                        T.C. Memo. 1999-15



                      UNITED STATES TAX COURT



              ESTATE OF ETHEL S. NOWELL, DECEASED,
    DAVID A. PRECHEL, PERSONAL REPRESENTATIVE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19056-96.                    Filed January 26, 1999.



     Alfred J. Olsen, James J. Rossie, Jr., Stephen E. Silver,

Brad S. Ostroff, and Martha C. Patrick, for petitioner.

     Rick V. Hosler, for respondent.



                        MEMORANDUM OPINION

     COHEN, Chief Judge:    This case is before the Court on cross-

motions for partial summary judgment under Rule 121.     Respondent

determined a deficiency of $342,688 in the Federal estate tax of

the estate of Ethel S. Nowell (decedent).     The issues for

decision are:   (1) Whether certain partnership interests
                                 - 2 -


includable in the gross estate pursuant to section 2044 should be

merged or aggregated with the partnership interests includable in

the gross estate pursuant to section 2038, for valuation

purposes; and (2) whether the interests in two partnerships

passing at death should be valued for Federal estate tax purposes

as "assignee" interests or as partnership interests.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect as of the date of decedent's

death, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                           Background

     Decedent died on December 22, 1992, a resident of Arizona.

She was survived by Nancy Prechel, decedent's only child from a

prior marriage, and by David A. Prechel (Mr. Prechel) and Diane

D. Prechel (Ms. Prechel), decedent's only grandchildren.

Mr. Prechel, a resident of Arizona, was decedent's personal

representative when the petition in this case was filed.

     Prior to January 18, 1991, decedent's assets consisted of

her undivided one-half community property interest in certain

publicly traded securities and real property.   These assets were

held in the Ethel S. Nowell Trust (the revocable trust) that was

established on April 20, 1990.    Mr. Prechel and Ms. Prechel were

named as cotrustees of this trust.
                                 - 3 -


     Ansell L. Nowell (Mr. Nowell), decedent's predeceased

husband, had established the A.L. Nowell Trust on April 20, 1990,

contributing his one-half community property interest in the

publicly traded securities and real estate to the trust and

naming himself and Mr. Prechel as cotrustees.    Upon Mr. Nowell's

death on April 26, 1990, the A.L. Nowell Trust estate was

distributed into three trusts:    The Decedent's Trust, the

A.L. Nowell Qualified Interest Trust-exempt (QTIP trust-exempt),

and the A.L. Nowell Qualified Interest Trust-nonexempt (QTIP

trust-nonexempt).   The QTIP trust-exempt and the QTIP trust-

nonexempt are referred to collectively herein as the QTIP trusts.

Decedent and Mr. Prechel were cotrustees of each trust at

decedent's death.

     The property in the QTIP trusts was to be held for the

benefit of decedent during her lifetime, with the remaining

property interests to be distributed to Mr. Prechel and

Ms. Prechel (in trust) at decedent's death.    In Mr. Nowell's

estate, the property that was held by the QTIP trusts was treated

as qualified terminable interest property (QTIP property)

pursuant to section 2056(b)(7).    Accordingly, Mr. Nowell's

executor made the appropriate election, and his estate claimed a

marital deduction in the amount of $808,046 attributable to the

QTIP property.   The deduction was not disallowed for Federal

estate tax purposes.
                                    - 4 -


     On January 18, 1991, decedent and Mr. Prechel formed the

Prechel Farms Limited Partnership (PFLP).           The general

partnership interests were held by Mr. Prechel and the QTIP

trust-nonexempt, while the limited partnership interests were

held by the Decedent's Trust, the QTIP trust-exempt, and the

revocable trust.        The property that was contributed to the PFLP

consisted of certain assets that were held by the trusts and a

$500 contribution from Mr. Prechel.          The following chart

indicates the partnership status of each partner, the value of

contributed property, and each partner's respective profits and

loss percentage.

                              Contributed   Profit & Loss    General or
             Partners          Property*      Percentage       Limited
      Revocable trust          $1,386,500      60.41%         Limited
      Decedent's Trust            300,000      13.07%         Limited
      QTIP trust-nonexempt        408,000      17.78%         General
      QTIP trust-exempt           200,000       8.72%         Limited
       Mr. Prechel                    500      0.02%          General
*Represents the value of property contributed.

