                       T.C. Memo. 1996-236



                     UNITED STATES TAX COURT



        BARJONA S. MEEK AND ROBERTA MEEK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12089-94.                      Filed May 22, 1996.



     Marshall W. Taylor, for petitioners.

     Maria D. Murphy, for respondent.


                          MEMORANDUM OPINION

     TANNENWALD, Judge:     Respondent determined a deficiency in

petitioners' 1991 Federal income tax of $30,924 and an accuracy-

related penalty under section 6662(a)1 of $6,185.    In an

amendment to her answer, respondent changed the deficiency to

1
    Unless otherwise indicated, all statutory references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
$34,550, to reflect the correction of computational errors.

Petitioners do not contest such correction, and respondent has

conceded the penalty.

     The sole issue for decision is whether section 267(a)

disallows petitioners a deduction for a capital loss from the

sale of a partnership interest by petitioner Barjona Meek

(hereinafter reference to Meek in the singular is to Barjona

Meek).

     All the facts have been stipulated.    The stipulation of

facts and attached exhibits are incorporated herein by this

reference.

     At the time the petition was filed, petitioners resided in

Pagosa Springs, Colorado.

     Immediately prior to the transactions which are the subject

matter of this case, Meek owned an 83-percent limited partnership

interest in Elgrade, Ltd., a California limited partnership

having an adjusted basis of $999,775.

     On December 11, 1991, petitioners, along with Thomas

McCormick and Forrest Furman, executed an instrument entitled the

"Barjona S. Meek and Roberta L. Meek Grandchildren Irrevocable

Trust" (the trust document).   The trust document was executed by

petitioners as "settlors" and by McCormick and Furman as

"trustees".   McCormick and Furman are not related to petitioners

or the beneficiaries of the trust, by blood or marriage.

     The trust document provides in part:
                                   - 3 -



          1.01 DECLARATION OF TRUST. THOMAS McCORMICK and
     FORREST FURMAN (collectively referred to as "trustees")
     declare that BARJONA S. MEEK and ROBERTA L. MEEK
     ("settlors") have transferred and delivered to the
     trustee without consideration the property described in
     Schedule A attached to this instrument.

                       *   *   *    *      *   *   *

          2.01 TRUST ESTATE. All property subject to this
     instrument from time to time, including the property
     listed in Schedule A, is referred to as the trust
     estate and shall be held, administered, and distributed
     according to this instrument.

                       *   *   *    *      *   *   *

          4.01 DIVISION OF TRUST ESTATE INTO SEPARATE
     SHARES.   The trustee shall immediately divide the
     trust estate into five shares for the benefit of the
     following five grandchildren of the settlors in the
     following proportions:


     Schedule A was supposed to be an attachment to the trust

document, but was never prepared and to date does not exist.

     The trust document also provides that the trust is to be

construed, interpreted, and administered under the laws of the

State of California.

     Also on December 11, 1991, Meek, McCormick, and Furman

executed a purchase agreement whereby Meek sold his 83-percent

interest in Elgrade, Ltd., to the trust for $868,308.   The

purchase agreement provides in part:

          THIS AGREEMENT is made as of this 11th day of
     December, 1991 by THOMAS McCORMICK and FORREST FURMAN,
     trustees of the BARJONA S. MEEK AND ROBERTA L. MEEK
     GRANDCHILDREN IRREVOCABLE TRUST ("Buyer") and BARJONA
                              - 4 -



S. MEEK ("Seller"), a limited partner of ELGRADE, LTD.,
a California limited partnership ("Elgrade").

                             RECITALS

     Seller desires to sell 100% of his limited
partnership interest in Elgrade to Buyer, and Buyer
desires to purchase all of Seller's limited partnership
interest in Elgrade.

     NOW, THEREFORE, in consideration of the mutual
covenants, and subject to the terms and conditions
herein contained, the parties hereto agree as follows:

               *   *     *      *     *   *   *

     1.2 Purchase Price.

          Buyer agrees to pay eight hundred thirty-two
thousand three hundred fifty and no/100 dollars
($832,350.00) for the limited partnership interest sold
by Seller. In addition to 832,350.00 selling price,
accounts receivable of 35,958.00.

     1.3. Payment of Purchase Price.

          The purchase price specified in section 1.2
shall be paid by Buyer to Seller on the Closing Date by
delivery of an executed note for the purchase price in
the form attached hereto as Exhibit A.

               *   *     *      *     *   *   *

               SELLER
                              Barjona S. Meek

               BUYER
                              BARJONA S. MEEK AND ROBERTA L. MEEK
                              GRANDCHILDREN IRREVOCABLE TRUST

                       By:
                              Thomas McCormick, Trustee


                              Forrest Furman, Trustee
                                - 5 -



     The parties have stipulated that the price at which the

partnership interest was conveyed to the Meek trust was adequate.

     Other than the above-described transactions, petitioners did

not convey, by gift or otherwise, any property or interest in

property to the trust during 1991.

