                           124 T.C. No. 8



                     UNITED STATES TAX COURT



ESTATE OF WAYNE C. BONGARD, DECEASED, JAMES A. BERNARDS, PERSONAL
                   REPRESENTATIVE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6141-03.                Filed March 15, 2005.


          In 1980, D incorporated Empak, Inc. In 1986, D
     established an irrevocable stock accumulation trust (ISA
     Trust) and funded it with some of his Empak stock. In the
     mid-1990s it was determined by Empak’s board of directors
     and advisers that pooling all of D’s family’s Empak stock in
     a holding company, WCB Holdings, LLC. (WCB Holdings), would
     better position Empak for a corporate liquidity event, which
     was necessary to raise capital and remain competitive. On
     Dec. 28, 1996, D and ISA Trust capitalized WCB Holdings by
     transferring to WCB Holdings their respective shares of
     Empak stock, and in exchange received WCB Holdings class A
     and class B membership units. Each class of membership
     units was further divided into governance and financial
     units, the class A governance units being the only units
     with voting rights.

          On Dec. 29, 1996, D and ISA Trust formed the Bongard
     Family Limited Partnership (BFLP). To capitalize BFLP, D
     transferred all of his WCB Holdings class B membership units
     to BFLP in exchange for a 99-percent limited partnership
                         - 2 -

interest, and ISA Trust transferred a portion of its WCB
Holdings class B membership units to BFLP in exchange for a
1-percent general partnership interest. On Dec. 10, 1997, D
made a gift of a 7.72-percent partnership interest to his
wife. D made no other gifts of his BFLP interest before his
death on Nov. 16, 1998.

     The IRS issued a notice of deficiency to the estate on
Feb. 4, 2003, which, among other things, returned to
decedent’s gross estate, under secs. 2035(a) and 2036(a) and
(b), I.R.C., all of the Empak shares decedent had
transferred to WCB Holdings.

     The estate argues that sec. 2036(a), I.R.C., is not
applicable to either D’s transfer of Empak shares to WCB
Holdings or D’s transfer of his WCB Holdings class B
membership units to BFLP because each transfer was a bona
fide sale for adequate and full consideration. The estate
argues, in the alternative, that even if the bona fide sale
exception was not satisfied by each transfer, D did not
retain a sec. 2036(a)(1) or (2), I.R.C., interest in the
property he transferred in either transaction.

     Held: D’s transfer of his Empak stock to WCB Holdings
satisfied the bona fide sale exception because D possessed a
legitimate and significant nontax reason for the transfer.

     Held, further, D’s transfer of WCB Holdings class B
membership units to BFLP did not satisfy the bona fide sale
exception.

     Held, further, an implied agreement existed whereby D
retained a sec. 2036(a), I.R.C., interest in the WCB
Holdings class B membership units he transferred to BFLP.

     Held, further, WCB Holdings class B membership units
allocable to the 7.72-percent partnership interest in BFLP D
gave to his wife are included in D’s gross estate under sec.
2035(a), I.R.C.



John W. Porter and Stephanie Loomis-Price, for petitioner.

Lillian D. Brigman and R. Scott Shieldes, for respondent.
                                - 3 -

     GOEKE, Judge:   Respondent determined a $52,878,785 Federal

estate tax deficiency against the Estate of Wayne C. Bongard (the

estate).   After concessions and stipulations, two issues remain

for decision: First, whether the shares of Empak, Inc. (Empak),

decedent transferred to WCB Holdings, LLC. (WCB Holdings), are

included in his gross estate pursuant to sections 2035(a)1 and

2036(a) and (b); and second, whether the WCB Holdings membership

units decedent transferred to the Bongard Family Limited

Partnership (BFLP) are included in his gross estate under

sections 2035(a) and 2036(a).   The resolution of these issues

depends on the applicability of section 2036(a) to decedent’s

respective transfers of Empak stock to WCB Holdings and of WCB

Holdings membership units to BFLP.

                         FINDINGS OF FACT

     Many of the facts have been stipulated.   The stipulation of

facts, stipulation of settled issues, and attached exhibits are

incorporated herein by this reference.

