                        T.C. Memo. 2011-259



                      UNITED STATES TAX COURT



  ESTATE OF PAUL H. LILJESTRAND, DECEASED, ROBERT LILJESTRAND,
                     EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 29397-08.               Filed November 2, 2011.



     Robert E. Kolek and David T. Morris, for petitioner.

     Nicholas D. Doukas, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a $2,573,171 Federal

estate tax deficiency against the Estate of Paul H. Liljestrand

(estate).   After concessions the issue for decision is whether

the value of the assets Dr. Paul H. Liljestrand (Dr. Liljestrand)
                                - 2 -

transferred to a family limited partnership are included in the

value of his gross estate under section 2036(a).1

                          FINDINGS OF FACT

1.   Background

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

The stipulation of facts is incorporated herein by this

reference.   Dr. Liljestrand was a resident of Hawaii when he died

testate on May 31, 2004, and his will was probated in that State.

The estate acts through its executor, Robert Liljestrand

(Robert).    Robert, Dr. Liljestrand’s son, resided in Hawaii when

the petition was filed.

     Dr. Liljestrand was born in Iowa in 1911.     He obtained an

undergraduate degree from Ohio Wesleyan University and a medical

degree from Harvard Medical School.     Upon completing medical

school, Dr. Liljestrand accepted a residency at Queens Hospital

in Honolulu, Hawaii.   In 1939, after his residency, Dr.

Liljestrand went to work at the plantation hospital in Aiea,

Hawaii (hospital), where he practiced medicine as a general

practitioner and surgeon.

     The plantation hospital was a small community hospital that

served the plantation’s workers and the surrounding area’s


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code, as in effect on the date of Dr.
Liljestrand’s death. Rule references are to the Tax Court Rules
of Practice and Procedure. Amounts are rounded to the nearest
dollar.
                               - 3 -

residents.   Some time after Dr. Liljestrand began working at the

hospital, the plantation closed and the decision was made to

close the hospital.   Dr. Liljestrand entered into an agreement

with the plantation’s owners to lease the hospital building.      Dr.

Liljestrand opened a medical practice in the building and

organized a not-for-profit group to operate the hospital.     A few

years later Dr. Liljestrand purchased the hospital property.

     Dr. Liljestrand retired from the practice of medicine in

1978.   A year later the rising cost of medical malpractice

insurance forced him to sell the hospital building.    The sale was

part of an exchange pursuant to section 1031.    Dr. Liljestrand

exchanged the hospital property for:    (1) A mini-warehouse in

Gresham, Oregon, (2) eight condominiums in Calabasas, California,

(3) three buildings in the Royal Village shopping center in El

Cajon, California, (4) a medical building in Mesa, Arizona, and

(5) a strip mall in Sanford, Florida.

2.   Family Life

     Dr. Liljestrand was married to Betty Liljestrand.    They had

four children, Robert Liljestrand (Robert), Eric Liljestrand

(Eric), Wendy Liljestrand (Wendy), and Lana Craigo (Lana).

Robert, after graduating from college with a degree in public

health, went to work for his father at the hospital.    Robert was

eventually appointed associate hospital administrator.    In that
                                - 4 -

position Robert worked closely with the hospital’s business

manager, Mr. Kennedy.

3.   Real Estate Business

     After selling the hospital property, Dr. Liljestrand hired

Mr. Kennedy to manage his newly acquired real estate business.

Robert also left the hospital to work for Dr. Liljestrand in his

real estate business.    Robert assisted Mr. Kennedy in managing

the real estate.    Robert coordinated with the local onsite

managers on repairs and maintenance.

     For almost 30 years, Irene Easter managed the condominiums

in Calabasas, California, and Dan Dellaripa managed the shopping

center located in El Cajon, California.    Mr. Dellaripa was an

active manager.    He was responsible for acquiring many of the

property’s leases.2   He also coordinated the cleanup effort after

a major fire on the property and was responsible for obtaining

reimbursements from tenants who caused property damage.3   The

Sanford strip mall and the Gresham mini-warehouse also had local

onsite managers.

     In or around 1984 Mr. Kennedy began contemplating

retirement.   Dr. Liljestrand approached Robert about taking over



     2
      In fact, Mr. Dellaripa signed many leases as the landlord.
     3
      A previous tenant, 24 Hour Fitness, upon vacating the
property left considerable damage. Mr. Dellaripa coordinated the
cleanup effort and the effort to recover damages. He was
successful in his efforts, obtaining $220,000 in damages from 24
Hour Fitness.
                                - 5 -

the overall management of the real estate business.    Robert

agreed and assumed control of the operations.    Mr. Kennedy

stopped making site visits, dealing with the local building

managers, and making decisions regarding the properties.    He

remained in his role as the business’ accountant until 1987, when

he retired and moved to Nevada.    Unable to take on the role of

accountant himself, Robert found a new accountant, Annie Au (Mrs.

Au).

4.     Creation of Dr. Liljestrand’s Revocable Trust

       In 1984 Dr. Liljestrand entered into a revocable trust

agreement for the “Revocable Trust of Paul Howard Liljestrand”

(trust).    The trust was funded with the real estate acquired in

the section 1031 exchange.    Dr. Liljestrand amended the trust

four times, including a second restatement in 1993.    The second

restatement named Dr. Liljestrand and Robert as cotrustees of the

trust.    Dr. Liljestrand, as trustee of the trust, retained

control and management over the contributed real estate.    Robert

as cotrustee, could take over management in the event of Dr.

Liljestrand’s inability to manage his affairs.    Dr. Liljestrand

was the sole beneficiary of the trust during his lifetime.      Under

the trust terms he had access to all trust income and corpus

without restriction and the trustees had a duty to administer the

trust solely for Dr. Liljestrand’s benefit.    Upon Dr.

Liljestrand’s death, the trust’s assets were distributed to two
                               - 6 -

new trusts created for the benefit of Dr. Liljestrand’s children,

i.e., a trust exempt from generation-skipping transfer tax

(residuary trust) and a children’s trust (children’s trust).

Robert was named the trustee of both trusts.    Both trusts would

terminate upon the death of the last of Dr. Liljestrand’s

children to die.

5.   Management Agreement

     In 1993 the trust entered into a management agreement with

Robert to manage its real estate (management agreement).    The

management agreement provided Robert with an annual salary of

$100,000 plus bonuses.   This salary was Robert’s primary source

of income.   Under the terms of the management agreement either

Dr. Liljestrand or Robert could terminate Robert’s employment at

any time during Dr. Liljestrand’s life.    However, after Dr.

Liljestrand’s death, only Robert could terminate his employment.

The management agreement was amended and restated a number of

times over the years, each time with substantially the same

terms.

6.   Plans To Create Limited Partnership

     In April 1996 Dr. Liljestrand and Robert met with Dr.