The ESN Group Limited Partnership (ESNGLP) was also formed by

decedent and Mr. Prechel on January 18, 1991.               The following

chart indicates the partners, their partnership status, the value

of contributed property, and each partner's respective profits

and loss percentage.
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                               Contributed    Profit & Loss     General or
             Partners           Property*       Percentage        Limited
         Revocable trust            $75,000        13.04%        Limited
         Decedent's Trust           300,000        52.17%        General
         QTIP trust-exempt          200,000        34.79%        Limited
* Represents the value of property contributed.

Both partnerships were duly organized and validly existing

partnerships under the laws of the State of Arizona at decedent's

death.

     Each partnership's Articles and Certificate of Limited

Partnership provided in pertinent part:

          7.05 Rights of Unadmitted Assignee. A Person who
     acquires one or more Units but who is not admitted as a
     Substituted Limited Partner pursuant to Section 7.06
     hereof (1) shall be entitled only to allocations and
     distributions with respect to such Units in accordance
     with these Articles, (2) shall have no right to any
     information or accounting of the affairs of the
     Partnership, (3) shall not be entitled to inspect the
     books or records of the Partnership, (4) shall not have
     any of the rights of a General Partner or a Limited
     Partner under the Act or these Articles, but (5) shall
     be subject to the obligations of a Unit Holder under
     these Articles, including but not limited to those
     provisions of Articles Seven, Ten and Eleven, to the
     same extent and in the same manner as any Unit Holder
     making a Prohibited Transfer.

          7.06 Admission of Unit Holders as Partners.
     Subject to the other provisions of this Article Seven,
     a transferee of Units may be admitted to the
     Partnership as a Substituted Limited Partner only upon
     satisfaction of the conditions set forth below:

            (1) All General Partners consent to such admission;

                  *        *    *      *       *     *      *
                               - 6 -


           8.01 Termination of General Partners.

                *    *    *    *       *   *   *

                (C) Permitted Transfers by General Partners

                *    *    *    *       *   *   *

                     (2) A transferee of Units from a
                General Partner hereunder shall be
                admitted as a General Partner with
                respect to such Units if, but only if,
                (a) at the time of such Transfer, such
                transferee is otherwise a General
                Partner, or (b) there is one or more
                General Partners and the admission of
                such transferee as a General Partner is
                approved by a majority of the Partners.
                [Emphasis added.]

Upon decedent's death, all partnership interests in PFLP were

distributed to Mr. Prechel, and all partnership interests in

ESNGLP were retained by the respective trusts for Ms. Prechel's

benefit.

     On September 22, 1993, Mr. Prechel, as decedent's personal

representative, filed a United States Estate (Generation-Skipping

Transfer) Tax Return, Form 706, for decedent's estate.    The

return included the partnership interests that were held by the

revocable trust pursuant to section 2038 and the partnership

interests that were held by the QTIP trusts pursuant to section

2044.   The partnership interests were discounted based on lack of

marketability, lack of control, and other disabilities.    The

discounts ranged from 50 percent to 65 percent of the net asset
                                    - 7 -


value of the partnerships.        The following chart sets forth the

Federal estate tax values of the partnership interests as

represented in the United States Estate Tax Return.

                                    Ownership   Estate Tax
       Partnership Interest           Units        Value        Discount
   PFLP in Revocable trust          1,386,500   $298,100          65%
   ESNGLP in Revocable trust           75,000     31,900          50%
   PFLP in QTIP trust-nonexempt       408,000    125,300          50%
   PFLP in QTIP trust-exempt          200,000     43,000          65%
   ESNGLP in QTIP trust-exempt        200,000     85,000          50%

     On examination, respondent determined that the partnership

interests that were held by the revocable trust and the QTIP

trusts should be merged for valuation purposes.              Accordingly,

respondent determined that the value of the partnership interests

in the revocable trust should be increased by $577,300 and that

the value of the partnership interests in the QTIP trusts should

be increased by $272,404.        Respondent also added $2,500 to

decedent's gross estate for a 1992 Federal income tax refund.

The resulting deficiency in Federal estate tax was determined to

be $342,688.

                                  Discussion

     Partial summary judgment is appropriate when the record

shows that there is no genuine issue of material fact and that a

decision may be rendered as a matter of law.          Rule 121(b);

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.
                               - 8 -


17 F.3d 965 (7th Cir. 1994).   The facts in this case have been

stipulated for purposes of the cross-motions for summary

judgment.   Decedent's gross estate includes partnership interests

pursuant to sections 2038 and 2044 valued with fractional

interest discounts based on lack of marketability and other

disabilities.   The first issue is whether the partnership

interests that were held by the estate should be valued

independently of each other.   The second issue is whether the

partnership interests that passed at decedent's death were

partnership interests or "assignee" interests.   Both issues

present legal questions and are, therefore, appropriate for

partial summary judgment.

