, an oral partnership

agreement existed prior to the time Mrs. Winkler purchased

the ticket.   Thus, petitioners argue that each member of

the Winkler family was entitled to receive a portion of the
                           - 19 -


proceeds of the winning ticket as his or her separate

property, and Mrs. Winkler did not make a gift of any

portion of the winning ticket to her children.

     Petitioners also argue that an agreement to divide the

proceeds of a winning lottery ticket should be respected

for tax purposes even in the absence of an enforceable

contract or valid partnership so long as the parties to the

agreement actually perform.    Finally, petitioners argue in

the alternative that if the division of the lottery

proceeds is determined to be a gift, the Estate of Emerson

Winkler is entitled to an increased marital deduction

because Mrs. Winkler's purported disclaimer of her

husband's 25-percent interest in the E & E Family

Partnership was ineffective.

     In deciding this case, the threshold question that

must be answered is whether there was a family partnership

in existence at the time Mrs. Winkler purchased the winning

ticket.   If we determine that a valid partnership existed

at that time, we must also decide whether Mrs. Winkler

purchased the ticket on behalf of the partnership.

Petitioners bear the burden of proving that Mrs. Winkler

purchased the winning Lotto ticket on behalf of a

partnership composed of the members of her immediate

family.   Rule 142(a).
                            - 20 -


     Whether a valid partnership exists for Federal tax

purposes is governed by Federal law.   See Commissioner v.

Culbertson, 337 U.S. 733 (1949); Lusthaus v. Commissioner,

327 U.S. 293 (1946); Commissioner v. Tower, 327 U.S. 280

(1946); Evans v. Commissioner, 447 F.2d 547, 550 (7th Cir.

1971); Frazell v. Commissioner, 88 T.C. 1405, 1412 (1987);

Wheeler v. Commissioner, T.C. Memo. 1978-208.    Section 761

of the Code defines the term "partnership" as follows:


     (a) PARTNERSHIP.--For purposes of this sub-
     title, the term "partnership" includes a
     syndicate, group, pool, joint venture or other
     unincorporated organization through or by means
     of which any business, financial operation, or
     venture is carried on, and which is not, within
     the meaning of this title [subtitle], a corpora-
     tion or a trust or estate. * * *


See also sec. 7701(a)(2).   The term "partnership" as

defined by the Code is broader in scope than the common

law meaning of partnership, and may include groups not

traditionally considered partnerships.    Sec. 1.761-1(a),

Income Tax Regs.; sec. 301.7701-3(a), Proced. & Admin.

Regs.

     A partnership is created "when persons join together

their money, goods, labor, or skill for the purpose of

carrying on a trade, profession, or business and when there

is a community of interest in the profits and losses."

Commissioner v. Tower, supra at 286.     Generally, "each
                            - 21 -


partner contributes one or both of the ingredients of

income--capital or services."   Commissioner v. Culbertson,

337 U.S. 733, 740 (1949).   In deciding whether two or more

persons have formed a partnership:

     The question is not whether the services or
     capital contributed by a partner are of
     sufficient importance to meet some objective
     standard * * * but whether, considering all the
     facts--the agreement, the conduct of the parties
     in execution of its provisions, their statements,
     the testimony of disinterested persons, the
     relationship of the parties, their respective
     abilities and capital contributions, the actual
     control of income and the purposes for which it
     is used, and any other facts throwing light on
     their true intent--the parties in good faith and
     acting with a business purpose intended to join
     together in the present conduct of the
     enterprise. Id.


See Luna v. Commissioner, 42 T.C. 1067, 1077-1078 (1964).

     Recognition of a partnership for Federal tax purposes

also requires that the parties conduct some business

activity.   See Madison Gas & Elec. Co. v. Commissioner,

633 F.2d 512, 514-518 (7th Cir. 1980), affg. 72 T.C. 521

(1979); Frazell v. Commissioner, 88 T.C. 1405, 1412 (1987).

For example, it is clear that neither joint ownership of

property nor sharing of expenses, by itself, creates a

partnership for Federal tax purposes.   Madison Gas &

Elec. Co. v. Commissioner, supra; Estate of Appleby v.

Commissioner, 41 B.T.A. 18, 20 (1940), affd. 123 F.2d 700

(2d Cir. 1941); Gabriel v. Commissioner, T.C. Memo. 1993-
                           - 22 -


524; Marinos v. Commissioner, T.C. Memo. 1989-492.    Sec.

1.761-1(a), Income Tax Regs.; sec. 301.7701-3(a), Proced.

