                        T.C. Memo. 2004-39



                      UNITED STATES TAX COURT



  ESTATE OF IDA ABRAHAM, DECEASED, DONNA M. CAWLEY AND DIANA A.
              SLATER, ADMINISTRATRIXES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7071-01.            Filed February 18, 2004.


     Brendan J. Shea, for petitioner.

     Carina J. Campobasso, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION



     RUWE, Judge:   The Estate of Ida Abraham (the estate) seeks a

redetermination of respondent’s deficiency determination of an

estate tax of $1,125,210.   The sole question presented is whether

the full date of death value of three family limited partnerships

is includable in the taxable estate of Ida Abraham (decedent)
                                - 2 -

under section 2036.1   Respondent concedes that decedent received

$320,000 in connection with the transfer of certain limited

partnership interests to her daughters, an amount which

constitutes consideration within the meaning of section 2043.

Additionally, respondent concedes adjustments made in the notice

of deficiency for adjusted taxable gifts in the amount of $71,195

and an aggregate gift tax payable in the amount of $29,142.

Because of respondent’s concessions, a Rule 155 computation will

be necessary.

                           FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time of filing the

petition, the administratrixes, Donna M. Cawley and Diana A.

Slater, resided in Massachusetts.

Background

     Decedent and her husband, Nicholas Abraham (Mr. Abraham,

Sr.), had four children:    Nicholas A. Abraham, Richard Abraham,

Donna Cawley, and Diana Slater.    Mr. Abraham, Sr., died on June

5, 1991, leaving significant assets to his wife.   Of his nearly

$7 million estate, $4,168,885.37 is reported as passing to



     1
      All section references are to the Internal Revenue Code in
effect as of the date of decedent’s death, and unless otherwise
indicated all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -

decedent on Schedule M, Bequests, etc., to Surviving Spouse, on

his Form 706, United States Estate (and Generation-Skipping

Transfer) Tax Return.    Among those assets bequeathed to decedent

were the following:    (1) Real properties consisting of ice and

roller skating rinks collectively known as the Tyngsboro

property; (2) the real property known as the Walpole property,

which was comprised of a lumber yard; and (3) the real property

known as the Smithfield property, which also had an ice skating

rink.    Mr. Abraham, Sr.’s will was contested, and the family

entered into an agreement to compromise his will, which the

probate court accepted.2

     On March 10, 1993, decedent was placed under a guardianship

in a proceeding docketed as In re: Guardianship of Ida Abraham,

Docket No. 92P 0589 in the Commonwealth of Massachusetts Probate

and Family Court.3    At some point, Mr. Peter F. Zupcofska, Esq.,

was appointed guardian ad litem for decedent.    On June 22, 1993,

the probate court appointed Ms. Cawley and Mr. Ira A. Nagel as

permanent guardians of the property and estate of decedent.4     On



     2
      At some point between the filing of the petition in this
case and the execution of the stipulation of facts, decedent’s
son, Mr. Nicholas A. Abraham, decided to forgo any interest he
had in his mother’s estate.
     3
      Apparently, decedent suffered from the effects of
Alzheimer’s disease.
     4
      The appointment of guardians was in accordance with the
terms of Mr. Abraham, Sr.’s compromised will.
                                - 4 -

or about November 3, 1993, Ms. Cawley and Mr. Nagel petitioned

the probate court for authority to “make gifts from funds not

needed for the * * * [decedent’s] own maintenance and support to

and/or in trust for the benefit of each of the * * * [decedent’s]

children and grandchildren and the spouses of her children.”      The

reason for the gifting powers was, inter alia, that decedent’s

estate “is likely to be subject at her death to * * * taxes at

the highest marginal tax rates then in effect.”    On December 30,

1993, the probate court signed a decree authorizing decedent’s

coguardians to make gifts.

     On June 13, 1994, decedent’s children, their respective

counsel, as well as decedent’s legal guardians and

representatives agreed to a stipulation and agreement for entry

of decree to petition to establish an estate plan for decedent

(the decree) regarding decedent’s guardianship in Docket No. 92P

0589.5    The decree contemplated, inter alia, the following

actions to be performed on behalf of decedent:

     1.    The Walpole and the Smithfield properties were to be

placed in a family limited partnership (FLP) of which decedent

was to become the general and a limited partner.    Mr. Richard

Abraham was to become a 30-percent limited partner in exchange




     5
      Decedent’s children, their respective counsel, and
decedent’s representatives signed the decree on Aug. 1, 1995.
                               - 5 -

for the settlement of his claims against decedent’s estate.      The

decree included the following agreement:

     Richard [Abraham] shall receive income from said family
     limited partnership as follows: either as the management
     fee and/or gifts from Ida Abraham after deducting from the
     gross income of the partnership all fees, taxes, partnership
     administrative expenses, reserve for expenses and monies
     needed in the discretion of the limited Guardian ad litem
     (as hereinafter defined) for Ida Abraham’s support.

     2.   Likewise, decedent was to be the general and a limited

partner of two FLPs, and each daughter, Ms. Cawley and Ms.

