                          T.C. Memo. 2009-119



                        UNITED STATES TAX COURT



    ESTATE OF VALERIA M. MILLER, DECEASED, VIRGIL G. MILLER,
                     EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5207-07.                  Filed May 27, 2009.



     Miriam R. Price and Adria S. Price, for petitioner.

     Mark D. Eblen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:     Respondent determined a deficiency of

$1,019,399 in the Federal estate tax of the Estate of Valeria M.

Miller (the estate).    There are two issues for decision.1    First


     1
      On brief the parties agree that the estate is entitled to
deduct $12 for unpaid income taxes.
                                                   (continued...)
                               - 2 -

we must decide whether the value of the gross estate includes an

amount for which the estate of Valeria M. Miller’s (decedent’s)

predeceased husband (Mr. Miller) claimed a marital deduction.    We

find that those amounts for which Mr. Miller’s estate claimed a

marital deduction are properly included in the value of

decedent’s gross estate.   Second, we must determine whether the

estate is required to include in the gross estate the total value

of assets transferred to decedent’s family limited partnership in

April 2002 and May 2003, or if those transfers qualify for a

discount.   We find the value of those securities transferred to

decedent’s family limited partnership in April 2002 qualifies for

a discount, while the value of those assets transferred in May

2003 does not qualify for a discount.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the date of decedent’s

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

Practice and Procedure.




     1
      (...continued)
     Further, the estate raised on brief the issue of a deduction
for legal fees incurred after decedent’s estate’s estate tax
return was filed. Respondent in reply conceded that the estate
will be allowed a deduction for legal fees incurred at or after
trial to the extent the estate is able to substantiate those
fees. These issues will be addressed in the parties’ Rule 155
computation.
                                 - 3 -

                         FINDINGS OF FACT

1.   Introduction

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.   On the date of her death,

May 28, 2003, decedent was a resident of Indiana.   Virgil G.

Miller (Virgil G.) was appointed executor of decedent’s estate.

At the time the petition was filed on behalf of the estate,

Virgil G. was a resident of Indiana.

2.   Mr. Miller

      Decedent married Mr. Miller on February 12, 1938, and they

remained married until Mr. Miller’s death on February 2, 2000.

Decedent and Mr. Miller had four children:   Virgil G., born

August 1939; Gordon, born July 1942; Donald, born July 1944; and

Marcia, born December 1946.   Virgil G. is a retired architect.

Donald is a retired manager of recreation activities at Fort

Benjamin Harrison.   Marcia was married but separated from her

husband in September 2002.    They were divorced in January 2003,

and she died in February 2006.

      Mr. Miller was an architect until his retirement at age 60.

Decedent served as Mr. Miller’s secretary and helped start his

architecture business.   From retirement to his death at age 86 in

2000, Mr. Miller devoted his time to researching and investing in

securities.   Mr. Miller spent significant time managing his
                                - 4 -

family’s investments and employed a specific investment

methodology--charting stocks.   Charting stocks involved the

purchase and sale of securities on the basis of an analysis of

their daily high and low values.   Mr. Miller kept handwritten

records of his investment activity.

     On October 29, 1991, Mr. Miller established the Virgil J.

Miller Living Trust (the revocable trust).   The agreement

establishing the trust also established a life estate marital

trust for decedent (the QTIP trust).

     Mr. Miller predeceased decedent.   Virgil G. as executor of

the estate timely filed a Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, with the Internal

Revenue Service (IRS).

     On the date of Mr. Miller’s death, his gross estate was

valued at $7,667,939.    Of his gross estate, $7,635,755, or 99.6

percent, consisted of securities held by his revocable trust.

     Virgil G. made an election pursuant to section 2056(b)(7) to

treat the QTIP trust property as qualified terminable interest

property.   Mr. Miller’s estate claimed a marital deduction of

$1,060,000 for assets funding the QTIP trust.   The QTIP trust was

made up of five accounts with Merrill Lynch.    On October 6, 2000,

securities were transferred from the Virgil J. Miller Living

Trust Merrill Lynch account to Merrill Lynch account No. 634-

37225 (account 7225), in the name of the QTIP trust.   The
                                 - 5 -

securities had a fair market value of $1,113,372 on October 27,

2000.   A portion of the securities used to fund account 7225 was

then used to fund four additional Merrill Lynch accounts,

numbered 8135 (account 8135), 8136 (account 8136), 8137 (account

8137), and 8138 (account 8138).    The transfers from account 7225

to the additional four accounts were made in June 2001.    Each

transfer had a fair market value of about $100,000.

      Virgil G. was trustee of the QTIP trust, and the trust

agreement provided that all income of the QTIP trust was to be

distributed to decedent at least annually and that income was not

to accumulate in the QTIP trust.    Decedent did not receive any

distributions or income from the QTIP trust.    All income from the

QTIP trust was reported on its own Forms 1041, U.S. Income Tax

Return for Estates and Trusts.

      On October 9, 2000, the remaining assets in the revocable

trust, then valued at approximately $3.6 million, were

distributed to decedent’s Revocable Living Trust (decedent’s

trust).   Decedent’s trust held an account with Merrill Lynch

(decedent’s trust’s Merrill Lynch account) and an additional

account at Fidelity Investments (decedent’s trust’s Fidelity

Investments account).

3.   Decedent’s Social Life and Gift Giving

      Decedent was involved in numerous community, social, and

religious activities including volunteering at nursing homes,
                               - 6 -

joining a singing group, reading at church, and playing cards.

Decedent was never deemed incapacitated or incompetent and was

never under a guardianship.

     Decedent made annual gifts to her children, her children’s

spouses, and her grandchildren, beginning by at least 1994 and

continuing every year thereafter until her death.    Decedent and

Mr. Miller established trusts for the benefit of decedent’s

grandchildren.   Virgil G. was trustee of each irrevocable trust.

Decedent made annual gifts to the irrevocable trusts.

