                          T.C. Memo. 2007-367



                      UNITED STATES TAX COURT



   ESTATE OF CONCETTA H. RECTOR, DECEASED, JOHN M. RECTOR, II,
      CO-EXECUTOR and CO-TRUSTEE, Petitioner v. COMMISSIONER
                  OF INTERNAL REVENUE, Respondent



     Docket No. 20860-05.                  Filed December 13, 2007.



     Edwin C. Anderson, Jr., Daniel E. Post, and Michael D.

Maciel, for petitioner.

     Alan E. Staines, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioner petitioned the Court to redetermine

a $1,633,049 Federal estate tax deficiency and a $92,790
                               - 2 -

accuracy-related penalty under section 6662(a).1    Following

concessions, we decide whether Concetta H. Rector (decedent)

retained the possession or enjoyment of, or the right to the

income from, property transferred to Rector Limited Partnership

(RLP) for purposes of section 2036(a)(1).   We hold she did.2   We

also decide whether decedent’s estate (estate) is liable for an

accuracy-related penalty under section 6662(a) for failure to

include as adjusted taxable gifts on the Federal estate tax

return prior gifts of $595,000.   We hold the estate liable for

the penalty.

                         FINDINGS OF FACT

1.   Preface

     Some facts were stipulated and are so found.    The

stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.   Decedent was a resident

of the State of Nevada when she died testate on January 11, 2002,

at the age of 95.   Decedent’s son, John M. Rector II (John

Rector), is coexecutor of decedent’s estate.   When the petition

was filed, John Rector resided in Sonoma County, California.
     1
       Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, Rule references
are to the Tax Court Rules of Practice and Procedure, and dollar
amounts are rounded.
     2
       Given this holding, we do not consider respondent’s other
arguments in support of respondent’s determination that the value
of the property is includable in decedent’s gross estate.
                                - 3 -

2.   Decedent and Her Family

     Decedent was born in 1906.    She was married to John Rector,

Sr. (Jack Rector).    Decedent and Jack Rector had two sons, John

Rector and Frederic Rector.    John Rector has been a licensed

investment broker since 1961, and he has managed equity, fixed

income, venture capital, and other investments.    John Rector also

holds a securities license, a commodities license, an insurance

license, an options license, and a registered investment advising

license.    John Rector was actively involved in decedent’s

finances.

3.   Decedent’s Trusts

     In 1975, decedent and Jack Rector created a trust.     After

Jack Rector died in 1978, the trust was bifurcated into Trust A

and Trust B.    John Rector was the investment counselor to Trust A

and Trust B.    In that capacity, John Rector managed the

investment portfolio of each trust, recommended transactions to

decedent, and executed the transactions she authorized him to

make.   John Rector also was a cotrustee of Trust A and Trust B.

Decedent was the other cotrustee of Trust A, and Frederic Rector

was the other cotrustee of Trust B.

     The property transferred to Trust A was decedent’s share of

the community property from her marriage, decedent’s separate

property, and one-half of Jack Rector’s gross estate.    Decedent
                               - 4 -

was entitled to the income and principal of Trust A and had a

power of appointment with respect to its remainder.

     The property transferred to Trust B was Jack Rector’s

remaining assets.   Decedent’s interest in Trust B was a life

estate, consisting of distributions of monthly income.   The terms

of the Trust B agreement directed that the cotrustees make

monthly payments of the net income to decedent during her

lifetime and allowed the cotrustees to pay to decedent “such

amounts of trust principal as the Trustee deems necessary for

* * * [decedent’s] care and comfortable support in * * * her

accustomed manner of living, but only if the principal of Trust A

may not in the judgment of the Trustee be readily used for these

purposes.”   The Trust B agreement stated that upon the death of

decedent, her sons were entitled to the entire income of Trust B

for life, payable monthly, and the remainder of Trust B would be

distributed in equal shares to decedent’s natural grandchildren.

     On October 29, 1991, at the age of 85, decedent created the

Concetta H. Rector Revocable Living Trust (1991 revocable trust)

to which she transferred the assets of Trust A.   Decedent and

John Rector were appointed cotrustees of the 1991 revocable

trust, and Frederic Rector was named successor cotrustee.    The

1991 revocable trust agreement stated that decedent was entitled

to all of the income and principal from the 1991 revocable trust.
                               - 5 -

The 1991 revocable trust agreement granted decedent the power to

amend and revoke the 1991 revocable trust by “written notice

delivered by Trustor during the lifetime of the Trustor to the

Trustees.   In the event of such revocation, the Trust Estate

[corpus] or revoked portion thereof shall revert to the Trustor

as her separate property, as if this Trust had not been created.”