Slater, was to be a limited partner therein in exchange for her

payment of $160,000.   Each of these FLPs was to hold a 50-percent

interest in the Tyngsboro property.    The decree included the

following agreement:

     Donna [Cawley] and Diana [Slater] shall receive income from
     their family limited partnership as follows: either as the
     management fee and/or gifts from Ida Abraham after deducting
     from the gross income of the partnership all fees, taxes,
     partnership administration expenses, reserve for expenses
     and monies needed in the discretion of the limited Guardian
     ad litem for Ida Abraham’s support.

     3. “The partnerships of the siblings, Richard, Donna, and

Diana shall share equally any and all costs and expenses related

to the ‘Ozdemir suit’, the Bloom potential action, and the

support of Ida Abraham insofar as the funds generated by Ida

Abraham’s properties maintained by her do not provide sufficient

funds for her adequate health, safety, welfare and comfort as

determined by the limited Guardian ad litem”.
                                - 6 -

     4.    Mr. David Goldman, Esq. (hereinafter sometimes referred

to as the limited guardian ad litem), was to act as a limited

guardian ad litem for the benefit of decedent “with regard to her

general and limited partnership interests in each of the three”

FLPs.     Furthermore,

     Mr. Goldman shall have the right to meet with the
     guardians of the person and the estate of Ida Abraham
     in order to ascertain her needs to determine any and
     all shortfall as between the funds generated by Ida
     Abraham’s segregated property and the income required
     of her from each of the separate limited partnerships.

     5.    Gifts of limited partnership interests in amounts not to

exceed the annual gift exclusion amount “shall be made as

expeditiously as possible” to decedent’s children, their spouses,

and her grandchildren.

     6.    Each of decedent’s children had the right to purchase

additional units from each of their respective FLPs, the proceeds

from which were to be held in a revocable trust for the benefit

of decedent during her life for her needs “(only if her other

assets are insufficient to do so)” and then held for such child

and his or her family upon decedent’s death.

     7.    Decedent’s living arrangement “shall remain in

accordance with the present arrangement and every effort will be

made to maintain her in ‘status quo’.    Her segregated assets

shall be maintained at a level established by the limited

Guardian ad litem in his sole discretion.”
                                - 7 -

     8.   Mr. Richard Abraham, Ms. Cawley, and Ms. Slater shall

share “pro rata” all gift and estate tax liabilities of decedent.

     Decedent’s estate plan evolved in numerous steps and

employed the use of many entities:6

     (1) Three separate real estate trusts were formed to hold

the real property interests:7   (a) The DAC Tyngsboro Real Estate

Trust was formed on October 1, 1995, naming Ms. Cawley as

trustee, and on October 6, 1995, that trust was deeded a one-

half, undivided interest in the Tyngsboro property; (b) the RMA

Walpole Real Estate Trust was formed on October 1, 1995, naming

Mr. Richard Abraham as trustee, and on that day that trust was

deeded the Walpole property;8 and (c) the DAS Real Estate Trust

was formed on October 1, 1995, naming Ms. Slater as trustee, and

on October 6, 1995, that trust was deeded a one-half, undivided

interest in the Tyngsboro property.9    On the date that the

Tyngsboro property was transferred to the DAS and the DAC real


     6
      Decedent’s estate plan, which benefited Mr. Richard
Abraham, differed slightly from those of Ms. Cawley’s and Ms.
Slater’s, and where relevant, we shall indicate any substantive
differences. However, most of the terms in the documents which
created the entities/structures herein discussed are
substantially similar.
     7
      The parties stipulated that certain real properties were
“placed” in the FLPs.
     8
      As discussed infra, the Smithfield property was deeded to
an FLP.
     9
      Decedent, through her coguardians, deeded the properties to
the real estate trusts.
                                - 8 -

estate trusts, the property had a total value of $1.8 million or

$900,000 to each trust.   According to an analysis that Mr.

Michael Lipof, an appraiser, performed, the Walpole property had

a value of $550,000 as of December 31, 1995.    At the time that

the aforementioned properties were transferred, they were all

subject to long-term leases with independent third parties.

     (2) Each of the aforementioned real estate trusts had as its

100-percent beneficiary a separate FLP.    In October 1995, the

following FLPs were formed:    The RMA Smithfield/Walpole Family

Limited Partnership (RMA FLP), the DAC Tyngsboro Family Limited

Partnership (DAC FLP), and the DAS Tyngsboro Family Limited

Partnership (DAS FLP).    On October 6, 1995, the Smithfield

property was deeded to the RMA FLP.10   The stated purpose of the

FLPs was to “acquire, own, hold, sell, invest, reinvest and

otherwise deal with the Property and any other investments.”

Under the FLP agreements “all income, deductions, profits, losses

and credits shall be allocated among the Partners in proportion

to their respective Percentage Interests.”   With respect to

distributions:

     If the General Partner shall determine that there is cash
     available for distribution, such cash shall be applied and
     distributed:

               (a) First, to the discharge, to the extent
          required by any lender or other creditor, of debts


     10
      See supra note 8. According to Mr. Lipof’s letter dated
Dec. 31, 1995, the value of the Smithfield property was $320,000.
                                 - 9 -

             and obligations of the Partnership and management
             fees;

                  (b) Second, to fund reserves for working
             capital, improvements or replacements or
             contingencies, to the extent deemed reasonable by
             the General Partner; and

                  (c) Thereafter, to the Partners in proportion
             to their respective Percentage Interests.

