                        T.C. Memo. 1999-357



                      UNITED STATES TAX COURT



              ESTATE OF ONA E. HENDRICKSON, DECEASED,
  DONALD G. HENDRICKSON, PERSONAL REPRESENTATIVE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13527-97.                 Filed October 25, 1999.



     Scott R. Cox and Sheldon G. Gilman, for petitioner.

     Russell D. Pinkerton, for respondent.



                             CONTENTS


Overview of Issues and Conclusions   . . . . . . . . . . . . . . 4

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . . . 6

    The Hendrickson Family Farm . . . . . . . . . .    . . . . . 9
    Decedent's Gifts of Family Farm Land . . . . . .   . . . . . 9
    Income and Losses From Family Farm Operations .    . . . . 11
    Decedent's Share of Investment Income of Garry's   Estate;
       Value of Coal Mining Rights . . . . . . . . .   . . . . 14
                               - 2 -


      Distributions From Garry's Estate to Decedent . . . . . 16
      Expenses Attributable to Decedent's Investment Income . 17
      Net Investment Income of Garry's Estate to Which Decedent
         Became Entitled During 1979-93   . . . . . . . . . . . 17
      Facts Relating to Petitioner's Primary Position--Existence
         of Claimed Family Farm Partnership   . . . . . . . . . 18
      Facts Relating to Petitioner's Secondary Position--
         Use of Decedent's Investment Income To Pay Expenses
         of Family Farm; Consideration Received by Decedent for
         Any Investment Income Not So Used . . . . . . . . . . 21
      HEI Receivable . . . . . . . . . . . . . . . . . . . . . 21
      Children's Performance of Services for Family Farm . . . 22
      Land Bank Loan . . . . . . . . . . . . . . . . . . . . . 23
      Use of Land Bank Loan Proceeds . . . . . . . . . . . . . 23
      Interest Deductions Claimed by Garry's Estate or Decedent
         With Respect to Land Bank Loan   . . . . . . . . . . . 25
      Security for Land Bank Loan Included in Decedent's Estate 25
      Miscellaneous Facts Relating to Land Bank Loan . . . . . 27

OPINION

I.   Did Decedent Make Taxable Gifts of Investment Income
        Received by Garry's Estate During 1979-93? . . . . .     .   27
     A. Relevance of Decedent's Taxable Gifts to This
            Estate Tax Case . . . . . . . . . . . . . . . . .    .   29
     B. Broad Definition of "Taxable Gift" . . . . . . . .       .   31
     C. The Parties' Positions--In General . . . . . . . .       .   33
     D. Petitioner's Primary Argument--Decedent's Transfer
            of Investment Income Was a Bona Fide, Ordinary
            Business Transaction . . . . . . . . . . . . . .     .   39
     E. Petitioner's Secondary Argument--Decedent Either
            Spent Investment Income on Her Own Expenses
            or Received Full Consideration for Any Income
            That Benefited Children . . . . . . . . . . . . .    .   48
         1. Petitioner's Estate "Accounting"    . . . . . . .    .   49
         2. Unreliability of Petitioner's Accounting     . . .   .   50
         3. Petitioner's Accounting Shows That Much of
                Decedent's Investment Income Was Spent on
                Children's Expenses . . . . . . . . . . . . .    .   52
         4. Decedent Did Not Receive Consideration
                Claimed by Petitioner for Any Income Not
                Used To Pay Farm Expenses . . . . . . . . . .    .   53
         5. No Land Bank Loan Payments Were Decedent's
                Expenses . . . . . . . . . . . . . . . . . .     .   56
         6. Decedent's Income Was Not Used To Pay Decedent's
                Share of Expenses of Any Business Other Than
                Family Farm . . . . . . . . . . . . . . . . .    .   58
                                  - 3 -


      F.    Decedent Gave Her Investment Income to Children
               As Asserted by Respondent on Brief, Except to
               Limited Extent Income Was Used To Pay Decedent's
               Share of Expenses of Family Farm . . . . . . . . .     60

II.    Is Petitioner Entitled To Deduct a Portion of
         Land Bank Loan as Unpaid Mortgage? . . . . . . . .     . .   64
       A. Value of Security Included in Decedent's Estate       . .   65
       B. Uncertainty That Land Bank Loan Will Ever Be
             Paid by Decedent's Estate . . . . . . . . . .      . .   68
           1. Petitioner's Section 2053 Deduction Must
                  Be Reduced on Account of Decedent's
                  Contribution Rights . . . . . . . . . . .     . .   68
           2. The Value of Decedent's Contribution Rights
                  Cannot Be Determined   . . . . . . . . . .    . .   70
           3. Decedent's Status as Guarantor or
                  "Accommodation" Party . . . . . . . . . .     . .   71
       C. Conclusion Re Unpaid Mortgage Deduction . . . .       . .   72

III.       Unused Exclusions Available as Conceded in
              Respondent's Brief; Offset and Deduction for Gift
              Taxes Payable . . . . . . . . . . . . . . . . . . .     74



                 MEMORANDUM FINDINGS OF FACT AND OPINION


       BEGHE, Judge:    Respondent determined a deficiency of

$1,243,548 in the Federal estate tax of the Estate of Ona E.

Hendrickson, Donald G. Hendrickson, personal representative

(petitioner).      Respondent also determined a late filing addition

to tax of $248,710 under section 6651(a)(1).1




       1
       All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise specified.
                                - 4 -

     By amended answer, respondent asserted an additional

deficiency of $150,178 in estate tax and an additional late

filing addition of $30,035.

               Overview of Issues and Conclusions

     Following concessions by the parties,2 the two issues for

decision are the "lifetime gifts" issue and the "unpaid mortgage"

issue.

     The lifetime gifts issue concerns whether, during 1979-93,

Ona E. Hendrickson (decedent) made lifetime taxable gifts to her

children of $913,200 in coal royalties, dividends, and interest

received by the estate of her late husband.   Petitioner asserts

that decedent made no such gifts.   According to petitioner,

decedent made transfers of her share of the estate’s investment

income to a "family farm partnership" owned one-half by decedent

and one-half by the children.   Petitioner argues that these

transfers were part of a bona fide, ongoing, ordinary business

transaction and therefore were not gifts, regardless of the

shortfall in the pecuniary consideration decedent received for



     2
       Because petitioner still contests much of the asserted
deficiency in estate tax, petitioner does not concede the amount
of the late filing addition determined by respondent. Petitioner
does concede, however, that the addition applies to any
deficiency we redetermine.

     Respondent has conceded the allowance of the properly
substantiated expenses of this litigation as additional
administrative expenses of decedent's estate.
                                 - 5 -

them.   See sec. 25.2512-8, Gift Tax Regs.   Petitioner

alternatively argues that even if no bona fide farm partnership

existed, decedent still made no gifts of the investment income

because most or all of the income was spent on decedent's share

of the family farm's expenses.    Petitioner further asserts that

decedent received full consideration for any income not so spent

by reason of the children's performance of services for the

family farm and the receipt of an indebtedness from Hendricksons

Enterprise, Inc., a corporation whose shares were owned by the

children and decedent.

     Any taxable gifts we find decedent made during 1979-93 must

be taken into account in computing petitioner's estate tax under

section 2001(b).   In addition, respondent, in a separate notice,

also determined deficiencies in decedent's Federal gift taxes for

1980-92 on the basis of the same gifts determined in the estate

tax notice at issue herein.   No petition was filed with this

Court concerning the gift tax notice.    As of the time of trial,

respondent had assessed the gift tax deficiencies but had taken

no action to collect them.    Respondent's counsel has informed the

Court that respondent will follow the Court's conclusions in this

case as to the amount of decedent's lifetime taxable gifts, in

any future collection actions with respect to the gift tax

assessments.   As a result, any gifts we find decedent made during
                                 - 6 -

1979-93 will also determine petitioner's gift tax liability in

the related controversy.

     We conclude that decedent gave $913,200 in investment income

to the children as argued by respondent on brief, except to the

limited extent we find the income was used to pay decedent's

share of family farm expenses.

     The unpaid mortgage issue concerns whether petitioner may

deduct, as an unpaid mortgage under section 2053(a)(4), part of

the outstanding balance (at decedent's death) of a secured bank

loan.    The resolution of this issue requires us to consider the

amount of the security for the loan that was included in

decedent's estate.

     We conclude that petitioner is not entitled to a deduction

for the loan.3

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found; the

stipulation of facts and the related exhibits are incorporated by

this reference.




     3
       In the statutory notice, respondent denied any deduction
for the bank loan and also asserted that decedent gave the loan
proceeds to her children. Respondent has since conceded that
these are alternative positions. Our conclusion that petitioner
may not deduct the outstanding loan balance therefore renders
moot respondent's contention that the proceeds of the loan were a
gift.
                                - 7 -

     At the time of her death, decedent resided in Warrick

County, Indiana.   At the time of filing of the petition in this

case, the address of decedent's personal representative, Donald

G. Hendrickson, was in Boonville, Indiana, the county seat of

Warrick County.    Donald Hendrickson also serves as the judge of

the Warrick County Circuit Court.

     Decedent married Garry O. Hendrickson (Garry) in 1924.

After more than 50 years of marriage, Garry died on July 6, 1979.

Decedent died 14 years later, on June 4, 1993.

     At the time of Garry's death, decedent and Garry had three

children:   Donald Hendrickson, Vera Lou Klippel (Mrs. Klippel),

and James O. Hendrickson (collectively, the children).

     The value of Garry's gross estate for Federal estate tax

purposes exceeded $4 million.    The value of Garry's taxable

estate was much less.    Garry's will provided for a bequest to

decedent of property having a value equal to the maximum marital

deduction allowable for Federal estate tax purposes.4    When Garry

died, the maximum marital deduction was equal to 50 percent of

the adjusted gross estate (subject to certain additional

adjustments).   See sec. 2056(c), as in effect for decedents dying

before 1982.    The value of Garry's bequest to decedent, and the


     4
       The will also provided that this bequest was to include
its proportionate share of the income of Garry's estate from and
after the date of Garry's death.
                               - 8 -

marital deduction ultimately allowed to Garry's estate, was

$2,154,781.

     As filed with respondent, petitioner's estate tax return

reported a gross estate of $1,107,141, a taxable estate of

$272,756, and adjusted taxable gifts of $313.

     Garry's will left the residue of his estate to the children.

His will specifically provided that all Garry's debts and

expenses of estate administration and all inheritance and other

transfer taxes were to be paid from the residuary estate, without

apportionment.

     Garry's estate ultimately paid respondent and the State of

Indiana a total of over $1 million on account of estate and

inheritance taxes.   The parties agree that pursuant to Garry's

will these taxes (and all administration expenses) were the

obligation of the children, to be paid out of their shares of the

estate.

     During the 14-year period between Garry's death and

decedent's death (i.e., from 1979 to 1993) Garry's estate was

neither wound up nor terminated.   Instead, it was administered as

an unsupervised estate; decedent was the personal representative.

Garry's estate therefore continued to hold substantial assets and

to receive substantial amounts of income during this period.
                                - 9 -

The Hendrickson Family Farm

       When Garry died in 1979, he owned 1,804 acres of land in

Warrick County (sometimes referred to hereinafter as the family

farm).    The parties agree that pursuant to Garry's will decedent

became entitled to an undivided 50-percent interest in this land

and in the income generated by the land after Garry's death.