     Section 267(a)(1) provides in part: "No deduction shall be

allowed in respect of any loss from the sale or exchange of

property, directly or indirectly, between persons specified in

any of the paragraphs of subsection (b)."

     Section 267(b) enumerates certain relationships, including

that between a grantor and a fiduciary of a trust.   Sec.

267(b)(4).    The person who creates the trust is the settlor, or

grantor,2 of a trust.   Restatement, Trusts 2d, sec. 3 (1959);

I Scott, Trusts, sec. 3 (4th ed. 1987).

     Petitioners and respondent agree that the trust was created

on December 11, 1991.   They further agree that the partnership

interest was held in trust for the benefit of Meek's

grandchildren and that McCormick and Furman were the trustees of

the trust.    As trustees, they are fiduciaries under section

7701(a)(6).   The issue before us is only whether Meek is the

settlor of the trust.

2
   The terms grantor, as used in sec. 267, and settlor, as used
in the trust document, both refer to the creator of a trust. See
Black's Law Dictionary at 700, 1373 (6th ed. 1990). We view them
as synonymous.
                                - 6 -



       We determine property rights of the parties under State law

(in this case, California, see supra p. 3) in order to provide

the foundation for deciding the Federal tax consequences thereof.

Helvering v. Stuart, 317 U.S. 154, 162 (1942); Estate of Heim v.

Commissioner, 914 F.2d 1322, 1327 (9th Cir. 1990), affg. T.C.

Memo. 1988-433; see also United States v. Irvine, 511 U.S.         ,

114 S. Ct. 1473, 1481 (1994).    We apply California law as

announced by the Supreme Court of California, or, if there is no

decision by that highest court, we apply what we conclude that

court would decide, giving proper regard to the decisions of

other courts of the State.    Commissioner v. Estate of Bosch, 387

U.S. 456, 465 (1967).3

       Petitioners argue that the trust document did not validly

create the trust because of the absence of Schedule A and that

therefore the trust fails for lack of trust property.    Proceeding

from this conclusion, petitioners argue that, by virtue of the

purchase agreement, McCormick and Furman acquired the property as

individuals and then, by virtue of their signatures on the trust

document and their designation as trustees in the purchase

agreement, constituted themselves trustees for the Meek

beneficiaries and consequently they, and not Meek, were the

settlors.


3
    See also Estate of McKay v. Commissioner, T.C. Memo. 1994-362.
                                  - 7 -



     Section 15200 of the California Probate Code provides in

part:

          Subject to other provisions of this chapter, a
     trust may be created by any of the following methods:

                      *   *   *    *      *   *    *

          (b) A transfer of property by the owner during the
     owner's lifetime to another person as trustee. [Cal.
     Prob. Code sec. 15200 (West 1991).]

     The California Probate Code further provides:         "A trust is

created only if there is trust property."         Cal. Prob. Code sec.

15202 (West 1991); see also Restatement, Trusts 2d, sec. 74

(1959).   There is no dispute as to the other requirements for the

creation of a trust.4

     Where the instrument is other than a will, there is no trust

until property is transferred to the trustee.          Cohen v. Myers, 86

Cal. Rptr. 456, 458 (Ct. App. 1970); Monell v. College of

Physicians and Surgeons, 17 Cal. Rptr. 744, 751 (Dist. Ct. App.

1962).    We do not disagree with petitioners' contention that the

trust document in and of itself did not create the trust in the

absence of a transfer of property.        Cal. Prob. Code sec. 15202

(West 1991).   Nor do we disagree with their assertion that the

purchase agreement standing alone did not create the trust

4
   The other requirements for the creation of a trust are: (1) An
intent to create a trust by the settlor; (2) a trust purpose; and
(3) an identifiable beneficiary. Cal. Prob. Code secs. 15201-
15205 (West 1991); see Chang v. Redding Bank of Commerce, 35 Cal.
Rptr. 2d 64, 70 (Ct. App. 1994).
                                - 8 -



because a mere contract to convey property is not a trust.     Reagh

v. Kelley, 89 Cal. Rptr. 425, 532 (Ct. App. 1970); Huebener v.

Chinn, 207 P.2d 1136, 1143 (Or. 1949); Restatement, Trusts 2d,

sec. 13 (1959).   But we do not think that this case can be

disposed of by such a separation of the two phases of the

transactions involved herein.   The two phases, which occurred on

the same day,5 are inextricably intertwined and indeed the

overall thrust of petitioners' argument is founded on this

element.    Security-First Natl. Bank v. Wright, 119 P.2d 25, 28

(Cal. Dist. Ct. App. 1941); see also Reagh v. Kelley, supra.

Reading the trust document and purchase agreement together, the

trust does not fail for lack of certainty as to the trust

property.   See Reiss v. Reiss, 114 P.2d 718, 722 (Cal. Dist. Ct.

App. 1941).

