                        T.C. Memo. 2001-72



                     UNITED STATES TAX COURT



           ESTATE OF AUGUSTA PORTER FORBES, DECEASED,
         FREDERICK W. ORR, JR., EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24492-97.                     Filed March 23, 2001.



     J. Nelson Irvine, Bruce C. Bailey, and John P. Cowart, Jr.,

for petitioner.

     John W. Sheffield III, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Respondent determined that petitioner is

liable for a $1,665,230 deficiency in Federal estate tax and a

$222,332 penalty under section 6662(g) for a substantial estate
                                 - 2 -

tax valuation understatement.1    The issues for decision are:

(1) The fair market value at the date of decedent’s death of

undivided fractional interests in two parcels of real property

held in a qualified terminable interest property trust (QTIP

trust) in which decedent had an income interest for life.

Subsumed in this issue is whether these undivided fractional

interests include interests in certain timber and pecan orchards

located on the parcels; and (2) whether petitioner is liable for

a penalty under section 6662(g).

                           FINDINGS OF FACT

     The parties have stipulated some of the facts, which we

incorporate in our findings by this reference.

Decedent

         On December 26, 1993, Augusta Porter Forbes (decedent)

died.     At the time of her death, she resided in Atlanta, Georgia.

Her estate was administered in Fulton County, Georgia.2




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the date of decedent’s
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
     2
       The record does not conclusively establish the residence
or principal place of business of the executor of decedent’s
estate, Frederick W. Orr, Jr., as of the date the petition was
filed. The petition provides only the executor’s mailing address
in care of a law firm in Atlanta, Georgia. Decedent’s amended
Form 706, United States Estate (and Generation-Skipping Transfer)
Tax Return, signed Sept. 23, 1997, lists the executor’s address
as a Cashiers, N.C., post office box.
                               - 3 -

Mr. Forbes

     In 1982, decedent was married to Walter T. Forbes, Sr. (Mr.

Forbes).   By a previous marriage, Mr. Forbes had two children:

Walter T. Forbes, Jr. (Walter), and Betty F. Rayburn (Betty).

     In 1982, Mr. Forbes owned individually approximately 2,058

acres of land in Macon and Houston Counties, Georgia (the Forbes

land).   In 1982, the Forbes land included approximately 676 acres

of timberland and 338 acres of pecan orchards.   The remainder was

open crop land, creek bottoms, slopes, gullies and drains, low-

lying land along Baptist Creek and Indian Creek, yards, roads,

and other areas around barns and sheds.   Mr. Forbes also owned

farm assets and operated a farming business on the Forbes land in

the form of a sole proprietorship known as Malatchie Farms (the

sole proprietorship).

The Limited Partnership

     On or about March 25, 1982, Mr. Forbes, Walter, and Betty

formed a limited partnership, Malatchie Land Co., L.P. (the

limited partnership).   The partnership agreement contains the

following statement of purpose:

          The purpose and character of the business of the
     Partnership is as follows: to purchase, lease and sell
     real estate, including farm and ranch properties, and
     to do the things necessary or advisable or expedient in
     connection with or incidental to such business.
                              - 4 -

     The partnership agreement provides that each of the three

partners will have ownership interests in accordance with their

initial capital contributions, as follows:

                        Initial Equity              Initial Equity
              General   Capital Amount    Limited   Capital Amount
              Partner    As A General     Partner    As A Limited
 Partner     Interest       Partner      Interest       Partner

Mr. Forbes     42%           $420            42%      $562,978
Walter         29%            290            29%       389,855
Betty          29%            290            29%       389,855

     The partnership agreement states that the initial equity

capital contributions are to be made either in cash or in the

form of property valued at fair market value.

     Under the partnership agreement, all deduction or loss

items, as well as net cash receipts of the partnership, are to be

allocated and disbursed to the general partners in accordance

with the participation percentages set forth above.    The

partnership agreement provides that upon the death of a general

partner, the business will be continued by the remaining general

partners and that, absent a buy-sell agreement among the

partners, the partnership interests of the deceased general

partner will vest in his heirs, legatees, successors, trustees,

receivers, other legal representatives, or assignees, who would

then be admitted as substituted limited partners with the consent

of the remaining general partners.    Upon the termination of the

sole remaining general partner, if the limited partners designate
                              - 5 -

a substituted general partner, the business of the partnership is

to be continued as a limited partnership that will succeed to all

assets of the general partnership; otherwise, the general

partnership is to be dissolved and liquidated, with the net

proceeds of the liquidation to be distributed according to the

participation percentages set forth above.

Contributions of Land to the Limited Partnership

     Upon formation of the limited partnership, Mr. Forbes

transferred to it title to all 2,058 acres of his land.   The

transfer was evidenced by a warranty deed dated March 25, 1982,

stating that in consideration of $1 and 562,978 limited

partnership units, Mr. Forbes conveyed to the limited partnership

“a full undivided interest” in his land “together with all

hereditaments and appurtenances thereto appertaining”.3   The

warranty deed otherwise contains no reference to timber, pecan

trees, or growing crops.

     Similarly, upon formation of the limited partnership,

Walter, Betty, and Mr. Forbes (as trustee of a trust created in

1959 for the benefit of Walter and Betty) executed warranty deeds

transferring to the limited partnership approximately 3,296


     3
       Thus, for purposes of valuing initial equity capital
contributions of Walter T. Forbes, Sr. (Mr. Forbes), the 2,058
acres of the Forbes land was treated as having fair market value
of $562,978. The record does not reveal the basis for this
valuation, nor the basis of the initial equity capital
contributions by Walter T. Forbes, Jr., (Walter) and Betty F.
Rayburn (Betty), discussed infra.
                               - 6 -

acres, “together with all hereditaments and appurtenances thereto

appertaining”.   In consideration, Walter and Betty each received

$1 and 389,855 limited partnership units.