4.   Decedent’s Move to the Golden Empire Convalescent Hospital

     In October 1998, at the age of 92, decedent became a full-

time resident of the Golden Empire Convalescent Hospital

(hospital).   She lived there until she died approximately 3 years

later.   Her medical expenses, including her residence at the

hospital, cost her $24,588 during 1998, $71,798 during 1999,

$78,114 during 2000, and $94,822 during 2001.

5.   Plans To Create a Limited Partnership

     Among decedent, John Rector, and Frederic Rector, John

Rector was the first to consider forming a limited partnership to

which to transfer decedent’s assets.   John Rector learned of the

idea from Ed Anderson (Anderson), an attorney who had created a

trust for John Rector and his wife and had amended decedent’s

1991 revocable trust agreement.   Anderson advised John Rector

that such a limited partnership would allow decedent to give

limited partner interests to her sons and grandchildren, protect

her assets from her creditors, and significantly reduce the value
                               - 6 -

of her gross estate through discounts for lack of marketability

and lack of control.   John Rector discussed Anderson’s advice

with decedent and Frederic Rector, and decedent and her sons

decided to pursue the idea.

     On September 3, 1998, John Rector met with Anderson and two

of Anderson’s colleagues to discuss forming a limited partnership

to which to transfer decedent’s assets.3   Afterwards, John Rector

met with decedent and Frederic Rector, and the three of them

discussed using a limited partnership to save Federal estate tax,

to allow decedent to give limited partner interests to her sons,

to diversify her assets, and to protect her assets from the reach

of her creditors.   Decedent and her sons decided to form RLP

without any negotiation over the terms of a partnership

agreement.   The three of them intended for decedent to contribute

to RLP all assets she held in the 1991 revocable trust, for no

one else to make any other contribution to RLP, for decedent to

give limited partner interests in RLP to each of her sons, and

for decedent to value the gifts at significantly less than the

proportionate value of RLP’s assets.

     In order to structure the partnership and draft the

agreement (RLP agreement), John Rector met with the attorneys in

     3
       The parties stipulated erroneously that the meeting
occurred on Sept. 3, 1999. A stipulated exhibit establishes that
the meeting occurred on Sept. 3, 1998.
                               - 7 -

person, Frederic Rector conversed with the attorneys by

telephone, and decedent corresponded with the attorneys.     The

attorneys believed that they represented decedent in this

process, but neither of decedent’s sons had separate counsel as

to the formation of RLP or as to the structuring and drafting of

the RLP agreement.

6.   Formation of RLP and Gifts of Partnership Interests

     The RLP agreement was executed on December 17, 1998.4    Under

the terms of the agreement, decedent was a 2-percent general

partner in RLP and the 1991 revocable trust was a 98-percent

limited partner in RLP.   John Rector was listed in the RLP

agreement as a 0-percent general partner, but he was not in fact

a general partner.5

     The RLP agreement stated that RLP was formed

     to own and manage the Property contributed by the
     Partners and to conduct any other lawful business that
     a limited partnership may conduct in the State of
     California; to provide a centralized management
     structure for all of such contributed and acquired
     property; and to provide a convenient mechanism for

     4
       RLP was formed in California and approximately 1 year
later merged into a Nevada partnership with an identical
partnership agreement. The parties make no distinction between
the California and Nevada partnerships, and neither do we.
     5
       The parties have stipulated that RLP was formed and
operated as a valid, legal entity under State law. Thus, we
assume the validity of a partnership created by a single
individual as the sole general partner and her revocable trust as
the sole limited partner.
                              - 8 -

     various family members to participate in the ownership
     of family assets.