     On May 1, 1994, decedent established the Valeria M. Miller

Irrevocable Trust, of which Virgil G. was trustee.   Decedent made

annual gifts to the Valeria M. Miller Irrevocable Trust which

were used by Virgil G. as trustee to pay life insurance premiums

for life insurance policies on decedent.   The trust owned two

life insurance policies which were sold on August 3, 2002, for a

total of $962,500.   The proceeds were kept in the trust.   The

life insurance policies eventually paid benefits of $2,750,000 to

the purchaser upon decedent’s death.

     On June 22, 1999, decedent signed a gift annuity agreement

with the National Heritage Foundation, a charitable organization

which paid her $4,390 per month for the rest of her life.    At

decedent’s death the remainder was distributed to the National

Heritage Foundation.
                               - 7 -

4.   The Miller Family Limited Partnership

      Mr. Miller and decedent received estate planning advice from

David Price (Mr. Price) of Price & Collins, L.L.P. (Price &

Collins).   After Mr. Miller died, decedent sought further estate

planning advice from Mr. Price.   On the basis of Mr. Price’s

advice, decedent decided to form a family limited partnership.

On November 21, 2001, the Indiana secretary of state issued a

certificate of limited partnership of the V/V Miller Family

Limited Partnership (MFLP).   Decedent was 86 when MFLP was

formed.   The MFLP agreement was prepared by Mr. Price and was

signed by Virgil G. as general partner, by decedent as trustee of

her trust, and by Donald, Marcia, and Gordon as limited partners.

Virgil G.’s address was used as MFLP’s business address.

      On December 13, 2001, MFLP applied for an Employer

Identification Number, which it later received from the IRS.

Although MFLP held no assets as of December 31, 2001, the fair

market value per unit of a limited partnership interest in MFLP

was appraised as of that date for gift tax purposes (the December

31, 2001, valuation).   Because MFLP had not yet been funded,

Virgil G. provided statements to the appraiser detailing the

assets that were going to be used to fund MFLP.

      The December 31, 2001, valuation indicates that MFLP had

marketable equity securities as of that date of $4,336,380, a

margin account payable of $499,573, and a net asset value of
                                - 8 -

$3,836,807.   The December 31, 2001, valuation applied a 35-

percent lack of marketability discount to the purported net asset

value of MFLP and concluded that as of that date MFLP had a fair

market value per unit of $2,264.73.

     The MFLP agreement had not been signed as of February 8,

2002.   On February 8, 2002, Mr. Price sent Virgil G. a letter

along with a partnership agreement and signature pages for

decedent and her children.    On February 26, 2002, Virgil G.

mailed the partners’ individual signed signature pages back to

Mr. Price.    On March 6, 2002, a paralegal at Price & Collins sent

Virgil G. the MFLP agreement along with certificates of

partnership interest for him to sign.    Virgil G. signed the

certificates and dated them November 27, 2001.

     On March 28, 2002, a paralegal at Price & Collins sent

Virgil G. revised MFLP certificates and a revised MFLP agreement.

Each of the intended partners of MFLP signed the partnership

agreement and was issued a certificate representing his or her

interests in the partnership.    The MFLP issued 1,000 units;

decedent’s trust owned 920 units and continued to own that number

on the date of her death.    Decedent’s children received their

partnership units as gifts from decedent.    Virgil G. received 10

general partner units and 10 limited partner units.    Donald,

Gordon, and Marcia each received 20 limited partner units.

Decedent’s children continued to own those units on the date of
                                 - 9 -

decedent’s death.   The MFLP agreement provided for centralized

asset management by vesting management and control exclusively in

the general partner, Virgil G.

     The MFLP agreement provided:

     The purpose of * * * [MFLP] shall be to buy, sell, and trade
     in securities of any nature, including short sales, on
     margin, and for such purposes may maintain and operate
     margin account with brokers, and to pledge any securities
     held or purchased by them with such brokers as security for
     loans and advances made to the Trustees; buy, sell and trade
     in commodities, commodity futures contracts and options on
     commodity futures contracts; and buy, sell, trade or deal in
     precious metals of any kind. Additionally, to maintain a
     margin account with a stock brokerage firm, to execute all
     documents necessary for the opening and maintenance thereof,
     to borrow money from a brokerage firm, to pledge securities
     owned by the Trust as collateral and to grant a security
     interest therein, and to permit the stock brokerage firm to
     relend these securities in the ordinary course of its
     business. Additionally * * * [MFLP] may acquire such assets
     and engage in investments of all types and any and all other
     lawful purposes that may be conducted by a limited
     partnership as deemed appropriate by the General Partner.

     The MFLP agreement also included a right of first refusal

should a limited partner wish to dispose of his or her interest

in MFLP and a clause requiring the partners to submit any dispute

among themselves to arbitration.    Further, Virgil G., as general

partner, was required to act in furtherance of MFLP’s interests

and had fiduciary obligations to the partnership and the limited

partners.

     MFLP established accounts at Fidelity Investments and

Merrill Lynch.   MFLP held one account at Fidelity (MFLP Fidelity

account) and three accounts at Merrill Lynch, account Nos. 7B10,
                              - 10 -

7B12, and 7B13.   Decedent made her first contribution to MFLP in

April 2002.

     a.   Merrill Lynch Account Transfers

     On March 28, 2002, MFLP’s Merrill Lynch account No. 7B10 had

a zero balance.   On April 10, 2002, decedent’s trust contributed

equity securities from decedent’s trust’s Merrill Lynch account

to MFLP’s Merrill Lynch account No. 7B10.   The securities had a

value of $2,766,004    After this transfer was complete, funds

were transferred from account No. 7B10 to account Nos. 7B12 and

7B13.