     Decedent resided in Minnesota on November 16, 1998, the date

of his death.   On December 9, 1998, the First Judicial District

Court, Probate Court Division, Carver County, Minnesota,

appointed James A. Bernards (Mr. Bernards) personal


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure. Dollar amounts are
generally rounded to the nearest dollar.
                               - 4 -

representative of decedent’s estate.    At the time the petition

was filed, Mr. Bernards resided in Minnesota.    On February 4,

2003, respondent issued a notice of deficiency to the estate with

respect to its timely filed Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return.

I.   General Background and Time Line

      Decedent was a skilled and experienced businessman.      In

1966, decedent was a founding employee of Fluoroware, Inc.

(Fluoroware), a Minnesota corporation that produced packaging

materials for the semiconductor, data storage, and

microelectronic industries.   In 1980, decedent left Fluoroware to

start his own corporation, Empak.

      On November 9, 1984, decedent married Cynthia Bongard.

Decedent entered into this marriage with four children from a

prior marriage: Beth Akerberg, Mark Bongard, Rhonda Notermann,

and Lynn Zupan.   Cynthia Bongard also entered the marriage with a

child from a previous marriage, Terra Saxe.2    Decedent and

Cynthia Bongard never had any children together, nor did decedent

adopt Terra Saxe.

      On May 23, 1986, decedent formed the Wayne C. Bongard

Irrevocable Stock Accumulation Trust (ISA Trust) for the benefit



      2
      The parties stipulated that Terra is the correct spelling,
but the Wayne C. Bongard Irrevocable Stock Accumulation Trust
Agreement spells her name Tara.
                                - 5 -

of his children and Terra Saxe, and funded it with shares of

Empak stock.    ISA Trust is described in further detail infra pp.

17-19.

     On January 17, 1991, Empak incorporated Empak International,

Inc. (Empak International), as a wholly owned subsidiary.

Pursuant to a joint venture agreement, Empak sold an interest in

Empak International to an unrelated foreign corporation.    See

infra p. 8 for greater details of this joint venture.

     Between April 22, 1991, and December 30, 1994, ISA Trust

made six distributions of shares of Empak stock to specific

beneficiaries.    After each distribution, Empak redeemed the

shares from the distributee for cash.    See infra pp. 18-19 for

specific details of these distributions/redemptions.

     On January 30, 1996, WCB Holdings, LLC. (WCB Holdings) was

established, but was not capitalized until December 28, 1996.

Before WCB Holdings was capitalized, two significant events

occurred.   First, on April 18, 1996, Empak had a stock split of

223 to 1, significantly increasing the number of shares decedent

and ISA Trust owned.    See infra pp. 10-11 and p. 19. for details

regarding the stock split and its effect it on the Empak

shareholders.    Second, in February 1996, Empak incorporated

Emplast, Inc. (Emplast), and capitalized it with some of Empak’s

noncore assets.    On July 31, 1996, Empak distributed its Emplast

shares to decedent in exchange for some of his Empak shares,
                                 - 6 -

which were canceled.    This transaction and its effects are

discussed further infra pp. 10-11 and p. 19.

     On December 28, 1996, decedent and ISA Trust transferred

their respective shares of Empak stock to WCB Holdings in

exchange for WCB Holdings membership units, which were divided

into class A governance, class A financial, class B governance,

and class B financial units.    For a greater discussion of this

transaction, see infra pp. 11-14.

     On December 29, 1996, decedent and ISA Trust created the

Bongard Family Limited Partnership (BFLP).    Decedent transferred

all of his WCB Holdings class B membership units to BFLP in

exchange for a 99-percent limited partnership interest, and ISA

Trust transferred a portion of its WCB Holdings class B

membership units to BFLP in exchange for a 1-percent general

partnership interest.    BFLP is discussed in further detail infra

pp. 19-21.

     On March 7, 1997, Empak International merged into Empak,

which resulted in the foreign corporation’s receiving an

ownership interest in Empak and the cancellation of Empak’s

shares in Empak International.    Facts regarding this transaction

are set forth infra pp. 14-15.