     The last-mentioned 3,296 acres, together with the 2,058

acres contributed by Mr. Forbes individually, make up the 5,354

acres that were conveyed to the limited partnership (sometimes

referred to herein as the subject property).

Ongoing Conduct of Mr. Forbes’ Sole Proprietorship

     After the formation of the limited partnership, Mr. Forbes

continued to conduct his commercial farming business, including

the growing of timber and pecans, as a sole proprietor on the

Forbes land.   The limited partnership did not conduct any

business growing timber, pecans, or other crops.    After

transferring the Forbes land to the limited partnership, Mr.

Forbes continued to receive all income from timber, pecans, and

other assets located on the Forbes land.    During his lifetime,

Mr. Forbes reported all such income and deducted all related

expenses, including depreciation, on his individual Federal

income tax returns.

      Similarly, after transferring their land to the limited

partnership, Walter and Betty each continued to receive and

report all income from timber, pecan orchards, and other assets

located on the land they had contributed.
                                - 7 -

     Mr. Forbes, Walter, and Betty never treated or reported the

timber, crops, or other improvements as having been transferred

to the limited partnership for economic, financial, income tax,

or other purposes.

Creation of the General Partnership

     On December 20, 1983, Walter and Betty formed a general

partnership known as Malatchie Farms (the general partnership).

They each owned a 50-percent interest in the general partnership,

with Walter designated as managing partner.    As stated in the

partnership agreement, the purpose of the general partnership was

“to conduct farming operations in Houston and Macon Counties,

Georgia, and in such other places as the parties may from time to

time agree” and “to engage in the business of wildlife

preservation, farming and other similar activities”.

Timber Contract

     On August 2, 1984, 18 days before Mr. Forbes died, Walter

executed a “Timber Deed” on behalf of the general partnership.

The timber deed indicates that the general partnership was

thereby selling to Tolleson Lumber Co., Inc. (Tolleson Lumber),

for $21 per ton “all merchantable pine timber” on a portion of

the Forbes’ land.    The timber deed provided Tolleson Lumber 18

months to cut and remove the timber.
                                - 8 -

Creation of QTIP Trust Upon Mr. Forbes’ Death

     In his will, Mr. Forbes created a QTIP trust, pursuant to

section 2056(b)(7), for decedent’s exclusive benefit.    The will

directs that “the entire remainder of my estate” shall be

transferred to trustees of the QTIP trust to be held in trust for

decedent during her lifetime.   The will provides that upon

Augusta Porter Forbes’ death, the remaining principal and

undistributed income of the QTIP trust shall be distributed free

of trust to Walter and Betty.

     The sole trustee of the QTIP trust was American National

Bank & Trust Co. of Chattanooga (the QTIP trustee).

Distribution of Property to QTIP Trustee

     As of July 31, 1986, the entire remainder of Mr. Forbes’

estate (the Forbes estate) consisted of only two assets:    (1) The

42-percent interest in the limited partnership; and (2) the

assets of the sole proprietorship.

     By general bill of sale dated August 1, 1986, the executors

of the Forbes estate transferred to the QTIP trustee “all of the

property owned and operated by” Mr. Forbes in the sole

proprietorship, including machinery and equipment, certain out-

buildings and other items of personal property, and “All growing

crops and timber on land owned by” the limited partnership.

     By execution of another general bill of sale, also dated

August 1, 1986, the QTIP trustee conveyed to Walter and Betty,
                               - 9 -

doing business as the general partnership, “all of the property

conveyed to * * * [the QTIP trustee] by an Executor’s General

Bill of Sale of even date conveying all of the property owned and

operated by” Mr. Forbes, doing business as the sole

proprietorship.   The assets so conveyed are described in language

identical to that contained in the general bill of sale from the

executor to the QTIP trustee, specifically including “All growing

crops and timber on land owned by” the limited partnership.   On

its books, the general partnership recorded receipt of all the

timber and growing crops on the Forbes land.   The pecan trees as

well as the pecan nuts were treated as growing crops.

     In consideration of all the sole proprietorship assets, the

general partnership agreed to pay the QTIP trustee $550,742, less

a $100,000 offsetting credit for net liabilities that the Forbes

estate owed the general partnership.   Accordingly, the general

partnership gave the QTIP trustee a promissory note for $450,742.

The purchase price was the result of arm’s-length bargaining and

was based on values reflected on the Forbes estate tax return

(which in turn were based on a 1985 independent appraisal), with

certain adjustments, including the addition of certain amounts

received or receivable under the timber contract with Tolleson

Lumber.4


     4
       Although the record is sketchy in this regard, the
evidence does not indicate, and respondent has not suggested,
                                                   (continued...)
                              - 10 -

     Following the August 1, 1986, sale, the general partnership

managed all the assets, including all the timber and pecan trees,

on the land held by the limited partnership, and reported all

timber and pecan business sales and expenses on all of the land

held by the limited partnership.

     On May 1, 1987, the executors of the Forbes estate conveyed

to the QTIP trustee the Forbes estate’s interest in the limited

partnership by endorsing the certificate of limited partnership

units.

Termination of the Limited Partnership and the General
Partnership

     On October 7, 1988, Betty and Walter executed a Partnership

Termination, Division and Release Agreement (the termination

agreement), terminating both the limited partnership and the

general partnership, effective December 31, 1987.   In the

termination agreement, Walter and Betty agreed that the assets of

the limited partnership and the general partnership would be

distributed so that Walter and Betty would each receive equal net

values, based upon independent appraisals, and that the QTIP

trust would continue to have a 42-percent undivided interest in

all of the land, excluding improvements, crops, trees, and

profits.   By the termination agreement, Walter and Betty agreed


     4
      (...continued)
that the Forbes estate claimed and was allowed a deduction for
property interests in excess of those with which the executor of
his estate funded the QTIP trust.
                             - 11 -

to have the 5,354 acres owned by the limited partnership divided

into two separate parcels--the North Property (containing 2,033

acres) and the South Property (containing 3,321 acres).   Both

parcels contained pecan orchards and timber.