     On April 18 and 22, 2002, MFLP transferred securities from

MFLP’s Merrill Lynch account No. 7B10 to MFLP’s Merrill Lynch

account No. 7B12.   The transferred securities had a value on

April 30, 2002, of $92,246.   On April 18 and 22, 2002, MFLP

transferred securities from MFLP’s Merrill Lynch account No. 7B10

to MFLP’s Merrill Lynch account No. 7B13.   The securities had a

value on April 30, 2002, of $95,957.

     b.   Fidelity Investments Account Transfers

     On March 31, 2002, decedent’s trust’s Fidelity Investments

account had a net value of $2,152,625.   On that same date MFLP’s

Fidelity Investments Account had a zero balance.
                               - 11 -

     On April 10, 2002, decedent transferred $1,197,668 of

securities from decedent’s trust’s Fidelity Investments account

to MFLP’s Fidelity Investments account.2

     The April 2002 transfers constituted about 77 percent of

decedent’s net assets.

     c.    Margin Accounts

     Decedent’s trust’s Merrill Lynch and Fidelity Investments

accounts often made purchases on margin.    When an investor

purchases a security on margin, he or she buys the security on

credit.    A margin balance is the total balance in a margin

account.    If the balance is negative, then the amount shown is

owed to a brokerage firm.    If the balance is positive, then that

balance is available to earn interest.

     Decedent’s trust’s Merrill Lynch and Fidelity Investments

accounts both had negative margin balances after the transfers of

securities described above, even though the securities purchased

on margin were no longer in the trust’s accounts.    In order to

pay off the margin accounts, MFLP sold some of the securities




     2
      The estate argues that respondent incorrectly valued this
transfer because respondent used a monthly statement ending Apr.
30, 2002, as the source for pricing information. However, the
Fidelity Investments account statements show, in addition to
beginning and ending account values, values per transaction.
Respondent’s valuation of the securities transferred mirrors the
Fidelity account statement’s valuations of the securities
transfer.
                              - 12 -

purchased on margin and transferred to MFLP and transferred the

proceeds back to decedent’s trust’s accounts.

      On March 28, 2002, decedent’s Trust’s Merrill Lynch account

had a debit balance of $276,926.    On April 10, 2002, MFLP’s

Merrill Lynch account No. 7B10 transferred $277,400 to decedent’s

trust’s Merrill Lynch account.   Another transfer of $39.42 was

made on April 10, 2002.

      On April 17, 2002, MFLP sold, through MFLP’s Merrill Lynch

account No. 7B10, 13,600 shares of AOL Time Warner, Inc. and 680

shares of Cisco Systems, Inc. stock for $272,685 and $10,576

respectively (totaling $283,261).

      On April 30, 2002, decedent’s trust’s Merrill Lynch account

had a debit balance of $1,896, and MFLP’s Merrill Lynch account

No. 7B10 had a debit balance of $320.

      On April 19, 2002, MFLP sold $147,249 in securities from

MFLP’s Fidelity Investments account.     On April 15, 2002, MFLP

transferred $51,801 in cash from MFLP’s Fidelity Investments

account to decedent’s trust’s Fidelity Investments account.

5.   MFLP Management

      Virgil G. owned VGM Enterprises.    MFLP paid VGM Enterprises

a monthly fee to manage the partnership’s securities.     Virgil G.

was the only employee of VGM Enterprises and worked about 40

hours per week managing MFLP’s assets.     Mr. Miller had taught

Virgil G. how to chart stocks, and Virgil G. managed MFLP’s
                              - 13 -

assets according to this philosophy.   Virgil G. began managing

the securities shortly after decedent’s first transfers to MFLP

in April 2002.   Virgil G. subscribed to trade publications and

purchased computer software to assist him in researching

securities and carrying out MFLP’s securities trading.

6.   Contributions to MFLP in 2003

      Decedent made additional contributions to MFLP in 2003.

Although decedent had been suffering from certain chronic

conditions associated with old age, her day-to-day health was

strong.

      On April 25, 2003, decedent suffered a fall at her residence

and broke her hip.   The next day, while she was awaiting surgery,

doctors discovered that decedent was having sinus pauses, which

indicated that her heart was stopping longer than normal.

Decedent underwent pacemaker implantation surgery on April 28,

2003, and orthopedic surgery to repair her broken hip on April

30, 2003.   The pacemaker implantation surgery was performed

before the orthopedic surgery to ensure that decedent’s heart was

beating regularly and strongly when the hip surgery was

performed, in order to increase decedent’s chances of both

surviving and recovering.

      On May 8, 2003, decedent was discharged from the hospital

and transferred to a continuing care facility for rehabilitation.

Decedent was to undergo rehabilitation and physical therapy so
                               - 14 -

she would be able to return home.    On May 12, 2003, decedent was

brought back to the hospital from the continuing care facility

because she was retaining fluid and was short of breath.     Upon

returning to the hospital decedent was diagnosed with congestive

heart failure.

     Hospital policy at that time was for all patients regardless

of age to fill out code status forms and orders upon admission to

the hospital.    These documents would inform the doctors caring

for a patient of the patient’s wishes and the type of action to

be taken in the event of a medical episode.   On May 12, 2003,

decedent’s code status was Level I, Full Code, which indicated

that if decedent was to experience any sort of acute medical

episode, all measures possible would be undertaken to return

decedent to consciousness and health.

     On May 19, 2003, a bruise was discovered on decedent’s scalp

while her daughter and daughter-in-law were fixing her hair.     A

CT scan performed that same day revealed a moderately enlarged

subacute subdural hematoma, a type of traumatic brain injury.

     On May 20, 2003, decedent’s doctor discussed with her and

her family surgical options versus comfort care only.     On that

same day decedent’s code order was changed to Level IV, No Code,

Comfort Measures Only.   Decedent died on May 28, 2003.    Her death
                                - 15 -

certificate stated the cause of death as “Coroner-Respiratory

Arrest; Subdural Hematoma; Fall”.3

     a.     Fidelity Investments Accounts

     After decedent broke her hip but before her bruise was

discovered, she signed a letter dated May 9, 2003, addressed to

Fidelity Investments requesting that Fidelity Investments

transfer all of her assets, except for cash in her Fidelity

Investments money market account, over and into MFLP’s Fidelity

Investments account.    Virgil G. wrote the letter and cosigned as

trustee of decedent’s trust.    On May 17, 2003, Virgil G. wrote a

check from decedent’s trust’s Fidelity Investments account in the

amount of $105,000 as an additional capital contribution to MFLP.