     (3) Each FLP had as its general partner a corporation

(sometimes referred to as the corporate general partners):       (a)

RMA Smithfield/Walpole Management Company, Inc. (RMA, Inc.); (b)

DAS Tyngsboro Management Company, Inc. (DAS, Inc.); and (c) DAC

Tyngsboro Management Company, Inc. (DAC, Inc.).     The president of

DAS, Inc., and DAC, Inc., was Mr. Goldman, decedent’s limited

guardian ad litem, who had the “exclusive right” to manage those

FLPs.     Similarly, Mr. Harold E. Rubin was named president of RMA,

Inc., and accordingly, he also had management responsibilities

over the RMA FLP.11    As the presidents of the corporate general

partners, Messrs. Goldman and Rubin acted in a fiduciary capacity

for decedent and had complete discretion to determine how much

money decedent needed from the FLPs to meet her needs.

     (4) By and through her legal representatives, decedent also

formed three separate revocable trusts (the family trusts) to

hold her stock in the corporate general partners.     In 1995, the



     11
      Mr. Rubin was the limited guardian ad litem of decedent
with respect to the interests of Mr. Richard Abraham in her
estate.
                                - 10 -

following family trusts were formed:     The DAS Family Trust, the

DAC Family Trust, and the RMA Family Trust.    Mr. Goldman was

named the trustee of the DAS and DAC family trusts, and Mr. Rubin

was initially named the trustee of the RMA family trust.12      Under

the agreement for each family trust, the trustee was granted the

following power:

     During Ida’s lifetime the Trustees in their discretion shall
     pay the net income and principal of the trust property to
     Ida during her lifetime for her benefit and may also make
     payments to any one or more of her * * * [children: Mr.
     Richard Abraham, Ms. Cawley, and Ms. Slater and their] issue
     and the spouse of * * * [children] to utilize gift tax
     exclusions.

Upon her death, the trustee was to transfer the balance of the

principal of the trust property to separate “family trusts” for

the benefit of decedent’s children, Mr. Richard Abraham, Ms.

Cawley, and Ms. Slater, or in accordance with each child’s

general power of appointment.

     Initially, with respect to the DAS and DAC FLPs, decedent

held a 98-percent limited partnership interest, the corporate

general partners, DAS, Inc., and DAC, Inc., each held a 1-percent

interest, and Ms. Cawley and Ms. Slater each held a 1-percent

interest.13   Similarly, decedent initially held a 99-percent


     12
      Mr. Richard Abraham and his wife, Jacqueline, became
cotrustees of the RMA Family Trust on Jan. 15, 1996.
     13
      Except for a letter discussed infra, there is no
indication in the record that Ms. Cawley and Ms. Slater paid any
consideration for 1-percent interests in the FLPs. See infra
                                                   (continued...)
                             - 11 -

limited partnership interest in the RMA FLP, and RMA, Inc., held

the remaining 1-percent interest.     On December 26, 1995, Mr.

Richard Abraham was given a 30-percent interest in the RMA FLP in

exchange for the settlement of his claims against decedent’s

estate.

     In a letter dated November 9, 1995, Mr. William D.

Kirchick14 explained to Ms. Cawley and Ms. Slater the methodology

used in determining the value of interests in the FLPs.     The

starting point was Mr. Lipof’s appraisal valuing the Tyngsboro

property at $1.8 million or $900,000 in each partnership.15       Mr.

Kirchik then applied a 15-percent minority and a 25-percent

marketability discount, arriving at a value of $5,795 for each 1-

percent limited partnership interest.    Similarly, in a letter

dated January 2, 1996, Mr. Kirchick explained his methodology to

determine the value of the RMA FLP.    The starting point was Mr.

Lipof’s appraisal that the Walpole and Smithfield properties had


     13
      (...continued)
note 15.
     14
      With the agreement of decedent’s family and their
respective representatives, the probate court appointed Mr.
Kirchik to “work with David Goldman in creating the limited
partnerships and any and all supporting documents necessary to
implement said limited partnerships.”
     15
      In a letter dated Nov. 9, 1995, Mr. Kirchick explained
that the daughters were deemed to have made capital contributions
of 1 percent of the total value of the partnership as their
initial capital contribution, or $9,091 each. Thus, he
calculated a total value for each partnership of $909,091 or
$9,091 for each 1-percent interest before applying discounts.
                               - 12 -

a combined fair market value of $870,000.     He then applied the

same 15-percent minority and 25-percent marketability discounts

to arrive at a net asset fair market value for each 1-percent

interest in the RMA FLP of $5,546.      In both of the aforementioned

letters, however, Mr. Kirchick noted that “no representation is

made that these discounts will hold up or that you will be

entitled to the full amount of the annual exclusions claimed for

the gifts made.”

