                        T.C. Memo. 2005-65



                      UNITED STATES TAX COURT



 ESTATE OF VIRGINIA A. BIGELOW, DECEASED, FRANKLIN T. BIGELOW,
                  JR., EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4066-02.                 Filed March 30, 2005.


     Joseph F. Moore, for petitioner.

     Donna F. Herbert, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a $217,480.05

deficiency in the Federal estate tax of the Estate of Virginia A.

Bigelow.

      Virginia A. Bigelow (decedent) established a trust

(decedent’s trust) and transferred her residence to it in 1991.

The trust exchanged the residence for other real property in
                                 - 2 -

1993.     Decedent’s trust and decedent’s children formed a family

limited partnership in 1994 when decedent was about age 85 and a

few months after she suffered a stroke and began living in an

assisted-living facility.    Decedent’s trust transferred the real

property, but not the liability for a loan and a line of credit

totaling $450,000 which were secured by the property, to the

partnership.     After the transfer, decedent was left with an

insufficient amount of income to meet her living expenses or to

satisfy her liability for the indebtedness.     Decedent’s sole

purposes in establishing the family limited partnership were to

facilitate gift giving and to reduce Federal estate tax.

     The issue for decision is whether the real property that

decedent’s trust transferred to the partnership is included in

decedent’s gross estate under section 2036(a)(1).     We hold that

it is.1

     Unless otherwise specified, section references are to the

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

in 1997, and Rule references are to the Tax Court Rules of

Practice and Procedure.




     1
       In an amendment to the answer, respondent asserted that
the property is also includable in decedent’s estate under secs.
2036(a)(2) and 2038(a)(1). Because we hold that the property
transferred to the partnership is included in decedent’s estate
under sec. 2036(a)(1), we need not decide whether the property is
included in decedent’s estate under sec. 2036(a)(2) or sec. 2038.
                               - 3 -

                         FINDINGS OF FACT

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

A.   Decedent, Her Family, and Decedent’s Estate

     Decedent died testate on August 8, 1997, at the age of 88.

She resided in Alhambra, California, at that time.   Decedent’s

son, Franklin T. Bigelow, Jr. (Mr. Bigelow), is the executor of

decedent’s estate.   He was also her attorney in fact pursuant to

a durable power of attorney from 1986 until she died.   Mr.

Bigelow resided in Altadena, California, when the petition in

this case was filed.

     Decedent was survived by Mr. Bigelow, her daughter Virginia

L. Burke (Mrs. Burke), and nine grandchildren.   Decedent’s

husband had died in 1966, and her daughter Katharine B.

Fitzgerald (Mrs. Fitzgerald) had died in 1996.

B.   The Sand Point Road Property

     In 1963, decedent and her husband purchased as their

principal residence a house on Sand Point Road (then called

Spindrift Lane), in Carpinteria, California (the Sand Point Road

property).   Decedent became the sole owner of that property in

1966 when her husband died.   She lived there until 1992.

     Decedent gave each of her three children a 1/175th undivided

interest in the Sand Point Road property in 1990 or 1991.     The

Sand Point Road property was worth $1,750,000 at that time.
                                - 4 -

C.   Decedent’s Trust

     In 1991, decedent executed (1) a declaration and agreement

of trust (the trust agreement), which created decedent’s trust,

and (2) a deed transferring her remaining 98.2857-percent

undivided interest in the Sand Point Road property to herself and

to her son as cotrustees (the trustees) of decedent’s trust.

     Decedent had the power to revoke the trust during her

lifetime.   The trust agreement required the trustees to

distribute all of the income to or for the benefit of decedent

and allowed the trustees to invade the trust corpus for

decedent’s care, maintenance, or support.    The assets remaining

in decedent’s trust when she died were to be distributed in equal

shares to her three children.

     Decedent suffered a stroke and was hospitalized on March 9,

1992.   After she was released from the hospital, she entered a

rehabilitation center for about 6 weeks.    She then moved to an

assisted-living facility in Alhambra, California.    On December

30, 1992, decedent withdrew a 1.5-percent interest in the Sand

Point Road property from the trust and gave each of her daughters

a 0.75-percent undivided interest in that property.

D.   The Exchange of the Sand Point Road Property for the Padaro
     Lane Property

     In the fall of 1992, the trustees of decedent’s trust listed

the Sand Point Road property for sale with a real estate broker.

In January 1993, the trustees of decedent’s trust and decedent’s
                                 - 5 -

children (collectively the Bigelows) entered into an exchange and

leaseback agreement (the exchange agreement) with Peter and

Margaret Seaman (the Seamans).    The Seamans owned a residence on

Padaro Lane in Carpinteria (the Padaro Lane property).