     There appear to have been a number of transfers between

decedent’s trust’s Fidelity Investments account and MFLP’s

Fidelity Investments account in May 2003.    However, the amounts

and dates of these transfers are recorded differently on the May

and June 2003 account statements issued to MFLP.

     The May 2003 statement shows a transfer of securities worth

approximately $79,690 from decedent’s trust’s Fidelity

Investments account to MFLP’s Fidelity Investments account on May

15, 2003.    This transfer was made up of decedent’s holdings in

three corporations.


     3
      The death certificates listed the causes of death
backwards--i.e., a fall caused a subdural hematoma, which caused
respiratory arrest.
                                - 16 -

     The May 2003 statement also shows a transfer of securities

worth approximately $930,751 from decedent’s trust’s Fidelity

Investments account to MFLP’s Fidelity Investments account on May

20, 2003.   This transfer was substantially all of decedent’s

holdings in her trust’s Fidelity Investments account and appeared

to include the securities that had already been transferred to

MFLP on May 15, 2003.

     Lastly, the May 2003 Fidelity Investments account statement

shows a transfer of securities worth approximately $950,286 from

MFLP’s Fidelity Investments account back to decedent’s trust’s

Fidelity Investments account.

     Thus, according to the May 2003 MFLP Fidelity Investments

account statement, the net amount of distributions from

decedent’s trust’s Fidelity Investments account to MFLP’s

Fidelity Investments account was $60,155.     Decedent’s trust’s

Fidelity Investments account would have had a balance of $889,898

on May 31, 2003.

     The June 2003 statement for decedent’s trust’s Fidelity

Investments account, however, shows only one transfer:     a

transfer of assets worth approximately $878,069 from decedent’s

trust’s Fidelity Investments account to MFLP’s Fidelity

Investments account on May 15, 2003.     The May and June 2003

statements do not explain why the transfers are recorded

differently on the respective statements.     According to the June
                               - 17 -

2003 statement, decedent’s trust’s Fidelity Investments account

had a balance of $49,180 on June 30, 2003.   Virgil G. explained

that the discrepancy resulted from errors made by Fidelity and

that he never authorized the transfer of any securities from MFLP

back to decedent’s trust.

     b.   Merrill Lynch Accounts

     On April 30, 2003, decedent’s trust’s Merrill Lynch account

had a balance of $184,819.   On May 19, 2003, decedent’s trust’s

Merrill Lynch account transferred all of its marketable

securities and $14,650 to MFLP’s Merrill Lynch account No. 7B10.

On May 30, 2003, decedent’s trust’s Merrill Lynch account had a

balance of $7.

     The MFLP is still in existence, and Virgil G. continues to

serve as general partner.    MFLP made no distributions to Virgil

G., Gordon, Donald, or Marcia in 2002 and 2003.

     Decedent’s will devises the remainder of her estate, after

payment of administration expenses, to decedent’s living trust.

Decedent’s living trust agreement provides that upon decedent’s

death the assets in her trust are divided into a portion A trust

and a portion B trust.   The portion A trust was to be a

generation-skipping transfer tax exempt trust.    The portion B

trust would be funded with the remainder of decedent’s estate

after the portion A trust was funded.   The portion B trust was
                              - 18 -

divided into four subtrusts for the benefit of each of decedent’s

four children.

      On January 29, 2004, MFLP made a pro rata cash distribution

to its partners.   MFLP disbursed $23,913 from its Fidelity

Investments account to each of Virgil G., Gordon, Marcia, and

Donald and disbursed $1.1 million to decedent’s trust.    A portion

of the $1.1 million was used to pay decedent’s estate’s Federal

and State estate tax liabilities.

7.   MFLP Trading Activity

      As discussed above, Mr. Miller spent his retirement charting

stocks and managing the family’s investments.    Decedent wanted

the family assets to be managed in accordance with Mr. Miller’s

investment strategy after her death.   MFLP actively managed the

cash and securities decedent transferred in April 2002 and March

2003.   Before making contributions to MFLP decedent’s trust’s

accounts made very few trades, but trading activity increased

after the securities were transferred to MFLP.    The overall value

of the transactions varied month to month.   However, MFLP’s

Merrill Lynch account Nos. 7B12 and 7B13 showed sales and

purchases of about $3,000 to $4,000 per month during 2002 and

2003.   Virgil G., as general partner, also kept his siblings

informed about MFLP’s status and provided financial advice to

them.
                                - 19 -

     A Form 706 was filed on behalf of the Estate of Valeria M.

Miller on February 22, 2004.    The Form 706 showed a gross estate

of $2,637,024, and tax due of $994,299.       The gross estate

included 920 MFLP units valued at $2,589,118.       The Form 706 did

not include the values of the securities used to fund the QTIP

trust in the value of the gross estate.       Decedent’s Form 706

indicated that decedent was the beneficiary of a trust for which

a deduction was claimed by the estate of a predeceased spouse

under section 2056(b)(7) and which was not reported on decedent’s

Form 706.

     On November 30, 2006, respondent issued a notice of

deficiency (the notice) that, in part, increased the value of

decedent’s gross estate by $546,702, the purported fair market

value of the securities in the QTIP trust, and by the amount of

decedent’s transfers to MFLP.    A timely petition for

redetermination was filed with the Court on March 5, 2007.

                                OPINION

     A Federal estate tax is imposed “on the transfer of the

taxable estate of every decedent who is a citizen or resident of

the United States.”   Sec. 2001(a).      The estate tax is imposed on

the value of the taxable estate with specified adjustments made.

Sec. 2001(b).   The value of a decedent’s taxable estate is the

value of the gross estate less enumerated deductions.      Sec. 2051.