& Admin. Regs.   The regulations in this regard provide as

follows:


     A joint undertaking merely to share expenses is
     not a partnership. For example, if two or more
     persons jointly construct a ditch merely to drain
     surface water from their properties, they are not
     partners. Mere co-ownership of property which is
     maintained, kept in repair, and rented or leased
     does not constitute a partnership. For example,
     if an individual owner, or tenants in common, of
     farm property lease it to a farmer for a cash
     rental or a share of the crops, they do not
     necessarily create a partnership thereby.
     Tenants in common, however, may be partners if
     they actively carry on a trade, business,
     financial operation, or venture and divide the
     profits thereof. For example, a partnership
     exists if co-owners of an apartment building
     lease space and in addition provide services to
     the occupants either directly or through an
     agent. * * * [Sec. 1.761-1(a), Income Tax Regs.;
     see also sec. 301.7701-3(a), Proced. & Admin.
     Regs.]


In Marinos v. Commissioner, supra, this Court stated that

"The regulations and relevant case law indicate the

distinction between mere co-owners and co-owners who are

engaged in a partnership lies in the degree of business

activity of the co-owners or their agents."

     In this case, based upon the credible testimony of

petitioners' witnesses, we find that the Winklers engaged

in the activity of pooling their money to purchase family
                            - 23 -


Lotto tickets.   We find that they conducted this activity

on a regular and consistent basis for more than a year

before March 4, 1989.    Thus, based upon all of the facts

and circumstances of this case, we find that the Winklers

in good faith and acting with a business purpose intended

to join together in the present conduct of an enterprise.

See Commissioner v. Culbertson, supra; Luna v. Commis-

sioner, supra.

     At trial, respondent emphasized the fact that prior

to the time Mrs. Winkler purchased the winning ticket, the

Winklers did not have a specific agreement as to how they

would divide proceeds.    We do not find the absence of such

agreement to be fatal to the existence of a partnership

prior to the time Mrs. Winkler purchased the winning

ticket.   As the Supreme Court noted in Culbertson:


     If, upon a consideration of all the facts, it
     is found that the partners joined together in
     good faith to conduct a business, having agreed
     that the services or capital to be contributed
     presently by each is of such value to the
     partnership that the contributor should
     participate in the distribution of profits,
     that is sufficient. [Commissioner v.
     Culbertson, supra at 744-745.]


     In the case of a partnership composed of members of

the same family, section 704(e) provides that a person

shall be recognized as a partner if:    (1) The partnership
                            - 24 -


is one in which capital is a "material income-producing

factor", and (2) the person "owns" the partnership

interest.   Ketter v. Commissioner, 70 T.C. 637, 643 (1978),

affd. without published opinion, 605 F.2d 1209 (8th Cir.

1979); see also Elrod v. Commissioner, 87 T.C. 1046, 1070-

1072 (1986).    Section 704(e) states as follows:

     (e) Family Partnerships.--

          (1) Recognition of interest created by
     purchase or gift.--A person shall be recognized
     as a partner for the purposes of this subtitle
     if he owns a capital interest in a partnership
     in which capital is a material income-producing
     factor, whether or not such interest was derived
     by purchase or gift from any other person.


     The purpose of section 704(e) is "to harmonize the

rules governing interests in so-called family partnerships

with those generally applicable to other forms of property

or business".    S. Rept. 781, 82d Cong., 1st Sess. 39

(1951), 1951-2 C.B. 458, 485; H. Rept. 586, 82d Cong., 1st

Sess. 33 (1951), 1951-2 C.B. 357, 380-381.    In the case of

a family partnership which derives income from the

ownership of property, as opposed to providing personal

services, section 704(e) makes it clear that the income is

taxable to the owner of a partnership interest if he or she

is the real owner.    This is true even if the owner acquired

his or her partnership interest as an intra-family gift and

performs no substantial services for the partnership.
                          - 25 -


     Section 1.704-1(e)(1)(iv), Income Tax Regs.,

establishes the following test for determining whether

capital is a "material income-producing factor":


     Capital as a material income-producing factor.
     For purposes of section 704(e)(1), the deter-
     mination as to whether capital is a material
     income-producing factor must be made by
     reference to all the facts of each case.
     Capital is a material income-producing factor
     if a substantial portion of the gross income
     of the business is attributable to the employ-
     ment of capital in the business conducted by
     the partnership. In general, capital is not
     a material income-producing factor where the
     income of the business consists primarily of
     fees, commissions, or other compensation for
     personal services performed by members or
     employees of the partnership. On the other
     hand, capital is ordinarily a material income-
     producing factor if the operation of the business
     requires substantial inventories or a substantial
     investment in plant, machinery, or other equip-
     ment.