     On March 15, 1997, decedent transferred WCB Holdings class A

membership units to three trusts that he had previously

established.   Each of these trusts was established to benefit
                                 - 7 -

different members of his family.    See infra pp. 21-23 for further

details regarding these trusts.    On December 10, 1997, decedent

gave Cynthia Bongard a 7.72-percent limited partnership interest

in BFLP.   That same day, Cynthia Bongard and decedent entered

into a postmarital agreement.    See infra pp. 23-24 for details of

the postmarital agreement.

      Decedent died unexpectedly on November 16, 1998, while on a

business/hunting trip in Austria.     Decedent was 58 years of age

and appeared to be in good health before his death.

II.   Decedent’s Business Interests

      A. Empak

      On July 14, 1980, decedent founded Empak as a Minnesota

corporation.     Decedent was assisted by Mr. Bernards, who was one

of Fluoroware’s outside accounting consultants, in incorporating

Empak.   Empak is an acronym for “electronic materials packaging”.

Empak engaged in the design, development, manufacture, and

marketing of plastic products used in the semiconductor and data

storage industries.    Some of Empak’s and Fluoroware’s businesses

directly competed with each other.

      Decedent was Empak’s sole shareholder upon incorporation.

Empak had only one class of stock, common voting stock.    When

decedent funded the ISA Trust with shares of Empak stock in 1986,

decedent’s ownership percentage decreased to 85 percent.

Decedent was also one of three directors on Empak’s board of
                                - 8 -

directors.    In the mid-1980s, decedent became the sole member of

Empak’s board of directors and remained in that position until

his death, except for a 28-day period from December 30, 1996, to

January 24, 1997.

     Empak grew into a successful business through decedent’s

leadership.   Empak’s growth was attributable to selling a greater

number and variety of products, expanding its markets,

reinvesting its earnings, and borrowing funds.   Empak, however,

never declared a dividend.

     B. Empak, Marubeni Corp., and Marubeni America Corp. Joint
        Venture

     In the 1980s, Empak, Marubeni Corp. (MC), and Marubeni

America Corp. (MAC) engaged in a joint venture to produce plastic

compact disk containers (a.k.a. jewel boxes).    MC was a Japanese

trading entity with over 700 subsidiaries and was listed on

numerous international stock exchanges.   MAC was the U.S. sales

and marketing subsidiary of MC.   Basically, MC financed and

provided materials for the joint venture and Empak manufactured

the jewel boxes.

     C.   Empak’s Incorporation of Empak International

     On January 17, 1991, Empak incorporated Empak International,

Inc., a wholly owned Minnesota subsidiary organized to

distribute, sell, and manufacture a proprietary line of computer

disk and semiconductor packaging products outside the United

States and Canada.   The formation of Empak International was a
                                - 9 -

function of the joint venture agreement between Empak and MC.

Pursuant to Empak International’s shareholder agreement, Empak

sold 49 percent of Empak International’s common stock to MC for

$3,765,000 but remained the majority shareholder with a 51-

percent interest.    During 1992 and 1993, Mark Bongard was

employed by Empak International as vice president of sales and

marketing.

     D.    Planning for Corporate Liquidity

     At a meeting in 1995, decedent, Robert Boyle (Mr. Boyle),

Mr. Bernards, and Chuck Eitel (Mr. Eitel), then president of

Empak, discussed various business plans for Empak to remain

competitive in the market.    Mr. Boyle began representing

decedent’s various business interests while he was an attorney at

Larkin, Hoffman, Daly & Lindgren, Ltd. (Larkin Hoffman).      Mr.

Boyle left Larkin Hoffman in 1995 but continued his professional

relationship with decedent.    As part of these discussions, Mr.

Boyle envisioned the necessary steps to position Empak for a

corporate liquidity event, which the discussants agreed would

provide Empak with the necessary capital to remain competitive.