     Under the exchange agreement, the Bigelows agreed to

transfer to the Seamans the Sand Point Road property which was

worth $1,325,000, and the Seamans agreed to pay the Bigelows

$125,000 and to transfer to decedent’s trust the Padaro Lane

property which was worth $1,200,000.     The Seamans wanted to build

a new house on the Sand Point Road property.    As part of the

agreement, the Bigelows agreed to lease the Padaro Lane property

to the Seamans until the new house was completed.

     Decedent’s trust obtained a $350,000 loan from the Great

Western Bank evidenced by a promissory note and secured by a

first position deed of trust on the Padaro Lane property in favor

of the bank.   Decedent and Mr. Bigelow personally guaranteed the

performance of decedent’s trust under the purchase money

promissory note.   Decedent’s trust used the proceeds from the

Great Western Bank loan to repay two Citibank loans secured by

the Sand Point Road property.

     Decedent signed the exchange agreement and the deed

transferring the Sand Point Road property to the Seamans.    Mr.

Bigelow signed the other documents, including the loan
                                - 6 -

guaranties, for himself and for decedent under the power of

attorney.

     The Bigelows received $68,630 from the transaction after

payment of closing costs.   As consideration for the sale or

exchange of their interests in the Sand Point Road property,

decedent’s daughters each received $17,508.82, Mr. Bigelow

received $7,571.32, and decedent’s trust received $25,833 and the

Padaro Lane property subject to the Great Western Bank mortgage.

The Bigelows executed deeds transferring the Sand Point Road

property to the Seamans.    The trustees of decedent’s trust leased

the Padaro Lane property back to the Seamans.      The lease provided

for an initial term of 12 months and for rent of $3,500 per

month.

E.   The Union Bank Line of Credit

     In December 1993, decedent’s trust obtained a $100,000 line

of credit from Union Bank secured by a second position deed of

trust on the Padaro Lane property.      Decedent guaranteed the

performance of decedent’s trust under the line of credit.

     Decedent’s trust drew down $100,000 on the Union Bank line

of credit between December 1993 and November 1994.      Decedent’s

children and grandchildren received gifts of money from the

proceeds of the line of credit in amounts not specified in the

record.   The amount owed on the Union Bank line of credit was

$100,130.50 in November 1994.
                                - 7 -

F.   Spindrift Associates, Ltd. (Decedent’s Family Limited
     Partnership)

     In December 1994, the trustees of decedent’s trust and

decedent’s three children executed a limited partnership

agreement (the partnership agreement) which formed Spindrift

Associates, Ltd., a California limited partnership (Spindrift or

the partnership).    The partnership agreement stated that the

purpose of the partnership was to engage in the business of

owning and operating residential real property, initially the

Padaro Lane property, and it prohibited the partnership from

engaging in any other principal business.    The partnership

agreement permitted the partnership to issue units with different

rights and preferences.    Each unit represented a contribution of

cash or property of $100.    “A units” were issued to limited

partners in exchange for cash or checks.    “B units” were issued

to limited partners in exchange for contributions of property.

     Decedent’s trust was both the sole general partner and a

limited partner.    Decedent’s three children were limited

partners.   In December 1994, decedent’s trust contributed $500 to

the partnership in exchange for a 1-percent interest as general

partner, and decedent’s trust and decedent’s three children each

contributed $100 in exchange for one A unit.

     On December 22, 1994, decedent’s trust transferred the

Padaro Lane property, then worth $1,450,000, but not the debt

secured by the property, to the partnership in exchange for
                                - 8 -

14,500 B units.   Decedent, in her capacity as grantor and

beneficiary of decedent’s trust, agreed to hold the partnership

harmless for the Great Western Bank loan and the Union Bank line

of credit.   The partnership agreement required the capital

account of decedent’s trust to be reduced to the extent that

partnership funds were used to pay any of the principal on the

Great Western Bank loan or the Union Bank line of credit.

     The partnership agreement allocated 1 percent of the net

operating profits and losses of the partnership to the general

partner and 99 percent to the limited partners.    Each of the

14,504 limited partnership units was allocated an equal share (1

÷ 14,504) of the allocation made to the limited partners.

     On December 30, 1994, a certificate of limited partnership

for Spindrift was filed with the California secretary of state.

Around February 2, 1995, decedent’s trust, as the general partner

of the partnership, opened a bank account for the partnership at

the Union Bank of California.