       In October 1995, Ms. Cawley transferred $160,000 to

decedent’s checking account to purchase an interest in the DAC

FLP.    In exchange for $151,000 of the $160,000 paid, Ms. Cawley

received a 26.057-percent interest in the DAC FLP.16     Likewise,

in October 1995, Ms. Slater transferred $160,000 to decedent’s

checking account in exchange for a 27.783-percent interest in the

DAS FLP.17

       On March 25, 1996, Ms. Cawley wrote a $30,000 check to the

DAC FLP and a $40,000 check to the DAS FLP.     The checks were

written from a joint account held in both Ms. Cawley and Ms.


       16
      The record does not disclose why $9,000 was also not
credited as consideration for the purchase of an interest in the
DAC FLP. However, it is clear that the parties used the
discounted value to calculate the percentage received in the
exchange: 26.057 percent interest x $5,795 = $151,000.31.
       17
      Apparently, although she paid only $160,000, Ms. Slater
was credited with having paid $161,000. It is clear that the
parties used the discounted value to calculate the percentage
received in the exchange: 27.783 percent interest x $5,795 =
$161,002.48.
                               - 13 -

Slater’s names.    In exchange for the $30,000 paid to the DAC FLP,

Ms. Cawley received an additional 5.178-percent interest in the

DAC FLP, and in exchange for the $40,000 paid to the DAS FLP, Ms.

Slater received an additional 6.904-percent interest in the DAS

FLP.

       On March 1 and April 4, 1997, Ms. Cawley wrote two checks to

the DAC FLP, each in the amount of $25,000, and in exchange for

these amounts paid to the DAC FLP, she received an additional

8.64-percent interest in the DAC FLP.    Similarly, on March 5 and

April 8, 1997, Ms. Slater wrote two checks to the DAS FLP, each

in the amount of $25,000, and in exchange for the amount paid to

the DAS FLP, Ms. Slater received an additional 8.63-percent

interest in the DAS FLP.

       In each of 1995, 1996, and 1997, decedent, through her

limited guardian ad litem, made gifts of 1.726-percent interests

in the DAS FLP to Ms. Slater, her husband, and their two

children.    Likewise, gifts were made of 1.726-percent interests

in the DAC FLP to Ms. Cawley, her husband, and their three

children in each of 1995, 1996, and 1997.    Similarly, gifts of

1.803-percent interests in the RMA FLP were made to Mr. Richard

Abraham and his family in 1995, 1996, and 1997.18




       18
      During 1995, 1996, and 1997, decedent gifted a total
23.439 percent of the RMA FLP to Mr. Richard Abraham and his
family.
                                 - 14 -

     On June 9, 1997, decedent Ida Abraham died in Boston,

Massachusetts.     On the date of decedent’s death, the fair market

value of the Tyngsboro property was $2.2 million, and the fair

market value of the Walpole and Smithfield properties was

$830,000.     After decedent’s death, Ms. Cawley received a

$93,078.62 distribution from the DAC FLP, and Ms. Slater received

a $120,869.42 distribution from the DAS FLP.

     Mr. Lipof determined the values of the FLPs for purposes of

valuing the decedent’s taxable estate, as of the date of death.

In a letter dated January 20, 1998, Mr. Lipof appraised the value

of the RMA FLP at $830,000 by looking at the value of the

underlying properties that FLP held.19     Mr. Lipof valued

decedent’s supposed 45-percent interest at a “gross book value”

before discounts of $373,500.     He then stated that a 30- to 40-

percent discount of the “gross book value” would be appropriate,

estimating the market value of decedent’s interest to be

$242,750.     Under a similar methodology, Mr. Lipof determined that

the Tyngsboro property had a value of $2.2 million.     Mr. Lipof

explained that at the time of decedent’s death, she owned 33.3

percent in the DAS and DAC FLPs, with a value before discounts of

$733,333.     Applying the same 30- to 40-percent discount, Mr.

Lipof opined that the market value of decedent’s interest in the




     19
          Mr. Lipof was a real estate consultant.
                                  - 15 -

partnerships at the time of her death was $476,666 or $238,333

for each partnership.

      On Schedule F, Other Miscellaneous Property Not Reportable

Under Any Other Schedule, of the estate tax return, the estate

reported the following miscellaneous property:         (1) RMA FLP, 45

percent interest, value at date of death $242,750; (2) DAS FLP,

33.3-percent interest, value at date of death $238,333; and (3)

DAC FLP, 33.3-percent interest, value at date of death $238,333.

In the notice of deficiency, respondent determined that 70

percent of the fair market value of the assets in the RMA FLP20

and 100 percent of the fair market value of the assets held in

the DAC and DAS FLPs were includable in decedent’s taxable

estate.

                                 OPINION

A.   Burden of Proof

      Generally, the burden of proof is on the petitioner.        See

Rule 142(a).      However, in certain circumstances the burden of

proof shifts to the Commissioner.21         For example, a new matter or

theory raised by the Commissioner can cause the burden to shift


      20
           On brief, respondent explains:

      In determining the includible value, the examiner
      erroneously treated Richard’s [Abraham] relinquishment of
      his right to share in Mrs. Abraham’s estate as consideration
      for purposes of I.R.C. § 2043, and subtracted it from the
      $830,000 date of death net asset value of the partnership.
      21
           Neither party argued the applicability of sec. 7491.
                               - 16 -

if “it either alters the original deficiency or requires the

presentation of different evidence.”     Wayne Bolt & Nut Co. v.