Decedent's Gifts of Family Farm Land

       Shortly after Garry died, decedent started giving her 50-

percent interest in the family farm land to the children and

their spouses.    From 1980 (the year following Garry's death) to

decedent's death in 1993, decedent gave away part of her interest

in the family farm land in almost every year, as shown in the

following table:

           Number of acres in   Decedent's ownership    Number of
         which decedent owned    interest, expressed      acres
            an undivided 50-      as a percentage of      given
          percent interest at     total acres in the   during the
Year       beginning of year          family farm          year
1979             1,804                  50.00             -0-
1980             1,804                  50.00              45
1981             1,759                  48.75              54
1982             1,705                  47.26              79
1983             1,626                  45.07             -0-
1984             1,626                  45.07             152
1985             1,474                  40.85             200
1986             1,274                  35.31             297
1987               977                  27.08             222
1988               755                  20.93             120
1989               635                  17.61             120
1990               515                  14.27             161
1991               354                   9.81             185
1992               169                   4.68             -0-
1993               169                   4.68             -0-
                                - 10 -

     Decedent filed Federal gift tax returns reporting her gifts

of family farm land.   Respondent has neither challenged the

valuations of the land reported on those returns nor asserted

that decedent made any gifts of land during the few gift tax

periods for which returns were not filed.

     On the basis of the gift tax returns filed by decedent, the

value of the family farm land given by decedent during 1979-93

was the following:

                       Number of                             Unused
                         donees               Applicable   exclusion
                         (three                 annual     for gifts
             Value      children   Value of    exclusion     to the
            of land       plus     gift per       per         three
  Year       given      spouses)     donee    individual    children
  1979        -0-        none         -0-      $3,000        $9,000
  1980      $15,000        6        $2,500      3,000          1,500
  1981       20,000        6         3,333      3,000         -0-
  1982       30,500        6         5,083     10,000        14,750
  1983        -0-        none         -0-      10,000        30,000
  1984       55,264        6         9,211     10,000          2,368
  1985       53,828        6         8,971     10,000          3,086
  1986       60,313        6        10,052     10,000         -0-
  1987       58,879        6         9,813     10,000            561
  1988       59,980        6         9,997     10,000             10
  1989       58,980        6         9,830     10,000            510
  1990       59,622        6         9,937     10,000            189
  1991       59,983        6         9,997     10,000              9
  1992        -0-        none         -0-      10,000        30,000
  1993        -0-        none         -0-      10,000        30,000
    Total   532,349                                         121,983

     In the foregoing table, the dollar amount shown in the last

column for any year is the amount of annual gift tax exclusion
                             - 11 -

available for decedent's gifts to her three children during that

year that was not used to offset the land gifts.

Income and Losses From Family Farm Operations

     Although decedent gave almost all her interest in the family

farm land to her children (and their spouses) during the period

1979-93, the taxable income and loss resulting from the

operations (or, in some years, the rental) of the family farm

during that period were reported on the Federal fiduciary income

tax returns filed by Garry's estate.5   These returns reported the

following amounts of net income (or loss) from the family farm:

            Fiscal year ending      Net family farm
               2/28 or 2/29        income (or loss)
                   1980               ($35,702)
                   1981               (166,606)
                   1982               (177,264)
                   1983                 49,324
                   1984                  5,157
                   1985                  1,833
                   1986                 (3,612)
                   1987                (27,906)
                   1988                (23,796)
                   1989                (22,166)
                   1990                (28,204)
                   1991                (17,402)
                   1992                 (9,425)
                   1993                (12,807)
                   1994                (13,001)
                     Total            (481,577)



     5
       For the fiscal years ending in 1985 and 1986, almost all
family farm income reported by Garry’s estate was rental income.
For the fiscal years ending in 1987-93, the estate reported its
farm income simply as “other income”, but it also reported that
the principal activity of the family farm was “land rental”. For
the fiscal year ending in 1994, the estate reported its farm
income on Form 4835, Farm Rental Income and Expenses.
                               - 12 -

     The information set forth on the income tax returns filed by

Garry’s estate for its fiscal years ended in February 1980

through February 1994 establishes the maximum net amount of funds

spent by the family farm during 1979-93 that was not generated by

the farm itself.   This amount is referred to as the “net cash

needs” of the family farm during 1979-93.

     The family farm used the cash method of accounting.

Therefore, the family farm generated funds during 1979-93 in

amounts corresponding to the items of farm income reported on the

income tax returns of Garry’s estate.

     Neither petitioner nor respondent has claimed that the

family farm information reported on the tax returns of Garry’s

estate is inaccurate.   In addition, petitioner has not identified

any unreported deductible expenditures of funds by the family

farm during 1979-93.    As a result, all deductible expenditures of

the family farm during 1979-93 are included in the net tax loss

of $481,577 reported on the income tax returns of Garry’s estate.

     With respect to the nondeductible expenditures of the family

farm during 1979-93, the family farm did purchase some farm

equipment (and other depreciable property) after Garry's death.

However, the farm stopped purchasing equipment in the early

1980's.   As a result, the cost of the depreciable property

acquired by the family farm after Garry’s death (and not

subsequently sold by the farm) was recovered by the farm via the
                               - 13 -

depreciation deductions included in the farm’s $481,577 reported

net tax loss.

     Petitioner has not identified any nondeductible expenditures

made by the family farm during 1979-93, other than the purchases

of depreciable property referred to above.6   In addition,

petitioner asserts that at the time of decedent's death, the

value of the family farm did not exceed the value of the farm

land itself.    Moreover, during the fiscal years ending from

February 1985 through February 1994, the family farm’s principal

activity was the rental of the family farm land; depreciation and

taxes accounted for almost all of the farm’s expenses during this

period.

     The cost of all family farm expenditures made during 1979-93

is therefore accounted for in the $481,577 reported tax loss of

the family farm.

     Approximately $171,500 of the $481,577 reported net loss

resulted from deductions claimed for the depreciation of farm

equipment (and other farm property) owned by Garry at the time of

his death.   Because this property was not purchased by the family

farm, the farm did not make any cash expenditures during 1979-93

corresponding to the depreciation deductions claimed.




     6
       The farm did purchase a few cows and hogs after Garry’s
death, but it sold all its livestock in its fiscal year ended in
February 1984.
                              - 14 -

     Similarly, at the time of his death Garry also owned certain

growing crops and livestock worth $70,893, which were assets of

the family farm.   Garry’s estate sold these crops and livestock

during 1979-93, and it used all $70,893 of basis in calculating

the family farm income reported on its fiduciary income tax

returns.   Because the family farm did not purchase these assets,

the family farm received $70,893 more cash during 1979-93 than

the amount of income reported on the sale of the assets.

     The aggregate net cash needs of the family farm during 1979-

93 therefore did not exceed the $481,577 loss reported on the

income tax returns of Garry's estate, less the $171,500 of

depreciation and $70,893 of basis claimed with respect to

property owned by Garry at the time of his death.   Accordingly,

the family farm's aggregate net cash needs for 1979-93 did not

exceed $239,184.

Decedent's Share of Investment Income of Garry's Estate; Value of
Coal Mining Rights

     In addition to the family farm, at the time of his death

Garry owned:   (1) A one-half interest in certain coal mining

rights to 5,499 acres in Gibson County, Indiana; (2) a stock

portfolio; (3) a $359,534 receivable from Hendricksons

Enterprise, Inc. (HEI);7 and (4) certain other interest-



     7
       Hendricksons Enterprise, Inc., is an automobile and farm
implement dealership, most of the stock of which was owned by
decedent and the children on the date of decedent's death.
                              - 15 -

generating investments.   The parties agree that pursuant to

Garry's will decedent became entitled to 50 percent of these

assets and 50 percent of the income generated therefrom.

     During 1979-93, Garry's estate received substantial payments

of coal royalties from the Gibson County coal mining rights.    It

also received large amounts of dividends and interest.    The

stipulated amounts of coal royalties, dividends, and interest

(referred to hereinafter as the investment income) received by

Garry's estate during 1979-93 were as shown in the second, third,

and fourth columns of the following table:

                                                Total     Decedent's
             Coal                            investment   50-percent
 Year     royalties   Interest   Dividends     income        share
 1979       $22,736    $21,409     $2,725       $46,870    $23,435
 1980        30,261      3,095      7,836        41,192     20,596
 1981        30,261         78      4,959        35,298     17,649
 1982        37,105     43,498      4,853        85,456     42,728
 1983        30,883     47,488      5,345        83,716     41,858
 1984       414,448     43,521      6,992       464,961    232,481
 1985       160,561     54,545      7,232       222,338    111,169
 1986       234,664     52,362      7,536       294,562    147,281
 1987       209,573     40,052      7,644       257,269    128,634
 1988        30,883     63,315      8,371       102,569     51,285
 1989        30,883     33,590      9,185        73,658     36,829
 1990         -0-       33,344      9,458        42,802     21,401
 1991         -0-       25,453      9,072        34,525     17,262
 1992        85,176     24,479      8,998       118,653     59,327
 1993        86,063      1,067      8,539        95,669     47,834
  Total   1,403,497    487,296    108,745     1,999,538    999,769
                               - 16 -

By reason of having become entitled under Garry's will to 50

percent of the coal royalties, dividends, and interest, decedent

became entitled to $999,769 of the investment income of Garry's

estate during 1979-93, as shown in the foregoing table.

     At the time of Garry's death, the value of the Gibson County

coal mining rights was approximately $1.5 million; the value of

decedent's 50-percent interest in those rights was approximately

$750,000.   By the time of decedent’s death, the value of

decedent's interest had declined to $268,805.

Distributions From Garry's Estate to Decedent

     Notwithstanding the approximately $2 million in investment

income Garry's estate received--and the $1.8 million excess of

that income over the aggregate net cash needs of the family

farm--Garry's estate made few distributions to decedent during

1979-93.    The Federal fiduciary income tax returns of Garry's

estate do not claim any distribution deductions for any of the

fiscal years ending from February 1980 through February 1994.

However, respondent has conceded that $14,303 in coal royalties

was distributed to decedent as follows:   $3,803 in 1979; $7,500

in 1980; and $3,000 in 1989.    These were the only distributions

by Garry's estate to decedent during 1979-93.
                             - 17 -

Expenses Attributable to Decedent's Investment Income

     Respondent has conceded that Garry's estate paid the

following amounts of expenses attributable to the production of

the investment income during 1979-93:

                Expenses attributable   Decedent's 50-percent
       Year      to investment income   share of the expenses
       1979                -0-                    -0-
       1980               $207                   $104
       1981              3,534                  1,767
       1982                743                    371
       1983              4,968                  2,484
       1984             10,318                  5,159
       1985                315                    158
       1986             61,534                 30,767
       1987              5,223                  2,611
       1988             13,132                  6,566
       1989             12,923                  6,462
       1990              5,391                  2,695
       1991              6,862                  3,431
       1992              7,816                  3,908
       1993             11,566                  5,783
        Total          144,532                 72,266
     During 1979-93, Garry's estate paid expenses attributable to

decedent's share of its investment income in the amounts conceded

by respondent, aggregating $72,266.

Net Investment Income of Garry's Estate to Which Decedent Became
Entitled During 1979-93

     During 1979-93, decedent became entitled to $913,200 of the

investment income of Garry's estate, which was neither paid by

the estate to defray expenses related to the production of that

income nor distributed to decedent by the estate (this $913,200
                              - 18 -

is sometimes referred to hereinafter as decedent's net investment

income).   The calculation is as follows:

Coal royalties, dividends, interest
  received by Garry's estate (1979-93)                $1,999,538
50 percent of above investment income,
  to which decedent was entitled                          999,769
Less:
  Expenses allocable to decedent's
    share of investment income              $72,266
  Investment income distributed
    to decedent                              14,303       86,569
Net undistributed investment income of
  Garry's estate to which decedent was                    913,200
    entitled

Facts Relating to Petitioner's Primary Position--Existence of
Claimed Family Farm Partnership

     There was no written partnership agreement between decedent

and the children concerning the operation of the family farm.