G.   The Partnership’s Leasing and Sale of the Padaro Lane
     Property

     The partnership made repairs to the Padaro Lane property

after the Seamans moved out.    On February 7, 1995, the

partnership entered into a 24-month lease with Michael H. Healy

and Tim F. Walsh (the Healy-Walsh lease) for the occupancy of the

Padaro Lane property.   In June 1996, the partnership engaged real

estate brokers to sell the Padaro Lane property for $1,585,000.
                               - 9 -

     On September 3, 1997, the partnership agreed to sell the

Padaro Lane property for $1,475,000.   The partnership received

$949,490.33 from the sale on November 21, 1997.   The partnership

began distributing the proceeds to the partners, including

decedent’s trust, by December 1997.

H.   The Partnership’s Financial Activity

     All of the rental receipts from the Padaro Lane property

were deposited into partnership bank accounts, and the expenses

for the Padaro Lane property were paid from those accounts.

Although decedent was obligated to make the monthly payments on

the Great Western Bank loan, the partnership made those payments.

The partnership, however, did not adjust the capital account of

decedent’s trust for payment of principal as required by the

partnership agreement.   Decedent’s trust made the monthly

payments on the Union Bank line of credit.

     From April 6, 1995, to August 8, 1997 (when decedent died),

Mr. Bigelow transferred funds between the partnership and

decedent’s trust 40 times.   When decedent died, decedent’s trust

owed Spindrift $3,500.   Mr. Bigelow transferred funds from

decedent’s trust to the partnership soon after it was formed to

pay the property taxes on the Padaro Lane property.   He

transferred funds from the partnership to decedent’s trust to
                             - 10 -

repay the earlier advances and later to pay decedent’s expenses.

I.   Decedent’s Gifts of Partnership Interests

     In December 1994, shortly after the partnership was formed,

Mr. Bigelow, under decedent’s power of attorney, withdrew 5,400 B

units from decedent’s trust and assigned 800 units to himself and

2,300 units to each of decedent’s daughters, and withdrew from

decedent’s trust the income rights associated with 600 B units

and assigned the income rights associated with 75 B units to each

of decedent’s grandchildren except Eliza K. Bigelow.

     In December 1995, Mr. Bigelow, under decedent’s power of

attorney, withdrew 600 B units from decedent’s trust and assigned

200 of those units to each of decedent’s children, and withdrew

the income rights associated with 210 B units and assigned the

income rights associated with 90 B units to Eliza K. Bigelow and

the income rights associated with 15 B units to each of

decedent’s other grandchildren.

     In December 1996, Mr. Bigelow, under decedent’s power of

attorney, withdrew 150 B units from decedent’s trust and assigned

50 B units to himself and 100 B units to Mrs. Burke, and withdrew

income rights associated with 450 B units and assigned the income

rights with respect to 50 B units to each of decedent’s

grandchildren.

     On July 18, 1997, Mr. Bigelow, under decedent’s power of

attorney, withdrew 100 B units from decedent’s trust and assigned
                              - 11 -

those units to Mrs. Burke.   He also withdrew the income rights

associated with 540 B units from decedent’s trust and assigned

the income rights associated with 60 B units to each of

decedent’s grandchildren.

     Mr. Bigelow, for himself and under decedent’s power of

attorney, acting as trustee of decedent’s trust, signed a

statement of ownership in which he certified that the ownership

of Spindrift limited partnership units as of July 18, 1997, was:

                   Partner                 A Units   B Units

     Decedent’s trust                         1       8,250
     Estate of Mrs. Fitzgerald, deceased      1       2,500
     Mrs. Burke                               1       2,700
     Mr. Bigelow                              1       1,050
       Total                                  4      14,500

He also certified that decedent’s grandchildren owned the income

rights associated with 1,800 B units (200 units each) owned by

the general partner.   The grandchildren were not substituted as

limited partners as a result of the gifts of income rights.

     Disregarding the limited partnership interests associated

with the income rights transferred to decedent’s grandchildren,

decedent’s trust owned a 1-percent general partnership interest

and a 45-percent ((8,250 - 1,800) ÷ 14,500) limited partnership

interest in the partnership when decedent died on August 8, 1997.

J.   Termination of the Partnership

     The partnership did not make any distributions to its

partners with respect to their interests in the partnership
                                 - 12 -

before decedent died.      After decedent died, decedent’s trust

continued to act as the general partner of the partnership until

the partnership was terminated.      By December 31, 1998:   (1) The

partnership was terminated; (2) final distributions were made to

the partners (including decedent’s trust); and (3) the

partnership’s dissolution documents were recorded in the office

of the California secretary of state.

