                       T.C. Memo. 2004-160



                      UNITED STATES TAX COURT



         MARK W. SENDA AND MICHELE SENDA, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17298-02.                Filed July 12, 2004.



     Daniel V. Conlisk, James R. Dankenbring, and James Robert

Loranger, for petitioners.

     Thomas C. Pliske, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies of

$185,572, $276,321, and $25,674 in petitioners’ Federal gift

taxes for 1998, 1999, and 2000, respectively.

     After concessions by respondent, the issue for decision is

whether petitioners’ transfers of stock to two family limited
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partnerships, coupled with petitioners’ transfers of limited

partnership interests to their children (or in trust therefor),

constitute indirect gifts of the stock to the children (or to the

trusts) within the meaning of section 2511.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                        FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioners resided in Lake St. Louis, Missouri, at the time that

they filed their petition in this case.

General Background

     Petitioners have three minor children, Mark R. Senda,

Janell N. Senda, and Ross J. Senda (collectively, the children).

     On May 29, 1996, Mark W. Senda (petitioner) attended a

seminar in Chicago, Illinois, on tax planning regarding the tax

benefits of forming a family limited partnership (FLP).   The

seminar, Executive Tax/Financial Planning Seminar, was sponsored

by Arthur Andersen, LLP, and Fraser Stryker Meusey Olson Boyer &

Bloch, P.C., an Omaha, Nebraska, law firm.    On December 30, 1996,

petitioners formed, but did not fund, an FLP under Illinois law.
                               - 3 -

     At the end of 1996 or beginning of 1997 and in 1998,

petitioner received approximately $5-6 million worth of MCI

WorldCom stock (stock) after MCI WorldCom acquired two companies

where petitioner was successively employed.

The Mark W. Senda Family Limited Partnership

     Sometime in 1998, petitioner met with James R. Dankenbring

(Dankenbring), his attorney, to discuss in more detail the

advantages of forming an FLP as a vehicle to hold investment

assets and to serve as a means of making gifts.     On or about

April 1, 1998, petitioners signed the Mark W. Senda Family

Limited Partnership Agreement (SFLP I Agreement).    On June 3,

1998, the secretary of state of Missouri issued a certificate of

limited partnership for the Mark W. Senda Family Limited

Partnership (SFLP I).   The partnership interests, as set forth in

the SFLP I Agreement, were initially held as follows:
                                - 4 -

                  Partner                   Percentage   Interest
Mark W. Senda, Trustee, or his               10.0         General
successors in trust, under the Mark W.
Senda Revocable Trust dated Nov. 20,
1996, and any amendments thereto
Mark W. Senda, Trustee, or his               89.8397      Limited
successors in trust, under the Mark W.
Senda Revocable Trust dated Nov. 20,
1996, as amended thereto
Michele Senda                                 0.1303      Limited
Mark W. Senda, as trustee for                 0.010       Limited
Mark R. Senda
Mark W. Senda, as trustee for                 0.010       Limited
Ross J. Senda
Mark W. Senda, as trustee for                 0.010       Limited
Janell N. Senda

     Although the children’s partnership interests were

purportedly held for them in trust, there was no written trust

agreement at the time of the transfers reflecting that the

children were beneficiaries of any trust for which petitioner was

the trustee.    The children, as limited partners, reported

income/losses from SFLP I on their individual tax returns.

Trusts for the benefit of the children and of which petitioner

was trustee have never filed tax returns.

     On December 28, 1998, petitioners contributed to SFLP I

28,500 shares of stock in exchange for their partnership

interests.   Petitioners transferred the stock from their joint

brokerage account to the brokerage account of SFLP I.    Both

accounts were held at Salomon Smith Barney.    The children (or
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trusts therefor) purportedly contributed oral accounts receivable

in exchange for their partnership interests.   The accounts

receivable, however, were never reduced to writing, had no terms

for repayment, and had not been paid as of the time of trial.

     By fax dated December 28, 1998, petitioners informed their

accountant that they had transferred stock to SFLP I and sought

advice as to what percentage of partnership interests they should

transfer to the children.   On that same day, petitioner gave to

each child (or trust therefor) a 29.94657-percent limited

partnership interest in SFLP I.   Michele Senda (Senda) gave to

each child (or trust therefor) a 0.0434-percent limited

partnership interest in SFLP I.   The certificates of ownership

reflecting these transfers were not prepared and signed until

several years thereafter.