Commissioner, 93 T.C. 500, 507 (1989).

     The estate argues on brief that the burden should shift to

respondent because the notice of deficiency was not sufficient to

put the estate on notice of the factual basis of respondent’s

determination.    The estate argues:

     Certainly a code section reference may have legal meaning to
     a tax professional or other students of the tax code but, a
     reference [in the notice] in this case to Section 2036 is of
     no descriptive assistance to a taxpayer.

     *        *       *         *          *         *         *

     The statements contained in the Notice indicate that the
     transfers were made for less than full and adequate
     consideration in money and monies worth but fails to
     describe why the consideration was inadequate and further
     fails to state the amount of consideration the Respondent
     would consider adequate.

     In Shea v. Commissioner, 112 T.C. 183, 197 (1999), this

Court held:

     where a notice of deficiency fails to describe the
     basis on which the Commissioner relies to support a
     deficiency determination and that basis requires the
     presentation of evidence that is different than that
     which would be necessary to resolve the determinations
     that were described in the notice of deficiency, the
     Commissioner will bear the burden of proof regarding
     the new basis. * * *

In that case, since the notice did not describe section 66(b) as

respondent’s basis for disallowing the benefits of community

property law to the taxpayer, we treated the section 66(b) issue
                                - 17 -

that the Commissioner raised as a “new matter” for which the

Commissioner should bear the burden of proof.

     In the instant case, respondent identified both the legal

and factual bases for his determination, stating, inter alia, in

the notice of deficiency:

     It is determined that the decedent/guardian transferred DAS,
     Tyngsboro Family Limited Partnership for less than adequate
     and full consideration in money or money’s worth and that
     the decedent, through the guardian, retained an interest in
     the asset. Therefore, pursuant to I.R.C., section 2036, the
     fair market value of the asset is includible in the
     decedent’s gross estate. Accordingly, the taxable estate is
     increased by $1,100,000.00.

Under that same reasoning, respondent determined that the full

fair market values of the DAC FLP and the RMA FLP, $1.1 million

and $581,000,22 respectively, should also be included in

decedent’s taxable estate.     Despite the estate’s protestations on

brief, it is clear that the estate understood the basis of

respondent’s determination.    For example, in paragraph 4 of the

petition, the estate states:

     (a) The Commissioner erred in reclassifying the Decedent’s
     thirty three and one third percent (33.3%) interest in the
     DAS Tyngsboro Family Limited Partnership (“DAS”) originally
     returned at a value of $238,333.00 on Schedule F, Item 3 of
     the Estate Tax Return. The Commissioner has taken the
     position in his reclassification that 100% of the DAC Family
     Limited Partnership is to be included on Schedule G of the
     Estate Tax Return. The Commissioner further errs in valuing
     the 100% interest in DAC at more than $238,333.00. * * *

And in paragraph 5 of the petition, the estate states:



     22
          See supra note 20.
                                 - 18 -

      (g) The fractional share gifts of the Limited Partnership
      interest made by the Decedent * * * were made outright,
      absolutely, and unconditional. The Decedent retained no
      incidents of ownership and had no further rights with
      respect to the Limited Partnerships, either express or
      implied.

      We think the description in the notice is sufficient to

provide the estate with a description of the factual and legal

bases for respondent’s deficiency determination and that

respondent has not raised any new issues.      Accordingly, we find

that the burden of proof does not shift to respondent.

B.   Section 2036--Full Inclusion of the FLP Interests?

      In the notice of deficiency, respondent determined that

decedent transferred interests in the FLPs “for less than

adequate and full value in money or money’s worth and that the

decedent, through the guardian, retained an interest” in the FLP

interests transferred and that the full fair market values of the

FLPs should have been included in decedent’s gross estate.23     On

brief, respondent explains that the interplay between the probate

court’s decree and the estate plan documents themselves expressly

created for decedent, through her duly appointed legal

representatives, a retained right to all the income that the FLPs

generated.      Alternatively, respondent argues that there was an

implied agreement between decedent’s children and the limited




      23
           See supra note 20.
                              - 19 -

guardian ad litem that decedent would retain the right to the

income generated by the FLP interests transferred.

     Generally, the Code imposes a tax on the transfer of a

decedent’s property in his taxable estate.    Sec. 2001(a).   The

“taxable estate” is defined as the value of the gross estate,

less applicable deductions.   Sec. 2051.   In turn, the gross

estate includes “all property, real or personal, tangible or

intangible, wherever situated” to the extent provided in sections

2033 through 2045.   Sec. 2031(a).   Section 2033 provides that

“The gross estate shall include the value of all property to the

extent of the interest therein of the decedent at the time of his

death.”   Included in the broad definition of gross estate is that

property described in section 2036, which provides in pertinent

part:

     SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.