K.       Decedent’s Assets and Sources of Income

         After her husband died, decedent received income from a

trust that she and her husband had established in 1954 (the 1954

trust).      A California trust company served as the corporate

trustee of the 1954 trust.      Initially, the corpus of the 1954

trust was an insurance policy on the life of decedent’s husband.

         When the partnership was formed in 1994, decedent had

monthly income of $9,300 from the following sources:

                      Source                        Amount

     Residential care insurance policies
       Fireman’s Fund/American Express         $2,100
       AARP/Prudential                          1,500
         Total                                           $3,600
     Rental income--Padaro Lane property                  3,500
     Other income1                                        2,200
       Total income                                       9,300
     1
     Veterans’ Administration benefits, Social Security, U.S.
Army retirement, distributions from the 1954 trust, and payments
from the sale of her husband’s business.

         When the partnership was formed in 1994, decedent’s monthly

expenses were:
                               - 13 -

                       Expense                  Amount

            Assisted living                     $3,600
            Health insurance supplement            150
            Pharmacy                               200
            Miscellaneous medical                  100
            Great Western loan                   2,000
            Union Bank line of credit              750
            Flood and liability insurance          350
            Property taxes                       1,000
            Storage                                150
            Phone and miscellaneous                 50
              Total                              8,350

     After Spindrift was formed and the Padaro Lane property was

transferred to the partnership, decedent no longer received the

rent from the property and her income was reduced to $5,800

($9,300 - $3,500).   Her expenses were reduced by the property

taxes and insurance to $7,000 ($8,350 - $1,350), creating a

shortfall of $1,200 ($5,800 - $7,000).

     After the Padaro Lane property was transferred to the

partnership, the partnership paid the $2,000 monthly payment on

the Great Western Bank loan.

     The $1,500 monthly benefit under decedent’s AARP/Prudential

residential care insurance policy expired in August 1995, and

decedent’s income was reduced to $4,300 ($5,800 - $1,500),

creating a shortfall of $2,700 ($4,300 - $7,000).   The $2,100

monthly benefit under the Fireman’s Fund/American Express policy

expired in August 1996, and decedent’s income was reduced to
                                - 14 -

$2,200 ($4,300 - $2,100), creating a shortfall of $4,800 ($2,200

- $7,000).

     After the benefits under decedent’s residential care

insurance policies had expired, Mr. Bigelow told the trustee of

the 1954 trust that decedent did not have enough income to pay

her expenses.    As a result, by April 1997, the trustee had

distributed a total of $68,214 to decedent and terminated the

1954 trust.    Mr. Bigelow and his wife received $22,000 from the

funds distributed from the 1954 trust before decedent died in

August 1997.

     Decedent’s trust had accounts at Citizens Bank.     When

Spindrift was formed, the total amount in those accounts was

about $23,500.     Decedent’s trust received more than $68,000 early

in 1997.   When decedent died, the combined balance was about

$5,500.    All of the checks drawn on the Citizens Bank accounts

were signed by Mr. Bigelow as trustee of decedent’s trust.

L.   Tax Returns

     1.      Decedent’s Income Tax Returns for 1993-97

     On decedent’s 1993 Form 1040, U.S. Individual Income Tax

Return (decedent’s 1993 return), decedent reported adjusted gross

income of $50,037.     On Form 8824, Like-Kind Exchanges, decedent

reported $25,833 as boot from the exchange of the Sand Point Road

property for the Padaro Lane property.     On Schedule E,

Supplemental Income and Loss, decedent reported $43,750 of rental
                              - 15 -

income and $40,578 of expenses for the Padaro Lane property

during that year.

     On her 1994 return, decedent reported adjusted gross income

of $10,284.   On Schedule E, decedent reported $42,000 of rental

income and $38,193 of expenses for the Padaro Lane property.

     On her 1995-97 returns, decedent reported adjusted gross

income of $14,918 in 1995, $38,880 in 1996, and $469 in 1997.

Decedent reported her shares of partnership income or loss on

those returns.