The value of the gross estate includes the values of all of
                               - 20 -

decedent’s property to the extent provided under sections 2033

through 2045.    Sec. 2033.

I.    Burden of Proof

       Generally the taxpayer bears the burden of proving the

Commissioner’s determinations are erroneous.     Rule 142(a).

However, with respect to a factual issue relevant to the

liability of a taxpayer for tax, the burden may shift to the

Commissioner if the taxpayer has produced credible evidence

relating to the issue, met substantiation requirements,

maintained records, and cooperated with the Secretary’s

reasonable requests for documents, witnesses, and meetings.       Sec.

7491(a).    Neither party addressed the burden of proof.   Our

resolution of the issues is based on the preponderance of the

evidence rather than the allocation of the burden of proof.

II.    Mr. Miller’s Estate’s Marital Deduction

       We first determine whether decedent is required to include

in her estate the securities used to fund the QTIP trust.       As

discussed above, Mr. Miller’s estate claimed a marital deduction

in the amount of the fair market value of those securities.

       Section 2056(a) grants a deduction for the value of any

interest in property passing to a surviving spouse which is

included in determining the value of the gross estate.     Pursuant

to section 2056(b)(1), a marital deduction cannot ordinarily be

claimed for property passing to a surviving spouse where the
                              - 21 -

interest of a surviving spouse may eventually terminate or fail.

However, section 2056(b)(7) allows a marital deduction for

qualified terminable interest property (QTIP).   QTIP is defined

in section 2056(b)(7)(B)(i) as property which passes from a

decedent, in which the surviving spouse has a qualified income

interest for life, and to which an election applies.

     Section 2056(b)(7)(B)(ii) provides that the surviving spouse

has a qualifying income interest for life if the surviving spouse

is entitled to all the income from the property, payable annually

or at more frequent intervals, and no person has a power to

appoint any part of the property to any person other than the

surviving spouse.   Under section 2056(b)(7)(A), QTIP is treated

for purposes of section 2056(a) as passing to the surviving

spouse and for purposes of section 2056(b)(1)(A) as not passing

to any person other than the surviving spouse.   Pursuant to

section 2056(b)(7)(B)(v), a QTIP election with respect to any

property shall be made by the executor on the Federal estate tax

return and once made is irrevocable.

     Section 2044 sets forth the tax treatment of QTIP in the

estate of the surviving spouse.   Under section 2044(a), the value

of the gross estate includes the value of any property to which

this section applies in which the decedent had a qualifying

income interest for life.   Section 2044(b)(1)(A) applies section

2044(a) to any property if a deduction was allowed with respect
                              - 22 -

to the transfer of such property to the decedent under section

2056(b)(7).   See Estate of Cavenaugh v. Commissioner, 100 T.C.

407, 417 (1993), affd. in part on this issue and revd. in part 51

F.3d 597, 599-601 (5th Cir. 1995).

     Under section 2056(b)(7)(B)(ii), the relevant questions are

whether decedent was entitled to all the income from the

property, payable at least annually, and whether any person had a

power to appoint any part of the property to any other person.

See Estate of Soberdash v. Commissioner, T.C. Memo. 1997-362.

     Respondent argues that the estate is required to include the

value of the assets in the QTIP trust on decedent’s date of death

in the value of decedent’s gross estate because a QTIP deduction

under section 2056(b)(7) was allowed for assets funding a QTIP

trust, a QTIP election was made, decedent had the right to

receive income from the trust annually, and decedent did not

dispose of her income interest in the trust before she died.

     The estate argues that the value of the assets funding the

QTIP trust should not be included in the value of decedent’s

gross estate because decedent did not receive an interest in the

trust or retain it at her death.   The estate argues that decedent

never received income or distributions from the trust, was never

considered to have an interest in the trust, and to the extent
                              - 23 -

she had an interest in the trust, effectively refuted it before

her death.4

     Respondent disputes the estate’s contention, arguing that

there is no evidence that decedent refuted or disposed of her

interest in the trust.   Respondent also points to testimony by

Mr. Price, decedent’s lawyer, who testified that decedent never

disposed of her interest in the QTIP trust.

     We agree with respondent.   The fair market value of the

securities in the QTIP trust must be included in the value of

decedent’s gross estate.   The trust agreement provided that all

income of the trust was to be distributed to decedent at least

annually and that income was not to accumulate in the trust.    Mr.

Miller’s estate made a valid QTIP election, and Mr. Miller’s

estate’s Form 706 claimed a $1,060,000 marital deduction under

section 2056(b)(7).

     Decedent’s Form 706 indicated that decedent had been the

beneficiary of a distribution for which a section 2056(b)(7)

election had been made but did not include the value of the

assets funding the QTIP trust.   Decedent did not dispose of her

income interest in the trust before she died.



     4
      The estate argues that should we find that decedent was
required to include the QTIP in her estate and did not dispose of
her income interest, we should take the fair market value of
those securities into account in the context of sec. 2036 when
evaluating whether decedent retained sufficient funds after
funding MFLP.
                               - 24 -

     Although the estate argues that the amounts should not be

included in the estate because decedent never needed the income,

the relevant questions under section 2056(b)(7)(B)(ii) are

whether decedent was entitled to all of the income from the

property, payable at least annually, and whether any person had a

power to appoint any part of the property to any other person.

See Estate of Soberdash v. Commissioner, supra.    These

requirements were met.   The need of the surviving spouse has no

bearing on the eligibility for a deduction under section

2056(b)(7) or the subsequent inclusion in the surviving spouse’s

gross estate under section 2044.   Id.

     As discussed above, the QTIP trust assets comprised five

Merrill Lynch bank accounts.   The parties dispute the fair market

value of the securities that must be included in the value of

decedent’s gross estate.   The notice valued the securities on the

date of decedent’s death at $546,702.    Respondent argues that

this is the amount that must be included under section 2044.

Respondent does not point to any other evidence in the record

supporting this calculation.