     Petitioner’s Federal estate tax return did not report, as an

asset of decedent's estate, a partnership interest in the family

farm or a partnership interest of any kind.

     Petitioner's estate tax return reported less than $15,000

worth of farm equipment as assets of decedent's estate.    All this

equipment was inherited from Garry in 1979; none of it was

acquired after that date.

     None of decedent's individual income tax returns for 1989-93

(the only income tax returns of decedent in the record) reported

any income or loss from a partnership.
                              - 19 -

     The record contains no Forms 1065 (or other partnership tax

reporting forms) relating to the claimed family farm partnership;

at least three other pass-through entities in which decedent or

the children have an ownership interest--HEI (a subchapter S

corporation), Hendrickson Farms (a partnership), and G.O. Farms,

Inc. (an S corporation)--file Federal income tax forms.

     Petitioner's purported "accounting" of Garry's estate lists

deposits made to and payments made from (other than interaccount

transfers) the following three bank accounts, which petitioner

claims were used to conduct the business of the family farm:    Old

National Bank account No. 317015885 (the Garry estate account);

Old National Bank account No. 317013807 (the Vera Lou Klippel

agent account); and Old National Bank account No. XXX-XX-XXXX

(the Hendrickson Farms account).   No part of any of these three

accounts was reported as an asset of decedent's estate on

petitioner's Federal estate tax return.

     In 1979 (the year of Garry’s death), part of the family farm

was farmed by Garry personally, and part was farmed by tenant

farmers.   Part of the family farm land was still being farmed by

tenant farmers during 1985.

     For its fiscal years ending in February 1980 through

February 1986, Garry’s estate reported the following amounts of

gross farm rental income on its Federal fiduciary income tax

returns:
                             - 20 -

  Fiscal year ending 2/28 or 2/29      Gross farm rental income
               1980                             $54,386
               1981                              65,176
               1982                              47,367
               1983                              43,599
               1984                               8,900
               1985                              45,370
               1986                              32,000
          Yearly average                         42,400

     At some time after Garry’s death, the tenant farmers gave up

their contracts to farm, and in 1984 or 1985 Donald Hendrickson

began farming the formerly rented family farm land.   By 1992,

Donald Hendrickson was farming almost all the land constituting

the family farm.

     On its income tax returns for its fiscal years ending from

February 1987 through February 1994, Garry’s estate reported the

following amounts of gross income for the entire family farm:

  Fiscal year ending 2/28 or 2/29     Gross income of family farm
               1987                             $16,094
               1988                               9,901
               1989                               8,536
               1990                               1,120
               1991                               5,391
               1992                               5,925
               1993                               2,203
               1994                               1,078
          Yearly average                          6,281
                               - 21 -

Facts Relating to Petitioner's Secondary Position--Use of
Decedent's Investment Income To Pay Expenses of Family Farm;
Consideration Received by Decedent for Any Investment Income Not
So Used

     During 1979-93, decedent became entitled to $913,200 of net

investment income.

     The net cash needs of the family farm during 1979-93 did not

exceed $239,184.

     As shown by petitioner's own "accounting" of Garry's estate,

at least $443,000 of decedent's funds was not used to pay

decedent's expenses.

     Most of decedent's $913,200 in net investment income was not

used to pay family farm expenses; the amount of decedent's income

so used did not exceed $239,184.

HEI Receivable

     There are no notes or other written agreements evidencing

any loans from Garry's estate or decedent to HEI.

     The Federal estate tax return of Garry's estate reported, as

one of the assets of Garry's estate, a receivable from HEI in the

amount of $359,534.    The Federal estate tax return of decedent's

estate also reported a receivable from HEI in the amount of

$166,500.

     On its Federal fiduciary income tax returns for the fiscal

years ending February 1980 through February 1994, Garry's estate

reported approximately $467,000 of interest income from HEI.
                              - 22 -

     According to the "accounting" of Garry's estate introduced

by petitioner at trial, the payments Garry's estate received from

HEI during 1979-93 totaled approximately $411,000.   Many of these

payments were referred to as interest in the accounting.

     The payments Garry's estate received from HEI during 1979-93

were therefore less than the amount of interest owed by HEI

during that period.

     HEI did not pay off the $359,534 receivable reported on the

estate tax return of Garry's estate.

     The $166,500 HEI receivable reported on petitioner's estate

tax return is part of the same receivable reported on Garry's

estate tax return.

     Garry's estate did not use any of decedent's investment

income to acquire the $166,500 receivable from HEI (or to acquire

any other receivable from HEI during 1979-93).

Children's Performance of Services for Family Farm

     During 1979-93, Donald Hendrickson and Mrs. Klippel each

performed not more than 10 hours per week of services relating to

the family farm, with values of $15 per hour and $8 per hour,

respectively.   James O. Hendrickson did not perform any material

services relating to the family farm during that period.

     The aggregate value of the services performed by the

children relating to the family farm during 1979-93 therefore did

not exceed $172,500 (i.e., 10 hours per week, times 50 weeks per
                              - 23 -

year, times 15 years, times the hourly rates of $15 and $8 per

hour).   During this period, the children owned from 50 percent to

95.32 percent of the land constituting the family farm.   In

addition, decedent was, of course, the children's mother.

Land Bank Loan

     On September 23, 1980, Garry's estate agreed to borrow

$950,000 from the Federal Land Bank of Louisville, Kentucky (the

Land Bank).   The promissory note representing this loan (the Land

Bank loan) provided that the following parties were jointly and

severally liable for repayment of the loan:   (1) Decedent, on

behalf of Garry's estate; (2) decedent, individually; (3) the

children; and (4) the children's spouses.   Repayment of the Land

Bank loan was secured by a mortgage of most (but not all) of the

1,804 acres constituting the family farm.

     During 1979-93, approximately $1.5 million in interest and

principal was paid on the Land Bank loan.   This amount was paid

from the three bank accounts used by Garry's estate, into which

decedent's investment income was also deposited.

Use of Land Bank Loan Proceeds

     Of the $950,000 principal amount of the Land Bank loan,

$58,734 was expended on a mandatory purchase of Land Bank stock

and other closing costs and fees, leaving net proceeds of

$891,266.
                              - 24 -

     At least $616,864 of the $891,266 net proceeds of the Land

Bank loan was used to pay the taxes and expenses of Garry's

estate.   Therefore, at least 65 percent of the gross proceeds of

the Land Bank loan (or at least 69 percent of the net proceeds)

was used to pay expenses that were the children's expenses, not

decedent's expenses.

      The $274,402 remaining net proceeds of the Land Bank loan

was disbursed in four Land Bank checks.   Three of these checks

were payable solely to Donald Hendrickson; the fourth was payable

collectively to Donald Hendrickson and the other signatories of

the note.   These checks were then deposited into the Vera Lou

Klippel agent account, which was owned solely by the children.

The Land Bank's loan closing statement and supplemental

disbursement report provide very general information about the

use of these funds--that the funds were used to pay "legal fees",

"operating", or (apparently) miscellaneous equipment expenses--

but provide no details of those expenses or state on whose behalf

the expenses were paid.

     Petitioner's estate tax return reported some of the Land

Bank stock, with a value of $12,980, as an asset of decedent's

estate.
                              - 25 -

Interest Deductions Claimed by Garry's Estate or Decedent
With Respect to Land Bank Loan

     Garry's estate did not claim any interest deductions on its

Federal fiduciary income tax returns for most of its fiscal years

ending from 1981 through 1994.   The estate claimed an interest

deduction in excess of $3,000 for only one of these years, the

year ending February 1981.

     Similarly, decedent's Federal individual income tax returns

claim no interest deductions for any of the years 1989-93 (the

only years for which decedent's returns are part of the record).

     According to the Land Bank's records, the amount of interest

paid on the Land Bank loan in the year ending March 1, 1981, was

$34,952; the amount of interest paid in each of the years ending

from March 1, 1982, to March 1, 1994, varied from $80,523 to

$118,476.

     Neither Garry's estate nor decedent claimed any Federal

income tax deductions for the interest on the Land Bank loan with

respect to their 1979-93 taxable years.

Security for Land Bank Loan Included in Decedent's Estate

     The outstanding balance of the Land Bank loan at decedent's

death was $825,068.

     Decedent gave away most of her interest in the family farm

land during 1979-93.   Therefore, at the time of her death

decedent owned little of the land securing the Land Bank loan.
                               - 26 -

     Petitioner's Federal estate tax return reported four tracts

of land, aggregating only 137.5 acres, as being subject to a

mortgage.   A comparison of the description of these tracts on

petitioner's return with the Land Bank mortgage reveals that two

of the tracts reported on the return–-tract 1102, containing

13.33 acres, and tract 1103, containing 26.66 acres--were subject

to the Land Bank mortgage.    The other two tracts-–tracts 1201 and

1202, containing 97.5 acres--were not subject to the mortgage.

     Decedent's estate therefore included an interest in two

tracts of the family farm land subject to the Land Bank mortgage:

tracts 1102 and 1103, aggregating 40 acres.

     With respect to the value of the two tracts subject to the

mortgage, petitioner's estate tax return reported a separate

value for only one of these tracts:     A value of $22,661, for

tract 1103, or a reported value of $850 per acre.     The return did

not report a separate value for the other tract, tract 1102;

instead, it reported an aggregate value of $78,790, for tracts

1102, 1201, and 1202.   These three tracts aggregated 110.83

acres; their reported value was therefore $711 per acre.

     The value of the security for the Land Bank loan included in

decedent's estate was $32,138, calculated as follows:     $22,661

for tract 1103 plus $9,477 for tract 1102 ($711 per acre

multiplied by 13.33 acres).
                             - 27 -

     The record contains no evidence of the aggregate fair market

value, at decedent's death, of the family farm land securing the

Land Bank loan that was not included in decedent's estate.

Miscellaneous Facts Relating to Land Bank Loan

     The deeds by which decedent gave her interest in the family

farm land to the children during 1979-93 provided that the gifts

were made subject to the Land Bank debt and that the debt was

expressly assumed by the grantees.

     No claims were filed against decedent's estate by the Land

Bank or by any of the signatories of the promissory note

representing the Land Bank loan.

     Payments of principal and interest have continued to be made

on the Land Bank loan since decedent's death.    As of March 1,

1998, the balance of the Land Bank loan had been reduced to

$636,814 from the $825,068 balance at decedent's death.

     Petitioner admits that, if decedent had made more than her

proportionate share of the Land Bank loan payments, she would

have been entitled to contribution from the other signatories of

the promissory note under Indiana law.

                             OPINION

I.   Did Decedent Make Taxable Gifts of Investment Income
     Received by Garry's Estate During 1979-93?

     In the statutory notice, respondent determined that

decedent, as a beneficiary of Garry's estate, became entitled to
                              - 28 -

$711,841 of coal royalties, dividends, and interest received by

the estate during 1980-92.   Respondent also determined that

decedent did not exercise her right to receive this investment

income, but instead allowed its economic benefit to be enjoyed by

the children.   Respondent further determined that decedent

thereby made indirect gifts of the investment income to the

children, which gifts are "taxable gifts" for purposes of section

2503 and the other estate and gift tax provisions of the Code.