Article 3.7 of the RLP agreement states that RLP’s “net cash

flow” shall be distributed as follows:

     All distributions of Partnership net cash flow shall be
     distributed to the Partners in proportion to their
     Partnership Interests. “Net Cash Flow” means the
     Partnership taxable income, increased by (1) Any
     depreciation or depletion deductions taken into account
     for computing taxable income; and (2) Any non-taxable
     income or receipts (other than capital contributions
     from the proceeds of any Partners), and reduced by:
     (3) Any principal payments on any Partnership debts;
     (4) Expenditures to acquire or improve Partnership
     assets; and (5) reasonable reserves, as determined by
     the General Partners, for future Partnership expenses
     and improvements.

     Article 4 of the RLP agreement elaborates on the management

and other specific powers held by the general partners.   Article

4.1 and 4.2 states:

     4.1 Management by General Partners. Subject to any
     limitation imposed elsewhere in this Agreement, the
     absolute management and control of the business and
     affairs of the Partnership shall be vested in the
     General Partners. The General Partners shall have the
     full, complete and exclusive right, power and authority
     to act for and bind the Partnership in all matters with
     respect to the business and affairs of the Partnership.
     The Limited Partners shall have no right to take part
     in the management of the Partnership.

     4.2 Specific Powers of the General Partners. The
     General Partners shall have, subject to any limitations
     imposed elsewhere in this Agreement, power on behalf of
     the Partnership to act with regard to any Partnership
     asset, real or personal, and to do anything reasonably
     connected with that action. Without limiting this
     authority, the General Partners shall have the power to
                                - 9 -

       sell, exchange, convey title to, and grant options for
       the sale of all or any portion of Partnership real or
       personal property * * * to borrow money and, as
       security for the borrowing, to encumber all or any part
       of Partnership property; and to modify, consolidate, or
       extend any deed of trust or other security device
       encumbering Partnership property.

       On March 9, 1999, approximately 3 months after RLP’s

formation, RLP was funded by decedent’s transfer from the 1991

revocable trust of $174,259.38 in cash and $8,635,082.77 in

marketable securities.    By virtue of this transfer, the 1991

revocable trust was left with no significant asset other than the

98-percent limited partner interest received in exchange for the

transfer of the cash and marketable securities.    At the time of

the transfer, the Trust B assets were worth approximately $2.5

million.    Decedent’s entitlement to income from Trust B was

$47,439.12 for 1999.

       In March 1999, decedent gave each of her sons, through her

revocable trust, an 11.11-percent limited partner interest in

RLP.    Approximately 2 years later, on January 2, 2001, decedent

assigned to the 1991 revocable trust her 2-percent general

partner interest in RLP.    On January 4, 2002, decedent’s trust

transferred a 2.754-percent limited partner interest in RLP to

each of her sons.    When she died, decedent (through the 1991

revocable trust) owned a 70.272-percent limited partner interest

in RLP and a 2-percent general partner interest in RLP.
                              - 10 -

7.   Operation of RLP

     RLP operated without a business plan or an investment

strategy, and it did not trade or acquire investments.    RLP also

issued no balance sheets, income statements, or other financial

statements.   RLP’s partners did not hold formal meetings.

     RLP functioned to own investment accounts, to make

distributions to partners, and to pay decedent’s personal

expenses (directly during 1999 and indirectly in later years).

RLP maintained monthly statements of investment account activity,

including distributions, and a handwritten check register for

payments.   Statements of activity and capital accounts were not

regularly maintained.

8.   Summary of RLP Distributions

     From its formation through December 11, 2001, RLP made

distributions to its partners.   During each of 1999, 2000, and

2001, RLP’s total distributions to its partners exceeded RLP’s

annual net income by $491,480.   Of the total distributions, 86 to

90 percent were made to decedent during 1999 and 2000.    RLP’s

distributions to each partner represented the following

percentages of RLP’s net income for each year:
                             - 11 -

                                     Percentage of RLP’s Net
         Year     Partner              Income/Distribution

         1999   Decedent                      122.87
                John Rector                    10.08
                Frederic Rector                10.08

         2000   Decedent                      251.92
                John Rector                    11.99
                Frederic Rector                11.99

         2001   Decedent                       57.86
                John Rector                    43.14
                Frederic Rector                43.14

9.   Payment of Decedent’s Living Expenses and Tax Liabilities

     Before forming RLP, decedent received income from Trust B

and from the 1991 revocable trust.     Afterwards, decedent

continued to receive the same monthly income from Trust B.     The

income from Trust B was decedent’s only significant income

besides the distributions that she received from RLP.     For 1998,

1999, 2000, and 2001, decedent received income from Trust B of

$44,481.34, $47,439.12, $43,001.70, and $42,632.78, respectively.