     The termination agreement (wherein Walter and Betty are

referred to as Forbes and Rayburn, respectively, and the QTIP

trustee is referred to as the Trustee) states in part:

          WHEREAS, Rayburn and Forbes each has had a 29
     percent interest and the Trustee a 42 percent interest
     in * * * [the limited partnership];


          WHEREAS, the principal if not sole, asset of * * *
     [the limited partnership] is that real property,
     (excluding improvements, crops, trees, profits and
     items other than the land itself) lying in Macon and
     Houston Counties, (the “Realty”) which has been rented
     by * * * [the limited partnership];

               *    *    *    *    *    *      *

          WHEREAS, pursuant to the termination of Malatchie
     Land, a portion of the Realty (the “South End”) is being
     distributed to Rayburn and the Trustee, Rayburn to have a
     58% interest and the Trustee to continue with its 42%
     interest and the Trustee to continue with its 42% interest
     in the South End, and the other portion of the Realty
     (the “North End”) is being distributed to Forbes and the
     Trustee, Forbes to have a 58% interest and the Trustee to
     continue with its 42% interest in the North End;

               *    *    *    *    *    *      *

          WHEREAS, after * * * purchase * * * [of certain
     previously specified assets, the general partnership],
     except for a few limited items, will be the owner of
     virtually all the buildings and other improvements on
     the Realty, together with nearly all the personal
     property, fixtures, timber, crops, trees, fruits,
     profits and other items upon the Realty, (the
     “Improvements and Personalty”);
                        - 12 -

     WHEREAS, * * * [the general partnership] acquired
from the Trustee certain of the Improvements and
Personalty in consideration of a promissory note in the
amount of $450,742.00 * * *;

     WHEREAS, Rayburn and Forbes have also agreed to
terminate * * * [the general partnership] effective as
of December 31, 1987 and to divide the assets of * * *
[the general partnership], (inclusive of the
Improvements and Personalty) taking into account the
Realty received by each from * * * [the limited
partnership] and the payment of certain monies between
or for the account of Rayburn and Forbes;

          *    *    *    *    *    *    *

     NOW, THEREFORE, * * * Rayburn and Forbes hereby
agree as follows:

     1.   Termination and Dissolution of Farms and
Malatchie Land. Rayburn and Forbes acknowledge and
agree that effective as of 11:59 p.m. December 31,
1987, * * * [the general partnership and the limited
partnership] are each terminated and dissolved, and all
assets of * * * [the general partnership and the
limited partnership] have been distributed pursuant to
the agreements between Rayburn, Forbes, and Trustee, as
applicable * * *.

          *    *    *    *    *    *    *

     3.   Division of Assets. Forbes and Rayburn agree that
the assets and liabilities of * * * [the limited
partnership and the general partnership] upon dissolution,
excluding that portion of * * * [the limited partnership]
distributed to the Trustee, are to be distributed in such
manner that the net values of properties received, after
deducting liabilities assumed, and taking into account other
monetary adjustments between the parties, result in an equal
distribution to both parties.

          *    *    *    *    *    *    *

     5.   Title to Assets Distributed. (a) The North
and South Ends of the Realty and respective related
Improvements and Personalty, except to the extent a 42
percent interest in the Realty is being conveyed to the
Trustee, are being conveyed to Rayburn and Forbes
                              - 13 -

     respectively free and clear of liens and encumbrances
     other than liens for current taxes, easements and
     restrictions of record.[5]

     In sum, following the division of the subject property into

the North Property and South Property:

     (a)   Walter agreed to relinquish any interest in the South

Property to and in favor of Betty;

     (b)   Betty agreed to relinquish any interest in the North

 Property to and in favor of Walter;

     (c)   All parties agreed that the QTIP trustee would

continue to have a 42-percent undivided interest in both the

South Property and the North Property; and

     (d)   Walter and Betty agreed to give each other mutual

rights of first refusal over the South Property and the North

Property for a period of twenty-one (21) years beginning

October 7, 1988.

     By quitclaim deed recorded October 13, 1988, the limited

partnership conveyed to Betty, as to an undivided 58-percent

interest, and to the QTIP trustee, as to an undivided 42-percent

interest, all of its “right, title, and interest in and to” the



     5
       Although this paragraph of the termination agreement
appears to indicate that the North Property and South Property
were conveyed to Betty and Walter, respectively, other provisions
of the termination agreement indicate the reverse. The parties
have stipulated that the South Property was conveyed to Betty and
the North Property was conveyed to Walter, with the qualified
terminable interest property (QTIP) trust retaining a 42-percent
undivided interest in each property.
                               - 14 -

South Property.   By substantially identical quitclaim deed, the

limited partnership conveyed to Walter and the QTIP trustee

undivided 58-percent and 42-percent interests, respectively, in

all of the limited partnership’s “right, title, and interest” to

the North Property.

     In a letter dated October 7, 1988, Walter and Betty

confirmed to the QTIP trustee the terms of the termination

agreement.   The letter states that in consideration of the QTIP

trustee’s agreement that Betty shall have “the use of the entire

South Property” and that Walter shall have “the use of the entire

North Property”, Betty and Walter each agree to pay any and all

ad valorem taxes with respect to their respective parcels, for so

long as the QTIP trustee should own any right, title, or interest

in their respective parcels.