     After having reviewed petitioner's responses to certain

interrogatories, respondent, by amended answer, asserted that

decedent had become entitled to an additional $332,945 of the

investment income of Garry's estate.   Respondent further asserted

that decedent similarly made taxable gifts of this additional

income to the children.   The entire increased deficiency asserted

in the amended answer is attributable to the asserted gifts of

this additional investment income.8

     Respondent made several concessions after the amended

answer.   Respondent now maintains that decedent became entitled

to a total of only $999,769 of the investment income of Garry's

estate during the period extending from Garry's death in 1979 to


     8
       With respect to the deficiency determined in the notice,
respondent's determination is presumed to be correct; petitioner
bears the burden of proving it wrong. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111 (1933). Respondent bears the burden of
proof with respect to the increased deficiency asserted in the
amended answer. See Rule 142(a).
                               - 29 -

decedent's death in 1993.   Respondent also concedes that decedent

received $14,303 of this income as distributions from Garry's

estate, and that Garry's estate expended $72,266 on expenses

related to the production of this income.

     As a result of these concessions, respondent now contends

that during 1979-93, decedent became entitled to $913,200 of the

investment income of Garry's estate, which was neither

distributed to decedent nor spent on the costs of earning that

income.   Respondent further contends that decedent permitted the

children to enjoy the economic benefit of this $913,200, and

thereby made aggregate taxable gifts to the children of that

amount, also during 1979-93.

     The evidence sustains respondent's first contention (and we

have so found).   During 1979-93, decedent became entitled to

$913,200 of the investment income of Garry's estate, which was

neither distributed to decedent nor spent to produce that income.

We now consider whether decedent made taxable gifts of all or

part of that $913,200 to her children, as respondent further

contends.

     A.   Relevance of Decedent's Taxable Gifts to This Estate Tax
          Case

     Section 2001(a) imposes the Federal estate tax on the

transfer of the "taxable estate" of every decedent who is a

citizen or resident of the United States.   Under certain
                              - 30 -

circumstances, a decedent's taxable estate may be deemed to

include property that was given away by the decedent before

death.   See, e.g., secs. 2036-2038.   In this case, however,

respondent has not asserted that any of decedent's lifetime gifts

should be included in decedent's taxable estate.

     Accordingly, respondent has not claimed that any of

decedent's $913,200 in investment income should be directly

subject to the estate tax, as part of decedent's taxable estate.

Nevertheless, the determination of the portion of the $913,200

that was transferred by decedent, during her lifetime, to the

children in transactions that constitute "taxable gifts" for gift

tax purposes remains relevant to this case.    Under section

2001(b), the amount of decedent's post-1976 "taxable gifts" is

taken into account in the calculation of decedent's estate tax;

the amount of such gifts in part determines the marginal rates of

tax imposed on decedent's taxable estate.    See Estate of Smith v.

Commissioner, 94 T.C. 872 (1990).

     Our decision concerning the amount of decedent's lifetime

taxable gifts will also determine the amounts to be collected on

the assessments of the related gift tax deficiencies determined

by respondent.   Respondent has undertaken to follow the Court's

conclusions in this case in any future collection actions taken

with respect to those deficiencies.
                               - 31 -

      B.   Broad Definition of "Taxable Gift"

      The Federal gift tax applies to "the transfer of property by

gift" by any individual.    Sec. 2501(a).

      Section 2503 defines the amount of an individual's "taxable

gifts".    Under that section, an individual's taxable gifts for

any gift tax period means the total amount of "gifts" made during

that period, less certain deductions and exclusions not relevant

here (other than the $3,000 or $10,000 annual exclusion for gifts

to any individual, set forth in section 2503(b)).

      The terms "gift" and "the transfer of property by gift"

cover a wide range of transactions.     In Commissioner v. Wemyss,

324 U.S. 303, 306 (1945), the Supreme Court laid down the

principle that Congress intended to use the term "gifts" in its

broadest and most comprehensive sense.      The Supreme Court in

Wemyss noted the "evident desire of Congress to hit all the

protean arrangements which the wit of man can devise that are not

business transactions within the meaning of ordinary speech".

Id.   The Court in Wemyss also stated that donative intent on the

part of the transferor is not an essential element in the

application of the gift tax to a transfer of property.      See id.

      The gift tax provisions of the Code evince--and the gift tax

regulations promulgated thereunder carry out--this congressional

intent to apply the gift tax to a broad range of transactions.

See sec. 2512(b); sec. 25.2511-1(g)(1), Gift Tax Regs.      Section
                              - 32 -

2512(b) provides that, where property is transferred for less

than an adequate and full consideration in money or money's

worth, the excess of the value of the property over the value of

the consideration shall be deemed a gift.     The purpose of this

provision is to protect the estate tax, by treating as taxable

gifts transfers of property that deplete what otherwise would

have been included in the donor's estate at death.    See

Commissioner v. Wemyss, supra at 307-308.

     Read literally, section 2512(b) would seem to provide that

every transfer of property for inadequate consideration is in

part a gift--including a business transaction, in which one party

simply got the better of the deal.     Notwithstanding the language

of section 2512(b), however, it is clear that the gift tax does

not apply to ordinary business transactions.    Section 25.2512-8,

Gift Tax Regs., provides:   “a sale, exchange, or other transfer

of property made in the ordinary course of business (a

transaction which is bona fide, at arm's length, and free from

any donative intent), will be considered as made for an adequate

and full consideration in money or money's worth.”    Because a

business transaction meeting this standard is deemed to be made

for adequate consideration, it is not a gift for gift tax

purposes--even if the consideration received by one of the

parties turns out to be inadequate.    See Estate of Anderson v.

Commissioner, 8 T.C. 706, 720-721 (1947).
                              - 33 -

     C.   The Parties' Positions--In General

     Respondent's position stresses the overall effect of

decedent's conduct with respect to the assets decedent received

under Garry's will and decedent's share of the investment income

generated by those assets during 1979-93.    According to

respondent, decedent's conduct with respect to these assets and

income both depleted decedent's taxable estate and benefited the

children, who were the natural objects of her bounty.

     Respondent urges us to remember that although decedent

received a bequest from Garry's estate with a value of over $2.15

million, and also became entitled to $913,200 of net investment

income during the period between Garry's death and her death,

petitioner reported a gross estate of only $1,107,141, a taxable

estate of only $272,756, and adjusted taxable gifts of only $313.

     Respondent additionally reminds us that because Garry's

bequest to decedent qualified for the marital deduction, Garry's

estate was not required to pay estate tax on the transfer of 50

percent of its assets to decedent.     Respondent, of course, has no

quarrel with this.   However, it is generally assumed that the

price to be paid for the tax-free transfer of assets via the

marital deduction is the taxation of those assets in the estate

of the surviving spouse.   See Estate of Cavenaugh v.

Commissioner, 100 T.C. 407, 416 (1993), affd. in part and revd.

in part on another ground 51 F.3d 597 (5th Cir. 1995).
                              - 34 -

     Respondent does not contend that decedent had a duty to

maximize her taxable estate by investing her assets and income

wisely.   An individual may consume or even squander her property

without making a gift.   See Dickman v. Commissioner, 465 U.S.

330, 340 (1984).   In addition, respondent recognizes that

decedent's repeated use of the gift tax annual exclusion--which

enabled decedent to give most of her interest in the family farm

land to the children and their spouses, while making only $313 of

taxable gifts--was proper.   Respondent correctly argues, however,

that, if decedent did not consume or squander her investment

income but instead transferred the economic benefit of that

income to the children (as respondent alleges), decedent made

gifts of the income to the children.   See id.

     On brief, petitioner attempts to address respondent's

concerns about the "disappearance" of both the assets decedent

was entitled to receive from Garry's estate and the investment

income generated by those assets.   Petitioner asserts that the

approximately $1 million excess of the value of those assets over

the value of decedent's gross estate is amply explained by:    (1)

Decedent's gifts of $532,349 in family farm land during 1979-93

(see supra pp. 9-10); (2) an approximately $85,000 decrease in

the value of decedent's interest in certain farm equipment

acquired from Garry’s estate (see supra p. 13); and (3) an
                              - 35 -

approximately $500,000 decrease in the value of decedent's

interest in the Gibson County coal rights (see supra p. 16).

     With respect to the income generated by the assets,

petitioner does not dispute that decedent became entitled to

$913,200 of net investment income during 1979-93, which was not

included in decedent's estate.   Petitioner admits that decedent's

income was transferred to a Hendrickson family "pool", in which

the children had an interest; petitioner also acknowledges that

intrafamily transactions are generally presumed to be gifts.

Notwithstanding all this, petitioner still maintains that

decedent did not make any of the taxable gifts determined by

respondent.

     Petitioner's position, unlike respondent's, focuses on

decedent's asserted motivation for her use of the investment

income.   As set forth in more detail below, petitioner argues

that decedent did not intend to make any gifts, and that she

either invested or spent most or all of her income to preserve

the family farm.   Petitioner additionally argues that, if any of

decedent's income was not in fact spent on the family farm,

decedent received full consideration for that income in money or

money's worth, in the form of a receivable from HEI and the

children's provision of services to the farm.

     In this context, petitioner notes that Garry's family had

lived in Warrick County, Indiana, since 1853 and that decedent
                                - 36 -

was born and raised in the same area.    Petitioner further notes

that Garry engaged in farming in Warrick County for most of his

life.

     Petitioner also reminds us that Donald Hendrickson testified

that decedent loved farming and wanted the family farm to

continue after Garry's death.    Donald Hendrickson further

testified that Garry had let the farm decline in the years

leading up to his death and that at that time farming had already

become the difficult business it is today.    Petitioner asserts

that decedent and the children therefore had to work and invest

together to preserve the family farm and that decedent insisted

this be done.

     We are of course aware that operating a family farm can be

an extremely demanding and daunting task.    We are also aware that

in these times a farmer (and his family) can work long and hard,

in the most businesslike way, and yet earn no economic profit

from the enterprise.

     We have no doubt that the family farm was important to

decedent and the children, for many laudable reasons.    The facts

of this case, however, do not fit the story petitioner's argument

constructs around them.   Petitioner's argument largely explains

what happened to the assets decedent received from Garry's

estate.   However, it fails to explain what happened to the income

generated by those assets.
                              - 37 -

     Petitioner claims that decedent spent most or all of her

investment income on the family farm, either as part of a bona

fide business venture with the children or for her own account

and pleasure.   We have found that decedent became entitled to

$913,200 of net investment income during 1979-93.    However, we

have also found that the aggregate net cash needs of the family

farm during that period did not exceed $239,184.    Therefore, even

if decedent had supplied all the cash needed by the farm, this

would only have accounted for about one-fourth of decedent's

investment income from Garry's estate.   Accordingly, we conclude

that most of decedent's income simply was not spent on the family

farm, notwithstanding petitioner's contentions.9    We also

conclude that decedent did not receive the consideration claimed

by petitioner for any investment income not spent on farm

expenses.