Decedent’s expenses for these years were at least $122,587,

$180,930, $117,754, and $134,961, respectively.     The expenses

were attributable to the following:6




     6
       Decedent also made gifts and charitable contributions not
listed here.
                               - 12 -

       Expense               1998         1999      2000         2001

  Medical/hospital
    residence              $24,588      $71,798   $78,114     $94,822
  Federal income tax        45,174       48,221     3,650       3,239
  State/local income tax    16,835       24,911     -0-         -0-
  Other living expenses     36,000       36,000    36,000      36,000
    Total                  122,597      180,930   117,754     134,961

     In 1999, 29 checks were written on RLP’s checking account to

pay $77,115.03 of decedent’s expenses.     Decedent wrote 21 of

these checks, and John Rector wrote the rest.     The 21 checks

written by decedent paid the following expenses of decedent:

Date Check
  Cleared                  Payee                            Amount

  4/14/99        Taylor Marketing SVC wheelchair       $108.00
  4/16/99        IRS                                  4,311.00
  4/16/99        CPA Tax Prep                           280.00
  4/19/99        California Franchise Tax Board (FTB) 3,902.00
  4/19/99        FTB                                 11,859.00
  4/26/99        Taylor Marketing SVC wheelchair        600.00
  4/29/99        IRS                                  7,975.00
  4/30/99        Jo Barrett caregiver                    50.00
  5/5/99         Cash                                   300.00
  5/10/99        Spring Hill Pharmacy--Rx               288.10
  5/14/99        Jo Barrett caregiver                    50.00
  5/19/99        Trinity Episcopal Church                45.00
  5/28/99        FG Rector gift, b’day                  500.00
  6/7/99         Spring Hill Pharmacy--Rx               288.10
  6/8/99         Jo Barrett caregiver                    60.00
  6/10/99        Optical shop--glasses                   85.00
  6/11/99        FTB                                  4,311.00
  6/15/99        IRS                                 11,859.00
  6/17/99        Unknown                              1,500.00
  7/12/99        Jo Barrett caregiver                    60.00
  7/14/99        Spring Hill Pharmacy--Rx               111.56
                                                     48,542.76
                              - 13 -

The eight checks written by John Rector paid the following

expenses of decedent:

Date Check
  Cleared                 Payee                      Amount

  3/10/99       Hospital                            $5,301.00
  3/30/99       HCFA Health Insurance                  763.60
  4/8/99        Pharmacy                               406.57
  4/8/99        Anderson Zeigler Disharoon
                Gallagher & Gray
                  (attorney’s fees)                    862.50
  4/8/99        Convalescent Hospital                5,130.00
  5/4/99        Convalescent Hospital               10,000.00
  5/7/99        Convalescent Hospital                5,345.00
  5/10/99       HCFA Health Insurance                  763.60
                                                    28,572.27

     In April 2000, RLP transferred $348,100 to decedent’s 1991

revocable trust.   The 1991 revocable trust then issued a check in

the same amount, payable to the Internal Revenue Service, for

decedent’s 1999 Federal gift tax liability.    In October 2001, RLP

opened a premier variable credit line account and borrowed

$1,303,700 on the credit line.    On October 21, 2002, RLP

transferred $1 million to the credit line and wrote on the credit

line a check for $2,038,098 to pay towards the estate’s Federal

estate tax liability.   On October 25, 2002, RLP wrote a check for

$262,654 on the credit line to pay the estate’s reported

California estate tax liability.    On May 20, 2005, a check for

$384,535 was written on the credit line to satisfy certain
                                 - 14 -

adjustments to tax resulting from omissions on the estate’s

Federal estate tax return.

10.   1991 and 1999 Cash Gifts

      In 1991, decedent’s attorney recommended that decedent make

gifts to John Rector and Frederic Rector during the year in the

total amount of $595,000.    Decedent followed this recommendation,

and she informed John Rector that she had made those gifts.     On

January 6, 1999, decedent made separate cash gifts of $35,000 to

John Rector and Frederic Rector.

11.   Federal Gift Tax Returns

      Decedent filed a 1991 Federal gift tax return on October 30,

1992, reporting $595,000 in gifts to John Rector and Frederic

Rector.   The return was prepared by an accountant in Nevada

County, California.