          (a) General Rule.–-The value of the gross estate shall
     include the value of all property to the extent of any
     interest therein of which the decedent has at any time made
     a transfer (except in case of a bona fide sale for an
     adequate and full consideration in money or money’s worth),
     by trust or otherwise, under which he has retained for his
     life or for any period not ascertainable without reference
     to his death or for any period which does not in fact end
     before his death–-

               (1) the possession or enjoyment of, or the
          right to the income from, the property, or

               (2) the right, either alone or in conjunction
          with any person, to designate the persons who
          shall possess or enjoy the property or the income
          therefrom.
                               - 20 -

     The general purpose of section 2036 is to “include in a

decedent’s gross estate transfers that are essentially

testamentary–-i.e., transfers which leave the transferor a

significant interest in or control over the property transferred

during his lifetime.”   United States v. Estate of Grace, 395 U.S.

316, 320 (1969); see also Estate of Harper v. Commissioner, T.C.

Memo. 2002-121.   “Thus, an asset transferred by a decedent while

he was alive cannot be excluded from his gross estate unless he

‘absolutely, unequivocally, irrevocably, and without possible

reservations, parts with all of his title and all of his

possession and all of his enjoyment of the transferred

property.’”   Estate of Thompson v. Commissioner, T.C. Memo. 2002-

246 (quoting Commissioner v. Estate of Church, 335 U.S. 632, 645

(1949)).

     The statute describes a “broad scheme of inclusion,” which

is not limited to the form of the transaction, but concerns “all

inter vivos transfers where outright disposition of the property

is delayed until the transferor’s death.”   Guynn v. United

States, 437 F.2d 1148, 1150 (4th Cir. 1971).   The statute

“effectively includes in the gross estate the full fair market

value, at the date of death, of all property transferred in which

the decedent had retained an interest, rather than the value of

only the retained interest.”   Estate of Thompson v. Commissioner,
                              - 21 -

supra (citing Fidelity-Philadelphia Trust Co. v. Rothensies, 324

U.S. 108 (1945)).

     Possession or enjoyment24 of the property transferred is

retained where there is an express or implied understanding among

the parties at the time of the transfer, even if the retained

interest is not legally enforceable.25   Estate of Harper v.

Commissioner, supra (citing Estate of Maxwell v. Commissioner, 3

F.3d 591, 593 (2d Cir. 1993), affg. 98 T.C. 594 (1992)); see also

sec. 20.2036-1(a), Estate Tax Regs. (“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.”).   “The retention of

a property’s income stream after the property has been

transferred is ‘very clear evidence that the decedent did indeed

retain possession or enjoyment.’”   Estate of Schauerhamer v.




     24
      The term enjoyment is “synonymous with substantial present
economic benefit.” Estate of McNichol v. Commissioner, 265 F.2d
667, 671 (3d Cir. 1959), affg. 29 T.C. 1179 (1958); see Estate of
Reichardt v. Commissioner, 114 T.C. 144, 151 (2000).
     25
      Whether there exists an implied agreement is a question of
fact to be determined with reference to the facts and
circumstances of the transfer and the subsequent use of the
property. Estate of Reichardt v. Commissioner, supra. And, the
taxpayer “bears the burden (which is especially onerous for
transactions involving family members) of proving that an implied
agreement or understanding between decedent and his children did
not exist when he transferred the property at issue to the trust
and to the partnership.” Id. at 151-152; see also Estate of
Hendry v. Commissioner, 62 T.C. 861 (2000).
                              - 22 -

Commissioner, T.C. Memo. 1997-242 (quoting Estate of Hendry v.

Commissioner, 62 T.C. 861, 873 (1974)).

     It is clear from the documentary evidence and the testimony

elicited at trial that, regardless of the form of decedent’s

transfers, she continued to enjoy the right to support and

maintenance from all the income that the FLPs generated.

According to the decree (the document which authorized the

creation of the FLPs), decedent’s needs for support were

contemplated first from the income that the FLPs generated.    Only

after decedent’s support needs, if any, were met did the

children/limited partners receive their proportionate share of

the partnership income.   Decedent’s support needs were treated as

an obligation of the FLPs.   For example, the decree provided that

decedent’s children

     shall receive income from said * * * [FLPs] * * * after
     deducting from the gross income of the partnership all fees,
     taxes, partnership administration expenses, reserve for
     expenses and monies needed in the discretion of the limited
     Guardian ad litem * * * for Ida Abraham’s support.

In the decree, decedent’s children agreed that they would

     share equally any and all costs and expenses related to
     * * * the support of Ida Abraham insofar as the funds
     generated by Ida Abraham’s properties maintained by her
     do not provide sufficient funds for her adequate
     health, safety, welfare and comfort as determined by
     the limited Guardian ad litem * * *

The document further provided:

     Ida Abraham’s living arrangement shall remain in accordance
     with the present arrangement and every effort will be made
     to maintain her in “status quo.” Her segregated assets
                               - 23 -

     shall be maintained at a level established by the limited
     Guardian ad litem in his sole discretion.