Liljestrand’s estate planning attorney, Mr. Ota.    According to

Mr. Ota and Robert, Dr. Liljestrand wanted to leave his property

to his four children equally, but he wanted to ensure Robert’s

continued employment as manager of the real estate.    Robert had
                               - 7 -

taken on more and more responsibility with regards to the real

estate business, and the other children wanted nothing to do with

the business.   Mr. Ota suggested that Dr. Liljestrand form a

limited partnership and transfer the real estate held by the

trust to the partnership.

     Mr. Ota was concerned with two Hawaii statutes which in his

opinion could jeopardize Robert’s management of the real estate

if the property remained in trust.     Hawaii Revised Statutes

Annotated sec. 668-1 (LexisNexis 2007)4 allowed certain property

owners to seek an action for partition in court, and Hawaii

Revised Statutes Annotated sec. 554A-5(b)5 allowed beneficiaries

of a trust to void the actions of an interested trustee.     Mr. Ota

believed that a limited partnership was the only business entity

in Hawaii that could protect against the restrictions contained




     4
      When two or more persons hold or are in possession of real
property as joint tenants or as tenants in common, in which one
or more of them have an estate in fee, or a life estate in
possession, any one or more of such persons may bring an action
in the circuit court of the circuit in which the property or some
part thereof is situated, for a partition of the property,
according to the respective rights of the parties interested
therein, and for a sale of the same or a part thereof if it
appears that a partition cannot be made without great prejudice
to the owners. * * * Haw. Rev. Stat. Ann. sec. 668-1 (LexisNexis
2007).
     5
      “If the duty of the trustee and the trustee’s individual
interest or the trustee’s interest as trustee of another trust,
conflict in the exercise of a trust power, the power may be
exercised only by court authorization * * * upon petition of the
trustee.” Haw. Rev. Stat. Ann. sec. 554A-5(b) (LexisNexis 2007).
                                - 8 -

in the Hawaiian statutes and ensure Robert’s continued management

of the real estate after Dr. Liljestrand’s death.

     Additionally, a limited partnership could be used to satisfy

Dr. Liljestrand’s desire to gift interests in the real estate to

his children during his life.   Mr. Ota discussed various aspects

of the limited partnership with Dr. Liljestrand, including the

ability to gift interests and the tax consequences of forming a

limited partnership.

7.   Formation of PLP

     In 1997 Dr. Liljestrand, in consultation with Mr. Ota,

decided to form the Paul H. Liljestrand Partners Limited

Partnership (PLP).   Mr. Ota, unfamiliar with drafting partnership

agreements, engaged a former colleague, Mickey Rosenthal, to

draft the PLP agreement.   It is unclear whether Mr. Rosenthal and

Dr. Liljestrand had any contact before Mr. Rosenthal drafted the

agreement.   In order to draft the partnership agreement, Mr.

Rosenthal had Dr. Liljestrand fill out a checklist.   The

checklist was sent to Mr. Ota, who forwarded it on to Dr.

Liljestrand.    Mr. Ota structured PLP on the basis of his general

understanding of what Dr. Liljestrand wanted.    Mr. Rosenthal met

with Mr. Ota and drafted the PLP agreement in accordance with his

instructions.   Though Dr. Liljestrand intended his children to

become partners in PLP, no child, other than Robert, participated

in any discussions regarding PLP’s formation.
                                   - 9 -

        Dr. Liljestrand and Robert signed the PLP agreement on April

4, 1997.6       PLP was formed on May 30, 1997, when Dr. Liljestrand

and Robert filed a certificate of limited partnership with the

State of Hawaii.       Dr. Liljestrand, through the trust, transferred

$5,915,1677 in real estate to PLP in exchange for his initial

partnership interest.       Title to the real estate was transferred

to PLP by recording deeds in the State of each property’s situs.

By December 1997 these transfers were completed.       Dr.

Liljestrand, through the trust, held a 99.98-percent interest in

PLP.8       Dr. Liljestrand’s children did not contribute to PLP, but


        6
      The agreement called for a general partner and two classes
of limited partners, class A and class B. The class A limited
partner was granted a preferred return. The amount of this
preferred return along with a number of other important terms was
left blank in the agreement when signed by the parties. The
blanks included the total number of PLP partnership units, the
number of partnership units each partner would receive, the value
of each unit, and the property each partner would be required to
contribute. Dr. Liljestrand contributed: (1) Two lots of land
in Honolulu, Hawaii, (2) a condominium located in Hawaii, (3) the
Gresham mini-warehouse, (4) the Sanford strip mall, (5) the El
Cajon shopping center, and (6) seven condominiums in Calabasas,
California. The Hawaii condominium was encumbered by a mortgage.
The mortgage was not transferred to PLP but remained Dr.
Liljestrand’s personal obligation. Additionally, many of the
transferred properties were under lease at the time of transfer.
These leases were not assigned or transferred to PLP.
        7
      Dr. Liljestrand, through the trust, contributed real estate
with an appraised value of $12,140,000 encumbered by $6,224,833
of debt. The partnership assumed these liabilities, resulting in
a contribution of $5,915,167.
        8
      Dr. Liljestrand, through the trust, was granted all 59
general partnership units, all 310 class A limited partnership
units, and 5,545 units of the 5,546 class B limited partnership
                                                   (continued...)
                                  - 10 -

Robert was granted 1 unit of class A limited partnership

interest.

     The children received their interests in PLP through gifts

from Dr. Liljestrand.       On January 2, 1998, the trust gifted 172

class B limited partnership units to each of four irrevocable

trusts established for Dr. Liljestrand’s children, representing

in total 12.4 percent of the outstanding class B limited

partnership units (1998 gifts).       On January 4, 1999, the trust

gifted 33 class B limited partnership units to each of four

irrevocable trusts established for Dr. Liljestrand’s children,

representing in total 2.38 percent of the outstanding class B

limited partnership units (1999 gifts).

     It is unclear how the interests were valued.      Mr. Ota hired

the appraisal firm of Moss-Adams Advisory Services (Moss-Adams)

to conduct an appraisal of the partnership interests in December

1997.       Moss-Adams valued the partnership interests using the

value of the real estate contributed in December 1997.       Moss-

Adams calculated a $2,140,100 fair market value for the class B

limited partnership units and calculated a $5,915,200 fair market

value for the class A limited partnership units.       Ignoring the

Moss-Adams valuation, the parties decided that the partnership

should have 59 general partnership units with a value of $59,000,



        8
      (...continued)
units in exchange for the real estate.
                              - 11 -

310 class A limited partnership units with a value of $310,000,

and 5,546 class B limited partnership units with a value of

$2,007,652.   As a result, each of the 1998 gifts was valued at

$62,092, and each of the 1999 gifts was valued at $11,913.    Each

gift exceeded the $10,000 annual gift tax exclusion.    Gift tax

returns were therefore required for 1998 and 1999 but were not

filed until 2005, after Dr. Liljestrand’s death.