      Decedent filed a 1999 Federal gift tax return on April 15,

2000, reporting gifts of 11.11-percent limited partner interests

to each of her sons.   This return did not report decedent’s

$35,000 cash gifts to her sons.

12.   Value of RLP Assets

      The estate elected to value decedent’s gross estate as of

the alternate valuation date.     On that date, the value of the

assets owned by RLP was $8,126,579.
                               - 15 -

13.   Federal Estate Tax Return

      The estate timely filed a Federal estate tax return on

October 16, 2002.    The return failed to report the 1991 and 1999

gifts of $595,000 and $70,000, respectively.    The return was

prepared by Anderson and signed by John Rector as coexecutor of

decedent’s estate.   The Federal estate tax return reported that

decedent’s gross estate on the applicable valuation date

consisted of a single asset; namely, her interest in the 1991

revocable trust.    The return elected the alternate valuation date

of July 11, 2002, as the applicable valuation date.    The return

reported that the fair market value of the 1991 revocable trust

as of the applicable valuation date was $4,757,325, calculated as

follows:

      Net asset value (NAV) of RLP               $8,126,579
      Decedent’s interest in RLP                     72.272%
      Decedent’s proportionate share of NAV       5,873,241
      Less 19 percent for lack of control
        and lack of marketability                 1,115,916
      Discounted value of decedent’s interest     4,757,325

                               OPINION

1.    Preface

      The value of an interest in property is included in a

decedent’s gross estate if:   (1) The decedent made an inter vivos

transfer of the property; (2) the transfer was for less than

adequate and full consideration; and (3) the decedent retained
                              - 16 -

the possession or enjoyment of, or the right to the income from,

the transferred property.   See sec. 2036(a); see also Estate of

Bigelow v. Commissioner, 503 F.3d 955 (9th Cir. 2007), affg. T.C.

Memo. 2005-65.   A decedent’s gross estate does not include the

value of property transferred pursuant to a bona fide sale for

adequate and full consideration.   See sec. 2036(a); see also

Estate of Bigelow v. Commissioner, supra at 963.

     The estate contends that the values of the assets decedent

transferred to   RLP are not included in her gross estate under

section 2036(a)(1) because she relinquished enjoyment of, and the

right to the income from, the transferred assets, and

alternatively, she transferred the assets to RLP in a bona fide

sale for adequate and full consideration.7   For the reasons


     7
       The estate further argues that sec. 2036(a), to the extent
it applies to this case, applies only to decedent’s transfer of
the limited partner interests to her sons and not to her transfer
of the assets to RLP. To this end, the estate asserts, decedent
received 100 percent of the interests in RLP in exchange for the
assets, which means that the value of decedent’s gross estate was
not depleted by that transfer but was depleted when decedent gave
away the limited partner interests. See Estate of Magnin v.
Commissioner, 184 F.3d 1074, 1079 (9th Cir. 1999) (stating that
the “purpose underlying the section [2036(a)] is to prevent the
depletion of the decedent’s gross estate”), revg. on other
grounds T.C. Memo. 1996-25. As detailed herein, we find on the
basis of the credible evidence at hand that decedent’s transfer
of her assets to RLP and her ensuing gifts of the limited partner
interests to her sons were part of a single plan to minimize
decedent’s Federal estate tax, lacked a significant nontax
business purpose, and accomplished no genuine pooling of assets.
On the basis of those findings, we reject this argument.
                              - 17 -

stated below, we reject both arguments.   The record here, as did

the record in Estate of Bigelow v. Commissioner, supra, supports

the finding, which we make, that RLP was formed to facilitate the

transfer of decedent’s property to decedent’s sons and

grandchildren primarily as a testamentary substitute, with the

aim of lowering the value of decedent’s gross estate by applying

discounts for lack of control and lack of marketability.