     2.   Partnership Returns for 1994-97

     The partnership reported no income or expenses for the

Padaro Lane property on its 1994 Form 1065, U.S. Partnership

Return of Income (the partnership’s 1994 return).   The

partnership’s balance sheets included in the 1995-97 returns

reported the Great Western Bank loan as a liability.   None of the

partners’ Schedules K-1, Partner’s Share of Income, Credits,

Deductions, Etc., accurately reflect the partners’ capital

accounts; e.g., decedent’s capital account as reported on the

Schedules K-1 never shows that decedent’s trust contributed the

Padaro Lane property.   The partnership reported income or loss

and decedent’s distributive shares of income and losses on its

returns for 1995-97 as follows:
                               - 16 -

                 Item                1995       1996       1997

   Partnership
     Rent                          $60,500    $54,000    $40,500
     Expenses and depreciation     (59,040)   (48,015)   (49,234)
     Net income (loss)               1,460      5,985     (8,734)
   Decedent’s distributive share       525      2,960     (2,896)

     3.   The Estate and Gift Tax Returns

     On November 9, 1998, Mr. Bigelow, as executor of decedent’s

estate, signed gift tax returns for 1994-97 and decedent’s estate

tax return.    The gift tax returns were filed with the estate tax

return.   The Internal Revenue Service received decedent’s estate

and gift tax returns on November 12, 1998.

          a.     The Gift Tax Returns

     On the gift tax returns, Mr. Bigelow reported that decedent

had made taxable gifts of $463,960 in 1994, $10,785 in 1995, zero

in 1996, and $2,000 in 1997.   Mr. Bigelow reported that decedent

had given limited partnership interests in Spindrift to her

children and grandchildren valued at $61.85 per unit in 1994 and

1995, $67.79 per unit in 1996, and $61.90 per unit in 1997.

     The valuation of the limited partnership units reported on

the gift tax returns was made on the basis of a market approach

using the appraised value of the Padaro Lane property.    Ninety-

nine percent of that value was assigned to the limited

partnership interests.   The value of each unit of limited

partnership interest was calculated by dividing 99 percent of the

value of the Padaro Lane property by the number of limited
                              - 17 -

partnership units (14,504) and applying a 31-percent discount for

lack of marketability.   No distinction was made in the appraisals

or on those returns between the limited partnership units given

to decedent’s children and the income rights given to decedent’s

grandchildren in the units retained by decedent’s trust.

     Mr. Bigelow reported on the 1994 gift tax return that

decedent had made cash gifts of $10,000 to Mr. Bigelow and

$10,000 to his wife, forgiven Mr. Bigelow $150,000 of

indebtedness evidenced by a promissory note, and assigned

interests in a promissory note payable to decedent by Mr. Bigelow

to Franklin T. Bigelow III and Anna D. Bigelow, $5,000 each.   He

also reported on the 1995-97 gift tax returns combined cash gifts

to Mr. Bigelow and his wife of $7,350 in 1995, $7,500 in 1996,

and $22,000 in 1997.

          b.   The Estate Tax Return

     On the estate tax return, Mr. Bigelow reported a gross

estate of $175,957.57 and taxable gifts of $463,070.

     The amount reported as the gross estate included $10,000 of

personal property, the refund of a $2,460 deposit owed to

decedent by the assisted-living facility, and $163,497.57 of

transfers during decedent’s life.   The amount reported as

transfers during decedent’s life included $135,079.88 for

decedent’s limited partnership in Spindrift; $19,912.50 for her

general partnership interest in Spindrift; $5,416.83 held by
                               - 18 -

decedent’s trust ($8,492.30 in a Merrill Lynch cash account

offset by an overdraft of $3,075.47 in the checking account); a

$169.38 cash payment due from Boston Co; and $2,918.98 in a

savings account.

     On the estate tax return, Mr. Bigelow reported that

decedent’s limited partnership interest in the partnership was

worth $135,079.88.    In computing that value, decedent’s estate:

(1) Computed 44 percent of $1,475,000 (the value of the Padaro

Lane property); i.e., $649,480.85, (2) subtracted $435,069.75;

i.e., the amount of the Great Western Bank loan and the Union

Bank line of credit secured by the property, and (3) applied to

the remainder a 37-percent discount for lack of marketability.

     Attached to the estate tax return was a document signed by

Mr. Bigelow called “Statement As to Status of Ownership of Units”

(the statement of status), in which he certified that the

ownership of the issued and outstanding Spindrift limited

partnership units as of July 18, 1997, was as follows:

                     Partner                A Units    B Units

    Decedent’s trust                           1         6,450
    Estate of Mrs. Fitzgerald, deceased        1         2,500
    Mrs. Burke                                 1         2,700
    Mr. Bigelow                                1         1,050
      Total                                    4       12,700

The statement of status also states that, on the valuation date,

decedent’s nine grandchildren owned the income rights associated

with 1,800 B units (200 units each) owned by the general partner.
                              - 19 -

     Mr. Bigelow reported that the value of decedent’s general

partnership interest was $19,912.50, computed by taking 1 percent

of the value of the Padaro Lane property and applying a 35-

percent control premium.