     In effect, decedent's conduct or acquiescence during the

lengthy period of administration of Garry's estate--both as a

beneficiary and as personal representative--prevented the

     9
       Donald Hendrickson testified at trial that he personally
borrowed about $600,000 for the expenses of the family farm and
spent more of his own money than that on family farm operations.
In light of our finding that the net cash needs of the family
farm during 1979-93 did not exceed $239,184, we conclude it is
quite unlikely that Donald Hendrickson spent such sums on the
family farm--although he may well have spent that much on some of
the other Hendrickson family farming operations he also managed,
including a farm owned by the children that was contiguous with
parts of the family farm.
                              - 38 -

investment income generated by the estate's assets from reaching

decedent and becoming part of decedent's taxable estate.   As

noted above, Garry's bequest to decedent qualified for the

maximum marital deduction then allowable for Federal estate tax

purposes.   Decedent’s effective deflection away from herself of

her marital share of the investment income of Garry’s estate is

inconsistent with the policies underlying the allowance of the

marital deduction on the transfer of the assets giving rise to

that income.   See sec. 20.2056(b)-4(a), Estate Tax Regs. (in

determining the value of an interest in property passing to the

spouse for purposes of the marital deduction, account must be

taken of the effect of any material limitations upon the

surviving spouse's right to income from the property);10 sec.

20.2056(b)-5(a), Estate Tax Regs. (in order for an interest in

property to qualify as a deductible life estate under section



     10
       The promulgation, in the wake of Commissioner v. Estate
of Hubert, 520 U.S. 93 (1997), of proposed regulations addressing
in detail the circumstances in which the use of estate income to
pay administration expenses will be considered a material
limitation on the value of the residue for purposes of the estate
tax charitable and marital deductions, see secs. 20.2055-1(d)(6),
20.2056(b)-4(e), Proposed Estate Tax Regs., 63 Fed. Reg. 69248,
69250-69251 (Dec. 16, 1998), evidences the continuing importance
of this issue. The “qualified terminable interest property”
(QTIP) rules, enacted in 1981–-after Garry’s death in 1979–-also
evidence Congress’ continuing concern that the surviving spouse
receive all income from any property qualifying for the marital
deduction. See sec. 2056(b)(7)(B)(ii)(I) (property is not QTIP
unless the surviving spouse is entitled to all the income from
the property, payable annually or at more frequent intervals, or
has a usufruct interest for life).
                              - 39 -

2056(b)(5), the surviving spouse must be entitled for life to all

the income from the interest, or a specific portion of the

interest).

     For this and the other reasons set forth in more detail

below, we conclude that decedent made taxable gifts of her

investment income as asserted by respondent on brief, except to

the limited extent that income was spent on family farm expenses

properly attributable to decedent.

     D.   Petitioner's Primary Argument--Decedent's Transfer of
          Investment Income Was a Bona Fide, Ordinary Business
          Transaction

     Petitioner's primary legal argument is that decedent

transferred her investment income in the ordinary course of

business, within the meaning of section 25.2512-8, Gift Tax Regs.

Petitioner therefore asserts that decedent did not make taxable

gifts of any of her investment income--regardless of the

shortfall in the consideration she received for it in money or

money's worth.

     More particularly, petitioner claims that shortly after

Garry's death, decedent and the children formed a partnership to

operate the family farm.   According to petitioner, under the

terms of the partnership agreement, decedent was entitled to 50

percent of the income or loss of this partnership; the children

were entitled to equal one-third shares of the other 50 percent.

Also according to petitioner, decedent and the children agreed to
                              - 40 -

contribute their shares of the investment income of Garry's

estate to the partnership, to be used as necessary to support the

farming activities.   Petitioner further asserts that, as matters

turned out, decedent's $913,200 of investment income was in fact

contributed to the partnership to support the losses of the farm

operations.

     As an initial response to petitioner’s argument, we note

that there was no written partnership agreement among decedent

and the children concerning the operation of the family farm.    In

addition, the record contains no Forms 1065 (or other partnership

tax reporting forms) relating to the claimed family farm

partnership--although at least three other pass-through entities

in which decedent or the children had an ownership interest filed

Federal income tax forms.

     We also note that petitioner's Federal estate tax return did

not report, as one of the assets of decedent's estate, a

partnership interest in the family farm.    It also did not report

as an asset any of the three bank accounts petitioner claims were

used to conduct the business of the farm partnership.   Moreover,

with respect to any equipment of the partnership, petitioner's

estate tax return reported less than $15,000 worth of farm

equipment as assets of decedent's estate, all of which had been

inherited by decedent from Garry in 1979.   Furthermore, with

respect to any income or loss of the claimed farm partnership,
                              - 41 -

none of decedent's individual income tax returns for 1989-93 (the

only income tax returns of decedent in the record) reports any

income or loss from a partnership.

     Finally, we note that for the fiscal years ending in

February 1985 and February 1986, almost all family farm income

reported by Garry’s estate was rental income.   For the fiscal

years ending in 1987 through 1993, the estate reported its farm

income simply as “other income”, but it also reported that the

principal activity of the family farm was “land rental”.    For the

fiscal year ending in February 1994, the estate reported its farm

income on Form 4835, Farm Rental Income and Expenses.   At trial,

Donald Hendrickson testified that in 1984 or 1985 he began

farming various portions of the family farm land formerly rented

to tenant farmers, and that by 1992 he was farming almost all of

the family farm land.   He also testified that the other children

and he were conducting this farming as “tenants”.

     All these facts strongly suggest that there was no family

farm partnership of any kind among decedent and the children,

much less a partnership that conducted the farming operations on

the family farm land.   However, even if we assume that a farm

partnership existed in the form claimed by petitioner--and also

assume that decedent transferred her net investment income to

that partnership--decedent’s transfers would not meet the "bona
                                - 42 -

fide, at arm's length, and free from any donative intent"

standard set forth in section 25.2512-8, Gift Tax Regs.

     Petitioner asserts that decedent contributed her investment

income to the claimed farm partnership in exchange for her 50-

percent partnership interest.    If this were true, decedent’s

transfers would not meet the standard set forth in the

regulation, for the following reason.    Decedent became entitled

to $913,200 of investment income during 1979-93, net of

distributions and expenses.   Petitioner claims this entire

$913,200 was contributed to the family farm partnership, for use

in the operations of the family farm.    However, on the basis of

the Federal fiduciary income tax returns filed by Garry's estate,

we have found that the aggregate net cash needs of the family

farm for 1979-93 did not exceed $239,184; decedent's 50-percent

"partnership share" of this loss would not exceed $119,592.

     Therefore, if the farm partnership existed as claimed by

petitioner, decedent would have contributed at least $793,000

(i.e., $913,200 less $119,592) in investment income to the

partnership, in excess of her share of the cash needs (or losses)

of the partnership.   There is no evidence that this excess is

accounted for by any assets acquired by the claimed partnership,

or by any value of decedent’s claimed partnership interest

itself.   As we have found, the family farm stopped purchasing

farm equipment during the early 1980's, and the farm's personal
                              - 43 -

property had been almost completely depreciated at decedent's

death.   Moreover, petitioner itself claims that decedent’s farm

partnership interest was worthless at that time.

     Petitioner argues that any excess contributions of capital

made by decedent were offset by contributions of services made by

the children.   According to petitioner, as a result of these

contributions of services, the family farm partnership qualifies

as an ordinary business transaction under the long history of

favorable case law dealing with the formation of family

partnerships.

     In making this argument, petitioner relies heavily on our

decision in Fischer v. Commissioner, 8 T.C. 732 (1947).    In

Fischer, we held that the formation (by a father and two sons) of

a partnership to carry on an established business owned by the

father did not result in taxable gifts from father to sons, where

the father contributed more capital than the sons, but the sons

planned to contribute more future services than the father.

     Petitioner argues that the facts of Fischer are "remarkably

similar" to the facts of this case.    In response, we note that in

Fischer, unlike the case at hand:   (1) There was a written

partnership agreement; (2) partnership tax returns were filed;

(3) the partners reported partnership earnings on their

individual income tax returns; and (4) for these reasons (among

others) we found that a valid, bona fide partnership existed.
                                - 44 -

     We also note that in Fischer there was a vastly different

relationship among the services provided by the children, the

capital contributed by the parent, and the partnership interests

received.   In Fischer the two sons had worked full time in the

family business for many years before the partnership was formed;

they also continued to provide vital full-time services to the

partnership thereafter.

     In this case, Donald Hendrickson testified at trial that he

worked about 20 hours per week for the family farm during 1979-93

and that his services had a value of approximately $15 per hour.

Donald Hendrickson also testified that his sister, Mrs. Klippel,

performed approximately 15 to 20 hours per week of bookkeeping

services for the family farm during the same period, with a value

of approximately $8 per hour.    Finally, Donald Hendrickson

testified that his brother, James O. Hendrickson, performed very

few services for the family farm.

     Donald Hendrickson also testified that during 1979-93 he was

employed full time as the judge of the Warrick County Circuit

Court.   In addition, Donald Hendrickson had many other business

interests, including other farming interests.    Moreover, Mrs.

Klippel also had another job, and she testified at trial that she

spent only 10 to 12 hours per week working for the family farm.

For all these reasons, we have found that:    (1) Donald

Hendrickson performed not more than 10 hours per week of services
                              - 45 -

for the family farm with a value of $15 per hour; (2) Mrs.

Klippel performed not more than 10 hours of services per week

with a value of $8 per hour; (3) James O. Hendrickson performed

no material services for the family farm; and (4) the value of

the services performed by the children for the family farm during

1979-93 did not exceed $172,500.

     In this case the value of the part-time services performed

by the children is therefore far less than the $913,200

assertedly contributed by decedent to the partnership or the

$793,000 excess of decedent's contributions over 50 percent of

the partnership's aggregate cash needs.   This imbalance between

the capital contributed by the parent and the services

contributed by the children suggests that our analysis in Gross

v. Commissioner, 7 T.C. 837 (1946) (formation of family

partnership created gift, even though children agreed to

contribute substantial services, where partnership's income was

primarily attributable to parent's contributed capital), applies

to this case, rather than our analysis in Fischer.

     Moreover, in this case the relationship between the services

allegedly performed by the children and the interests they

allegedly received in the farm partnership serves as further

proof that if the farm partnership existed, any transfers by

decedent to that partnership were neither at arm's length nor

free from donative intent.   The value of the services performed
                              - 46 -

by Mrs. Klippel was approximately one-half the value of the

services performed by Donald Hendrickson; James O. Hendrickson

performed no material services.   Despite these differences,

however, each of the three children received (also according to

petitioner) an equal 16-2/3-percent share of the partnership's

profits and losses.   This asserted awarding of equal partnership

shares for vastly unequal work is further evidence that the

family farm partnership, if it existed, was motivated by feelings

of family solidarity, rather than ordinary business

considerations.   See Heringer v. Commissioner, 235 F.2d 149, 151

(9th Cir. 1956) (parents' transfer of farm land to corporation

owned by parents and their 11 children held to be gift; Court of

Appeals found it noteworthy that all 11 children received stock

in the corporation, but only 9 of the children were partners in

the operating partnership that actually farmed the land),

vacating and remanding 21 T.C. 607 (1954).

     Above all, in interpreting the "ordinary business

transaction" exception to the gift tax, the pertinent inquiry is

whether the transaction is a genuine business transaction, as

distinguished from the marital or family type of transaction.

See Estate of Anderson v. Commissioner, 8 T.C. at 720.    In the

case at hand, the alleged partners were a mother and her three

children.   The general rule is that intrafamily transactions are

subject to special scrutiny and presumed to be gifts.    See
                             - 47 -

Harwood v. Commissioner, 82 T.C. 239, 259 (1984), affd. without

published opinion 786 F.2d 1174 (9th Cir. 1986).   There is no

evidence of any arm's-length bargaining of decedent with her

children that suggests that business purposes rather than family

relationships were the impelling considerations.   Also, as noted

above, decedent's alleged contributions to the partnership

substantially exceeded her share of the partnership's losses; the

value of the services allegedly performed by the children was

relatively small compared to the value of decedent's capital

contributions; and the children allegedly received equal shares

in the partnership, although they provided substantially unequal

services.11

     For all these reasons, we find that decedent did not make

any transfers to the asserted family farm partnership that were

bona fide, at arm's length, and free from donative intent.