Issue 1

     Section 2031 includes in the decedent's gross estate the

value of property described in sections 2033 through 2044.     Under

section 2038, a decedent's gross estate includes the value of all

property interests transferred by a decedent during the

decedent's lifetime, unless for full consideration, if at the

decedent's death the enjoyment of such property is subject to any

change through a retained power to revoke.   Section 2044 includes

in the gross estate the value of all property in which the

decedent had a qualified income interest for life and for which a

deduction was allowed under section 2056(b)(7) in computing the

value of the decedent's predeceased spouse's estate.   Property
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included in the decedent's gross estate pursuant to sections 2031

through 2044 is generally included at its fair market value, the

price at which the property would change hands between a willing

buyer and a willing seller, neither being under any compulsion to

buy or sell, and both having reasonable knowledge of the relevant

facts.   Sec. 2031; United States v. Cartwright, 411 U.S. 546, 551

(1973); sec. 20.2031-1(b), Estate Tax Regs.

     The partnership interests that were held by the revocable

trust are included in decedent's gross estate pursuant to section

2038, and the partnership interests that were held by the QTIP

trusts are included in decedent's gross estate pursuant to

section 2044.   Respondent argues that, in valuing the partnership

interest for Federal estate tax purposes, the decedent should be

treated as the owner of property included in the estate pursuant

to section 2044 and that the respective partnership interests

held by the trusts should merge or be aggregated.   Accordingly,

respondent concludes that decedent's estate should be taxed on an

84.1-percent limited partnership interest in PFLP, a 99.9-percent

general partnership interest in PFLP, and a 100-percent limited

partnership interest in ESNGLP, rather than on the separate

partnership interests owned by each trust.

     We rejected respondent's aggregation argument in Estate of

Mellinger v. Commissioner, 112 T.C. 26 (1999), filed this date,

and we find no reason to reach a different conclusion in this
                                - 10 -


case.     In Estate of Mellinger, the decedent died owning 2,460,580

shares of stock that were held in her revocable trust.     The stock

was included in her estate pursuant to section 2033.     Also

included in her taxable estate, pursuant to section 2044, were

2,460,580 shares of the same stock held in a QTIP trust

established by the decedent's predeceased spouse.     Respondent

argued that the shares should be aggregated and valued as a

control block rather than as two separate minority interests.       We

rejected that argument stating:

        Respondent has identified nothing in the statute that
        indicates that Congress intended that result or that
        QTIP assets should be aggregated with other property in
        the estate for valuation purposes. Cf. secs. 267, 318,
        544 (indicating aggregation of interests in terms of
        ownership). Furthermore, at no time did decedent
        possess, control, or have any power of disposition over
        the FOH shares in the QTIP trust. Cf. secs. 2035,
        2036, 2041 (requiring inclusion in the gross estate
        where decedent had control over the assets at some time
        during her life). [Id. at __ (slip op. at 17).]

        Respondent, in Estate of Mellinger, also argued that the

decedent should be treated as the owner of QTIP property for

valuation purposes.     We held that "Neither section 2044 nor the

legislative history indicates that decedent should be treated as

the owner of QTIP property for this purpose."     Id. at __ (slip

op. at 18).     Accordingly, the shares of stock in the trusts were

valued as two separate minority interests.     Id. at __ (slip op.

at 18); see also Estate of Bonner v. United States, 84 F.3d 196

(5th Cir. 1996).
                               - 11 -


      These principles are equally applicable to the case before

us.   Analysis of section 2044 and the accompanying regulations

thereunder does not indicate that Congress intended that property

interests includable under section 2044 should be merged or

aggregated with interests in the same property included in the

estate pursuant to section 2038 for purposes of determining

Federal estate tax value.    Section 2044 provides only that the

value of property in the gross estate shall include property in

which the decedent had a qualifying income interest for life and

that the inclusion of such property shall be at its fair market

value.    Sec. 20.2044-1(d), Estate Tax Regs.   Section 2044(c)

treats QTIP property as "passing from the decedent" but does not

indicate that the decedent should be treated as the owner of such

property for purposes of aggregation.    Thus, the partnership

interests included pursuant to section 2038 and section 2044

should be valued separately.

Issue 2

      The second issue for decision is whether the interests in

the two partnerships passing at death should be valued for

Federal estate tax purposes as "assignee" interests or as

partnership interests.

      The Federal estate tax is a tax on the privilege of

transferring property upon one's death.    United States v.