2.   Retained Interests

     Under section 2036(a)(1), decedent’s gross estate includes

the fair market value of transferred assets to the extent that

she retained possession or enjoyment of, or the right to income

from, the assets for her life or for any other period that does

not end before her death.   In order not to have a retained

interest described in section 2036(a)(1), decedent must have

“absolutely, unequivocally, irrevocably, and without possible

reservations,” parted with all of her title, possession, and

enjoyment of the transferred assets.   See Commissioner v. Estate

of Church, 335 U.S. 632, 645 (1949).   Decedent will have retained

such an interest if there was an express or implied agreement

among the parties to the transfer at the time of transfer that

the transferor retain the possession or enjoyment of, or the

right to the income from, the transferred property.   See Estate

of Bigelow v. Commissioner, supra; Estate of Thompson v.
                                   - 18 -

Commissioner, 382 F.3d 367, 375 (3d Cir. 2004), affg. T.C. Memo.

2002-246; Estate of Maxwell v. Commissioner, 3 F.3d 591, 594 (2d

Cir. 1993), affg. 98 T.C. 594 (1992); Estate of Reichardt v.

Commissioner, 114 T.C. 144, 151-152 (2000).        Whether there was

such an understanding or agreement is determined from all of the

facts and circumstances surrounding both the transfer itself and

the assets’ subsequent use.       See Estate of Abraham v.

Commissioner, T.C. Memo. 2004-39, affd. 408 F.3d 26 (1st Cir.

2005).       In the context of this case, the term “enjoyment”

includes present economic benefits.         See Guynn v. United States,

437 F.2d 1148, 1150 (4th Cir. 1971); Estate of Reichardt v.

Commissioner, supra at 151.

       The estate contends that there was neither an express nor an

implied agreement for decedent to retain possession, enjoyment,

or the right to income from the assets that she transferred to

RLP.       We disagree.   We find on the basis of the credible evidence

at hand that decedent and her sons had an implied understanding

that decedent would retain enjoyment and the right to income from

the transferred assets.8

       The RLP agreement reflects an understanding among decedent

and her sons that decedent would retain her interest in the

       8
       Given this finding, we need not and do not decide whether
they also had an express agreement that decedent would retain
enjoyment and the right to income from the transferred assets.
                              - 19 -

transferred assets by virtue of her ability to control those

assets, including the management and disposition thereof.

Initially, as the direct general partner of RLP, decedent was

given the right by the RLP partnership agreement to cause a

distribution of RLP’s net cashflow to RLP’s partners in

proportion to their partnership interests, and she was given the

power “to do anything reasonably connected” with RLP’s assets.

Later, as an indirect (through the 1991 revocable trust) general

partner of RLP, decedent continued to retain that right and power

directly in that she was a cotrustee of the 1991 revocable trust

and, most importantly, she had the absolute power to revoke the

trust as if it had never been created in the first place.   Thus,

at all relevant times, decedent held both a majority interest in

RLP and the powers incident to serving as RLP’s general partner.

     We also find as a fact that decedent and her sons agreed

impliedly that the transferred assets and the income earned

therefrom would continue to be used for decedent’s pecuniary

benefit.   The transfer of practically all of decedent’s wealth to

RLP left decedent with insufficient liquid assets with which to

pay her living expenses.   The estate asserts that decedent’s

assets were sufficient because Trust B had a corpus of $2.5

million at the time of the transfer and decedent’s sons, as

cotrustees, could distribute Trust B’s corpus to pay decedent’s
                                - 20 -

expenses.    The estate’s argument is unavailing.   When RLP was

formed, decedent and her sons knew that decedent’s annual income

from Trust B, which for 1998 was $44,481, would be insufficient

to cover decedent’s annual expenses of approximately three times

as much.    Decedent had just become a full-time resident at the

Hospital, where her residence resulted in medical costs totaling

$71,788 for 1999, $78,114 for 2000, and $94,822 for 2001.

Decedent and John Rector also directly drew over $77,000 in funds

from RLP during 1999 to pay decedent’s personal expenses.     The

estate attempts to downplay the significance of the direct use of

RLP funds to pay decedent’s personal expenses by attributing that

use to “errors”.    In the light of John Rector’s extensive

financial expertise and his testimony that it never occurred to

him that RLP should be reimbursed for such “errors” after they

were discovered, we find that this argument lacks credibility.