Even the decree to compromise Mr. Nicholas Abraham, Sr.’s will

expressly contemplated that decedent would retain the right to

all the income generated:

     The undersigned agree to compromise the will of Nicholas
     Abraham by substituting for the Nicholas Abraham 1987 Trust
     four (4) separate trusts, each of which shall have as
     trustee one (1) of the four (4) living children of Nicholas
     Abraham (Nicholas A. Abraham, Donna Cawley, Richard Abraham,
     and Diana Slater). The current income beneficiary of each
     trust shall be Ida Abraham, the surviving spouse * * *.
     Each trustee shall have the power to invade principal for
     the benefit of Ida Abraham * * * in the trustee’s sole
     discretion necessary for the health, support, and
     maintenance of Ida Abraham * * *.

     Decedent’s retention of the right to all income that the

FLPs generated is evident from testimony elicited at trial.   Ms.

Cawley testified as follows:

     Q:   Did you have any pre-arrangement with Mr. Goldman other
     than the Court order as to how –- what income or assets that
     your mother could receive?

     A:   No. The arrangement was my mother lives a status quo
     time. The [sic] always lived. Nothing was to change.

          *      *      *        *      *       *      *

     A:   * * * And my mother needed to be protected. And the
     only way to protect her was to form these partnerships.
     Paid off her legal fees by using her personal assets, but
     the partnerships assured me that she would be constantly
     protected. She would never want for anything. There would
     always be money there. And if there wasn’t money in her
     partnership fund, it had to come out of my partnership
     shares or my brother’s, but the protection was there for her
     as a guarantee that she would live status quo.

          *      *      *        *      *       *      *
                          - 24 -

Q:   You said that if the money wasn’t sufficient from her
[decedent’s] share of the partnerships to pay for her needs,
extra funds would come out of your share, your sister’s
share and your brother’s share?

A:   Yes. And that’s why my sister and I purchased shares.
* * * When we came up with the agreement for the limited
partnerships, it was the thing that anybody ever agreed to;
the three of us finally agreed to something. Judge Gould
sat at a table with us months, every day for three weeks
straight. She sat at the conference table with us and
worked this out with us.

     *      *      *        *      *       *      *

Q:   Now, you testified on direct that your mother had the
right to income from her share, correct?

A:   Yes.

Q:   But you also testified earlier that if there hadn’t
been enough income from her share, she would have been able
to get the income from your share and your sister’s share?

A:   Yes, I did say that. I would have given my mother
money to take care of her living. It was from my share and
personal assets.

Q:   So, that if she had had an extraordinary expense in any
given month, like an un-reimbursable medical bill, you would
have paid it, right?

A:   Yes, I would have.

Q:   And you would have sought reimbursement from that
expense from Mr. Goldman first?

A:   Yes, I would have.

Q:   And if it absorbed all of the income from the
partnerships for that month, Mr. Goldman –- you still would
have asked for it from Mr. Goldman, right?

A:   I would have asked for it.

Q:   And he would have paid it?

A:   Yes.
                               - 25 -

     Q:   In fact, you were under a duty for –- Mr. Goldman was
     under a duty to pay the full amount of Ida’s expenses,
     right, under –- pursuant to Exhibit 11(j) [the decree]?

     A:     Whatever her own personal assets did not cover, yes.

     Similarly, Mr. Goldman’s testimony echoes decedent’s

retained right to all the FLP income.     According to his

testimony, money earned from leasing the properties that two of

the three partnerships owned was collected into bank accounts

solely controlled by Mr. Goldman.     Ms. Cawley sent Mr. Goldman

accountings “as to what was expended” for decedent’s maintenance

and support on a monthly basis and therein indicated the month’s

support “shortfall”; i.e., the extent to which her income from

other sources was not sufficient to pay her expenses for that

month.    Mr. Goldman testified:   “It was my responsibility to make

up the shortfall” from the moneys earned by the FLPs.     The

partnerships shared equally in these “shortfalls”.26    Mr. Goldman

testified that he had a fiduciary duty to ensure decedent

maintained a “status quo” of support and comfort and that the

decree “indicated to * * * [him] that that was a priority in the

allocation of [partnership] funds.”     He had discretionary power

to pay out such sums from the partnerships he deemed necessary

for decedent’s support and maintenance.    He testified that after

paying all decedent’s expenses, he paid the excess partnership


     26
      Mr. Goldman sent Mr. Rubin a reimbursement request for
one-third of the monthly “shortfall” which was to come from the
RMA FLP.
                              - 26 -

income to the daughters.   Finally, Mr. Goldman testified as

follows:

     Q:   Now, in regard to the status quo paragraph, if Mrs.
     Abraham’s expenses had increased, say she had some
     extraordinary medical expenses that weren’t covered, you
     would have continued to pay whatever expenses were necessary
     out of the partnership accounts, right?

     A:   I would have done everything necessary, because I
     thought that was my prime appointment, reason for my
     appointment to do that, but as you said, it never occurred.

      The documentary evidence, including the stipulated decree

of the probate court, and the understanding of decedent’s

children and legal representatives demonstrate that decedent was

entitled to any and all funds generated from the partnerships for

her support first.   Only after this could any excess be

distributed in proportion of the partners supposed ownership

interests.   Here, it is clear that at the time of the transfers,

decedent explicitly retained the right to the income that the

FLPs generated to the extent necessary to meet her needs.