     The estate argues that respondent’s calculation is incorrect

and values the securities at $526,758.    The estate contends that

respondent overstates the value of the securities because

respondent counts certain securities in one of the QTIP trust’s

accounts twice.
                               - 25 -

     There is no evidence in the record concerning the fair

market value of the securities on May 28, 2003, the date of

decedent’s death.   However, the record does contain account

statements for the five Merrill Lynch accounts for the period

ending May 30, 2003.    The May 2003 account statements for the

accounts at issue, stipulated by the parties, do not indicate

that any securities were counted more than once in determining

the value of the account.

     The statement for account No. 7225 is incomplete.    However,

the account statement for account No. 8135 includes values for

both account Nos. 8135 and 7225.    The account statement for

account No. 8135 values account No. 7225 at $202,8505 and account

No. 8135 at $102,051, for a total of $304,902.6   The account

statement for account No. 8136 values that account at $69,151.

The account statement for account No. 8137 values that account at

$88,192.   Lastly the account statement for account No. 8138

values that account at $70,980.    These statements value the five

accounts at $533,225.    Accordingly, decedent’s gross estate is

increased by $533,225 pursuant to section 2044.




     5
      The value of account No. 7225 ($202,850) in the account
statement for account No. 8135 matches a summary contained in the
aforementioned incomplete account statement for account No. 7225.
     6
      The $1 difference is due to rounding.
                                - 26 -

III.   Decedent’s Contributions to MFLP

       Lastly we determine whether the cash and securities decedent

transferred to MFLP in April 2002 and May 2003 must be included

in the value of decedent’s gross estate under section 2036 at

their fair market value or are entitled to a discount.

Decedent’s gross estate included 920 partnership units in MFLP.

The 920 partnership units were valued at $2,589,118 after

application of a 35-percent discount.     Respondent does not

contest the amount of the discount that the estate claimed on

decedent’s estate’s Form 706.    Rather, respondent argues that the

estate is not entitled to any discount and must include the full

value of the transferred assets in the value of the gross estate.

       The purpose of section 2036 is to include in a deceased

taxpayer’s gross estate inter vivos transfers that were

testamentary.    United States v. Estate of Grace, 395 U.S. 316

(1969).    Section 2036(a) generally provides that if a decedent

made an inter vivos transfer of property, other than a bona fide

sale for adequate and full consideration, and retained certain

enumerated rights or interests in the property which were not

relinquished until death, the full value of the transferred

property will be included in the value of the decedent’s gross

estate.    Section 2036(a) is applicable when three conditions are

met:    (1) The decedent made an inter vivos transfer of property;

(2) the decedent’s transfer was not a bona fide sale for adequate
                               - 27 -

and full consideration; and (3) the decedent retained an interest

or right enumerated in section 2036(a)(1) or (2) or (b) in the

transferred property which she did not relinquish before her

death.    Estate of Bongard v. Commissioner, 124 T.C. 95, 112

(2005).

     The bona fide sale for adequate and full consideration

exception is limited to a transfer of property where the

transferor “has received benefit in full consideration in a

genuine arm’s length transaction”.      Estate of Goetchius v.

Commissioner, 17 T.C. 495, 503 (1951).     In Estate of Bongard v.

Commissioner, supra at 118, we held that the exception for a bona

fide sale for an adequate and full consideration in money or

money’s worth is satisfied in the context of a family limited

partnership--

     where the record establishes the existence of a legitimate
     and significant nontax reason for creating the family
     limited partnership, and the transferors received
     partnership interests proportionate to the value of the
     property transferred. See, e.g. Estate of Stone v.
     Commissioner, * * * [T.C. Memo. 2003-309]. The objective
     evidence must indicate that the nontax reason was a
     significant factor that motivated the partnership’s
     creation. * * * A significant purpose must be an actual
     motivation, not a theoretical justification.

     The bona fide sale exception is not applicable “where the

facts fail to establish that the transaction was motivated by a

legitimate and significant nontax purpose.”      Id.   In Estate of

Bongard v. Commissioner, supra at 118-119, we listed a number of

factors that support such a finding, including
                              - 28 -

     the taxpayer’s standing on both sides of the transaction,
     * * * the taxpayer’s financial dependence on distributions
     from the partnership, * * * the partners’ commingling of
     partnership funds with their own, * * * and the taxpayer’s
     actual failure to transfer the property to the partnership.
     * * *

     Respondent argues that decedent’s transfer of assets to MFLP

is not exempt from the application of section 2036(a) because the

transfer did not constitute a bona fide sale for adequate and

full consideration.   Respondent points to the following factors

as evidence that the transfer was not bona fide:    (1) MFLP’s lack

of a functioning business operation; (2) the delay in making

contributions to MFLP after MFLP was formed and the partnership

agreement was signed; (3) the type of assets transferred; (4)

decedent’s age; (5) that decedent stood on both sides of the

transaction; (6) decedent’s failure to retain sufficient assets

outside of MFLP; and (7) the stated reason for MFLP’s formation.

     The estate argues that decedent’s transfers to MFLP were

bona fide sales for adequate and full consideration.   The estate

contends that there were legitimate and substantial nontax

business reasons for the creation of MFLP, including asset

protection, succession of management, centralized management, and

continuation of the family’s investment strategy.   The estate

points out that the securities were actually transferred to MFLP

and never commingled with decedent’s personal assets, and

partnership formalities were satisfied.   We will analyze each

contribution separately.
                                  - 29 -

       A.    April 2002 Contributions

       We agree with the estate that decedent’s April 2002

transfers to MFLP satisfy the bona fide sale for adequate and

full consideration exception and are not governed by section

2036.       Decedent had legitimate and substantial nontax business

reasons for forming MFLP and for contributing securities in April

2002.       See Estate of Mirowski v. Commissioner, T.C. Memo. 2008-

74; Estate of Schutt v. Commissioner, T.C. Memo. 2005-126.