Property Held by the QTIP Trust at Decedent’s Death

     On December 26, 1993, the date of decedent’s death, the QTIP

trust held a 42-percent undivided interest in the South Property,

a 42.9-percent interest6 in the North Property, and two




     6
       After 1988, in an isolated transaction between the QTIP
trustee and Walter, the QTIP trust’s interest in the North
Property was increased to 42.9 percent and Walter’s interest in
the North Property was decreased to 57.1 percent.
                             - 15 -

promissory notes dated June 30, 1988, each in the amount of

$225,371, one payable by Betty and the other payable by Walter.7

     Decedent’s Federal estate tax return reported the value of

the QTIP trust’s undivided interests in the North Property and

the South Property, excluding any interest in the timber and

pecan trees, as $519,000--predicated on an appraisal indicating

that the fair market value of the entire 5,354 acres, taken as a

whole, in fee simple and without regard to any valuation

discounts, and without including timber or pecan trees, was

$1,746,795, and that the value of the undivided interests should

reflect a 30-percent fractional interest discount.

     In the notice of deficiency, respondent determined that the

QTIP trust’s undivided interests in the subject property included

beneficial interests in the timber and pecan trees, that the

5,354 acres had a fair market value of $7,045,800 at the date of

decedent’s death, and that the value of the QTIP trust’s

undivided interests in the property was $2,990,942.   The notice

of deficiency reduced the value of the QTIP trust’s undivided

interests by $450,742, reflecting the value of the two notes from

Walter and Betty held by the QTIP trustee as consideration of the



     7
       Pursuant to the termination of Malatchie Land Co., L.P.
(the limited partnership) and Malatchie Farms (the general
partnership), the promissory note from the general partnership to
the QTIP trust was canceled and rewritten as two separate notes,
each in the amount of $225,371, one from Betty and the other from
Walter, each to the QTIP trust.
                              - 16 -

QTIP trustee’s August 1, 1986, sale of the sole proprietorship

assets to the general partnership.     Respondent also determined

that the QTIP trustee’s sale of the sole proprietorship assets to

the general partnership was for less than full and adequate

consideration, giving rise to a $1,052,772 cause of action in

decedent’s favor, and increased her gross estate accordingly.

                              OPINION

     A decedent’s gross estate generally includes the value of

all property interests described in sections 2033 through 2044.

See sec. 2031; sec. 20.2031-1(a), Estate Tax Regs.    Under section

2033, all property beneficially owned by the decedent at the time

of death will be included in the gross estate.    See sec.

20.2033-1(a), Estate Tax Regs.   Section 2044 includes in the

gross estate the value of all qualified terminable interest

property (QTIP); i.e., property in which the decedent had a

qualifying income interest for life and for which a deduction was

allowed to the estate of a predeceased spouse under section

2056(b)(7).   Upon the death of the second spouse, the QTIP is

taxed as part of the second spouse's estate.    See sec. 2044(c);

sec. 20.2044-1(a), Estate Tax Regs.

     Property includable in the gross estate is generally

included at its fair market value at the time of death.      See

secs. 2031-2044.   Fair market value is the price at which the

property would change hands between a willing buyer and a willing
                                - 17 -

seller, neither being under any compulsion to buy or sell and

both having reasonable knowledge of the relevant facts.    See

United States v. Cartwright, 411 U.S. 546, 551 (1973); sec.

20.2031-1(b), Estate Tax Regs.

     At decedent’s death, the principal assets in the QTIP trust

were:

     (1) A 42-percent undivided interest in the 3,321 acres of

the South Property and a 42.9-percent undivided interest in the

2,033 acres of the North Property; and

     (2) the two notes from Walter and Betty, representing the

consideration received by the QTIP trustee when he sold the sole

proprietorship assets to the general partnership on August 1,

1986.

The Parties’ Contentions

        On brief, respondent concedes that the QTIP trustee received

full and adequate consideration for the sole proprietorship

assets conveyed to the general partnership on August 1, 1986, and

that accordingly decedent’s estate does not include a right of

action for a bargain sale of assets by the QTIP trustee.    The

central dispute remaining, then, is the fair market value of the

QTIP trust’s undivided interests in the subject property, and

more particularly, whether these interests include beneficial

interests in the timber and pecan orchards on the subject

property.
                              - 18 -

     Petitioner argues that the gross estate should exclude the

value of timber and pecan orchards on the subject property

because the limited partnership, which quitclaimed the undivided

interests to the QTIP trustee, had no beneficial interest in the

timber and pecan orchards to convey.    Petitioner argues that when

the limited partnership terminated in 1988 and conveyed the

undivided interests in the subject property to the QTIP trust, it

held at most “bare legal title” to the timber and pecan orchards,

holding all beneficial ownership therein in implied resulting

trusts for the benefit of Walter and Betty, who petitioner

contends were the rightful owners.

     Respondent’s primary argument, raised for the first time on

brief, is that the limited partnership was a sham and that the

resulting trust doctrine is therefore inapplicable because the

limited partners had “unclean hands”.

     As a general rule, this Court will not consider issues

raised for the first time on brief where surprise and prejudice

are found to exist.   See Sundstrand Corp. v. Commissioner, 96

T.C. 226, 346-347 (1991); Seligman v. Commissioner, 84 T.C. 191,

198 (1985), affd. 796 F.2d 116 (5th Cir. 1986); Fox Chevrolet,

Inc. v. Commissioner, 76 T.C. 708, 733-735 (1981).    Although the

Court may affirm respondent’s determinations for reasons other

than those cited in the notice of deficiency, “the Court must

determine whether there has been surprise and substantial
                               - 19 -

disadvantage to the petitioner in the presentation of his case

because of the manner in which the statutory notice and pleadings

were drawn”.    Estate of Horvath v. Commissioner, 59 T.C. 551, 555

(1973); see Mills v. Commissioner, 399 F.2d 744 (4th Cir. 1968),

affg. T.C. Memo. 1967-67; Estate of Finder v. Commissioner, 37

T.C. 411 (1961).