A corporate liquidity event included either a public or private

offering of Empak stock.    Mr. Boyle handwrote notes during this

meeting.    These contemporaneous handwritten notes indicate that a

single holding company, to hold all the Empak stock owned by the

Bongard family, was going to be established as part of this
                                - 10 -

business plan.     As explained hereinafter, the formation of BFLP

was part of decedent’s estate plan and not contemplated as a

necessary step in positioning Empak for a corporate liquidity

event.   On December 22, 1995, Mr. Boyle provided decedent with a

letter memorializing the steps associated with obtaining

corporate liquidity.     Many of these integrated steps were

completed before decedent’s death.

          1.     Empak’s Incorporation and Spinoff3 of Emplast

     On February 21, 1996, Empak incorporated a wholly owned

subsidiary, Emplast.     Emplast was incorporated and capitalized

with noncore assets of Empak to streamline Empak in preparation

for a corporate liquidity event.     The noncore assets consisted of

assets outside of Empak’s semiconductor business.     The net book

value of these assets was $5,752,854, which represented 5 percent

of Empak’s net book value.     Mark Bongard was appointed the chief

executive officer of Emplast and remained in that position until

decedent’s death.

     Empak had a stock split on April 18, 1996, which was

approved by a vote of the outstanding Empak stockholders.        Empak

shareholders received 223 shares for each Empak share held, which

increased decedent’s number of shares to 5,686,500.     The stock

split also increased ISA Trust’s number of shares.     See infra p.


     3
      The parties’ stipulation terms this transaction as a
“spinoff”. However, it appears that the distribution was a
splitoff.
                                - 11 -

19.   The day following Empak’s stock split, decedent in his

capacity as Empak’s sole member on its board of directors adopted

a resolution authorizing grants of incentive stock options and

nonqualified stock options.     It does not appear that any of these

stock options were exercised before decedent’s death.

      On July 31, 1996, Empak distributed the stock of Emplast to

decedent.    In exchange for receiving 100 percent ownership of

Emplast, 551,871 of decedent’s shares in Empak were canceled.

This decreased decedent’s ownership interest in Empak to

5,134,629 shares, or 86.39 percent.      Because some of decedent’s

shares were canceled and ISA Trust did not participate in the

distribution, ISA Trust’s ownership percentage in Empak increased

to 13.61 percent.    ISA Trust’s percentage holding of Empak had

decreased after 1986 due to the redemptions of some of the Empak

stocks held by the trust.

            2.   WCB Holdings

      In view of market conditions in 1996, Mr. Boyle determined

that investors would be more likely to invest in Empak if the

Bongard family members’ ownership interests were placed in a

holding company.    As of December 1996, decedent and ISA Trust

held all of the Empak stock.    Decedent had established the ISA

Trust on May 23, 1986, with the assistance of John Fullmer (Mr.

Fullmer) and Mr. Boyle.     When ISA Trust was established, Messrs.

Fullmer and Boyle were both attorneys with Larkin Hoffman, but in
                              - 12 -

1996 only Mr. Fullmer was with Larkin Hoffman.   In 1996, Mr.

Boyle, who continued to represent decedent’s business interests

after leaving Larkin Hoffman, informed Mr. Fullmer, decedent’s

estate planning attorney, that decedent’s Empak stock was going

to be transferred to a holding company as part of the overall

plan to achieve corporate liquidity.

     On January 30, 1996, Mr. Boyle, on behalf of decedent,

organized WCB Holdings as a Minnesota limited liability company

(WCB Holdings).   Its articles of organization (articles), as

amended, authorized the issuance of class A governance, class A

financial, class B governance, and class B financial units.     The

class A governance units were the sole membership units with

voting rights except as provided under State law.4

     On December 28, 1996, decedent contributed his 5,134,629

shares of Empak stock to WCB Holdings.   Decedent received in

exchange 513,463 class A governance, 513,463 class A financial,

4,621,166 class B governance, and 4,621,166 class B financial

membership units in WCB Holdings.   This gave decedent an 86.39-

percent ownership interest in each subclass of WCB Holdings

membership units.   ISA Trust also contributed its 808,598 shares

of Empak stock to WCB Holdings and received 80,860 class A


     4
      Minn. Stat. Ann. sec. 322B.155 in effect in 1996 generally
provided voting rights for any class of membership units, whether
or not the articles of organization provided such units voting
rights, only if the rights or interests attached to that class
could be affected by a proposed change.
                              - 13 -