8.   Operations of the Partnership

     Despite having transferred legal title of the real estate to

PLP, the parties continued to treat the real estate as an asset

of the trust.   The partnership agreement required the partners to

deposit partnership funds in a bank account opened in the

partnership’s name.   However, the partnership did not open a bank

account until August 1999.   Thus, in 1997, 1998, and part of

1999, partnership income (i.e., the real estate income) was

deposited in the trust’s bank account, resulting in an

unavoidable commingling of funds.    Additionally, in 1997 and

1998, Dr. Liljestrand reported the real estate income and

expenses on his Form 1040, Schedule E, Supplemental Income and

Loss.

     The failure to treat the real estate as a partnership asset

was discovered in 1999 when Mrs. Au, while preparing Dr.

Liljestrand’s Federal income tax returns, discovered invoices for

attorney’s fees relating to the formation of PLP.    At this point,
                                - 12 -

the parties applied for an employer identification number for PLP

and opened a bank account in the partnership’s name.     Mrs. Au

also began keeping books and filing Federal tax returns for the

partnership in 1999.     Rather than file amended Federal income tax

returns for the years 1997 and 1998, Dr. Liljestrand and his

advisers decided to treat the partnership as having commenced

business on January 1, 1999, even though legal title to the real

property had been transferred to the partnership by December

1997.

9.   Management of PLP

        In 2001 PLP executed a management agreement with Robert,

commencing January 1, 1998.     The management agreement contained

substantially the same terms as the previous management

agreements executed by the trust.     Shortly thereafter, the

management agreement was terminated, presumably because as

trustee of the trust (i.e., PLP’s general partner) Robert had the

authority to manage the real estate without a management

contract.     Dr. Liljestrand and Robert continued to manage the

real estate in the same manner before and after the transfer of

the real property to the partnership.     The same onsite managers

managed the properties before and after the transfer, and Robert

continued to approve all major decisions and sign all checks.
                              - 13 -

10.   PLP Distributions and Payment of Personal Expenses

      Dr. Liljestrand contributed almost all of his income-

producing assets to PLP.   He kept his home and an adjacent lot

used as a driveway and a few other minor assets outside of the

partnership.   Dr. Liljestrand’s retained assets were insufficient

to pay his living expenses.   Dr. Liljestrand’s expenses for the

years 1999, 2000, 2001, 2002, and 2003 were $81,479, $122,801,

$96,807, $180,563, and $270,553, respectively.   During these

years Dr. Liljestrand’s earnings, not including distributions

from PLP, totaled $26,150, $120,382,9 $30,652, $27,758, and

$25,985, respectively.   In order to offset the shortfall in Dr.

Liljestrand’s income, the partnership made disproportionate

distributions to the trust and directly paid a number of Dr.

Liljestrand’s personal expenses.

      The partnership agreement guaranteed the class A limited

partners a 14 percent preferred return.   The class A limited

partnership interest was valued at $310,000.   Thus Dr.

Liljestrand through the trust was guaranteed an annual preferred

return equal to $43,400.   Moss-Adams estimated that the

partnership’s annual income would equal $43,000.   The general

partner had the exclusive right to make distributions.

Distributions had to be made first to the class A limited


      9
      This amount was significantly higher than the income for
the other years because it included a one-time liquidating
distribution from Partners of HI XVIII of $67,140.
                               - 14 -

partners on their preferred return, then to the general partner

and the class B limited partners pro rata.

     Mrs. Au began performing accounting services for the real

estate business in 1987.    Mrs. Au handled the bookkeeping for the

real estate and prepared the tax returns.    In 1999 she began

keeping the partnership’s books and preparing the partnership’s

tax returns.   Robert made all partnership distributions.    He

would write checks during the year, and at the end of the year he

would provide the check register to Mrs. Au.

     Mrs. Au set up a general ledger for PLP to categorize and

account for all transactions affecting the partnership assets and

income beginning in 1999.   Capital accounts10 as well as ledger

accounts were established for each partner to show distributions

to each partner, income received by the partnership, and expenses

incurred by the partnership.   In addition, Mrs. Au set up

accounts to keep track of disproportionate distributions to each

partner and payment of personal expenses with partnership funds.

These accounts had various titles such as:    Property tax paid,

grandchildren’s gifts, and account for household employees.

These accounts were presumably necessitated in large part on


     10
      1999 was the first year capital accounts were maintained
for PLP. According to PLP’s statement of partners’ capital
account prepared by Mrs. Au, the total value of all of PLP’s
capital accounts as of Dec. 31, 1999, was $24,203. The
partnership needed to properly maintain capital accounts because
the partnership agreement called for liquidating distributions in
accordance with the partners’ capital accounts.
                                - 15 -

account of Robert’s distribution of funds to the trust without

regard for the partnership agreement.    The balance in these

accounts were treated as draws against each partner’s capital

account.

     In June 2004 after Dr. Liljestrand’s death Mrs. Au requested

a meeting with Mr. Rosenthal to discuss PLP’s accounting.     During

that meeting Mrs. Au learned that she had incorrectly accounted

for the disproportionate distributions and payment of partner

personal expenses.   Mr. Rosenthal explained to Mrs. Au that these

amounts should be treated as partnership receivables which the

partners should repay.    The record does not contain any evidence

of partners repaying personal expense payments or

disproportionate distributions they had received.

     Between 1997 and mid-1999 there was no partnership activity

except for the gifts of partnership interests to Dr.

Liljestrand’s children.   Starting in 1999 the partnership began

paying Dr. Liljestrand’s personal expenses and making

disproportionate distributions in his favor in order to offset

the shortfall in his income.    In 1999 PLP sold two of the

Calabasas condominium units for $316,000, receiving $206,496 in

net proceeds.   Robert used the proceeds to satisfy one of Dr.

Liljestrand’s personal debts.    In 1998 Dr. Liljestrand obtained

an equity line of credit against his home with the Bank of

Hawaii, withdrawing $142,500.    Robert made three payments in 1999
                               - 16 -

and 2000 of $2,096, $60,000, and $107,220 in satisfaction of the

liability.   That year, PLP also distributed $80,414 to the trust.

No other distributions were made that year.

     In 2000 PLP distributed $43,400 to the trust, presumably in

satisfaction of the guaranteed payment to the partnership’s class

A limited partner.   PLP made no other distributions that year.

In 2001 PLP sold the Sanford strip mall for $1,821,881 and

received $160,097 in net proceeds.      That year, PLP distributed

$226,718 to the trust, and the following year PLP distributed

$75,552 to the trust.   No other partner received distributions in

either 2001 or 2002.    In 2003 PLP sold the Gresham mini-warehouse

along with accompanying personal property for $2,029,903.      PLP

received $1,242,314 in net proceeds.      PLP distributed $335,807 of

the net proceeds to the trust and $26,000 of the net proceeds to

each of the children’s irrevocable trusts.