     We also note that the Trust B agreement allowed the

cotrustees to pay to decedent amounts of trust principal

necessary for her “care and comfortable support in * * * her

accustomed manner of living”.    The implied understanding among

decedent and her sons was that the assets of RLP would be readily

used to meet decedent’s expenses and that the corpus of Trust B

would not be invaded.    We conclude that the principal of Trust B

was not available in any significant sense to decedent to pay her
                                - 21 -

living expenses.     In fact, decedent never even asked her sons to

distribute Trust B principal to her when her monthly income was

insufficient to cover her expenses; rather, decedent relied

heavily on the assets she had transferred to RLP and the income

earned therefrom.9

     In sum, we conclude that decedent impliedly retained

enjoyment of and the right to income from the assets that she

transferred to RLP.    Decedent derived economic benefit from using

RLP’s assets to pay her living expenses, to meet her tax

obligations, and to make gifts to her family members.    Such use

of RLP’s assets shows an agreement among decedent and her sons

that decedent would retain the enjoyment of and the right to

income from the transferred assets by withdrawing those assets

and/or income from RLP at will.

3.   Bona Fide Sale for Adequate and Full Consideration

     Under the exception to section 2036(a) contained in that

section, a decedent’s gross estate does not include the value of

property transferred in “a bona fide sale for an adequate and


     9
       RLP transactions in 2002 and 2005 also illustrate the
implied agreement among decedent and her sons that the
transferred assets would continue to be used for the liabilities
of decedent, even after her death. In those years, an RLP credit
line was used to pay decedent’s Federal and State tax liabilities
of $2,038,098 and $262,654, respectively. A check also was
written on the RLP credit line for $384,535 to pay some of
decedent’s Federal estate tax.
                               - 22 -

full consideration in money or money’s worth”.    The exception

aims to exclude from the reach of Federal estate and gift taxes

transfers in which a decedent received consideration sufficient

to protect against depletion of the estate’s assets.      See Estate

of Magnin v. Commissioner, 184 F.3d 1074, 1079 (9th Cir. 1999),

revg. on other grounds T.C. Memo. 1996-25.    The estate argues

that the transfer of decedent’s assets to RLP in exchange for the

entire interest in RLP was a “bona fide sale” for which decedent

received adequate and full consideration and, hence, that section

2036(a) does not apply here.   We disagree.   The transfer of

decedent’s assets to RLP in exchange for the entire interest in

RLP was not “a bona fide sale for an adequate and full

consideration” within the meaning of section 2036(a).

     First, the formation of RLP entailed no change in the

underlying pool of assets or the likelihood of profit.     Without

such a change or a potential for profit, decedent’s receipt of

the partnership interests does not constitute the receipt of full

and adequate consideration.    See Estate of Bongard v.

Commissioner, 124 T.C. 95, 128-129 (2005); see also Estate of

Bigelow v. Commissioner, 503 F.3d 955 (9th Cir. 2007).

     Second, to constitute a bona fide sale for adequate and full

consideration, decedent’s transfer of the assets to RLP must have

been made in good faith.   See sec. 20.2043-1(a), Estate Tax Regs.
                                - 23 -

For this purpose, good faith requires that the transfer be made

for a legitimate and significant nontax business purpose.    See

Estate of Bongard v. Commissioner, supra at 118; Estate of Rosen

v. Commissioner, T.C. Memo. 2006-115.    A transaction between

family members is subject to heightened scrutiny to ensure that

the transaction is not a disguised gift.   See Estate of Bigelow

v. Commissioner, supra at 969; Harwood v. Commissioner, 82 T.C.

239, 258 (1984), affd. without published opinion 786 F.2d 1174

(9th Cir. 1986).

     With respect to good faith in transactions between family

members, this Court has considered whether “the terms of the

transaction differed from those of two unrelated parties

negotiating at arm’s length.”    Estate of Bongard v. Commissioner,

supra at 123.   The parties’ actions during the formation of RLP

contrast starkly with those that would be anticipated from

unrelated parties forming a limited partnership.   Decedent and

her sons did not negotiate the terms of the RLP agreement, and

they did not retain independent counsel.   Decedent (through her

revocable trust) made all contributions to RLP, and her

contributions constituted the vast bulk of her wealth.    RLP was

formed with decedent and her revocable trust as the only

partners.   RLP was not actually funded until nearly 3 months

after it was formed.   We also note that the RLP partnership
                               - 24 -

agreement contemplated that more than one partner would

contribute property to RLP but that decedent and her sons never

intended that anyone other than her (or her, through her

revocable trust) would actually contribute property to RLP.