Accordingly, we sustain respondent’s determination that decedent

retained the enjoyment and use of the FLP interests transferred

within the meaning of section 2036.

     Section 2036(a) excepts from inclusion property transferred

pursuant to a “bona fide sale for an adequate and full

consideration in money or money’s worth”.27


     27
      In construing bona fide sale, “the word ‘sale’ means an
exchange resulting from a bargain.” Estate of Harper v.
                                                   (continued...)
                              - 27 -

     To constitute a bona fide sale for an adequate and full
     consideration in money or money’s worth, the transfer must
     have been made in good faith, and the price must have been
     an adequate and full equivalent reducible to a money value.
     If the price was less than such consideration, only the
     excess of the fair market value of the property (as of the
     applicable valuation date) over the price received by the
     decedent is included in ascertaining the value of his gross
     estate. [Sec. 20.2043-1(a), Estate Tax Regs.28]

See sec. 20.2036-1(a), Estate Tax Regs.

     In the notice of deficiency, respondent determined that

decedent did not receive adequate and full consideration for the

FLP interests transferred to her children.   Clearly, decedent did

not receive any consideration for the gifted interests.   Thus,

what remains at issue is whether the daughters’ supposed payments

constituted the commensurate consideration.29




     27
      (...continued)
Commissioner, T.C. Memo. 2002-121 (quoting Mollenberg’s Estate v.
Commissioner, 173 F.2d 698, 701 (2d Cir. 1949)).
     28
      As the Court stated in Estate of Goetchius v.
Commissioner, 17 T.C. 495, 503 (1951):

     the exemption from tax is limited to those transfers of
     property where the transferor or donor has received
     benefit in full consideration in a genuine arm’s-length
     transaction; and the exemption is not to be allowed in
     a case where there is only contractual consideration
     but not “adequate and full consideration in money or
     money’s worth.” * * *
     29
      In the notice, respondent gave the estate credit for 30
percent of the value of the RMA FLP on the basis of Mr. Richard
Abraham’s settlement of his claims against decedent’s estate.
See supra note 20. Despite his position on brief that the
auditor’s determination was erroneous, respondent explains that
he is not seeking an increase in the deficiency amount.
                                 - 28 -

     As found above, in October 1995, Ms. Cawley and Ms. Slater

each transferred $160,000 to their mother in exchange for certain

percentages in their respective FLPs.30    The problem here is that

there is no evidence as to the fair market value of the FLP

interests on the date that the daughters purchased them.     The

percentages that the daughters received in the exchange were on

the basis of Mr. Lipof’s appraisal of the underlying real estate.

Mr. Kirchik then applied minority and marketability discounts to

arrive at a price per 1-percent interest.     There is no evidence

that the discounts taken under these facts were appropriate.

Indeed, in his letters, Mr. Kirchik specified that he made “no

representation * * * that these discounts will hold up”.     While

we agree that in certain circumstances discounts may be

appropriate in valuing interests in property, nonetheless there

must be some showing that the discounts taken were appropriate.

Mr. Kirchik’s letters31 provide no basis upon which we may judge

whether the discounts taken were appropriate.     There are no

expert witness reports in the record, and no experts testified at

trial.     Accordingly, we agree with respondent that the record

fails to demonstrate that these payments constitute adequate and

full consideration as required by section 2036.     However, we do




     30
          See supra notes 16 and 17.
     31
         Mr. Kirchik did not testify at trial.
                              - 29 -

note that respondent grants the estate credit for these payments

under section 2043.

     The estate also argues that respondent erroneously failed to

give it credit for additional amounts that Ms. Cawley and Ms.

Slater paid.   Specifically, in his determination respondent

failed to acknowledge that in 1996 and 1997 Ms. Cawley and Ms.

Slater paid an additional $80,000 and $90,000, respectively, for

which they received additional interests in the FLPs.   The

evidence demonstrates that these amounts, unlike the initial

$160,000, were not paid to decedent, but instead to the FLPs

themselves.

     The estate fails to cite any authority upon which we may

rely, and we cannot see how these amounts could constitute

consideration if they were not paid to decedent.32   Indeed, the

evidence does show that after decedent’s death, Ms. Cawley

received a $93,078.62 distribution from the DAC FLP, and Ms.

Slater received a $120,869.42 distribution from the DAS FLP.

Accordingly, we sustain respondent’s determination that these

additional amounts that Ms. Slater and Ms. Cawley paid directly

to the FLPs should not reduce the amount included in decedent’s

gross estate under section 2036.




     32
      If the children were buying part of decedent’s interest in
the FLPs, decedent and not the FLPs should have received those
purchase moneys.
                              - 30 -

C.   Conclusion

      The record demonstrates that the structure that decedent

employed through her legal representatives and family was merely

a testamentary vehicle employed to shift her assets to future

generations while maintaining her continued right to benefit from

the FLP interests transferred.    This is precisely the type of

situation for which section 2036 was created.      Accordingly, we

sustain respondent’s determination, subject to the parties’

concessions.



                                      Decision will be entered

                                 under Rule 155.