     In addition to receiving disproportionate distributions, Dr.

Liljestrand also used PLP funds to pay a number of personal

expenses.    The partnership paid Dr. Liljestrand’s grandchildrens’

tuition expenses, the cost of various gifts to his grandchildren,

Dr. Liljestrand’s housekeepers’ salaries, various household

expenses, legal service expenses for the trust, and the mortgage

on the Hawaiian condominium.    Dr. Liljestrand’s children also

used PLP funds to pay personal expenses.      For instance, Robert

obtained multiple loans from the partnership.      Robert did not
                              - 17 -

execute any promissory notes and did not repay the loans.

Additionally, PLP paid Eric’s and Lana’s income taxes and paid

for accounting services for each of their irrevocable trusts.

     Dr. Liljestrand passed away on May 31, 2004.   The estate

filed a Form 706, United States Estate (and Generation-Skipping

Transfer) Tax Return, on August 31, 2005.   The estate reported a

taxable estate of $5,696,011 and tax due of $2,370,000.    That

same year, PLP refinanced a loan on the El Cajon property,

resulting in $2,797,300 being deposited into PLP’s bank account.

PLP used these proceeds to satisfy Dr. Liljestrand’s estate tax

obligation.   PLP paid Dr. Liljestrand’s Federal estate tax of

$2,370,000 and Dr. Liljestrand’s Hawaii estate tax of $130,000.

     On August 27, 2008, respondent issued the estate a notice of

deficiency that determined a Federal estate tax deficiency of

$2,573,171.   Respondent in the notice of deficiency included in

the gross estate the value of the real estate that Dr.

Liljestrand had transferred to PLP.    The estate filed a petition

with this Court on November 21, 2008.

                             OPINION

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 of proof may shift to
                                - 18 -

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).

      The estate argues that the burden of proof shifts to

respondent under section 7491.    Our resolution of the issue is

based on the preponderance of the evidence rather than the

allocation of the burden of proof; therefore, we need not address

the estate’s arguments with respect to the burden of proof.    See

Estate of Jorgensen v. Commissioner, __ Fed. Appx. __, 107 AFTR

2d 2011-2069, 2011-1 USTC par. 60,619 (9th Cir. 2011), affg. T.C.

Memo. 2009-66; Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th

Cir. 2005), affg. T.C. Memo. 2003-212; Polack v. Commissioner,

366 F.3d 608, 613 (8th Cir. 2004), affg. T.C. Memo. 2002-145;

Knudsen v. Commissioner, 131 T.C. 185 (2008).

II.   Section 2036(a)

      “‘Section 2036(a) is * * * intended to prevent parties from

avoiding the estate tax by means of testamentary substitutes that

permit a transferor to retain lifetime enjoyment of purportedly

transferred property.’”     Estate of Bigelow v. Commissioner, 503

F.3d 955, 963 (9th Cir. 2007) (quoting Strangi v. Commissioner,

417 F.3d 468, 476 (5th Cir. 2005), affg. T.C. Memo. 2003-145),

affg. T.C. Memo. 2005-65.    Section 2036(a) is applicable when
                                - 19 -

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 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 the

decedent did not relinquish before his death.      If these

conditions are met, the full value of the transferred property

will be included in the value of the decedent’s gross estate.

Estate of Bongard v. Commissioner, 124 T.C. 95, 112 (2005).

     A.   Whether There Was a Section 2036(a) Transfer

     The estate acknowledges that Dr. Liljestrand made

transfers of property to PLP.    In the light of that

acknowledgment, we find that Dr. Liljestrand’s transfers to PLP

were transfers of property under section 2036(a).

     B.   Whether the Transfers Were Bona Fide Sales for Adequate
          and Full Consideration

     Section 2036(a) excepts from its application any transfer of

property otherwise subject to that section which is a “bona fide

sale for an adequate and full consideration in money or money’s

worth”.   The 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).      The exception is

satisfied in the context of a family limited partnership
                               - 20 -

     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. 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.

          By contrast, 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. A list of factors that
     support such a finding includes the taxpayer 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.

Estate of Bongard v. Commissioner, supra at 118-119

(citations omitted).

     We separate the bona fide sale exception into two prongs:

(1) Whether the transaction qualifies as a bona fide sale; and

(2) whether the decedent received adequate and full

consideration.   Id. at 119, 122-125; see also Estate of Jorgensen

v. Commissioner, T.C. Memo. 2009-66.

          1.     Whether Dr. Liljestrand’s Transfer of Assets to
                 PLP Was a Bona Fide Sale

     Whether a sale is bona fide is a question of motive.    We

must determine whether Dr. Liljestrand had a legitimate and

significant nontax reason, established by the record, for

transferring his property.   The estate argues that Dr.

Liljestrand had several nontax reasons for transferring his
                                  - 21 -

property to PLP.       Respondent disputes the significance and

legitimacy of those reasons and offers several factors to support

his argument that tax savings were the primary reason Dr.

Liljestrand transferred his real estate to PLP.

                  a.     Dr. Liljestrand’s Nontax Reasons for Forming
                         the Partnership

     The estate argues that Dr. Liljestrand had three significant

nontax business purposes in forming PLP.       First, the partnership

form ensured that Dr. Liljestrand’s real estate would be

centrally managed and that Robert would have guaranteed long-term

employment as manager of the real estate.       Second, the

partnership form was the only business form that would ensure

that the real estate would not be subject to partition or

division.   Third, the partnership form served to protect the real

estate from potential creditors.       We take each of these arguments

in turn.

                         i.   Ensure Robert Would Continue to Manage
                              the Real Estate

     The estate argues that Dr. Liljestrand formed PLP to:        (1)

Ensure that his real estate would be centrally managed by Robert

and (2) guarantee Robert’s long-term employment as the manager of

the real estate.       Robert began helping his father manage his real

estate in 1979.    By the mid-eighties Robert was overseeing

management of the real estate, then held by the trust.        Robert

had a management agreement and was also cotrustee of the trust.
                                - 22 -

Given the fact that Robert managed the real estate before the

formation of PLP, we do not see how forming PLP ensured that Dr.

Liljestrand’s real estate would be centrally managed by Robert.

       The estate also argues that the trust agreement and the

management agreement did not ensure Robert’s long-term employment

as manager of the real estate, leading Dr. Liljestrand to form

PLP.    Robert’s dual roles as manager of the real estate and

trustee of the trust created a conflict of interest.     Robert had

a personal interest in the trust’s retaining the real estate,11

but he also had a duty as trustee of the trust to sell the real

estate if beneficial for the beneficiaries.     Hawaii Revised

Statutes Annotated sec. 554A-5(b) provides a beneficiary of a

trust the means to void the actions of a trustee where there is a

conflict between the trustee’s individual interests and his role

as trustee.