     Clearly, petitioner was surprised and prejudiced by

respondent’s posttrial contentions in this regard.    Because

neither the notice of deficiency nor the pleadings alerted

petitioner to respondent’s sham argument, petitioner was denied

the opportunity to present evidence regarding it.    Accordingly,

we decline to consider respondent’s sham argument first raised on

brief.   See Seligman v. Commissioner, supra.

     In any event, even if we were to consider respondent’s sham

argument, it is not apparent how it would avail respondent.     On

reply brief, respondent contends that Mr. Forbes conveyed his

land to the limited partnership so that his estate could claim a

fractional discount with respect to its limited partnership

interest.8   Respondent’s reply brief states:   “The parties [i.e.,

Mr. Forbes, Walter, and Betty] did not really part with their

property.    There was no economic consequence to the conveyance to

the partnership.”   Respondent’s sham argument raises many


     8
       The record does not conclusively establish how Mr. Forbes’
estate valued his limited partnership interest for Federal estate
tax purposes.
                               - 20 -

unanswered questions.   If, as respondent contends, Walter and

Betty never parted with their interests in their 3,296 acres, how

do we account for the fact that the QTIP trust held undivided

interests in this acreage?–-an undisputed fact upon which

respondent’s determinations are in significant part predicated.

Moreover, if Mr. Forbes’ 2,058 acres were never transferred to

the limited partnership, it would appear from all the evidence

that this acreage passed to the QTIP trust as part of Mr. Forbes’

sole proprietorship and would have been sold by the QTIP trustee

to the general partnership as part of the August 1, 1986, sale of

all the sole proprietorship assets–-a sale that respondent now

concedes was for full and adequate consideration.9

     In sum, respondent’s sham argument comes too late and proves

too much, suggesting that at decedent’s death, the QTIP trust

held no interest in the subject property–-a position that even

petitioner has not advanced.




     9
       On brief, respondent suggests for the first time that the
QTIP trustee’s Aug. 1, 1986, sale of the sole proprietorship
assets excluded the sole proprietorship’s interests in growing
timber and pecan orchards on the Forbes land. This position
appears inconsistent with respondent’s position in his notice of
deficiency that the Aug. 1, 1986, sale was a bargain sale from
the QTIP trustee to Walter and Betty of timber worth $3,887,000,
farm improvements worth $450,000, and farm equipment worth
$145,550, and that decedent’s gross estate should be increased to
reflect a cause of action against the QTIP trustee for a bargain
sale of assets. As previously noted, respondent has now conceded
that the sale was not a bargain sale and that decedent’s gross
estate includes no right of action against the QTIP trustee.
                              - 21 -

Implied Trusts

     We apply Georgia State law to determine what interest the

QTIP trust had in the South Property and North Property on the

date of decedent’s death.   See Commissioner v. Estate of Bosch,

387 U.S. 456, 465 (1967); Estate of Spruill v. Commissioner, 88

T.C. 1197, 1216 (1987).   Because the QTIP trust obtained its two

undivided interests in the subject property from the limited

partnership by quitclaim deed, the QTIP trust received only such

interest as the limited partnership possessed at the time of the

conveyance.   See Chatham Amusement Co. v. Perry, 117 S.E.2d 320,

325 (Ga. 1960).

     Petitioner contends that when the limited partnership

conveyed the undivided interests in the subject property to the

QTIP trustee in 1988, the limited partnership held any beneficial

interests in the timber and pecan orchards in implied resulting

trusts in favor of Walter and Betty.

     Determining Applicable Georgia Statutory Law

     As a threshold matter, we must determine the appropriate

Georgia statutory law to apply to the facts of this case.

Effective July 1, 1991, chapter 12, regarding trusts, of title 53

of the Official Code of Georgia Annotated was repealed and

reenacted to adopt the provisions of the Georgia Trust Act, which

rewrote and reorganized the provisions of prior statutory law

relating to implied trusts.   The Georgia statutory law in effect
                              - 22 -

prior to July 1, 1991, expressly recognized implied trusts but

did not expressly distinguish between implied resulting trusts

and implied constructive trusts.10   The Georgia Trust Act

provides separate treatment for resulting trusts, see Ga. Code

Ann. sec. 53-12-91 (1997), and constructive trusts, see Ga. Code




     10
       Prior to July 1, 1991, Georgia statutory law provided
(Ga. Code Ann. secs. 53-12-22 and 53-12-26 (1982)):

     53-12-22. Distinction between express and implied trusts.

          Trusts are either express or implied. Express trusts
     are those trusts created and manifested by agreement of the
     parties. Implied trusts are those trusts which are inferred
     by law from the nature of the transaction or the conduct of
     the parties.


     53-12-26. Events and conditions giving rise to implied
               trust.

     A trust is implied:

               (1) Whenever the legal title is in one person
          but the beneficial interest, either from
          the payment of the purchase money or from
          other circumstances, is either wholly or
          partially in another;

               (2) Where, from any fraud, one person obtains
          the title to property which rightly belongs
          to another;

               (3) Where, from the nature of the transaction,
          it is manifest that it was the intention of
          the parties that the person taking the legal
          title should have no beneficial interest * * *
                              - 23 -

Ann. sec. 53-12-93 (1997).   The texts of these statutory

provisions are set out in the margin.11




     11
       The relevant sections of the Georgia Trust Act, as
embodied in the Official Code of Georgia Annotated (1997), are as
follows:

     53-12-90. Implied trusts.

          An implied trust is either a resulting trust or a
     constructive trust.


     53-12-91. Resulting trusts.