                              OPINION

     The value of an interest in property is included in a

decedent’s gross estate if:   (1) The decedent made an inter vivos

transfer of the property;2 (2) the transfer was for less than

adequate and full consideration; and (3) the decedent retained

the possession or enjoyment of, or the right to the income from,

the transferred property.   Sec. 2036(a)(1).3   However, a

decedent’s gross estate does not include property transferred




     2
       The estate does not contend that the transfer of the
Padaro Lane property by decedent’s trust to Spindrift was not an
inter vivos transfer by decedent for purposes of sec. 2036(a),
and we conclude that it was.
     3
      Sec. 2036(a)(1) provides in pertinent part:

     SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.

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

               (1) the possession or enjoyment of, or the
          right to the income from, the property, * * *
                              - 20 -

pursuant to a bona fide sale for adequate and full consideration.

Sec. 2036(a).

     The estate contends that the Padaro Lane property that

decedent’s trust conveyed to Spindrift is not includable in

decedent’s estate by section 2036(a)(1) because:   (1) Decedent

did not retain enjoyment of, or the right to the income from, the

Padaro Lane property; and (2) the transfer of the property was a

bona fide sale for adequate and full consideration.4   We disagree

for reasons discussed next.

A.   Whether Decedent Retained Possession or Enjoyment of, or the
     Right to the Income From, the Padaro Lane Property During
     Her Lifetime

     Section 2036(a)(1) does not apply unless the decedent

retains the possession or enjoyment of, or the right to the

income from, the transferred property.   That requirement is met

if there is an implied agreement among the parties to the

transaction at the time of transfer that the transferor may

retain the possession or enjoyment of, or the right to the income

from, the transferred property.   Estate of Thompson v.

Commissioner, 382 F.3d 367, 376 (3d Cir. 2004), affg. T.C. Memo.

2002-246; Estate of Maxwell v. Commissioner, 3 F.3d 591, 594 (2d

Cir. 1993), affg. 98 T.C. 594 (1992); Estate of Reichardt v.

Commissioner, 114 T.C. 144, 151-152 (2000).   The estate contends


     4
       The burden of proof shifts to the Commissioner in
specified circumstances. Sec. 7491(a). However, our findings
are not affected by the burden of proof.
                                - 21 -

that decedent did not retain or have an implied or express

agreement to retain the possession, enjoyment, or right to the

income from the Padaro Lane property after it was transferred to

Spindrift.

     1.     Whether There Was an Implied Agreement That Decedent
            Would Retain the Right to the Income From the Padaro
            Lane Property During Her Lifetime

     The estate contends that there was no implied agreement for

decedent to retain the right to income from the Padaro Lane

property.    We disagree.   The Padaro Lane property was generating

monthly rent of $3,500.     The taxes and insurance on the property

totaled $1,350.    After the partnership was formed, decedent used

$2,000 of the $2,150 net income from the rental of the Padaro

Lane property to make monthly payments on the Great Western loan.

After the AARP/Prudential residential care insurance policy

expired in August 1995, decedent’s expenses exceeded her income

by $2,700.    The partnership continued to make the $2,000 payments

on the Great Western loan, and Mr. Bigelow transferred

partnership funds to decedent’s trust to support decedent.    No

distributions were made to any other partner before decedent’s

death.    Section 2036 applies if a decedent retains the right to

income from the property or if there was an implied agreement to

that effect.    Estate of Reichardt v. Commissioner, supra at 153;

Estate of Hillgren v. Commissioner, T.C. Memo. 2004-46; see

Estate of Thompson v. Commissioner, supra at 375.     Decedent’s use
                                - 22 -

of partnership income to replace the income lost because of the

transfer of the Padaro Lane property to the partnership shows

that there was an implied agreement between decedent and her

children that she would retain the right to the income from the

Padaro Lane property.

     2.     Whether There Was an Implied Agreement That Decedent
            Would Retain the Enjoyment of the Padaro Lane Property
            During Her Lifetime

     The estate contends that there was no express or implied

agreement for decedent to retain the enjoyment of the Padaro Lane

property.    We disagree.   Enjoyment includes present economic

benefits.    Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir.

1971); Estate of Reichardt v. Commissioner, supra at 151.     After

the transfer of the Padaro Lane property to Spindrift, the

property continued to secure decedent’s legal obligation to pay

the $350,000 Great Western Bank loan and the $100,000 Union Bank

line of credit.    Thus, decedent retained the economic benefit of

ownership of the Padaro Lane property after it was transferred to

the partnership.