     11
       We again note that in 1984 or 1985, Donald Hendrickson
began farming the family farm land formerly rented to certain
tenant farmers, and that by 1992, Donald Hendrickson was farming
substantially all the family farm land. Donald Hendrickson
testified that the other children and he were conducting this
farming as tenants; he also testified that whatever profit he
made from farming the family farm land he divided 50 percent to
decedent and 50 percent to the children.

     As set forth supra p. 20, the annual gross income Garry’s
estate received from the entire family farm during 1986-93, when
substantial acreage was being farmed by Donald Hendrickson, was
far less than the farm rental income the estate received during
1979-85, when only a part of the farm was being rented to tenant
farmers. This further suggests that if the alleged family farm
partnership existed, it was not an arm’s-length arrangement.
                              - 48 -

Accordingly, we hold that the "ordinary business transaction"

exception does not apply to this case.

     E.   Petitioner's Secondary Argument--Decedent Either Spent
          Investment Income on Her Own Expenses or Received Full
          Consideration for Any Income That Benefited Children

     Petitioner asserts that, even if the ordinary business

transaction exception does not apply, decedent still did not make

taxable gifts of any of her $913,200 in investment income.

According to petitioner, whether or not a formal partnership

existed, most or all of decedent's income from Garry's estate was

used to pay decedent's share of the expenses of the family farm.

To the extent decedent's income was not used to pay farm

expenses, petitioner further argues that decedent received full

consideration for that income, in the form of a $166,500

receivable from HEI and the children's provision of services to

the family farm.

     In our consideration of petitioner's primary argument, we

simply assumed that decedent transferred her net investment

income to the asserted family farm partnership.   We now try to

determine what decedent (or Garry's estate) actually did with

decedent's net investment income.   Although the record in this

case is extensive, it is unfortunately quite difficult to make

this determination, in part because there was extensive

commingling of estate and other funds among decedent and the

children.
                               - 49 -

         1.   Petitioner's Estate "Accounting"

     Petitioner's primary evidence concerning the use of

decedent's investment income is a purported "accounting" of

Garry's estate, which petitioner introduced at trial.    According

to petitioner, its accounting--an approximately 125-page

document--lists every deposit made to and every payment made from

(other than interaccount transfers) the three bank accounts

petitioner claims were used to conduct the business of the family

farm.   Petitioner alleges these three accounts were also used to

conduct the other business of Garry’s estate.    Therefore,

petitioner asserts that the bank account information summarized

in the accounting proves how all income of Garry's estate was

spent, including any income received by the estate for the

benefit of decedent.

     We do not agree with petitioner's characterization of the

accounting.    For the reasons set forth below, the accounting is

not sufficiently complete or reliable to prove how all of

decedent's investment income (or all income of Garry's estate)

was spent.    Moreover, whether we treat the accounting as an

admission or evaluate it in light of the other evidence in the

record, petitioner's accounting in fact shows that substantial

amounts of decedent's investment income were spent on the

children's expenses, not decedent's expenses.
                               - 50 -

     2.   Unreliability of Petitioner's Accounting

     There are many reasons to question the reliability of

petitioner's purported accounting of Garry's estate.    The

accounting covers thousands of transactions over a 14-year period

from 1979 to 1993.   The accounting generally identifies these

items, however, only by the date of receipt or payment and the

name of the claimed payor or payee.     In addition, the accounting

was prepared by Donald Hendrickson, not by an outside accountant,

and he did not keep the records on which the accounting was

based.    Moreover, petitioner admits that the Hendrickson family

never had a plan to keep a running list of whose money was spent

during the operation of the various Hendrickson family

businesses.

     Under these circumstances, it is not surprising that at

trial respondent proved, by reference to bank records and

canceled checks, that several transactions involving the three

bank accounts used by Garry's estate were either omitted from,

inaccurately described in, or inaccurately classified by,

petitioner's accounting, including one transaction involving

$100,000.

     There is a more fundamental problem with petitioner's

accounting, however, than the errors and omissions detected by

respondent.   The three bank accounts described in the accounting

were not used solely to receive the joint income, and to pay the
                              - 51 -

joint obligations, of decedent and the children.    They were also

used to receive income that belonged solely to the children and

to pay obligations for which the children were solely

responsible.

     Because of this commingling, the proper classification of

the thousands of transactions listed in petitioner's accounting

as "children's expenses", "joint expenses", or "decedent's

expenses" is of vital importance.   The classifications presented

in petitioner's accounting were performed entirely by Donald

Hendrickson.   Because the books reviewed by Donald Hendrickson

had classified the bank account items only as money coming in or

money going out, he was required to perform these

classifications, and the resulting allocations, largely on the

basis of his recollections of the purposes of the transactions.

In addition, Donald Hendrickson generally reviewed only check

registers, rather than the canceled checks.   Moreover, we again

note that the accounting concerns thousands of transactions over

14 years and that Donald Hendrickson did not himself keep the

records on which the accounting is based.

     For all these reasons-–and without suggesting any

dishonesty--we believe that petitioner's accounting is not

reliable enough either to establish the precise amount of

decedent's expenses paid by Garry's estate or to serve more

generally as a complete "accounting" of Garry's estate.
                               - 52 -

     3.    Petitioner's Accounting Shows That Much of Decedent's
           Investment Income Was Spent on Children's Expenses

     Although petitioner's "accounting" is not sufficiently

reliable to show exactly how the income of Garry's estate was

spent, it is still quite useful.    Whether we treat the accounting

as an admission by petitioner or evaluate it in light of the

other evidence in the record, the accounting corroborates our

conclusion that the bulk of decedent's investment income was not

spent on the family farm.    It also strongly suggests that much of

decedent's income was in fact used to pay the children's

expenses, rather than decedent's expenses.

     Petitioner's accounting clearly shows that at least $443,000

of decedent's funds was not used to pay decedent's expenses

during 1979-93.    It also clearly shows that the three bank

accounts of Garry's estate summarized in the accounting were used

to pay millions of dollars of the children's expenses during

1979-93.    For example, petitioner's accounting shows that over

$1.5 million of expenses explicitly identified as "Children's

Expenses" was paid from the estate's accounts during 1979-93.

The accounting also shows that approximately $1,575,000 of

principal and interest on the Land Bank loan was paid from the

estate's accounts during the same period.    Because petitioner

admits that most of the proceeds of the Land Bank loan were used

to pay the children's expenses, petitioner concedes on brief that
                                - 53 -

82.5 percent of these loan payments (approximately $1,340,000)

was the children's expenses.

     As a result, petitioner's own accounting shows that the bank

accounts of Garry's estate were used to pay over $2.8 million of

the children's expenses during 1979-93.     It also shows (as noted

above) that those bank accounts received over $443,000 of

decedent's funds that were not used to pay decedent's expenses.

For these reasons, petitioner's accounting strongly suggests that

large amounts of decedent's investment income were used to pay

the children's expenses during 1979-93.12

     4.   Decedent Did Not Receive Consideration Claimed by
          Petitioner for Any Income Not Used To Pay Farm Expenses

     Petitioner argues that, even if some of decedent's

investment income was not used to pay family farm expenses,

decedent did not make taxable gifts of that income.    According to

petitioner, decedent received full consideration for any income

not spent on the farm, in the form of:    (1) A $166,500 receivable

from HEI; and (2) the children's performance of substantial

services for the family farm.

     With respect to the HEI receivable, we note that Garry's

estate tax return and petitioner's estate tax return each



     12
       Petitioner essentially admits on brief that the amount of
the children's expenses paid out of the three bank accounts of
Garry's estate exceeded the amount of the children's income
received by those accounts.
                              - 54 -

reported a receivable from HEI as an asset of the estate.

Petitioner claims that the two returns did not refer to the same

receivable.   According to petitioner, HEI paid off the $359,534

receivable reported on Garry's estate tax return over several

years following Garry's death, and the $166,500 receivable

reported on petitioner's return was a new asset acquired

subsequently by Garry's estate on behalf of decedent.

     The evidence does not support petitioner's assertions.    To

the contrary, it shows that the same receivable was reported on

both returns.   Having found that none of decedent's funds were

used by Garry's estate to acquire a receivable from HEI during

1979-93, we have also found that decedent received no

consideration for her investment income in the form of a

receivable from HEI.

     With respect to the children's provision of services to the

family farm, we have found that Donald Hendrickson and Mrs.

Klippel performed some services during 1979-93 with respect to

the operations of the family farm.     However, we now hold that

these services do not constitute "consideration" for decedent's

investment income within the meaning of the gift tax, for the

following reasons.

     The children owned 50 percent of the family farm land after

Garry's death in 1979.   Their ownership of the farm land then

increased continuously until 1992, when it reached 95.32
                               - 55 -

percent.    Therefore, to a great extent, the children's services

were performed on (or with respect to) their own land and did not

substantially benefit decedent.

     In addition, the children were, of course, decedent's

children.    The children worked only part time for the family

farm, and their services were not of great value.     To the extent

the children's services benefited decedent, the services were

well within the range of activities children in the prime of life

normally perform for their elderly parents, out of love and

affection.    Moreover, there is no credible evidence that the

children's services were bargained for; i.e., that decedent

agreed at arm's length to exchange some of her investment income

for any services performed.

     A transfer of property does not constitute a gift to the

extent consideration in money or in money's worth is received in

exchange therefor.    See sec. 2512(b).   However, in order for

consideration to be taken into account for gift tax purposes, it

must benefit the transferor; detriment to the transferee is not

sufficient.    See Commissioner v. Wemyss, 324 U.S. at 307-308.     In

addition, the consideration must be bargained for, at least in

the family context.    See Rohmer v. Commissioner, 21 T.C. 1099,

1103-1104 (1954) (wife's asserted professional services rendered

with respect to husband/author's novel were not consideration for
                              - 56 -

husband's transfer of certain literary rights, in the absence of

proof that the services were bargained for).

     As we have noted, the children's services were performed

primarily with respect to their own land, and there is no

evidence their services were bargained for.    Therefore, we find

that the children's services do not constitute consideration for

purposes of the gift tax; they do not offset any use of

decedent's income for the benefit of the children.

     5.   No Land Bank Loan Payments Were Decedent's Expenses

     Petitioner admits that 65 percent of the proceeds of the

Land Bank loan was used to pay the taxes and administration

expenses of Garry's estate.   Petitioner further admits that under

Garry's will the children were responsible for these payments.

     Petitioner claims that the remaining 35 percent of the loan

proceeds was used to pay the expenses of the family farm.

Because petitioner believes one-half of the farm expenses were

decedent's expenses, petitioner claims that 17.5 percent of the

loan proceeds was used to pay decedent's expenses.   As a result,

petitioner asserts that 17.5 percent of the Land Bank loan

payments made during 1979-93 (approximately $276,000) should be

considered to be decedent's expenses, the payment of which by

decedent would not be a taxable gift.

     The evidence suggests that even more than 65 percent of the

loan proceeds was used to pay the taxes and administration
                                - 57 -

expenses of Garry's estate.    For this reason, we have found that

"at least" 65 percent of the proceeds was so used.