governance, 80,860 class A financial, 727,738 class B governance,

and 727,738 class B financial units.   This gave ISA Trust a

13.61-percent ownership interest in each subclass of WCB Holdings

membership units.   Decedent and ISA Trust received WCB Holdings

class A governance, class A financial, class B governance, and

class B financial membership units in proportion to the number of

Empak shares each contributed.5

     On December 28, 1996, Mark Bongard was elected chief

manager, secretary, and treasurer of WCB Holdings.    According to

the Member Control Agreement, the chief manager is the person

“duly elected or appointed pursuant to the terms of this

Agreement to manage the business of the Company.”    Some of the

chief manager’s duties include general management, presiding at

meetings, overseeing that orders and resolutions are carried out,

maintaining records and certifying proceedings, and signing and

delivering WCB Holdings documents.

     Limitations were placed on the chief manager’s powers.    For

instance, the Member Control Agreement provided that the chief

manager was not granted sole decisionmaking authority over the



     5
      It appears the number of class A governance units and class
A financial units issued to each member was determined by
multiplying the number of Empak shares the respective shareholder
contributed by 10 percent, rounded to the nearest share. The
number of class B governance units and class B financial units
issued to each member was then calculated by decreasing the
number of Empak shares contributed by 10 percent of the number of
Empak shares contributed, rounded to the nearest share.
                               - 14 -

allocation of distributions.    If a distribution were authorized,

it would be allocated according to the number of class A

financial and class B financial units owned.    The chief manager

was also charged with the decisionmaking for accounting matters,

except if the members representing a majority of class A

governance units disagreed.    The members by a majority vote of

the class A governance units could take any action the chief

manager himself could take and could remove the chief manager.

Lastly, the chief manager needed the approval of the members

representing the majority of the class A governance units before

he could issue additional membership units, lend, borrow, or

commit WCB Holdings’s funds in excess of $25,000, authorize

capital expenditures in excess of $10,000, sell any of WCB

Holdings’s assets, including its Empak stock, worth over $10,000

in any 12-month period, or vote any securities, including its

Empak stock, owned by WCB Holdings.

     On December 30, 1996, 2 days after WCB Holdings was

capitalized, a vote was held to increase the number of Empak

directors to two.   The WCB Holdings chief manager did not vote on

this change, even though WCB Holdings was the sole shareholder of

Empak stock.   Rather, decedent and Mr. Boyle, as trustees for the

ISA Trust, voted for this change.
                                 - 15 -

            3.    Empak International’s Merger Into Empak

     On March 7, 1997, Empak International merged into Empak.       As

part of the merger, MC’s stock in Empak International was

canceled and MC received, among other things, 660,359 shares of

Empak common stock and an option to purchase 58,667 additional

shares of Empak common stock.     Empak’s stock in Empak

International was canceled.

     Pursuant to the merger, Empak assumed responsibility for the

foreign distribution of Empak products with the exception of

Japan.    Empak appointed MAC as the exclusive exporter of Empak

products to Japan and MC as the exclusive distributor of Empak

products in Japan.     Empak’s ownership was altered as a result of

the merger of Empak International into Empak as follows:

                                           Percentage
                             Number of         of
     Empak shareholder         shares         total
     WCB Holdings             5,943,227        90%
     MC                         396,215         6
     MAC                        264,144         4
          Total               6,603,586       100

     E.    Consolidation of Empak and Fluoroware

     In the summer of 1998, Empak and Fluoroware began

consolidation discussions.     Decedent engaged in the discussions

in his capacity as chairman of the board and chief executive

officer of Empak.     Before November 1998, decedent had sketched

out potential organizational structures in the event the
                               - 16 -

corporations consolidated, but Empak and Fluoroware did not agree

to specific details regarding the consolidation before decedent’s

death.   Following decedent’s unexpected death on November 16,

1998, consolidation discussions were renewed.