          A resulting trust is a trust implied for the benefit of
     the settlor or the settlor’s successors in interest when it
     is determined that the settlor did not intend that the
     holder of the legal title to the trust property also should
     have the beneficial interest in the property, under any of
     the following circumstances:

          (1) A trust is created but fails, in whole or in part,
     for any reason;

          (2) A trust is fully performed without exhausting all
     the trust property; or

          (3) A purchase money resulting trust as defined in
     subsection (a) of Code Section 53-12-92 is established.


     53-12-93. Constructive trusts.

          (a) A constructive trust is a trust implied whenever
     the circumstances are such that the person holding legal
     title to property, either from fraud or otherwise, cannot
     enjoy the beneficial interest in the property without
     violating some established principle of equity.

          (b) The person claiming the beneficial interest in the
     property may be found to have waived the right to a
     constructive trust by subsequent ratification or long
     acquiescence.
                              - 24 -

     In addition to expressly distinguishing between resulting

trusts and constructive trusts, the Georgia Trust Act also

appears to make other substantive changes to prior statutory law.

We have discovered no authority addressing the application of the

Georgia Trust Act to facts analogous to those here.     For the

reasons described below, we conclude that the Georgia Trust Act

is inapplicable to the instant case.

     The Georgia Trust Act provides that “Except to the extent it

would impair vested rights and except as otherwise provided by

law, this chapter shall apply to any trust regardless of the date

it was created.”   Ga. Code Ann. sec. 53-12-3 (1997).    Strictly

speaking, it is unlikely at this point that Walter’s or Betty’s

vested property rights would be impaired by application of the

Georgia Trust Act or of any other provision of trust law, for

after decedent died in 1994, the QTIP trust distributed its total

interests in the subject property to Walter and Betty free of

trust.

     The question before us, however, is not what interests in

the subject property Walter and Betty possessed after decedent’s

death, but rather what property interests the QTIP trust

possessed immediately preceding decedent’s death, which in turn

depends upon the property interests held by the limited

partnership in 1988 before it quitclaimed its property interests

to the QTIP trustee, Walter, and Betty.   More particularly, the
                             - 25 -

relevant question is whether the limited partnership held

beneficial interests in the timber and pecan orchards on the

subject property in implied trusts in favor of Walter and Betty.

This question is meaningful only as it pertains to the period

before the limited partnership terminated in 1988.   After the

limited partnership terminated and quitclaimed its interests in

the subject property to the partners, any such implied trusts

would have also terminated, since whatever beneficial interests

the limited partnership might have held in implied trusts in

favor of Walter and Betty would have merged with Walter’s and

Betty’s respective legal interests in the subject property.    We

believe that when the Georgia Trust Act provides that it “shall

apply to any trust regardless of the date it was created”, Ga.

Code Ann. sec. 53-12-3 (1997), it presupposes that the trust to

which it is to apply is extant on or after the July 1, 1991,

effective date of the Georgia Trust Act.   It would be anomalous

to apply the Georgia Trust Act retroactively to a trust that

necessarily would have terminated, if it ever existed, before the

enactment of the Georgia Trust Act.   Accordingly, we conclude

that the Georgia Trust Act is inapplicable and that Georgia

statutory law as in effect no later than the date the limited

partnership terminated--i.e., October 7, 1988--should govern.

Cf. Major Realty Corp. v. Commissioner, 749 F.2d 1483, 1486 (11th

Cir. 1985).
                              - 26 -

     Analysis Under Pre-Georgia Trust Act Law

     For the reader’s convenience, we set out here once again the

relevant Georgia statutory provision (Ga. Code Ann. sec. 53-12-26

(1982)) as in effect prior to adoption of the Georgia Trust Act:

     53-12-26.   Events and conditions giving rise to implied
                 trust.

     A trust is implied:

               (1) Whenever the legal title is in one person
          but the beneficial interest, either from
          the payment of the purchase money or from
          other circumstances, is either wholly or
          partially in another;

               (2) Where, from any fraud, one person obtains
          the title to property which rightly belongs
          to another;

               (3) Where, from the nature of the transaction,
          it is manifest that it was the intention of
          the parties that the person taking the legal
          title should have no beneficial interest * * *

     It has been stated that implied trusts arising under the

first and third classifications in the statute above are

generally considered resulting trusts, while those arising under

the second classification are generally considered constructive

trusts.   See Estate of Spruill v. Commissioner, 88 T.C. at 1217,

(citing Hancock v. Hancock, 54 S.E.2d 385, 389 (Ga. 1949)).     As

previously noted, however, the statute itself does not

distinguish between resulting trusts and constructive trusts–-a

distinction that is often difficult but ordinarily unnecessary

under this statute since “both are implied trusts and are
                               - 27 -

governed by the same rules.”   Hancock v. Hancock, supra.

Consequently, although petitioner’s case is predicated on the

creation of implied resulting trusts upon creation of the limited

partnership, the characterization of the implied trust as implied

or constructive would appear to make little difference under this

statute.

     Under Georgia law, extrinsic evidence bearing on the

parties’ intent is admissible to establish the existence of an

oral trust regarding land.   See Harrell v. Harrell, 290 S.E.2d

906, 907 (Ga. 1982) (involving the substantially identical

predecessor statute to Georgia Code section 53-12-26), in which

the Georgia Supreme Court stated:

     circumstances may be offered as evidence of an
     intention (whether or not expressly articulated by each
     party) that title shall vest in one and beneficial
     ownership in the other. The scope of such evidence
     includes all of the facts and circumstances surrounding
     the transaction. The ultimate inquiry is whether there
     was, in truth, a mutual understanding, not whether such
     an understanding was expressed in plain and unambiguous
     terms.