     The SFLP I Agreement provides that the general partner shall

prepare or have prepared annual financial statements.     It further

provides that, not less than annually, all partners shall meet to

discuss the financial condition of the partnership.   SFLP I has

never had annual financial statements prepared or held

partnership meetings.   The only books and records maintained by

petitioner, as general partner, were brokerage account statements

and partnership tax returns.   The 1998 Form 1065, U.S.

Partnership Return of Income, for SFLP I was signed by the tax

return preparer on October 8, 1999.
                               - 6 -

Senda & Associates, L.P.

     Sometime in 1999, Dankenbring advised petitioner that, if

petitioner wished to transfer additional property in partnership

form to the children, he should form a second FLP instead of

recapitalizing SFLP I.

     On December 2, 1999, the secretary of state of Missouri

issued a certificate of limited partnership for Senda &

Associates, L.P. (SFLP II).   On December 4, 1999, Robert Brendell

signed, as trustee, the irrevocable trusts (trusts) for the

benefit of each child.   Petitioner and Senda, however, did not

sign the trusts as “trustmakers” until May 1 and 11, 2000,

respectively.   Although the trusts also list Citicorp Trust South

Dakota (Citicorp) as trustee, a representative of Citicorp never

signed the trusts.

     On December 17, 1999, petitioners signed the SFLP II

Partnership Agreement (SFLP II Agreement).   The partnership

interests, as set forth in the SFLP II Agreement, were initially

held as follows:
                               - 7 -

                 Partner                    Percentage     Interest
Mark W. Senda, Trustee, or his                 1.0         General
successors in trust, under the Mark W.
Senda Revocable Trust dated Feb. 23,
1998, and any amendments thereto
Mark W. Senda, Trustee, or his                97.97        Limited
successors in trust, under the Mark W.
Senda Revocable Trust dated Feb. 23,
1998, and any amendments thereto
Michele Senda                                  1.0         Limited
Citicorp Trust South Dakota and Robert         0.01        Limited
Brendell, Trustees of the
Mark R. Senda Irrevocable Trust
Citicorp Trust South Dakota and Robert         0.01        Limited
Brendell, Trustees of the
Ross J. Senda Irrevocable Trust
Citicorp Trust South Dakota and Robert         0.01        Limited
Brendell, Trustees of the Janell N.
Senda Irrevocable Trust

     On December 20, 1999, petitioners contributed to SFLP II

18,477 shares of stock in exchange for their partnership

interests.   Petitioners transferred the stock from their joint

brokerage account to the brokerage account of SFLP II.     Both

accounts were held at Salomon Smith Barney.   Trusts for the

children purportedly contributed oral accounts receivable in

exchange for their partnership interests.   The accounts

receivable, however, were never reduced to writing, had no terms

for repayment, and had not been paid as of the time of trial.        On

that same day, petitioner gave to each child, in trust, a

17.9-percent limited partnership interest in SFLP II.    The
                                 - 8 -

certificates of ownership reflecting these transfers were not

prepared and signed until several weeks after the transfers.

     By fax dated December 22, 1999, petitioners informed their

accountant that they had transferred stock to SFLP II and sought

advice as to the percentage of partnership interests they should

transfer to the children to maximize their annual gift tax

exclusions and use all of their remaining unified credits.

     On January 31, 2000, petitioner gave to each child, in

trust, an additional 4.5-percent limited partnership interest in

SFLP II.

     The SFLP II Agreement provides that petitioner, as general

partner, shall keep the financial statements of the partnership

for the most recent 3 fiscal years.      SFLP II has never had annual

financial statements prepared.    The only books and records

maintained by petitioner, as general partner, were brokerage

account statements and partnership tax returns.     The 1999

Form 1065 for SFLP II was signed by the tax return preparer on

August 30, 2000.

     Petitioner paid all legal fees and filing costs with respect

to SFLP I and SFLP II.   The partnerships did not reimburse those

costs to petitioner, nor were those costs a liability of the

partnerships.
                               - 9 -

Gift Tax Returns and the Notice of Deficiency

     Petitioners filed Forms 709, United States Gift (and

Generation-Skipping Transfer) Tax Return, for 1998, 1999, and

2000.   On those returns, petitioners reported split gifts of

$462,379, $183,792, and $14,307.71 for 1998, 1999, and 2000,

respectively.   Those amounts reflect the discounted values of the

partnership interests transferred to the children, which were

calculated by multiplying, for each year in issue, the value of

the property petitioners contributed to the partnerships, as

reported on the Forms 709, by the percentage of the partnership

interests transferred to the children.   Petitioners then applied

lack of marketability and minority interest discounts and

subtracted the annual exclusion amount for each child.