See generally, Ketter v. Commissioner, supra.

     In viewing the fact that any income from the

enterprise in this case would be attributable to the

purchase of a winning Lotto ticket, or to the investment of

the proceeds of a winning ticket, and none of the income

would consist "of fees, commissions, or other compensation

for personal services performed by members or employees of

the partnership", it is clear that capital is a material

income-producing factor in the enterprise.   Sec. 1.704-

1(e)(1)(iv), Income Tax Regs.   Thus, pursuant to section
                              - 26 -


704(e), each member of the Winkler family shall be

recognized as a partner if he or she owns a capital

interest in the enterprise.     Sec. 704(e)(1).

     Section 1.704-1(e)(2), Income Tax Regs., sets forth

basic tests to determine "ownership".      These tests are

designed to determine "Whether an alleged partner who is a

donee of a capital interest in a partnership is the real

owner of such capital interest, and whether the donee has

dominion and control over such interest".      Id.   For this

purpose, a capital "interest purchased by one member of a

family from another shall be considered to be created by

gift from the seller, and the fair market value of the

purchased interest shall be considered to be donated

capital."   Sec. 704(e)(3).    The basic tests fall into five

categories:   Retained controls by the transferor of the

partnership interest, indirect controls by the transferor,

participation in management, income distributions, and

conduct of partnership business.       Cirelli v. Commissioner,

82 T.C. 335, 345 (1984); sec. 1.704-1(e)(2), Income Tax

Regs.   Whether a person "owns" a capital interest in a

partnership is a mixed factual and legal issue to be

determined from the totality of the circumstances.

Pflugradt v. United States, 310 F.2d 412, 416 (7th Cir.

1962); Reynolds, T.C. Memo. 1987-261.
                           - 27 -


     Considering all of the facts and circumstances, we

find that each of the Winkler family members did in fact

"own" a capital interest in the partnership prior to the

time Mrs. Winkler purchased the winning ticket.     Each

member of the family contributed capital in the form of

dollar bills to purchase Lotto tickets on more than one

occasion.   Each member of the family, except for

Mr. Winkler, also contributed services on more than one

occasion by going into the store to purchase the tickets.

The family agreed among themselves that these contributions

of capital and services were of such value to the

partnership that the contributing family members should

share in any winnings.   They also agreed to joint

proprietorship and control over the tickets, and they

agreed to share the proceeds of any winning ticket.

Finally, each of the Winkler family members was treated

as a partner at all times during the operation of the

partnership.   For example, each member of the family

attended the meetings with Mr. Oehler and Mr. Turner and

had a say in formulating the written partnership agreement.

Under these circumstances, we find that each of the family

members actually owned a partnership interest as required

by section 704(e).   Sec. 1.704-1(e)(2), Income Tax Regs.

Cf. Commissioner v. Culbertson, 337 U.S. 733 (1949); S & M
                           - 28 -


Plumbing Co. v. Commissioner, 55 T.C. 702 (1971); Wheeler

v. Commissioner, T.C. Memo. 1978-208.

     The second factual question is whether Mrs. Winkler

purchased the winning Lotto ticket on behalf of the pre-

existing family partnership.   Courts typically focus on

the facts and circumstances surrounding the purchase of a

lottery ticket, including the intent and understanding of

the parties at the time of purchase, to determine ownership

of the proceeds of the ticket for income tax purposes.

See, e.g., Tavares v. Commissioner, 275 F.2d 369 (1st Cir.

1960), affg. 32 T.C. 591 (1959); Schultz v. Commissioner,

T.C. Memo. 1977-67; Dowling v. Commissioner, T.C. Memo.

1959-169; Chelius v. Commissioner, T.C. Memo. 1958-29.     For

example, where a taxpayer purchases a lottery ticket with

the intent and understanding that the proceeds will be

shared with one or more other persons, the courts have

treated the proceeds of the ticket as income to the

recipients rather than as income to the purchaser.    Solomon

v. Commissioner, 25 T.C. 936 (1956); Huntington v.