       The estate argues that Dr. Liljestrand was worried one of

his children would invoke this statute after his death,

jeopardizing Robert’s ability to effectively manage the real

estate.     In order to avoid applicability of the statute, Dr.

Liljestrand formed PLP.




       11
      The management agreement provided Robert with his primary
source of income. If the trust sold the real estate there would
be nothing to manage and Robert would lose his primary source of
income.
                                 - 23 -

     We do not agree with the estate that Dr. Liljestrand formed

PLP with this purpose in mind.     The formation of PLP did not

resolve Robert’s conflict of interest or avoid application of the

statute, nor did it change Robert’s roles with respect to the

real estate.   It simply changed the assets of the trust; instead

of holding the real estate directly, the trust now held a

majority of the interest in PLP.      PLP’s value was based upon the

value of the real estate it held.     Upon Dr. Liljestrand’s death,

the trust’s assets (i.e., the PLP general partnership interest

and the PLP class A and class B limited partnership interests)

were distributed to the residuary trust and the children’s trust.

Robert is trustee of both trusts.     As trustee of both trusts he

is also the general partner of PLP and its manager.      Robert would

continue to owe a duty to the beneficiaries of both trusts to

manage the real estate for their benefit.      Robert continued to

hold a personal interest in the real estate and a fiduciary duty

to the beneficiaries of both trusts.      PLP did not resolve

Robert’s conflict of interest.

                     ii.     Ensure Real Estate Would Not Be Subject
                             to Partition

     The estate claims that Dr. Liljestrand formed PLP to ensure

that the real estate would not be subject to partition after his

death.   Under Hawaii law,

     When two or more persons hold or are in possession of
     real property as joint tenants or as tenants in common,
     in which one or more of them have an estate in fee, or
                              - 24 -

     a life estate in possession, any one or more of such
     persons may bring an action in the circuit court of the
     circuit in which the property or some part thereof is
     situated, for a partition of the property, according to
     the respective rights of the parties interested
     therein, and for a sale of the same or a part thereof
     if it appears that a partition cannot be made without
     great prejudice to the owners.

Haw. Rev. Stat. Ann. sec. 668-1.   As explained above, the real

estate was originally held in the trust.   The estate argues that

upon Dr. Liljestrand’s death, the beneficiaries of the trust or

their creditors could have sued for partition of the real estate

under the above statute.

     The estate’s argument is unconvincing.    First, most of Dr.

Liljestrand’s real estate was outside of Hawaii and therefore was

not subject to the partition statute.   Of the thirteen properties

contributed to PLP, only three properties were in Hawaii, two

lots of land and the Hawaii condominium.   The remaining 10

properties contributed to the partnership were in Oregon,

Florida, and California.   Dr. Liljestrand’s estate planning

attorney, Mr. Ota, understood that the nonHawaii properties were

not subject to the Hawaii partition statute.   Though Mr. Ota

understood that the Hawaii statute was not applicable to these

properties, he decided not to research the law of partition in

Oregon, Florida, and California.   The lack of such basic legal

research is telling as to the significance of partition in the

decision to form PLP.
                                - 25 -

     Second, as discussed above, the real estate if left in the

trust would be distributed to the residuary trust and the

children’s trust upon Dr. Liljestrand’s death.    The residuary

trust and children’s trust would hold legal title to the real

estate.   Neither trust would terminate until the death of Dr.

Liljestrand’s last living child.    The trusts’ beneficiaries

(i.e., Dr. Liljestrand’s children) would not hold the real estate

as joint tenants or tenants in common and could never be joint

tenants or tenants in common.    As a result, the Hawaii partition

statute was inapplicable.   The estate claims that Dr. Liljestrand

feared his children would invoke the Hawaii partition statute,

yet Dr. Liljestrand had no problem leaving his home held outside

the partnership to his children as joint tenants, apparently

without the fear of partition.

     Finally, there is no evidence that any of Dr. Liljestrand’s

children had any interest in seeking a partition.    The estate

argues that it is immaterial that there were no disputes among

the children and that no child had threatened to invoke either

the Hawaii partition statute or conflict of interest statute.

The estate argues that the existence of both statutes created

more than a mere hypothetical threat of litigation.    The estate

relies on Estate of Shurtz v. Commissioner, T.C. Memo. 2010-21,

in support of its argument.
                              - 26 -

     We disagree that there was a real threat of litigation and

find the estate’s reliance on Estate of Shurtz is misplaced.       In

Estate of Shurtz, the decedent’s attorney credibly testified that

he regularly advised his clients about the use of limited

partnerships to protect family assets from the risks imposed by

Mississippi’s litigious atmosphere.    Id.   This was merely one of

several nontax reasons for forming the family limited partnership

that the Court relied on to find a bona fide sale.     We do not

find Mr. Ota’s testimony credible regarding the litigious

environment in Hawaii.   Mr. Ota had never been involved in a

partition and had never advised clients to form a limited

partnership to avoid partition before he advised Dr. Liljestrand.

We do not find the fear of partition to be a legitimate nontax

purpose for forming PLP in the light of the fact that a majority

of the property was outside Hawaii, the trust as written

protected against the partition statutes, and no child had

threatened to invoke the partition statute.    In fact, this Court

has previously found that the fear of partition without an actual

threat of litigation is not a significant nontax purpose.12



     12
      Estate of Bigelow v. Commissioner, 503 F.3d 955, 972 (9th
Cir. 2007) (“we also reject the proffered nontax rationale that
the formation of * * * [the partnership] would serve to protect
the Padaro Lane property from a partition sale. There was no
evidence that any of the Bigelow children or grandchildren
contemplated such an action, or that any of the Bigelow children
or grandchildren had creditors which might resort to such a
forced sale.”), affg. T.C. Memo. 2005-65.
                                - 27 -

                            iii. Provide Additional Creditor
                                 Protection

     The estate argues that Dr. Liljestrand formed PLP to protect

the real estate from potential creditors.    We are skeptical.

There is no evidence that Dr. Liljestrand or any of the other PLP

partners was concerned with creditor claims.    The estate failed

to name a single creditor or even establish an activity or

pattern of activity by the partners which could open them up to

potential liability.    The estate simply argued, without much

explanation, that holding the property in trust would jeopardize

the real estate, as a creditor of a child could conceivably bring

an action against one of the children and claim partial ownership

of the real estate.    The estate argued that PLP protected against

such actions.

                b.     Factors Indicating the Transfers Were Not
                       Bona Fide Sales

                       i.   Disregard of Partnership Formalities

     The partnership failed to follow even the most basic of

partnership formalities.    To begin with, PLP failed to open and

maintain a separate bank account for the first 2 years of its

existence.   During this period all of PLP’s banking was conducted

through the trust’s bank account, resulting in an unavoidable

commingling of partnership and personal funds.