     In the notice of deficiency, respondent determined that the

fair market value of the property transferred to the children was

$1,798,647, $791,826, and $164,103 for 1998, 1999, and 2000,

respectively.   Those amounts reflect the value of the property

that petitioners contributed to the partnerships without lack of

marketability and minority interest discounts.

Valuation Discounts

     The parties stipulate that, if we conclude (1) that the

partnership interests, rather than the underlying assets, should

be valued for gift tax purposes and (2) that discounts should be
                                  - 10 -

applied to the net asset value of the partnership assets, the

following discounts should apply:

                   Date of       Minority   Marketability   Combined
Partnership       Transfer       Discount      Discount     Discount
  SFLP I         12/28/98          5.88%         35%         38.82%
  SFLP II        12/20/99         15.44          35          45.0
  SFLP II         1/31/00         17.12          35          46.13

There is no dispute as to the value of the stock without any

discount.

                                 OPINION

     Section 2501 imposes a tax on the transfer of property by

gift during the taxable year.      This tax is imposed whether the

transfer is in trust or otherwise and whether the gift is direct

or indirect.    See sec. 2511.    A gift of property is valued as of

the date of the transfer.    See sec. 2512(a).     The gift is

measured by the value of the property passing from the donor,

rather than by the value of the property received by the donee or

upon measure of enrichment to the donee.       See sec. 25.2511-2(a),

Gift Tax Regs.

     The fair market value of the transferred property is the

“price at which property would change hands between a willing

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

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

facts.”    Sec. 25.2512-1, Gift Tax Regs.     Where property is

transferred for less than adequate and full consideration in
                               - 11 -

money or money’s worth, the amount of the gift is the amount by

which the value of the property transferred exceeds the value of

the property received.    See sec. 2512(b).

     Petitioners contend that they made gifts of limited

partnership interests and that the partnerships have economic

substance and are valid under Missouri law.    Thus, they argue

that the partnerships may not be disregarded for Federal tax

purposes and that the stipulated discounts apply in determining

the value of the gifts.   Petitioners further contend that,

because they did not shift economic value to the children when

they contributed the stock to the partnerships, they did not make

gifts on formation of the partnerships.

     Respondent does not dispute that the partnerships are valid

under Missouri law or that the partnerships have economic

substance.   Respondent contends, however, that petitioners’

transfers of the stock to the partnerships, coupled with the

transfer of limited partnership interests to the children, were

indirect gifts of the stock to the children.    Accordingly,

respondent argues that the stock, and not the partnership

interests, should be valued for gift tax purposes.    Respondent

argues that “the transitory allocations to petitioners’ capital

accounts, if such allocations even occurred at all, were merely

steps in integrated transactions intended to pass the stock to

the petitioners’ children in partnership form.”
                                 - 12 -

     We need not discuss the burden of proof.     We decide this

case on the preponderance of the evidence.     Whether the

children’s interests were held in valid trusts or not is not

material to our decision.

     Section 25.2511-1(h)(1), Gift Tax Regs., provides that a

transfer of property by a taxpayer to a corporation represents a

gift by the taxpayer to the other shareholders of the corporation

to the extent of their proportionate interests in the

corporation.    In Shepherd v. Commissioner, 115 T.C. 376, 389

(2000), affd. 283 F.3d 1258 (11th Cir. 2002), we applied the

principle that, like a transfer of property to a corporation, a

transfer of property to a partnership for less than full and

adequate consideration may represent a gift to the other

partners.

     In Shepherd, the taxpayer transferred real property and

stock to a newly formed family partnership in which he was a

50-percent owner and his two sons were each 25-percent owners.

Id. at 380-381.    Rather than allocating contributions to the

capital account of the contributing partner, the partnership

agreement provided that any contributions would be allocated

pro rata to the capital accounts of each partner according to

ownership.     Id. at 380.   Because the contributions were reflected

partially in the capital accounts of the noncontributing

partners, the value of the noncontributing partners’ interests
                               - 13 -

was enhanced by the contributions of the taxpayer.      Accordingly,

we held that the transfers to the partnership were indirect gifts

by the taxpayer to his sons of undivided 25-percent interests in

the real property and stock.    Id. at 389.    The Court of Appeals

for the Eleventh Circuit affirmed our decision for the reasons

stated in our Opinion.