     We conclude that there was an implied agreement between

decedent and her children that she would retain for her life the

present economic benefit of the Padaro Lane property.
                               - 23 -

B.     Whether the Transfer of the Padaro Lane Property by
       Decedent’s Trust for 14,500 B Units in Spindrift Was a Bona
       Fide Sale for Adequate and Full Consideration

       Section 2036(a)(1) does not apply if the transfer of

property was part of a bona fide sale for adequate and full

consideration.    The estate contends that the transfer by

decedent’s trust of the fee simple interest in the Padaro Lane

property to the partnership was a bona fide and genuine transfer

for which decedent’s trust received adequate and full

consideration; i.e., 14,500 of the 14,504 limited partnership

units (99.97242 percent).

       To constitute a bona fide sale for adequate and full

consideration, the transfer of the property must be made in good

faith.    Estate of Thompson v. Commissioner, supra at 383; sec.

20.2043-1(a), Estate Tax Regs.    Such a sale requires that the

transfer be made for a legitimate nontax purpose.    Estate of

Bongard v. Commissioner, 124 T.C. ___, ___ (2005) (slip op. at

39).    Transactions between family members are subject to

heightened scrutiny to ensure that the transaction is not a

disguised gift.    See Harwood v. Commissioner, 82 T.C. 239, 258

(1984), affd. without published opinion 786 F.2d 1174 (9th Cir.

1986); Estate of Stone v. Commissioner, T.C. Memo. 2003-309; cf.

Estate of Reichardt v. Commissioner, supra.    As discussed next,

the transfer of the Padaro Lane property to Spindrift was not

made in good faith.
                              - 24 -

     1.   Impoverishment of Decedent

     The estate contends that the transfer of the Padaro Lane

property had no adverse financial effect on decedent because she

received partnership interests in the partnership that held the

Padaro Lane property which were, when she received them, equal in

value to the transferred property.     The estate contends that

decedent’s financial situation worsened only when her residential

care insurance policies expired in 1995 and 1996.

     We disagree.   Before the Padaro Lane property was

transferred to the partnership, decedent met her financial

obligations.5   After the transfer, decedent no longer received

rent from the property, but she remained liable for both the

Great Western Bank loan and the Union Bank line of credit.     The

transfer of the Padaro Lane property to the partnership left

decedent unable to meet her financial obligations because her

reduced income of $5,800 was insufficient to pay her reduced

expenses of $7,000.

     After decedent’s residential care insurance benefits expired

in August 1996, Mr. Bigelow informed the trustee of the 1954



     5
        When decedent formed the partnership in 1994, she had
monthly income of $9,300 ($3,600 from two residential care
insurance policies, $3,500 from rent paid on the Padaro Lane
property, and $2,200 from other sources). At that time, her
monthly expenses averaged $8,350 ($3,600 for assisted living
expenses, $2,750 for the Great Western Bank loan and Union Bank
line of credit, $1,350 for property taxes and insurance, and $650
for other expenses).
                                - 25 -

trust that decedent did not have enough income to pay her

expenses.    By April 1997, the trustee of the 1954 trust had

distributed $68,214 to decedent and terminated the trust.

Although decedent’s financial needs prompted the distribution of

the funds from the 1954 trust, decedent gave $22,000 to Mr.

Bigelow and his wife in 1997.    When she died, decedent had only

$8,505 of liquid assets left to supplement her inadequate monthly

income; i.e., $5,417 of assets held in decedent’s trust, $169 due

from Boston Co., and $2,919 in a savings account.

     2.     Failure To Respect Partnership Formalities

     The parties’ failure to respect the provisions of the

agreement governing their transaction tends to show that the

transaction was not entered into in good faith.    See Estate of

Harper v. Commissioner, T.C. Memo. 2002-121; Riverpoint Lace

Works, Inc. v. Commissioner, T.C. Memo. 1954-39.

      The estate points out that formalities to establish the

partnership were met and contends that any lapses in complying

with partnership formalities after formation were unimportant.

We disagree.    Spindrift did not properly maintain records of

partnership capital or the partners’ capital accounts.    The

balance sheets included in the 1995-97 returns incorrectly show

the Great Western Bank loan as a liability of the partnership.

None of the partners’ Schedules K-1 accurately reflect the

partners’ capital accounts; e.g., decedent’s capital account
                              - 26 -

reported on the Schedules K-1 never reflects decedent’s trust’s

contribution of the Padaro Lane property.    The Bigelows did not

comply with all of the terms of the partnership agreement.       These

facts suggest that the sale was not in good faith.