     The parties testified that there had been only one

partnership meeting since its formation.    There were no other
                                - 28 -

formal meetings between the partners, and no minutes were ever

kept.     Dr. Liljestrand and Robert often failed to treat the

partnership as a separate entity.     Dr. Liljestrand used

partnership assets to pay personal expenses.     He used partnership

assets to pay his housekeepers and personal secretary, pay off

the equity line of credit taken on his home, pay the mortgage on

the Hawaii condo which was a personal liability, pay his

grandchildren’s tuition, and pay the taxes and the expense of

accounting services for his children.     The commingling of

personal funds with partnership funds suggests that the transfer

of property to a family limited partnership was not motivated by

a legitimate and significant nontax reason.     Estate of Reichardt

v. Commissioner, 114 T.C. 144, 152 (2000).

        Additionally, PLP failed to make the required proportionate

distributions as required under the partnership agreement.

During the years 1999 through 2002 Dr. Liljestrand was the only

partner to receive distributions from the partnership, even

though his children each held over a 3-percent interest in the

partnership.     Except for the distribution in 2000, these

distributions greatly exceeded the $43,400 guaranteed

distributions that were due to Dr. Liljestrand as a class A

limited partner.

        Furthermore, Dr. Liljestrand was financially dependent upon

partnership distributions to maintain his lifestyle and pay his
                               - 29 -

everyday expenses.   Dr. Liljestrand’s expenses for the years

1999, 2000, 2001, 2002, and 2003 were $81,479, $122,801, $96,807,

$180,563, and $270,553, respectively.   During these years Dr.

Liljestrand’s earnings, not including distributions from PLP,

totaled $26,150, $120,382, $30,652, $27,758, $25,985,

respectively.   Without the partnership distributions Dr.

Liljestrand would have been unable to cover his personal

expenses.   A taxpayer’s financial dependence on distributions

from the partnership suggests that the transfer of property to a

family limited partnership was not motivated by a legitimate and

significant nontax reason.    Estate of Thompson v. Commissioner,

T.C. Memo. 2002-246, affd. 382 F.3d 367 (3d Cir. 2004); Estate of

Harper v. Commissioner, T.C. Memo. 2002-121.

     PLP also made a number of loans to its partners.   Robert

borrowed money from the partnership on a number of occasions.     He

never executed any promissory note and never repaid these loans.

Rather Mrs. Au treated these loans as draws against his capital

account, even though doing so violated the partnership’s

requirement that distributions be pro rata.

                     ii.   Whether the Transfers to PLP Were at
                           Arm’s Length

     Where a taxpayer stands on both sides of a transaction, we

have concluded that there is no arm’s-length bargaining and thus

the bona fide transfer exception does not apply.   E.g., Estate of

Jorgensen v. Commissioner, T.C. Memo. 2009-66; Estate of Strangi
                               - 30 -

v. Commissioner, T.C. Memo. 2003-145; Estate of Harper v.

Commissioner, supra.    On the other hand, we have found an arm’s-

length bargain in the intrafamily context when the interests of

the family members were sufficiently divergent.    E.g., Estate of

Stone v. Commissioner, T.C. Memo. 2003-309.    Although intrafamily

transfers are permitted under section 2036(a), they are subject

to heightened scrutiny.    Estate of Bigelow v. Commissioner, 503

F.3d at 969; Kimbell v. United States, 371 F.3d 257, 263 (5th

Cir. 2004).

     Dr. Liljestrand stood on all sides of the transaction.      He

formed and fully funded PLP.    He received 100 percent of the

general partnership interests, 100 percent of the class A limited

partnership interests, and 99.98 percent of the class B limited

partnership interests (5545 units out of 5546 units).    Besides

Dr. Liljestrand, only Robert received a partnership interest at

the time of formation, 1 unit of the class B limited partnership

interests.    Robert did not make a capital contribution in

exchange for this 1 unit of partnership interest.13   Dr.

Liljestrand made the entire capital contribution to the


     13
      The estate argues that Robert contributed $362 for his 1
unit of class B limited partnership interest. PLP did not have a
bank account at its formation. PLP conducted its business
through the trust’s bank account for its first 2 years of
existence. The estate has failed to provide any financial
records verifying Robert’s contribution of $362 to PLP or the
trust’s bank accounts. Given the circumstance, we do not believe
Robert made an actual cash contribution to PLP equal to the
interest he received.
                              - 31 -

partnership with his contribution of the real estate.    Though

Robert was an initial partner, he failed to obtain counsel

separate from his father.   The only attorneys involved in the

formation of PLP were Dr. Liljestrand’s attorneys.

     Although Dr. Liljestrand contemplated all four of his

children’s becoming partners in PLP, Dr. Liljestrand did not

consult with Eric, Lana, or Wendy when forming the partnership.

Dr. Liljestrand’s attorneys testified that they formed PLP solely

to address Dr. Liljestrand goals.   They also testified that

before PLP’s formation they had no contact with Eric, Lana, or

Wendy.

                c.   Conclusion With Respect to Whether the
                     Transactions Were a Bona Fide Sale

     Taking into account the totality of the facts and

circumstances surrounding the formation and funding of the

partnership, on the preponderance of the evidence we conclude

that Dr. Liljestrand did not have a legitimate and significant

nontax reason for transferring his assets to PLP, and therefore

these were not bona fide sales.   We find especially significant

that the transactions were not at arm’s length and that the

partnership failed to follow the most basic of partnership

formalities.   Although the estate recites a number of purported

nontax reasons for the formation and funding of the partnership,

we are skeptical of their true role in the formation of PLP.
                               - 32 -

Therefore, we find that the estate has failed to establish that

any of the stated reasons were significant and legitimate.

           2.   Whether the Transactions Were for Adequate and
                Full Consideration

      The general test for deciding whether transfers to a

partnership are made for adequate and full consideration is to

measure the value received in the form of a partnership interest

to see whether it is approximately equal to the property given

up.   Kimbell v. United States, supra at 262; Estate of Bongard v.

Commissioner, 124 T.C. at 118; Estate of Jorgensen v.

Commissioner, supra.    Under Kimbell v. United States, supra at

266, we focus on three things:

      (1) whether the interests credited to each of the
      partners was proportionate to the fair market value of
      the assets each partner contributed to the partnership,
      (2) whether the assets contributed by each partner to
      the partnership were properly credited to the
      respective capital accounts of the partners, and (3)
      whether on termination or dissolution of the
      partnership the partners were entitled to distributions
      from the partnership in amounts equal to their
      respective capital accounts. * * *

      Respondent disputes that the transfers were made for

adequate and full consideration.

                a.    Whether the Interests Credited to Each of the
                      Partners Was Proportionate to the Fair Market
                      Value of the Assets Each Partner Contributed
                      to the Partnership

      The estate argues that each partner received an interest in

PLP proportionate to the fair market value of the property each

contributed to PLP.    The partnership engaged Moss-Adams to
                              - 33 -

calculate the value of the class A and class B limited

partnership interests in PLP using the value of the total

property being contributed.   The trust contributed its

California, Florida, Oregon, and Hawaii properties with a total

net value of $5,915,167 to PLP, in exchange for all 59 general

partnership units, all 310 class A limited partnership units, and

5,545 of the 5,546 class B limited partnership units.     Moss-Adams

calculated a $2,140,100 fair market value for the class B limited

partnership units and calculated a $5,915,200 fair market value

for the class A limited partnership units.