Commissioner, 35 B.T.A. 835 (1937); Droge v. Commissioner,

35 B.T.A. 829 (1937); Dowling v. Commissioner, T.C. Memo.

1959-169; Chelius v. Commissioner, supra.   This is true

even though the agreement to divide proceeds is void and

unenforceable.   Tavares v. Commissioner, supra; Dowling
                           - 29 -


v. Commissioner.   As this Court stated in Dowling v.

Commissioner, supra:


     The rule regularly applied in such circumstances
     is that where a ticket on a lottery is purchased
     in the name of one of two persons and they agree
     prior to the drawing to share any winnings, each
     person is taxable only upon his agreed share
     provided that the nominal owner in fact divides
     the proceeds in accordance with their agreement,
     even though the agreement be void and unenforce-
     able. * * * [Dowling v. Commissioner, supra
     (citations omitted).]


     The facts in this case are that Mrs. Winkler did not

normally play games of chance, and she never purchased

Lotto tickets other than the family tickets purchased in

the presence of other family members.   She purchased the

winning Lotto ticket as one of three "family tickets" on

March 4, 1989, while she was with her daughter, Charlotte.

She took the tickets home and placed them in a glass bowl

in the china cupboard, as was customary for family tickets.

Based upon the record in this case, we find that

Mrs. Winkler purchased the winning Lotto ticket on behalf

of the family partnership and not as her sole property.     In

making this finding, we are mindful of Mrs. Winkler's gift

tax return in which she took the position that she made

gifts to her children of the value of the ticket prior to

the time it was determined to be the winner (i.e., $.10 to

each child).   However, we accept Mrs. Winkler's testimony,
                             - 30 -


that she signed the gift tax return on an accountant's

advice despite the fact that she did not intend to make a

gift of the ticket, as credible and as consistent with the

other facts and circumstances of this case.

     Finally, we must determine the Winklers' respective

partnership interests at the time Mrs. Winkler purchased

the winning ticket.   Normally, a partner's interest in the

partnership is determined by the partnership agreement.

Sec. 704(a); sec. 1.704-1(a), Income Tax Regs.      In this

case, there was no written partnership agreement when

Mrs. Winkler purchased the winning ticket, and the members

of the Winkler family had not yet agreed upon specific

partnership interests.   However, section 1.761-1(c), Income

Tax Regs., provides that "As to any matter on which [a]

partnership agreement, or any modification thereof, is

silent, the provisions of local law shall be considered to

constitute part of the agreement."      See also sec. 1.704-

1(b)(2)(ii)(h), Income Tax Regs.      At all relevant times,

the Illinois Uniform Partnership Act provided that absent

agreement to the contrary:


     Each partner shall be repaid his contribution,
     whether by way of capital or advances to the
     partnership property and share equally in
     the profits and surplus remaining after all
     liabilities, including those to partners, are
     satisfied; and must contribute towards the
     losses, whether of capital or otherwise,
                            - 31 -


     sustained by the partnership according to his
     share in the profits. [Ill. Ann. Stat. ch. 106½,
     par. 18(a) (Smith-Hurd 1987) (emphasis added).]


     Accordingly, under section 1.761-1(c), Income Tax

Regs., and the Illinois Uniform Partnership Act, the

Winklers' partnership agreement as it existed at the time

Mrs. Winkler purchased the winning ticket is deemed to have

required an equal distribution of partnership profits and

surplus.    Therefore, at that time, each member of the

Winkler family held a 1/7th, or a 14.29-percent, interest

in the winning Lotto ticket through the partnership.

     Under the written E & E Family Partnership agreement,

Mr. and Mrs. Winkler each received a 25-percent interest

in the "partnership's income and capital", and each of

the five children received a 10-percent interest.    Thus,

under the E & E Family Partnership Agreement, Mr. and

Mrs. Winkler each received a 10.71-percent greater

interest, and each of the children received a 4.29-percent

lesser interest in the partnership profits and surplus than

would have been the case under the oral partnership

agreement.    In this situation, there is no basis on which

we can find that Mrs. Winkler made a gift to her children

and, accordingly, we reject respondent's determinations of

gift tax deficiencies that are based upon a finding to the

contrary.
                            - 32 -


     Because we find that Mrs. Winkler did not make

taxable gifts of interests in the winning Lotto ticket,

there is no estate tax deficiency, and we need not address

petitioners' alternative contention that the Estate of

Emerson Winkler is entitled to an increased marital

deduction.    Based upon our finding that there are no tax

deficiencies in this case, we hold that petitioners are not

liable for the penalties under section 6662(a) that were

determined by respondent in the subject notices of

deficiency.



                                     Decision will be entered

                              for petitioners.