     The evidence concerning the net loan proceeds not used to

pay such taxes and expenses is less clear.    The Land Bank's

records provide few details about the use of these proceeds.    It

is clear, however, that some of these proceeds were disbursed by

the Land Bank using checks payable solely to Donald Hendrickson.

It is also clear that all net proceeds not used to pay the taxes

and expenses of Garry's estate were deposited in the Vera Lou

Klippel agent account, which was owned solely by the children.

In addition, other than the unsubstantiated testimony of Donald

Hendrickson, there is no evidence that more than a de minimis

amount of the loan proceeds was used to pay expenses of the

family farm or was otherwise received by or used for the benefit

of decedent.13

     The note representing the Land Bank loan provided that

decedent was jointly and severally liable for repayment of the

loan.     However, the deeds by which decedent gave away most of her

interest in the family farm land during 1979-93 expressly

provided that the grantees assumed the Land Bank debt to which

the transferred land was subject.    As a result of these



     13
        Petitioner's estate tax return did report some of the
Land Bank stock, with a value of $12,980, as an asset of the
estate.
                              - 58 -

assumptions by the children (and their spouses), decedent

effectively became a guarantor, rather than a co-obligor, with

respect to most of the Land Bank loan.

     In addition, the evidence shows that neither decedent nor

Garry's estate claimed any deductions for Federal income tax

purposes with respect to the interest on the Land Bank loan.

This strongly suggests that the signatories to the loan did not

consider decedent to be the true obligor of the loan.   See sec.

20.2053-6(f), Estate Tax Regs. (an enforceable agreement between

spouses concerning the allocation of their joint income tax

liability may limit the amount of income taxes allowable as a

claim against the estate, notwithstanding the spouses' joint and

several liability for the taxes to the Commissioner).

     For all these reasons we find that the Land Bank loan

payments were not decedent’s expenses.

     6.   Decedent's Income Was Not Used To Pay Decedent's Share
          of Expenses of Any Business Other Than Family Farm

     The bulk of petitioner's argument and evidence concerns the

asserted use of decedent's investment income to pay the expenses

of the family farm, to purchase an HEI receivable, or to induce

the children to perform services for the family farm.   On brief,

however, petitioner attempts to muddy the waters by suggesting

that some of decedent's funds may have been used to pay

decedent's share of the expenses of Hendrickson family businesses
                                - 59 -

other than the family farm.    Petitioner's brief even asserts at

one point that the family, including decedent, pooled all its

resources and contributed them to the family businesses,

including the family farm.

     We reject this attempt to confuse the issues.    There simply

is no evidence that decedent's investment income was used to pay

decedent's share of the expenses of any family business other

than the family farm.    Indeed, elsewhere in its brief petitioner

states that "There is no testimony from any party that Ona's

[decedent's] money was not used for the farm."14    By contrast,

there is a great deal of evidence that decedent and the children

did not pool all their assets and in fact owned several business

interests separately.    For example, although decedent owned the

family farm land as a tenant in common with the children, it is

undisputed that decedent also owned other farm land outright and

that she treated the income from that land as her separate

property.    As another example, the parties have stipulated that

the children had a farming partnership, in which decedent was not

a partner; they have also stipulated that Donald Hendrickson, his

wife, and his son owned a farming corporation, in which decedent

was not a shareholder.




     14
          Respondent did not present any witnesses at trial.
                                - 60 -

     For all these reasons, we find that none of decedent's

investment income was used to pay decedent's share of the

expenses of any family business other than the family farm.

     F.    Decedent Gave Her Investment Income to Children As
           Asserted by Respondent on Brief, Except to Limited
           Extent Income Was Used To Pay Decedent's Share of
           Expenses of Family Farm

     On the basis of our conclusions set forth above and our

review of the entire record, we find that decedent made gifts of

her $913,200 in investment income to the children as asserted by

respondent on brief, with one exception.

     Contrary to petitioner's position, we have found that most

of decedent's investment income was not expended on the family

farm.     Contrary to respondent's position, however, we find that

at least some of decedent's income was used to pay family farm

expenses; we also find that at least some of those expenses were

properly attributable to decedent.       Because the evidence has not

established the precise amount of decedent's farm expenses, we

believe we should estimate that amount, and reduce decedent's

gifts correspondingly, under the principle set forth in Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930).       See Pascarelli v.

Commissioner, 55 T.C. 1082, 1087-1088, 1096 (1971), in which we

applied the Cohan principle to estimate an amount of transferred

funds that did not constitute a gift, because it was used by the
                              - 61 -

transferee, at the direction of the transferor, to pay the

transferor's expenses.

     We have found that the net aggregate cash needs of the

family farm from 1979 to 1993 did not exceed $239,184.   We

believe, however, that even if decedent's investment income had

been used to pay this entire amount, only a portion of the amount

should be considered to be decedent's expenses, for the following

reason.

     Petitioner asserts that an individual may consume her own

income as she wishes, without making a taxable gift.   Petitioner

also claims that decedent deeply desired to preserve the family

farm.   Accordingly, petitioner asserts that decedent, who had

both emotional and ownership interests in the family farm land,

could have spent as much money as she wanted on the farm without

making a taxable gift--even if she received no pecuniary return

on her investment.

     As a general principle, petitioner is undoubtedly correct

that an individual is under no duty to invest her property

productively.   Indeed, an individual may consume or even squander

her property without making a gift.    See Dickman v. Commissioner,

465 U.S. at 340.   However, when an individual transfers her

property (or the use of her property) to members of her family

without receiving adequate consideration for it in money or
                               - 62 -

money's worth, she has made a gift.     See sec. 2512(b); Dickman v.

Commissioner, supra.

     More relevant to this case, one may spend her money on her

own real estate without making a gift.    However, when she spends

her funds on someone else's real estate, without receiving

adequate consideration, she has made a gift to that other person.

See Pascarelli v. Commissioner, supra at 1099 (man's payment of

landscaping and renovation expenses for house owned solely by

woman held to be gift from man to woman, even though both lived

in the house).

     Shortly after Garry's death, decedent began a program of

giving her interest in the family farm land to the children.    As

a result, decedent's ownership of the farm land declined from 50

percent of the land in 1979 to 4.68 percent in 1992.    For this

reason, only a small portion of the expenses of the family farm

represents expenses properly attributable to decedent for gift

tax purposes.

     On average, decedent owned approximately 31 percent of the

family farm land during the period in issue, 1979-93.    The

aggregate net cash needs of the family farm during this period

did not exceed $239,184.    We therefore estimate that during 1979-

93, approximately $74,147 (31 percent of $239,184) of decedent's

investment income was used to pay family farm expenses properly

attributable to decedent.   Dividing this amount by the 15
                                - 63 -

calendar years in the period at issue produces an amount of

approximately $4,950 per year.

     We therefore hold that during 1979-93, decedent gave her

$913,200 in investment income to the children as asserted by

respondent on brief, except that the amount of the gifts asserted

by respondent should be reduced by $4,950 per year15 on account

of moneys spent by Garry's estate on decedent's share of the cost

of operating the family farm.16

     We realize that this approach only roughly estimates the

amount of decedent's investment income actually spent on family

farm land owned by decedent during each of the 15 years in issue.

However, the Cohan rule recognizes that the true injustice would

be to take an all-or-nothing approach, because of a failure of

proof.17    It also contemplates that we may bear down, if we so


     15
       In applying the unused annual gift tax exclusions to
which decedent was entitled (see supra p. 10), this amount should
be divided equally among the three children; i.e., the asserted
gifts to each of the three children should be reduced by $1,650
per year.
     16
       As discussed above, we have not treated any of the Land
Bank loan payments as decedent's expenses. However, we have
found that the amount of decedent's investment income used to pay
decedent's share of the family farm expenses during 1979-93 was
equal to decedent's full share of the aggregate net cash needs of
the family farm for that period. For this reason, if we had
found that any Land Bank loan proceeds had been used to pay
decedent's share of the farm expenses, we would also have found
that less of decedent's investment income had been so used.
     17
          See Gerling Intl. Ins. Co. v. Commissioner, 98 T.C. 640,
                                                      (continued...)
                                - 64 -

choose, on the taxpayer whose inexactitude is of his own making.

See Cohan v. Commissioner, 39 F.2d at 543-544.

      We again note that the funds of Garry's estate were

commingled with funds owned solely by the children.    For this and

other reasons, petitioner's purported accounting of Garry's

estate is unreliable and simply does not permit us to determine

the amount of family farm expenses actually paid with decedent's

funds.     It also falls far short of the kind of accounting usually

expected of a fiduciary with respect to the funds under his

control.

II.   Is Petitioner Entitled To Deduct a Portion of Land Bank Loan
      as Unpaid Mortgage?

      In 1980, Garry's estate agreed to borrow $950,000 from the

Land Bank.    According to the promissory note, eight parties

(including decedent individually and as personal representative

of Garry's estate, the children, and the children’s spouses) were

jointly and severally liable for repayment of the Land Bank loan.

These parties also executed a mortgage to secure the loan.      The




      17
      (...continued)
659 (1992), where, after applying the rule set forth in Cohan v.
Commissioner, 39 F.2d 540 (2d Cir. 1930), we wrote that "We are
satisfied that these seemingly arbitrary holdings comport with
the admonition of Judge Learned Hand in Commissioner v. Maresi
[citation omitted], that 'The one sure way to do injustice * * *
is to allow nothing whatever upon the excuse that we cannot tell
how much to allow'."
                                - 65 -

mortgage covered most (but not all) of the 1,804 acres

constituting the family farm.

     At decedent's death, the outstanding balance of the Land

Bank loan was $825,068.   Petitioner claimed on the estate tax

return that this entire balance was deductible from decedent's

gross estate, in part as a "claim against the estate" under

section 2053(a)(3) and in part as an "unpaid mortgage" under

section 2053(a)(4).   On brief, petitioner concedes that its

original position was incorrect.    Petitioner now seeks a

deduction only for an "unpaid mortgage" under section 2053(a)(4)

in the amount of $88,109.   Respondent maintains that no deduction

is allowable.

     Section 2053(a)(4) allows a deduction from the gross estate

for "unpaid mortgages" on property.      The mortgage for the Land

Bank loan is unquestionably an unpaid mortgage, to the extent of

the $825,068 outstanding balance at decedent's death.      However,

the limitations on the unpaid mortgage deduction thwart even

petitioner’s reduced claim, as explained below.

     A.   Value of Security Included in Decedent's Estate

     Section 2053(a)(4) by its terms applies to an unpaid

mortgage on property "where the value of the decedent's interest

therein, undiminished by such mortgage * * * is included in the

value of the gross estate".   We have interpreted and applied this

language to hold that where the value of the property securing
                              - 66 -

the mortgage is not included in the gross estate, the mortgage is

not deductible under section 2053(a)(4).   See Estate of Courtney

v. Commissioner, 62 T.C. 317, 323-324 (1974).

     It is not entirely clear how section 2053(a)(4) should be

applied when only a part of the security for a mortgage is

included in a decedent's gross estate.   We have held, however,

that the deduction may in no event exceed the amount of the

security included in the estate.   See Estate of Fawcett v.

Commissioner, 64 T.C. 889, 897 (1975).