     Ignoring the Moss-Adams valuation, the parties valued the 59

general partnership units at $59,000, the 310 class A limited

partnership units at $310,000, and 5,545 class B limited

partnership units at $2,376,290.   The trust exchanged $5,915,167

worth of real estate for partnership interests valued at

$2,376,290.   Given the valuations before us, we find it difficult

to find the trust received an interest in PLP proportionate to

the fair market value of the assets contributed.

     Moreover, the estate claims Robert contributed $362 in cash

to PLP in exchange for 1 class B limited partnership unit with a

stated value of $362.   We find no evidence in the record to

suggest Robert actually contributed $362 to the partnership.    We

find especially significant the fact that PLP did not maintain a

bank account for its first 2 years of existence, leaving no
                               - 34 -

account in which to deposit the contribution.   Without some

evidence of an actual contribution of $362 in cash, we find that

Robert has been credited with a partnership interest

disproportionate to the fair market value of property

contributed.

     Under these circumstances, we conclude that the interests

credited to each of the partners were not proportionate to the

fair market value of the assets each partner contributed to the

partnership.

                b.   Whether the Assets Contributed by Each
                     Partner to the Partnership Were Properly
                     Credited to the Respective Capital Accounts
                     of the Partners

     The estate argues that the assets contributed by each

partner were properly credited to their respective capital

accounts.   We disagree.   The trust contributed its real estate to

PLP in December 1997.   However, PLP did not begin keeping track

of its partners’ capital accounts until June 1999 at the

earliest.   Additionally, the evidence introduced by the estate

fails to support their argument.   The estate introduced into

evidence PLP’s statement of partners’ capital account (capital

account statement) for the year ended December 31, 2000.

According to the capital account statement the total value of all

of PLP’s capital accounts as of December 31, 1999 was $24,203.

The trust had contributed $5,915,167 worth of real estate to the

PLP in 1997.   This contribution is not reflected in the capital
                               - 35 -

accounts as of December 31, 1999.   On the basis of the foregoing,

we conclude that the assets contributed by each partner were not

properly credited to their respective capital accounts.

                 c.   Whether on Termination or Dissolution of the
                      Partnership the Partners Were Entitled to
                      Distributions From the Partnership in Amounts
                      Equal to Their Respective Capital Accounts

     The estate argues, and we agree, that upon termination of

the partnership the partners were entitled to distributions from

PLP in amounts equal to their respective capital accounts.

                 d.   Conclusions With Respect to Whether the
                      Transactions Were for Adequate and Full
                      Consideration

     Having concluded that: (1) The interests credited to each

partner were not proportionate to the fair market value of the

assets contributed by the partner, and (2) the assets contributed

by each partner were not properly credited to their respective

capital accounts, we conclude that Dr. Liljestrand did not

contribute the real estate to PLP for adequate and full

consideration.   We find especially significant that PLP failed to

maintain capital accounts upon formation of the partnership in

1997 and used neither the values established in the Moss-Adams

appraisal nor the fair market value of the real estate to

establish the value of each partner’s PLP interest.

     Having concluded that the transfer was not a bona fide sale

for adequate and full consideration, we now turn to the issue of
                               - 36 -

whether Dr. Liljestrand retained the possession or enjoyment of,

or the right to income from, the property he transferred to PLP.

     C.     Whether Dr. Liljestrand Retained the Possession or
            Enjoyment of, or the Right to the Income From, the
            Property He Transferred to PLP

     “An interest or right is treated as having been retained or

reserved if at the time of the transfer there was an

understanding, express or implied, that the interest or right

would later be conferred.”    Sec. 20.2036-1(a), Estate Tax Regs.

“The existence of formal legal structures which prevent de jure

retention of benefits of the transferred property does not

preclude an implicit retention of such benefits.”    Estate of

Thompson v. Commissioner, 382 F.3d 367, 375 (3d Cir. 2004), affg.

T.C. Memo. 2002-246; Estate of McNichol v. Commissioner, 265 F.2d

667, 671 (3d Cir. 1959), affg. 29 T.C. 1179 (1958); Estate of

Bongard v. Commissioner, 124 T.C. at 129.

     The existence of an implied agreement is a question of fact

that can be inferred from the circumstances surrounding a

transfer of property and the subsequent use of the transferred

property.    Estate of Bongard v. Commissioner, supra at 129.    We

have found implied agreements where:    (1) The decedent used

partnership assets to pay personal expenses, e.g., Estate of

Rosen v. Commissioner, T.C. Memo. 2006-115; (2) the decedent

transferred nearly all of his assets to the partnership, e.g.,

Estate of Reichardt v. Commissioner, 114 T.C. 144 (2000); (3) the
                               - 37 -

decedent’s relationship to the assets remained the same before

and after the transfer, e.g., id.; Estate of Rosen v.

Commissioner, supra; and (4) the partnership served as an

alternate vehicle through which the decedent was able to provide

for his children at his death, e.g., Estate of Harper v.

Commissioner, T.C. Memo. 2002-121.

     Although Dr. Liljestrand retained some assets outside the

partnership, we find he lacked sufficient funds outside of the

partnership to maintain his lifestyle and satisfy his future

obligations.   Dr. Liljestrand contributed almost all of his

income-generating property to PLP.      Respondent alleges that the

transfer left Dr. Liljestrand with inadequate assets and cashflow

to meet his living expenses.   The estate counters respondent’s

assertion by claiming that Dr. Liljestrand retained his home and

could easily have borrowed against his interest in PLP and the

house to support himself.

     The estate relies on the Estate of Mirowski v. Commissioner,

T.C. Memo. 2008-74, in arguing that Dr. Liljestrand had retained

sufficient assets outside of PLP.    In Estate of Mirowski, the

Commissioner argued that the decedent did not retain sufficient

assets outside of the partnership to meet her anticipated

financial obligations.   The Court disagreed, finding that Mrs.

Mirowski had retained $7.5 million of personal assets that she

did not transfer to the partnership, including $3.3 million in
                              - 38 -

cash and cash equivalents.   These assets were more than

sufficient to cover her personal expenses.   With regard to her

anticipated gift tax liability, the Court found that Mrs.

Mirowski had the ability to satisfy such liability with the

distributions she would receive from the partnership and through

her ability to borrow against her personal assets, including her

partnership interest.