Decedent established and funded MFLP to ensure that her assets

continued to be managed according to Mr. Miller’s investment

philosophy.

       Mr. Price, Virgil G., and Donald all testified credibly

about Mr. Miller’s investment strategy.       Mr. Price specifically

testified that Mr. Miller had been charting stocks by hand since

the beginning of their business relationship and would often

bring detailed records with him when the two met.       We find

credible the witnesses’ testimony that the driving force behind

decedent’s desire to form MFLP was to continue the management of

family assets in accordance with Mr. Miller’s investment

strategy.

       MFLP did not hold investments passively, collecting

dividends and interest.       See Estate of Gore v. Commissioner, T.C.

Memo. 2007-169; Estate of Rosen v. Commissioner, T.C. Memo. 2006-

115.    Virgil G. testified that he spent about 40 hours per week
                               - 30 -

managing MFLP’s assets, and we find his testimony credible.

Before contribution, the assets in decedent’s trust accounts were

not regularly traded.   However, Virgil G. began monitoring and

trading the assets regularly once they were contributed to MFLP.

Although MFLP earned income monthly from these sources, Virgil G.

also evaluated stocks daily.   See Estate of Schutt v.

Commissioner, supra (family limited partnership had a significant

nontax purpose of facilitating the decedent’s buy and hold

investment strategy and assuaging his worry that his heirs would

sell his investments after his death); cf. Estate of Jorgensen v.

Commissioner, T.C. Memo. 2009-66 (“There are no special skills *

* * when adhering to a ‘buy and hold’ strategy, especially when

one pays an investment adviser to recommend what to buy and when

to sell.”).

     Virgil G. subscribed to a number of trade publications and

purchased computer software to assist in his securities trading,

and VGM was compensated by MFLP for management services.    MFLP

involved an active securities trading operation closely aligned

with Mr. Miller’s investment strategy.   Decedent wanted her

assets to be traded according to her husband’s investment

philosophy and set up MFLP to do just that.   Virgil G. was the

only family member versed in Mr. Miller’s trading philosophy, and

he was given authority to trade securities on behalf of MFLP.
                              - 31 -

Virgil G. also discussed MFLP with his siblings and provided

financial advice.

     Respondent contends that the trades MFLP actually made were

not sufficient to qualify MFLP as a legitimate operation.

Respondent relies on Estate of Thompson v. Commissioner, 382 F.3d

367 (3d Cir. 2004), affg. T.C. Memo. 2002-246, in support of this

argument and also argues that MFLP lacked employees, kept no

books or records, and had no bank accounts in its name.

Respondent further contends that the types of assets transferred

weigh against a finding of a valid nontax business purpose for

the transfers.   Respondent again points to Estate of Thompson v.

Commissioner, supra, and Estate of Rosen v. Commissioner, supra,

in support of his contention that there was no benefit to be

derived from transfer of the assets to MFLP other than favorable

estate tax treatment.

     MFLP’s activities need not rise to the level of a “business”

under the Federal income tax laws in order for the exception

under section 2036(a) to apply.   See Estate of Mirowski v.

Commissioner, supra; Estate of Stone v. Commissioner, T.C. Memo.

2003-309.   Respondent’s argument concerning the types of assets

transferred fails for the same reason.   The nontax purpose behind

formation of MFLP was to continue Mr. Miller’s investment

philosophy and to apply it to family assets.   This goal could not

have been met had decedent not transferred securities to MFLP.
                              - 32 -

     Respondent’s reliance on Estate of Thompson and Estate of

Rosen is misplaced.   In those cases decedents transferred

property that was not actively managed by family limited

partnerships.   See Estate of Thompson v. Commissioner, supra at

379 (“The record demonstrates that neither the Turner Partnership

nor the Thompson Partnership engaged in any valid, functioning

business enterprise.”); Estate of Rosen v. Commissioner, supra

(“For the most part, the assets of the LRFLP appear not to have

been traded by the LRFLP, which, in part, explains the minimal

capital gain income and loss reported by the LRFLP.”).     As stated

above, MFLP was not a passive holder of securities.

     Respondent’s contentions concerning decedent’s age are

likewise misplaced.   Respondent contends that the transfers were

made because decedent and Virgil G. recognized that decedent’s

health was failing.   Respondent argues that decedent and Virgil

G. made these transfers in view of her failing health in order to

reduce the value of her taxable estate.   We do not agree.   At the

time of the April 2002 transfers, decedent, although dealing with

some chronic conditions, was generally in good health.     Neither

decedent nor her family expected any significant decline in

decedent’s health in the near future.

     As stated above, decedent’s desire to continue her deceased

husband’s investment philosophy is a significant nontax business

purpose.   Although intrafamily transfers are subject to
                                - 33 -

heightened scrutiny, they are not barred.       See Estate of Bongard

v. Commissioner, 124 T.C. at 123.    Decedent was able to ensure

that her assets would be managed and invested in a manner that

decedent both desired and trusted:       her deceased husband’s

investment strategy.

     Decedent also retained sufficient assets outside of MFLP

after the April 2002 contributions such that she did not need to

rely on distributions from MFLP to pay for day-to-day living

expenses.    Respondent’s argument that decedent did not retain

sufficient assets after making the transfers fails; decedent

retained almost $1 million in securities in decedent’s trust’s

Merrill Lynch and Fidelity Investments accounts and also had

access to the securities in the QTIP trust after the April 2002

transfers.    Nor do we believe the use of MFLP funds to pay

decedent’s trust’s margin accounts taints decedent’s transfers.

This is not an example of partnership funds being used to pay

personal expenses of the decedent.       Decedent’s trust purchased

stock on margin; those stocks were later sold to pay the

corresponding margin account.