     According to petitioner, decedent's estate included some of

the land subject to the Land Bank mortgage, with a fair market

value at decedent's death of $101,451.   Because the original

principal amount of the Land Bank loan was $950,000, petitioner

asserts the land included in decedent's estate represented 10.68

percent (i.e., $101,451 divided by $950,000) of the security for

the loan.   As a result, petitioner also asserts it is entitled to

a section 2053(a)(4) deduction in an amount equal to 10.68

percent of the $825,068 balance outstanding at decedent's death,

or $88,109.18




     18
       In performing these calculations, petitioner apparently
assumed that the value, at decedent's death, of all the security
for the Land Bank loan was equal to the $950,000 original
principal amount of the loan. The record, however, contains no
evidence of the value of the land securing the loan that was not
included in decedent's estate.
                              - 67 -

     Petitioner's estate tax return reported four tracts of land

as being subject to a mortgage, with an aggregate reported value

of $101,451.   Petitioner's brief asserts that the mortgage

referred to was the Land Bank mortgage.   However, by comparing

the description of the four tracts on petitioner's estate tax

return with the Land Bank mortgage, we have found that only two

of the tracts reported on the return-–tract 1102, containing

13.33 acres, and tract 1103, containing 26.66 acres--were in fact

subject to the mortgage.

     With respect to the value of the tracts subject to the Land

Bank mortgage, petitioner's return reported a separate value for

only one of these tracts (a value of $22,661, for tract 1103).

The return reported a combined value of $78,790 for three other

tracts, including tract 1102, the second tract subject to the

Land Bank mortgage.   By assuming that these three tracts had the

same per-acre value, we have estimated that the value of tract

1102 was $9,477.

     For all these reasons, we have found that only $32,138 of

the security for the Land Bank loan was included in decedent's

estate.   Therefore, petitioner's section 2053(a)(4) deduction

could in no event exceed $32,138--even if the other requirements

set forth below were satisfied.   See Estate of Fawcett v.

Commissioner, supra at 897.
                                - 68 -

     B.    Uncertainty That Land Bank Loan Will Ever Be Paid by
           Decedent's Estate

     An item may be deducted under section 2053 even if its exact

amount is not known, provided it is ascertainable with reasonable

certainty, and will be paid.     See sec. 20.2053-1(b)(3), Estate

Tax Regs.     However, no deduction may be taken on the basis of a

vague or uncertain estimate, or for a debt that will not in fact

be paid.     See id.; Estate of Courtney v. Commissioner, supra at

319-323.

     As Donald Hendrickson testified at trial, if decedent had

paid more than her allocable share of the Land Bank loan, she

would have been entitled to seek contribution from her co-

obligors.     As explained below, the value of decedent's

contribution rights must be taken into account in determining the

allowable amount of petitioner's deduction for the Land Bank

loan.     However, under the circumstances of this case, petitioner

has not established (and it is impossible for us to determine)

the value of those contribution rights.     For this reason (and the

other reasons discussed below), it is impossible to estimate

petitioner's liability for the Land Bank loan with reasonable

certainty, and no deduction is allowed.

     1.    Petitioner's Section 2053 Deduction Must Be Reduced on
           Account of Decedent's Contribution Rights

     Decedent individually was but one of eight parties who were

jointly and severally liable for repayment of the Land Bank loan.
                                - 69 -

As a result of this joint liability, decedent would have been

entitled under Indiana law to payments from her co-obligors, if

she had paid more than her share of the Land Bank loan.      See Ind.

Code Ann. sec. 26-1-3.1-116(b) (Michie 1999).

     The purpose of the deduction for unpaid mortgages (and

generally for claims against the estate) is to ensure that the

estate tax is imposed on the net amount of wealth a decedent can

transmit to his or her heirs.    See Estate of Courtney v.

Commissioner, supra at 321.     To achieve this purpose, where a

decedent was jointly and severally liable for a debt at the time

of death, the decedent's estate is not allowed to deduct the

entire debt; instead, the estate's section 2053 deduction is

adjusted to take account of the decedent's right of contribution

from his co-obligors.   See Parrott v. Commissioner, 7 B.T.A. 134

(1927), affd. 30 F.2d 792 (9th Cir. 1929).    This may be done

directly, by limiting the decedent's section 2053 deduction to

the amount of the joint and several debt, less the value of the

decedent's contribution rights.    It may also be done indirectly,

by allowing the decedent a deduction for the full amount of the

debt, but by including the value of the decedent's contribution

rights in the value of the gross estate.    See id. at 138.

     In this case, the value of decedent's right to seek

contribution has not been included in decedent's gross estate.

Therefore, the amount of petitioner's section 2053 deduction must
                                - 70 -

be adjusted to take into account the value of decedent's

contribution rights.

     2.    The Value of Decedent's Contribution Rights Cannot Be
           Determined

     Of course, it is not always easy to determine the value of

contribution rights.     In some cases, we have simply held that

each co-obligor would contribute a proportionate share of the

debt, based on the number of obligors.     See, e.g., Estate of

Atkins v. Commissioner, 2 T.C. 332, 346-347 (1943) (decedent was

one of three debtors; held, because of contribution rights,

estate's deduction limited to one-third of original amount of

debt, less amounts decedent had previously paid); McCue v.

Commissioner, a Memorandum Opinion of this Court dated Mar. 4,

1946 (decedent was one of 15 parties liable for a tax claim;

held, because taxpayer had not proved value of contribution

rights, estate's deduction limited to one-fifteenth of amount of

claim).

     In this case, we cannot determine the value of decedent's

contribution rights on the basis of the number of obligors,

because much of decedent's share of the Land Bank loan has been

assumed by the children and their spouses.

     As noted above, by the time of her death decedent had given

away all but 4.68 percent of the land constituting the family

farm.     The deeds by which decedent made these gifts expressly
                              - 71 -

provided that the grantees assumed the Land Bank debt to which

the transferred land was subject.

     As a result of these assumptions by the children (and their

spouses), decedent effectively became a guarantor, rather than a

co-obligor, with respect to most of the Land Bank loan.    Because

a guarantor's rights to contribution (or subrogation) are greater

than a co-obligor's, it would be inappropriate to determine the

value of decedent's contribution rights by reference to the

number of obligors on the Land Bank loan.   See Estate of Theis v.

Commissioner, 770 F.2d 981 (11th Cir. 1985) (section 2053

deduction denied in its entirety where decedent was only

secondarily liable, because decedent had 100-percent right of

contribution from primary debtor), affg. 81 T.C. 741 (1983).

     3.   Decedent's Status as Guarantor or "Accommodation" Party

     In addition to the assumptions of debt by decedent's

transferees, there is other evidence that suggests decedent

functioned largely as a guarantor or "accommodation" party with

respect to the Land Bank loan.

     First, even petitioner claims that only 17.5 percent of the

proceeds from the Land Bank loan was used for decedent's benefit.

In addition, all of the net loan proceeds not used to pay the

taxes and expenses of Garry's estate were deposited in the Vera

Lou Klippel agent account, which was owned solely by the

children.   Moreover, other than the unsubstantiated testimony of
                               - 72 -

Donald Hendrickson, there is no evidence that more than a de

minimis portion of the proceeds was in fact used for decedent’s

benefit.

     Second, no claim was filed against decedent's estate with

respect to the Land Bank loan by either the Land Bank or any of

decedent's co-obligors.

     Third, payments have continued to be made on the Land Bank

loan since decedent's death.    In fact, as of March 1, 1998, the

balance of the Land Bank loan had been reduced to $636,814 from

the $825,068 balance at decedent's death.   Petitioner has not

claimed that it made or contributed to any of these payments.

     Fourth, neither decedent nor Garry's estate deducted any of

the interest payments on the Land Bank loan.    This suggests that

the parties to the loan did not regard decedent as a real obligor

of the loan.

     C.    Conclusion Re Unpaid Mortgage Deduction

     In Estate of Theis v. Commissioner, supra, we were required

to consider the availability of a deduction for joint and several

debt, where the security for the loan was included in the

decedent's estate.    We held that no unpaid mortgage deduction was

allowable, because the decedent was in fact a guarantor or

accommodation party, rather than a true co-obligor.   See id. at

748-751.
                             - 73 -

     As noted above, in this case:    (1) The children and their

spouses expressly assumed most of decedent's share of the Land

Bank loan; (2) decedent had rights of contribution (or

subrogation) against her co-obligors on the Land Bank loan, but

we are unable to determine the value of those rights; (3)

petitioner admits that most of the proceeds of the Land Bank loan

did not benefit decedent, and there is little evidence that more

than a de minimis portion of the proceeds benefited decedent; (4)

payments have continued to be made on the Land Bank loan since

decedent's death; (5) neither Garry's estate nor decedent

deducted the interest on the Land Bank loan; (6) no claims were

filed against decedent's estate with respect to the Land Bank

loan; and (7) only a small portion of the security for the Land

Bank loan was included in decedent's estate.

     On the basis of all these facts and circumstances, we hold

that petitioner is not entitled to any deduction for the Land

Bank loan under section 2053(a)(4), even though a small portion

of the security for the loan was included in decedent's estate.

See Estate of Theis v. Commissioner, supra; Estate of Courtney v.

Commissioner, supra; cf. Estate of Fawcett v. Commissioner, 64

T.C. 889 (1975) (Commissioner's determination that one-half of

joint and several debt was deductible as an unpaid mortgage was

not disturbed); Estate of Scofield v. Commissioner, T.C. Memo.

1980-470 (estate's unpaid mortgage deduction, reduced by value of
                               - 74 -

decedent’s right of subrogation, held proper where decedent

guaranteed secured debt; property securing debt was distributed

to decedent's son (the primary debtor) by the estate, subject to

the mortgage; and the giving of the guaranty was not a gift).

III.    Unused Exclusions Available as Conceded in Respondent's
        Brief; Offset and Deduction for Gift Taxes Payable

       Respondent admits that decedent's gifts of farm land during

1979-93 did not consume all of decedent's annual gift tax

exclusions for gifts to the children.    Accordingly, on brief

respondent has conceded that in determining the taxable gifts

made by decedent, the amounts of unused exclusion shown in the

table in our findings of fact, see supra pp. 10-11, should be

taken into account.

       By contrast, petitioner contends that the exclusions

available should be twice the amounts shown in the table.

Petitioner apparently believes that if any additional gifts were

made by decedent, they were made to six donees (presumably, to

the children and their spouses) rather than to three.

       Petitioner has offered no evidence that decedent intended to

give anything other than the family farm land to the children's

spouses.    Moreover, the assertion that the investment income at

issue herein was transferred to anyone other than the children is

totally inconsistent with petitioner's primary argument, which is

that all amounts at issue were consumed by a bona fide business
                             - 75 -

venture owned entirely by decedent and the children.   It is also

inconsistent with the evidence introduced to support that

argument.

     For these reasons we find that the amounts of unused annual

exclusion available are those shown in our findings of fact.

     The amount of decedent's taxable gifts redetermined in this

opinion will increase the amount of estate tax due from

petitioner, because it will increase the amount of petitioner's

"tentative" estate tax computed under section 2001(b)(1).

However, the amount of gift tax that would have been payable on

those gifts, whether or not actually paid, will offset part of

this increase in tax, because it will increase the "hypothetical"

gift taxes payable for purposes of section 2001(b)(2).    See

Estate of Smith v. Commissioner, 94 T.C. 872 (1990).     Of course,

if petitioner ultimately pays any gift taxes associated with the

gifts at issue herein, petitioner will be entitled to additional

deductions from the gross estate on account of those taxes.     See

sec. 2053; sec. 20.2053-6(d), Estate Tax Regs.

     To reflect all the foregoing,


                                     Decision will be entered

                              under Rule 155.