     The Georgia Supreme Court in Harrell acknowledged that

“hidden beneficial ownership can be pernicious” and create

uncertainty, but nevertheless concluded that the relevant

statutory provisions “appear to sanction hidden trusts, and we

must be guided by the law as given by the General Assembly.”      Id.

at 907-908; see also McKinney v. Burns, 31 Ga. 295 (1860) (parol

evidence was competent to establish, with regard to beneficial
                              - 28 -

interests in land, an implied trust in favor of a son-in-law who,

without consideration and without relinquishing possession of the

land, had executed a land deed to his father-in-law with the

mutual understanding that the father-in-law would convey the land

to the son-in-law’s wife and children).

     In Estate of Spruill v. Commissioner, supra, this Court

applied these principles of implied trusts under Georgia law to

conclude that an implied resulting trust arose in favor of a

daughter and her husband with respect to a homesite where the

facts clearly demonstrated an understanding among the parties

that the daughter’s father took legal title to the homesite for

the sole purpose of obtaining financing on the property but

enjoyed no beneficial interest in the property.   Accordingly,

this Court determined that the homesite was not includable in the

father’s gross estate.   See also Estate of Rodriguez v.

Commissioner, T.C. Memo. 1989-13 (applying Georgia law to hold

that decedent’s gross estate excluded beneficial interests in

real property with respect to which decedent held legal title as

the trustee of an implied resulting trust in favor of his closely

held corporation, based on a mutual understanding that the

closely held corporation was to have beneficial ownership).

     Here, the totality of the evidence clearly shows a mutual

understanding and intent that when Mr. Forbes, Walter, and Betty

transferred their respective property interests to the limited
                               - 29 -

partnership in 1984, legal title would vest in the limited

partnership but beneficial ownership of the timber, pecan

orchards, and other growing crops would remain with the

contributing limited partners individually.    The undisputed

evidence shows that the parties consistently treated their

property interests as conforming to this mutual understanding.

The limited partnership never conducted any business with regard

to the timber, pecans, or other crops.    Instead, after

transferring his property to the limited partnership, Mr. Forbes

continued to conduct his farming and timber business on the land

he previously held, received all income therefrom, and reported

all related income and deductions on his individual income tax

returns.    Similarly, Walter and Betty continued to receive and

report individually all income from their farming and timber

business on the land they had contributed to the limited

partnership, creating the general partnership to conduct this

business.

     After Mr. Forbes’ death, his executors conveyed to the QTIP

trust, and the QTIP trustee immediately reconveyed to Walter and

Betty, for consideration that respondent now concedes was full

and adequate, the assets of Mr. Forbes’ sole proprietorship.    The

general bills of sale by which these conveyances were

accomplished expressly indicate that the conveyances included

“All growing crops and timber on land owned by” the limited
                              - 30 -

partnership.   The evidence indicates that the purchase price was

computed consistently with this representation.   Following this

sale, the general partnership (i.e., Walter and Betty) managed

all the assets, including the timber and pecan orchards, on

the land held by the limited partnership and paid for all timber

plantings on the land.

      The termination agreement whereby the limited partnership

and the general partnership were terminated in 1988 clearly

indicates the parties’ understanding that the limited partnership

owned only the “Realty”, defined in the termination agreement as

the land itself and excluding, among other things, crops and

trees, and that the general partnership owned the “Improvements

and Personalty” thereon, defined in the termination agreement to

include, among other things, timber, crops, and trees.   The QTIP

trust had a partnership interest in the limited partnership, but

no interest in the general partnership between Walter and Betty.

The termination agreement reflects the parties’ intention that in

distributing the assets of the two partnerships, Walter’s and

Betty’s interests in their respective parcels would include both

“Realty” and “Improvements and Personalty”, whereas the QTIP

trustee would receive only 42-percent undivided interests in the

“Realty”.   After the termination of the partnerships, the QTIP

trustee agreed to give Walter and Betty the “entire use” of their

respective parcels in consideration for their payment of ad
                              - 31 -

valorem taxes thereon, with the relatively nominal consideration

strongly suggesting that the QTIP trustee did not believe that

the QTIP trust possessed rights to timber, pecan orchards, and

other crops that would thereby have been transferred to Walter

and Betty.

     In sum, the evidence clearly manifests a mutual

understanding that the limited partnership would hold legal title

to the subject property but take no beneficial interest in the

timber, pecan orchards, and other crops.12   We conclude that

under applicable Georgia law, the limited partnership held legal

title to the land subject to implied trusts in favor of the

limited partners with respect to beneficial interests in the

timber, pecan orchards, and crops on the land.   Because the

limited partnership possessed no beneficial interests in the

timber, pecan orchards, and other crops, in quitclaiming



     12
       Without explanation, on reply brief respondent appears to
concede this point by stating “no objection” to petitioner’s
following proposed finding of fact number 10:

          Mr. Forbes, Sr., did not agree to put the timber,
     pecan trees and growing crops on the land he owned in
     his name into * * * [the limited partnership]. He
     continued to own and manage those assets in his
     proprietorship company. He never put timber, pecan
     trees or growing crops into a partnership with Walter,
     Jr., and Betty Rayburn. * * *

Because respondent’s apparent concession appears inconsistent
with other positions in respondent’s brief, however, we give it
little weight and instead decide the issue on the merits as
analyzed above.
                                - 32 -

interests in the subject property to the QTIP trust, it conveyed

no such beneficial interests.    Accordingly, we conclude and hold

that on the date of decedent’s death, the QTIP trust held no

beneficial interest in the timber and pecan orchards on the

subject land.   Consequently, petitioner appropriately excluded

the value of any such beneficial interests from decedent’s gross

estate.