     The estate in comparing the instant case to Estate of

Mirowski, relies primarily on the fact that Dr. Liljestrand could

borrow against his home and did in fact borrow $142,500 against

his home.   We believe Estate of Mirowski is distinguishable from

the instant case.   In Estate of Mirowski, the decedent retained

$7.5 million outside of the partnership, more than enough to

satisfy her personal expenses.   Dr. Liljestrand, on the other

hand, did not retain sufficient assets outside of PLP to satisfy

his personal expenses, as demonstrated by the fact that PLP paid

a number of Dr. Liljestrand’s personal expenses, including his

housekeepers’ salaries and grandchildrens’ tuition.   Moreover, we

find the estate’s reliance on Dr. Liljestrand’s actually

borrowing against the equity line of credit to be disingenuous.

PLP repaid this equity line of credit, not Dr. Liljestrand.    In

fact, the partnership sold two properties in order to raise the

funds necessary to make the payments.
                              - 39 -

     Additionally, PLP refinanced a loan in order to pay

$2,370,000 and $130,000 to the U.S. Government and the State of

Hawaii, respectively, to satisfy Dr. Liljestrand’s estate tax

obligations.   The use of a significant portion of partnership

assets to discharge obligations of a taxpayer’s estate is

evidence of a retained interest in the assets transferred to the

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

of Korby v. Commissioner, T.C. Memo. 2005-103, affd. 471 F.3d 848

(8th Cir. 2006); Estate of Thompson v. Commissioner, T.C. Memo.

2002-246.   “[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 at 477.

     The estate attempts to downplay the significance of the

direct use of PLP funds to pay Dr. Liljestrand’s personal

expenses by claiming that such distributions were properly

accounted for as draws against Dr. Liljestrand’s capital account.

To the extent that the estate’s arguments focus on accounting

manipulations, they are unavailing.    Robert and Annie Au, PLP’s

accountant, each testified that accounting adjustments were made

at yearend after monies had actually been distributed.

Accounting entries made by Mrs. Au were a belated attempt to undo

Dr. Liljestrand’s receipt of disproportionate distributions.

After-the-fact paperwork by Dr. Liljestrand’s accountant does not
                                - 40 -

refute the implied understanding that Dr. Liljestrand could

continue to use and control the partnership property during his

life.    The accounting adjustments do not preclude a conclusion

that those involved understood that Dr. Liljestrand’s assets

would be made available as needs materialized.      See Estate of

Reichardt v. Commissioner, supra at 154-155; Estate of Harper v.

Commissioner, supra.

        Respondent also cites the fact that Dr. Liljestrand’s

commingled personal and partnership funds.      This fact was one of

the most heavily relied upon in both Estate of Reichardt v.

Commissioner, supra at 152, and Estate of Schauerhamer v.

Commissioner, T.C. Memo. 1997-242.       The PLP agreement specified:

“All funds of the Partnership shall be deposited in its name in

such checking and savings accounts, certificates’ of deposit,

United States government obligation or other short-term interest

bearing accounts with institutions selected by the General

partner”.     Yet no such account was opened until August 1999,

almost 2 years after the entity began its legal existence.

Before that time, partnership income was deposited in the trust’s

account, resulting in an unavoidable commingling of funds.

        We also consider the partnership distributions in

determining whether there was an implied agreement to retain

possession of the transferred assets.      As part of the partnership

agreement, Dr. Liljestrand was guaranteed a preferred return of
                              - 41 -

14 percent of the value of his class A limited partnership

interest.   Dr. Liljestrand’s class A limited partnership interest

was valued at $310,000, thus Dr. Liljestrand was guaranteed

annual payments equal to $43,400.   Moss-Adam’s appraisal

estimated the partnership’s annual income would equal $43,000.

We find this guaranteed return indicative of an agreement to

retain an interest or right in the contributed property.

     In addition to the preferred returns, the partnership

distributions were heavily weighted in favor of Dr. Liljestrand.

According to PLP’s reconciliation reports, for the years 1999

through 2002, PLP distributed to the trust $80,414, $43,400,

$226,718, and $75,552, respectively.   PLP made these

distributions to Dr. Liljestrand without making a distribution to

any other partner.

     In addition to arguing that such distributions were

accounted for as draws against the trust’s capital account, the

estate also argues that the distributions to the trust were

consistent with PLP’s guaranteed payment obligation.    We find

that this argument has little credibility given that only the

2000 payment was for the guaranteed payment amount.     The record

supports a conclusion that in making the payments Robert was not

concerned with meeting PLP’s guaranteed payment obligation but

rather was concerned with Dr. Liljestrand’s support.    The

disproportionate distributions provide further evidence of an
                               - 42 -

implied agreement to retain possession or enjoyment of the

transferred assets.

     Lastly, we focus on the testamentary characteristics of the

partnership arrangement.   While we acknowledge that PLP did come

into existence before Dr. Liljestrand’s death and that some

change ensued in the formal relationship of those involved to the

assets, we are satisfied that any practical effect during

decedent’s life was minimal.   Rather, the partnership served

primarily as a testamentary device through which decedent would

provide for his children at his death.

     The motivation for PLP’s formation is admittedly postmortem.

The record is devoid of any significant change in Dr.

Liljestrand’s relationship with the assets before his death.     Dr.

Liljestrand received a disproportionate share of the partnership

distributions, engineered a guaranteed payment equal to the

partnership expected annual income, and benefited from the sale

of partnership assets.   The objective evidence points to the fact

that Dr. Liljestrand continued to enjoy the economic benefits

associated with the transferred property during his lifetime.

With regards to Dr. Liljestrand’s motivation for forming PLP, Dr.

Liljestrand was concerned with the disposition of his property

after death.   The estate claims he wanted to protect the property

from partition and guarantee Robert’s management of the property

after his death.   These motives are primarily testamentary in
                              - 43 -

nature.   The objective and subjective evidence lead to a

conclusion that the partnership was simply a vehicle for

controlling Dr. Liljestrand’s property after his death.

     In summary, we are satisfied that PLP was created

principally as an alternate testamentary vehicle to the trust.

Taking this feature in the light of all the factors discussed

above, we conclude that Dr. Liljestrand retained enjoyment of the

contributed property within the meaning of section 2036(a).

     D.   Conclusion With Respect to Whether the Values of the
          Assets Transferred to PLP Are Includable in the Value
          of the Gross Estate

     On the record before us, we find that:    (1) Dr. Liljestrand

transferred assets to PLP within the meaning of section 2036, (2)

the transfer was not a bona fide sale for adequate and full

consideration, and (3) Dr. Liljestrand retained enjoyment of the

transferred assets.   Therefore, we conclude that pursuant to

section 2036(a)(1), the value of the Dr. Liljestrand’s gross

estate includes the values of the assets Dr. Liljestrand

transferred to PLP.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.