     As to the need for a significant nontax business purpose, we

inquire whether the transfer of assets to RLP was reasonably

likely to serve such a purpose at its inception.   See Strangi v.

Commissioner, 417 F.3d 468, 480 (5th Cir. 2005), affg. T.C. Memo.

2003-145.   The estate asserts that the motivation behind the

formation of RLP was the desire to benefit from estate tax

savings, the ability to give away partnership interests, the need

to protect decedent’s assets from her creditors, and the desire

to diversify decedent’s assets.   We disagree with the estate that

decedent had the requisite purpose when she transferred her

assets to RLP.   The estate’s stated goal of gift-giving is a

testamentary purpose and is not a significant nontax business

purpose.    See Estate of Bigelow v. Commissioner, supra; see also

Estate of Schauerhamer v. Commissioner, T.C. Memo. 1997-242.    Nor

is the estate’s stated goal of efficiently managing assets such a

purpose, given the lack of evidence that RLP required any special

kind of active management.   See Estate of Bigelow v.

Commissioner, supra.   The protection of assets against creditors

also is not such a purpose in that the record does not establish
                                - 25 -

any legitimate concern about the liabilities of decedent, nor did

decedent’s transfer of her assets to RLP actually protect the

assets from her creditors in that she or her trust was at all

times an RLP general partner.    See id.   The estate’s stated claim

to a diversification of assets also is not such a purpose in that

RLP’s ownership and management of the transferred assets was

essentially identical to the 1991 revocable trust’s pretransfer

ownership and management of those assets.     We also note that RLP

had no investment strategy or business plan of providing added

diversification of investments; rather, RLP held the securities

transferred by decedent without any substantial change in

investment strategy and did not engage in business transactions

with anyone outside of the family.10     See Estate of Thompson v.

Commissioner, 382 F.3d at 378 (partnership lacked substantial

nontax purpose under similar facts).     Given these findings and

conclusions, and our additional findings as to decedent’s age and

health at the time of RLP’s formation, as well as the fact that

only decedent’s cash and marketable securities were contributed

to RLP, we conclude that the formation of RLP was more consistent




     10
       While the estate discerns a business purpose from the
banking and securities investments of decedent’s predeceased
spouse and his parents, we find that family history to have no
bearing on this case.
                               - 26 -

with an estate plan than an investment in a legitimate business.

Id. at 377; see also Estate of Rosen v. Commissioner, supra.

4.   Accuracy-Related Penalty Under Section 6662

     Section 6662(a) and (b)(1) imposes an accuracy-related

penalty equal to 20 percent of the portion of an underpayment

which is attributable to negligence or disregard of rules or

regulations.    The term “negligence” includes any failure to make

a reasonable attempt to comply with the internal revenue laws or

to exercise ordinary and reasonable care in the preparation of a

tax return.    See sec. 1.6662-3(b)(1), Income Tax Regs.     The term

“disregard” includes any careless, reckless, or intentional

disregard of rules or regulations.      See sec. 6662(c).   Section

6664(c) provides that no penalty shall be imposed under section

6662 with respect to any portion of an underpayment if the

taxpayer can show that the taxpayer acted with reasonable cause

and in good faith.

     Respondent determined that the estate was negligent in

failing to report the $595,000 of prior gifts as adjusted taxable

gifts on the estate’s Federal estate tax return.      We agree.11

     11
       Neither party mentions the applicability of sec. 7491(c).
That section provides that the Commissioner has the burden of
production “in any court proceeding with respect to the liability
of any individual for any penalty, addition to tax, or additional
amount imposed by this title.” We need not decide whether sec.
7491(c) applies to estates because the record is sufficient to
                                                   (continued...)
                              - 27 -

John Rector, who signed the return as coexecutor of the estate,

had extensive expertise in financial matters.    He knew, or at

least should have known, about the omission in his capacity as

cotrustee of decedent’s 1991 revocable trust, as coexecutor of

decedent’s estate, and most significantly as the donee of

one-half of the $595,000.   The estate makes no showing of

reasonable cause or good faith with respect to the omission.

         _______________________________________________

     We have considered all arguments by petitioner for holdings

contrary to those reached herein and find those agreements not

discussed herein to be without merit.


                                    Decision will be entered

                               under Rule 155.




11
 (...continued)
meet any burden of production respondent may have with respect to
his determination of negligence.