Valuation Discount

     The parties agree that on the date of decedent’s death, the

fair market value of the entire 5,354 acres of the subject

property, taken as a whole, in fee simple and without regard to

fractional interests, equitable claims of partners, or discounts,

and without including timber or pecan trees, was $1,746,795.    In

reporting a $519,000 fair market value for the two undivided

interests in the subject property on decedent’s Federal estate

tax return, petitioner took an allocable percentage of the

$1,746,795 value and adjusted it downward by a 30-percent

discount.

      Respondent concedes that if the “tax-motivated sham” is

disregarded, a fractional interest discount is appropriate.    As

previously discussed, we decline to consider respondent’s

untimely sham argument.   Accordingly, in determining the value of

decedent’s undivided interests in the South Property and the
                              - 33 -

North Property, the only remaining issue is what fractional

discount should apply.

     Both parties rely on expert testimony to value decedent’s

undivided interests in the subject property.   We evaluate expert

opinions in light of all the evidence in the record and may

accept or reject the expert testimony, in whole or in part,

according to our own judgment.   See Helvering v. National Grocery

Co., 304 U.S. 282, 295 (1938); Estate of Mellinger v.

Commissioner, 112 T.C. 26, 39 (1999).   “The persuasiveness of an

expert’s opinion depends largely upon the disclosed facts on

which it is based.”   Estate of Davis v. Commissioner, 110 T.C.

530, 538 (1998).

     Petitioner presented testimony of two expert witnesses:   Mr.

James F. Lawton (Lawton) and Mr. Glen A. Hultquist (Hultquist).

     Lawton determined that a fractional interest valuation

discount is appropriate because the QTIP trust’s undivided

interests were minority interests and because the market for such

interests would be restricted taking into consideration the

limited pool of potential buyers, the likely difficulty of

securing financing, and the likely costs of partitioning the two

separate parcels.   Lawton was unable to locate comparable sales,

but he determined that in the market in which the subject

property is located, real estate brokers had applied fractional

interests of 10 percent to 30 percent in liquidating
                              - 34 -

partnerships.   Based on this information, and taking into

consideration the specific characteristics of the subject

property, possible intra-family conflicts, and other factors

adversely affecting the marketability of the two undivided

interests in the subject property, Lawton concluded that a

valuation discount of 30 percent is appropriate.

     Hultquist, petitioner’s other expert, concluded that the

fair market value of the two undivided interests in the subject

property as of decedent’s date of death was $720,000, based on

the correlated present value of net annual income streams that he

projected from hypothetical partitions or forced sales of the

subject property under various scenarios.    Hultquist assumed that

the QTIP trust’s undivided interests included the value of pecan

orchards but not the value of any timber.    Because this

assumption is contrary to our previous determination that the

QTIP trust’s undivided interests included no beneficial interest

in the pecan orchards, his $720,000 estimate of discounted fair

market value is of little utility.

     Because Hultquist’s $720,000 estimate of the discounted fair

market value is approximately 36 percent less than what Hultquist

assumed to be the undiscounted fair market value of the undivided

interests in the subject property (again assuming that pecan

orchards but not timber are included), petitioner argues that a

36 percent discount rate is appropriate.    We disagree.    We are
                              - 35 -

unconvinced that a discount rate extrapolated from one set of

indicated values, under assumptions inapplicable here, would

correspond to the discount rate extrapolated from a different set

of indicated values if the underlying assumptions were altered.

Moreover, even disregarding his faulty assumptions, Hultquist’s

present value computations are inadequately explained and

justified, particularly in regard to the manner in which he

derived the projected revenues from his hypothetical partitions

or forced sales and the manner in which he derived his chosen 14

percent equity yield for purposes of his present value

computations.

     Respondent’s expert, Mr. Richard Parks (Parks), purported to

use a comparable sales approach to determine an appropriate

valuation discount for a 42-percent undivided interest in the

subject property.   Parks indicated that because he was unable to

locate minority interest sales in the market where the subject

property is located, he had identified three other “appropriate

examples” involving:   (1) A 1989 sale of an office building in

Birmingham, Alabama; (2) a 1961 sale of a 128-acre vacant tract

in Jefferson County, Alabama; and (3) a 1981 sale of a 1,600-acre

tract known as Bell Plantation (location not specifically

identified but apparently somewhere outside of Georgia).    These

three “comparables” suggested discounts ranging from 25 percent

to 64 percent.   With little explanation, Parks concludes that
                              - 36 -

based on these examples and “other market oriented research

completed by this appraiser” (not otherwise described by Parks),

the appropriate discount rate is 18 percent.

     We are unpersuaded that the “examples” on which Parks bases

his comparable sales analysis actually represent comparable

sales.   Even if they did, we find no adequate justification for

his selection of an 18-percent discount rate–-a rate that is well

below the smallest discount indicated by Parks’ own

“comparables”.   Consequently, we do not rely on Parks’ report.

See Rule 143(f)(1).

     We are unsatisfied that any of the parties’ experts have

adequately justified their recommended discount rates–-a

shortcoming that might be attributable in part to a lack of

available empirical data.   Given that the parties agree that some

valuation discount is appropriate, however, and lacking any firm

basis on which we might independently derive one, we accept

Lawton’s recommended 30-percent valuation discount as being the

most reasonably justified of the opinions presented to us.    This

is the same discount rate that petitioner used in reporting the

value of the undivided interests for Federal estate tax purposes.

     Accordingly, all valuation issues in dispute having been

determined in petitioner’s favor, we conclude that petitioner

correctly reported the fair market value of the QTIP trust’s

undivided interests in the subject property as $519,000.
                             - 37 -

Section 6662(g) Penalty

     There being no estate tax valuation understatement,

respondent’s assertion of a penalty under section 6662(g) is not

sustained.

     To reflect the foregoing and to permit petitioner to claim

additional administrative expenses pursuant to section 2053,


                                        Decision will be

                                   entered under Rule 155.