     Petitioners’ transfers of stock in the instant case are

similar to the transfer of property in Shepherd.      In both cases,

the value of the children’s partnership interests was enhanced by

their parents’ contributions to the partnerships.      Petitioners

attempt to distinguish Shepherd by referring to our statement in

that case that “not every capital contribution to a partnership

results in a gift to the other partners, particularly where the

contributing partner’s capital account is increased by the amount

of his contribution”.    Id. at 389.    Petitioners argue that, in

the instant case, petitioners’ capital accounts were increased by

the amount of their contributions.      Petitioners further argue

that, under Estate of Jones v. Commissioner, 116 T.C. 121 (2001),

it is irrelevant that the contributions of the stock to the

partnerships and the transfers of the partnership interests to

the children occurred on the same day.

     In Estate of Jones, the taxpayer contributed property to the

partnerships and received continuing limited partnership

interests in return.    All of the contributions of property were
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properly reflected in the capital accounts of the taxpayer.       Id.

at 128.   In the instant case, however, it is unclear whether

petitioners’ contributions of stock were ever reflected in their

capital accounts.    On cross-examination, petitioner testified

with respect to SFLP I as follows:

          Q And, at that same time, certainly the same day,
     you transferred the partnership interests, limited
     partnership interests from yourself and Michele to the
     children, correct?

           A   Yes, sir.

           Q   And when did you do that?        On December 28?

                      *    *   *     *      *   *   *

          A Well, keep in mind that these things have been
     weeks in the making. So the fact that they triggered
     at a particular day or on a particular day may or may
     not be relevant.

          The fact that that happened during that day, I
     couldn’t tell you if it happened at 1:00, 3:00 or 5:00.
     If that’s what you’re asking me.

          Q That was what I was asking you. The transfer
     of the limited partnership interests, how did that
     occur on December 28, 1998?

          A    How did that occur?       Tell me where you’re
     going.    I’m not sure.

                      *    *   *     *      *   *   *

          Q So how did you transfer it from yourself to the
     children?

          A How did I transfer? I’m not certain what the
     right, what you’re looking for here.
                                - 15 -

     It is apparent from petitioner’s evasive testimony and from

the total record that petitioners were more concerned with

ensuring that the beneficial ownership of the stock was

transferred to the children in tax-advantaged form than they were

with the formalities of FLPs.    Indeed, petitioner, as general

partner, did not maintain any books or records for the

partnerships other than brokerage account statements and

partnership tax returns.   Those tax returns were prepared months

after the transfers of the partnership interests.       Thus, they are

unreliable in deciding whether petitioners transferred the

partnership interests to the children before or after they

contributed the stock to the partnerships.       The same is true of

the certificates of ownership reflecting the transfers of the

partnership interests, which were not prepared until at least

several weeks after the transfers.       The informality is not

surprising, inasmuch as petitioners alone, individually, or on

behalf of their minor children were united in purpose and acted

without restraint by any adverse interest.       As a result, however,

petitioners have presented no reliable evidence that they

contributed the stock to the partnerships before they transferred

the partnership interests to the children.       At best, the

transactions were integrated (as asserted by respondent) and, in

effect, simultaneous.
                               - 16 -

     Petitioners argue that there is sufficient evidence showing

that they first funded the partnerships and then transferred the

partnership interests to the children and direct our attention to

the letters that they faxed to their accountant after they had

funded the partnerships.    Those faxes, however, establish only

that petitioners had funded the partnerships.    They do not show

what the partnership ownership interests were immediately before

the funding or how the stock was allocated among the partners’

capital accounts at the time of the funding.    Moreover, the fax

seeking advice with respect to the SFLP II partnership interests

was dated 2 days after petitioners had allegedly transferred the

partnership interests to the children.

     On this record, we conclude that the value of the children’s

partnership interests was enhanced upon petitioners’

contributions of stock to the partnerships.    Accordingly, we hold

that petitioners’ transfers of stock to SFLP I and SFLP II on

December 28, 1998, and December 20, 1999, respectively, were

indirect gifts of the stock to the children for purposes of

sections 2501 and 2511.    Respondent has conceded that the

January 31, 2000, gifts were gifts of partnership interests and

not gifts of stock.   The gift tax thus shall be determined on the

value of the stock rather than on the value of the partnership

interests transferred.
                               - 17 -

     We have considered the other arguments of the parties, and

they are either without merit or need not be addressed in view of

our resolution of the issue.

     To reflect the foregoing and respondent’s concessions,


                                         Decision will be entered

                                    under Rule 155.