Manufacturers Natl. Bank of Detroit, 363 U.S. 194, 198 (1960).
                               - 12 -


"[T]he property to be valued for estate tax purposes is that

which the decedent actually transfers at his death rather than

the interest held by the decedent before death, or that held by

the legatee after death."   Propstra v. United States, 680 F.2d

1248, 1250 (9th Cir. 1982); see also Ahmanson Found. v. United

States, 674 F.2d 761, 769 (9th Cir. 1981).

     For purposes of determining value, the standard is an

objective test using hypothetical buyers and sellers in the

marketplace and is not a personalized one that envisions a

particular buyer and seller.   Estate of Andrews v. Commissioner,

79 T.C. 938, 956 (1982); Kolom v. Commissioner, 71 T.C. 235, 244

(1978), affd. 644 F.2d 1282 (9th Cir. 1981).   Respondent argues,

however, that, although the valuation standard utilizes a

hypothetical buyer, who could not, under the terms of the

partnership agreement, purchase a partnership interest, it does

not transform the nature of the interest that actually passed at

death from partnership interests to assignee interests.

Respondent's argument rests on the notion that the partnership

interests that were transferred to Mr. Prechel remained

partnership interests because he was "automatically" admitted as

a general partner by virtue of his already being a partner in

both partnerships.   In addition, respondent argues that, because

the trusts continued to hold some of the partnership interests
                                - 13 -


after decedent's death, only substituting Ms. Prechel as the

beneficiary, the interests remained partnership interests.

     In determining the value of an asset for Federal estate tax

purposes, State law first determines precisely what property is

transferred.    Morgan v. Commissioner, 309 U.S. 78, 80 (1940);

Estate of Bright v. United States, 658 F.2d 999, 1001 (5th Cir.

1981).     After that determination is made, the Federal tax law

takes over to determine how such rights and interests will be

taxed.   United States v. Bess, 357 U.S. 51, 55 (1958).      Thus,

State law must be consulted to determine what property interests

were transferred at a decedent's death.

     Under the Arizona Limited Partnership Act, "An assignment

entitles the assignee to receive, to the extent assigned, only

the distribution to which the assignor would be entitled."      Ariz.

Rev. Stat. sec. 29-340 (1991).       A partner in an Arizona limited

partnership cannot, however, confer to an assignee the rights to

exercise the powers of a partner, unless provided otherwise in

the partnership agreement.     Id.    The PFLP and ESNGLP partnership

agreements specify that the assignee of limited partnership

interests in either partnership will become an assignee and not a

substitute limited partner unless, among other things, the

general partners consent to the assignee's admission as a limited

partner.    Accordingly, limited partner status in PFLP and ESNGLP
                                - 14 -


is conferred on Mr. Prechel and Ms. Prechel only if the general

partners consent.

     Under the partnership agreements, the assignee of a general

partnership interest is a general partner with respect to such

assignment if "at the time of such * * * [assignment, the

assignee] is otherwise a General Partner".    If the assignee of a

general partnership interest is not a general partner, the

assignee will become a substitute general partner only if

approved by a majority of the partners.    Because Mr. Prechel was

already a general partner in PFLP, the 408,000 general

partnership units in PFLP assigned to him continued to be a

general partnership interest.

     Applying the Federal estate tax valuation principles to the

interests described above, the limited partnership interests must

be valued as "assignee" interests, and the general partnership

interest in PFLP distributed to Mr. Prechel must be valued as a

general partnership interest.    Determination of whether

Mr. Prechel and Ms. Prechel will be treated as limited partners

of the respective partnerships can be made only by taking into

consideration whether the remaining general partners will consent

to their admission as limited partners, subjective factors that

cannot be taken into consideration under the objective standard

of the hypothetical seller/buyer analysis.    See Propstra v.

United States, supra at 1252; Estate of Andrews v. Commissioner,
                               - 15 -


supra at 956; Kolom v. Commissioner, supra at 244.    Thus, the

limited partnership interests received by Mr. Prechel and

Ms. Prechel must be valued as assignee interests.

     There are, however, no subjective factors to consider when

determining whether Mr. Prechel will be a general partner with

respect to the general partnership interest assigned to him.      The

partnership agreement automatically treats him as a general

partner.    Accordingly, the general partnership interest received

by Mr. Prechel should be valued as a general partnership

interest.   No general partnership interests passed to

Ms. Prechel.

     Petitioner's motion for partial summary judgment will be

granted in part and denied in part, and respondent's motion for

partial summary judgment will be granted in part and denied in

part.

     To reflect the foregoing,

                                          An appropriate order will

                                     be issued.