     Thus, we find inapposite those cases cited by petitioners

that hold there is no trust in the absence of certain

identifiable property.   See In re Ralston's Estate, 37 P.2d 76

(Cal. 1934) (trust failed for lack of sufficient certainty as to

the beneficiaries); Lefrooth v. Prentice, 259 P. 947, 952 (Cal.

1927) (trust failed for lack of delivery of trust property);

Balian v. Balian's Market, 119 P.2d 426, 429 (Cal. Dist. Ct. App.


5
   There is no evidence to show the order of execution, but we
are satisfied that, under the circumstances herein, such evidence
would not be relevant.
                                - 9 -



1941) ("this requisite of certainty includes the subject-matter

or property embraced within the trust"); Garcia v. United States,

421 F.2d 1231 (5th Cir. 1970) (same).

       Petitioners seek to shift the characterization as grantor to

McCormick and Furman by arguing that they furnished the

consideration for the transfer of the partnership interest and

that the decided cases reflect the view that the person who

furnishes consideration for a transfer in trust is treated as the

grantor.    Initially, we note that section 15200 of the California

Probate Code requires only the "transfer" of property.      Supra p.

7.    We have found no basis for concluding that a person cannot

create a trust by means of a sale for consideration.     Indeed, by

providing that consideration is not "required", Cal. Prob. Code

sec. 15208 (West 1991), clearly implies that the creation of a

trust may involve receipt of a quid pro quo.6    See also

Restatement, Trusts 2d, secs. 29 and 30 (1959); Peschel &

Spurgeon, Federal Taxation of Trusts, Grantors and Beneficiaries,

par. 2.05, pp. 2-14 to 2-19 (2d ed. 1989).    Thus, the fact that

Meek received consideration for the transfer in the form of a

promissory note from McCormick and Furman as trustees does not

6
     Cal. Prob. Code sec. 15208 (West 1991), states:

            Consideration is not required to create a trust,
       but a promise to create a trust in the future is
       enforceable only if the requirements for an enforceable
       contract are satisfied.
                               - 10 -



necessarily militate against treating him as the grantor.    Nor

are we persuaded that, under the circumstances herein, the fact

that McCormick and Furman furnished consideration requires that

they and not Meek be treated as the grantor of the trust.

     Petitioners point to Mahoney v. United States, 831 F.2d 641

(6th Cir. 1987), for the proposition that a settlor must

contribute property to a trust gratuitously.    We do not agree

that Mahoney supports such a proposition.    In that case, a third

party who was designated as a beneficiary of a trust had given

consideration for the transfer of property into the trust.      The

court held the beneficiary was the effective grantor to the

extent of his payment of consideration.    However, this is a

different situation than the one before us where it is the

trustees, on behalf of the trust, who furnished consideration for

the trust property and who did not participate to any degree in

the dispositive provisions of the trust.    The same distinction

applies to Security-First Natl. Bank v. Wright, supra, and the

hypothetical situation discussed in IIA Scott, Trusts, sec. 156.3

(4th ed. 1987).

     Petitioners also cite Lehman v. Commissioner, 109 F.2d 99

(2d Cir. 1940), affg. 39 B.T.A. 17 (1939), for the proposition

that a person is a settlor of a trust if he furnishes

consideration for the trust.   Lehman involved reciprocal trusts

and the taxpayer, who furnished consideration in the form of a
                              - 11 -



trust for the benefit of his brother, received consideration from

his brother in the form of a trust for his benefit.   In this

context, petitioners' attempt to convert the Court of Appeals'

use of the word "if" to mean "only if" is without merit.

     The situations in Mahoney and Lehman are thus clearly

distinguishable7 from the situation herein; McCormick and Furman

received the property and furnished the consideration as trustees

and received no property interest in return.8

     In sum, the trust document, along with the purchase

agreement, creates a valid trust under California law, with Meek

as the settlor.   McCormick and Furman were simply the conduit

through which Meek transferred property, i.e., his partnership

interest, to the trust and, in effect, fleshed out the missing

link of description which would otherwise have been set forth in

Schedule A of the trust document.   In this connection, we note

that the parties have stipulated that by virtue of the purchase

agreement, Meek "sold his 83 percent partnership interest in

Elgarde, Ltd. to the Meek Trust" (emphasis added).    We conclude

that Meek was engaged in a transaction between a grantor and


7
   Similar reasoning distinguishes Ballard v. MacCallum, 101 P.2d
692 (Cal. 1940).
8
   If petitioners' position herein were correct, it would seem to
follow McCormick and Furman could personally be held liable on
the purchase note that they furnished as trustees, a result which
we think it unlikely any California court would countenance.
                             - 12 -



fiduciary within the meaning of section 267(b)(4).   Such being

the case, we hold that the claimed loss is not allowable under

section 267(a), which we note covers losses not only "directly"

but also "indirectly" from the proscribed sales or exchanges.

Supra p. 5.

     In accordance with the foregoing,

                              Decision will be entered for

                         respondent for the amount of the

                         increased deficiency, and decision

                         will be entered for petitioners as

                         to the accuracy-related penalty.