     Decedent’s transfers to MFLP in April 2002 satisfy the bona

fide sale exception and are therefore entitled to the claimed

discount in valuing decedent’s gross estate.       See Estate of

Mirowski v. Commissioner, T.C. Memo. 2008-74.       We next analyze

the May 2003 contributions.
                               - 34 -

     B.    May 2003 Contributions

     We agree with respondent that decedent did not have

legitimate and substantial nontax business reasons for the May

2003 transfers.    The record indicates that the driving force

behind the May 2003 transfers was the precipitous decline in

decedent’s health in the weeks before the transfers.     The

decision to make additional contributions to MFLP in May 2003 was

made shortly after decedent broke her hip.     See Estate of

Erickson v. Commissioner, T.C. Memo. 2007-107.      Although decedent

was generally in good health before the April 2002 transfers,

this was not the case in May 2003.      In addition to breaking her

hip, decedent had just undergone pacemaker implantation surgery.

Further, decedent’s rehabilitation was not progressing, and she

was forced to return to the hospital with congestive heart

failure.

     The witnesses’ testimony that decedent’s family hoped for

her recovery is credible, but her health was in decline.       Given

the lapse in time between the April 2002 contributions and the

May 2003 contributions, the decline in her health and the

decision to reduce her taxable estate were clearly the driving

forces behind Virgil G.’s decision to make additional

contributions to MFLP.

     The estate’s argument that decedent contributed the

remainder of her assets to MFLP in May 2003 so that they were
                               - 35 -

managed in accordance with Mr. Miller’s investment strategy is

undercut by the fact that decedent had the option of contributing

these securities to MFLP 1 year earlier.    Had decedent wanted all

of her assets managed by Virgil G. in accordance with Mr.

Miller’s investment strategy, there would have been no need to

wait until the last weeks of her life to make additional

transfers to MFLP.   The May 2003 contributions were driven by

Virgil G.’s desire to reduce the value of decedent’s taxable

estate.   Accordingly, there was no significant nontax reason for

the transfer, and the transfer does not qualify as a bona fide

sale for adequate and full consideration.    See Estate of Erickson

v. Commissioner, supra (“It was only after Mrs. Erickson had been

admitted to the hospital with pneumonia, two days before she

died, that the partners finally completed their transfers.”);

Estate of Rosen v. Commissioner, T.C. Memo. 2006-115 (“The fact

that decedent was 88 years old and in failing health strongly

supports our finding that the transfer of the assets was purely

for the purpose of avoiding Federal estate and gift taxes.”).

     Because we find that decedent did not have a significant

nontax purpose in making the May 2003 transfers, we must

determine whether decedent retained the possession or enjoyment

of, or the right to the income from, the property transferred to

MFLP in May 2003.    Sec. 2036(a).
                              - 36 -

     It is clear that when the decision was made to further fund

MFLP in May 2003, Virgil G., as trustee of decedent’s trust and

as general partner of MFLP, knew that MFLP funds would be needed

to pay decedent’s estate tax liabilities.    See Estate of Rector

v. Commissioner, T.C. Memo. 2007-367.     The May 2003 transfers

were driven by Virgil G.’s desire to decrease the value of

decedent’s taxable estate.   After this contribution, decedent did

not retain sufficient assets to satisfy her estate tax

liabilities.   See Estate of Erickson v. Commissioner, supra;

Estate of Rosen v. Commissioner, supra.

     Although the estate argues that the distribution to

decedent’s trust in 2004 was simply a pro rata distribution to

MFLP’s partners, the funds were used to satisfy decedent’s

estate’s tax liability.   “[P]art of the ‘possession or enjoyment’

of one’s assets is the assurance that they will be available to

pay various debts and expenses upon one’s death.”     Strangi v.

Commissioner, 417 F.3d 468, 477 (5th Cir. 2005), affg. T.C. Memo.

2003-145.   That the remaining partners of MFLP received de

minimis amounts as part of the 2004 distribution serves to

highlight the fact that a large amount of MFLP funds was needed

to satisfy decedent’s liabilities.     “Where an individual conveys

all or nearly all of his or her assets to a trust or

partnership,” Estate of Rosen v. Commissioner, supra, the

likelihood that the individual will have access to the assets is
                               - 37 -

the greatest, id.    Virgil G.’s use of funds distributed by MFLP

to pay decedent’s estate tax liability shows that the final

contributions to MFLP completely depleted decedent’s resources.

See Strangi v. Commissioner, supra at 478; Estate of Rector v.

Commissioner, supra; Estate of Rosen v. Commissioner, supra.

     The estate’s contention that Virgil G. would not distribute

funds to decedent because to do so would violate his fiduciary

duties and would be at odds with the stated goals of MFLP is not

credible.   It is inconceivable that had decedent recovered and

faced, for example, increased day-to-day living expenses or

catastrophic medical costs, Virgil G., as general partner of

MFLP, would not have provided her with access to the securities

used to fund MFLP.

     We conclude that at the time of the May 2003 transfer to

MFLP decedent retained the economic benefit of the securities

transferred.   See Estate of Jorgensen v. Commissioner, T.C. Memo.

2009-66; Estate of Rector v. Commissioner, supra.    Accordingly,

the securities transferred are not entitled to the claimed

discount and must be included in the value of decedent’s gross

estate at their fair market value.7


     7
      For purposes of valuing the securities transferred from
decedent’s trust’s Fidelity Investments account to MFLP’s
Fidelity Investments account in May 2003, we find Virgil G.’s
explanation for the discrepancy between the May and June 2003
account statements credible. Accordingly, those transfers will
be valued according to the June 2003 statement which shows the
                                                   (continued...)
                                 - 38 -

IV.   Conclusion

      Decedent’s estate is increased by the amounts used to fund

the QTIP trust.      Decedent’s estate is entitled to the claimed

discount for the securities transferred to MFLP in April 2002.

Decedent’s estate is not entitled to the claimed discount for the

securities transferred to MFLP in May 2003.      The parties’

agreement as to taxes and any deduction for legal fees will be

dealt with in the Rule 155 computation.

      Accordingly,



                                            Decision will be entered

                                       under Rule 155.




      7
      (...continued)
transfers being made as of May 15, 2003.