     3.   No Potential for Nontax Benefit to Decedent

     The transfer did not provide and had no potential to provide

any nontax benefit to decedent because management of the assets

did not change as a result of the transfer and there was no

pooling of assets.   A transfer of assets is not a bona fide sale

for estate tax purposes unless the transfer provides the

transferor some benefit other than estate tax savings.     See

Estate of Thompson v. Commissioner, 382 F.3d 367 (3d Cir. 2004);

Estate of Harper v. Commissioner, supra.

     The estate contends that transferring the Padaro Lane

property to the limited partnership had three nontax purposes.

First, the estate contends that one of those purposes was to

provide legal protection from creditors.    We disagree.

Transferring the Padaro Lane property to Spindrift did not give

decedent’s trust any additional protection from creditors because

decedent’s trust was the sole general partner.    As a general

partner, decedent’s trust was not protected from liability

arising from the ownership of the property.    Limiting the

liability of decedent’s trust was not a purpose for forming the

partnership and transferring the Padaro Lane property to it.
                                - 27 -

       Second, the estate contends that the partnership provided

continuity of management for the Padaro Lane property.       We

disagree.    There was no change in the continuity of management of

the Padaro Lane property after decedent’s trust transferred it to

Spindrift.    Under the partnership agreement, the partnership

terminated if the general partner terminated unless the remaining

partners agreed to continue the partnership.       The partnership

would terminate when decedent’s trust terminated because

decedent’s trust was the general partner.       Transferring the

Padaro Lane property to Spindrift did not provide any additional

continuity of management of the property; the sole source of

management was the trust.

       Third, the estate contends that it was more efficient for

decedent to give her children and grandchildren interests in the

partnership than to withdraw small undivided interests in the

Padaro Lane property from decedent’s trust and give them to her

children and grandchildren by deed.      A transfer made solely to

reduce taxes and to facilitate gift giving is not considered in

this context to be made in good faith or for a bona fide purpose.

See Estate of Thompson v. Commissioner, supra at 369, 373-374,

379.

       4.    Comparison With the Kimbell Case

       The estate asserts that the transfer by decedent’s trust of

the Padaro Lane property to Spindrift was a bona fide sale for
                             - 28 -

adequate and full consideration under Kimbell v. United States,

371 F.3d 257, 265 (5th Cir. 2004), where the court stated:

          In summary, what is required for the transfer by
     Mrs. Kimbell to the Partnership to qualify as a bona
     fide sale is that it be a sale in which the decedent/
     transferor actually parted with her interest in the
     assets transferred and the partnership/transferee
     actually parted with the partnership interest issued in
     exchange. In order for the sale to be for adequate and
     full consideration, the exchange of assets for
     partnership interests must be roughly equivalent so the
     transfer does not deplete the estate. * * *

     The estate’s reliance on Kimbell is misplaced because the

facts in that case differ substantially from those here.   First,

decedent’s trust did not part with all of its interest in the

Padaro Lane property as shown by the fact that the property

continued to secure the obligations of decedent and the trust to

repay the Great Western Bank loan and the Union Bank line of

credit.

     Second, because there was no potential benefit for decedent

or her trust stemming from the transfer of the Padaro Lane

property to Spindrift, the partnership interest received by

decedent’s trust was not equivalent to the Padaro Lane property.

     Third, the general partner of the Kimbell partnership was a

limited liability company, not Mrs. Kimbell’s trust.   When Mrs.

Kimbell’s trust transferred property to the partnership, the

trust shielded itself from liability.   In contrast, decedent’s

trust was the sole general partner of Spindrift.   The transfer of

the Padaro Lane property from decedent’s trust to Spindrift did
                                  - 29 -

not shield the trust from its liability as an owner of the

property because decedent’s trust was Spindrift’s general

partner.

     Fourth, Mrs. Kimbell retained more than $450,000 in assets

outside of the partnership for her support.    In contrast,

decedent did not retain enough assets to support herself.

     Finally, Mrs. Kimbell did not make continuous transfers

between her personal assets and the Kimbell partnership’s assets.

Mr. Bigelow transferred funds between decedent’s trust and

Spindrift 40 times from April 1995 to August 1997.    Decedent’s

trust used partnership funds and the partnership used trust

funds.    The facts supporting a finding of a bona fide sale for

adequate and full consideration in Kimbell are not present here.

C.   Conclusion

     We conclude that decedent and her children had an implied

agreement that decedent could continue during her lifetime to

enjoy the economic benefits of, and retain the right to the

income from, the Padaro Lane property after she conveyed the

property to the partnership, and that the transfer was not a bona

fide sale for adequate and full consideration.    Thus, the value

of the Padaro Lane property is included in decedent’s gross

estate.    See sec. 2036(a)(1).


                                               Decision will be

                                           entered for respondent.