     On February 5, 1999, Mr. Bernards, who assisted in

representing Empak in the discussions, recommended the approval

of a consolidation between Empak and Fluoroware.      On March 15,

1999, Empak and Fluoroware signed a letter of intent to

consummate the general terms of the consolidation.      Between April

13 and 14, 1999, Mr. Boyle, as corporate secretary of Empak,

prepared and filed Federal Trade Commission (FTC) Form 4 (a.k.a.

Hart-Scott-Rodino filing), with the FTC indicating the parties’

intended consolidation.   Mark Bongard, as chief manager of WCB

Holdings, gave notice of a special meeting to its members to

consider the proposed consolidation, which was approved by the

members.    On June 1, 1999, Empak and Fluoroware entered into a

consolidation agreement which provided for the formation of a new

corporation, Entegris, Inc. (Entegris).      Pursuant to the new

consolidation agreement, Empak shareholders received 10,250,789

Entegris shares, which represented a 40-percent ownership

interest.

     On March 31, 2000, Entegris filed a registration statement

with the Securities and Exchange Commission in anticipation of

its initial public offering (IPO).      On July 11, 2000, Entegris
                                  - 17 -

had a 2-for-1 stock split, resulting in WCB Holdings’s owning

21,580,6086 shares of Entegris stock.      Also on July 11, 2000,

Entegris completed its IPO.       WCB Holdings sold 1,925,000 shares

of Entegris as part of the Entegris IPO.

III.       Decedent’s Estate Planning

       Decedent sought counsel, considered advice, and worked on

his estate planning from at least 1984.       In 1984, decedent did

not want either his children or Cynthia Bongard to directly own

Empak stock.       Decedent engaged Larkin Hoffman for estate and

business planning purposes.

       A.     ISA Trust

       On May 23, 1986, decedent established ISA Trust with the

assistance of Larkin Hoffman.       ISA Trust was initially funded by

decedent’s transfer of 4,500 of Empak’s 30,000 outstanding

shares, which represented a 15-percent ownership interest in

Empak.       The beneficiaries of ISA Trust were decedent’s four

children and Terra Saxe.       The initial trustees of ISA Trust were

Mr. Bernards and Larry Welter, an employee of Empak.       The

trustees were granted the power to distribute the trust’s income

or principal to any beneficiary acquiring a home or establishing

and maintaining a trade or business.       On February 14, 1988, Mr.



       6
      It appears the Empak shareholders received an additional
539,515 shares of Entegris stock pursuant to the consolidation
agreement on the first anniversary of the closing date (June 7,
1999).
                              - 18 -

Bernards resigned as trustee of ISA Trust, leaving Mr. Welter as

sole trustee.

     ISA Trust made six distributions between April 22, 1991, and

December 30, 1994.   Each distribution was preceded by decedent’s

requesting the trustee or trustees to consider making the

distribution.   After each distribution, an entry was made in

Empak’s stock register recording ISA Trust’s distribution of

Empak shares to a particular beneficiary.    Empak and the named

distributee would enter into a stock redemption agreement at

approximately the same time as the distribution.    The stock

redemption agreements provided for Empak to redeem the

distributed shares if the distributee was willing.

     The first distribution occurred on April 22, 1991.    ISA

Trust distributed 150 shares of Empak stock to Mark Bongard, who

then caused Empak to redeem the shares on May 1, 1991, for

$40,000, which he used to purchase a home.    The second

distribution of 180 shares of Empak stock occurred on August 31,

1992.   Beth Akerberg was the recipient of this distribution,

which was shortly followed by a redemption of the shares by Empak

in exchange for a 90-day note.   On February 1, 1994, ISA Trust

distributed 250 shares of Empak stock to Lynn Zupan.    On the same

day, Empak redeemed the 250 shares from Lynn Zupan.    Empak paid a

portion of the redemption proceeds directly to a third party who

had performed home improvement work on Lynn Zupan’s home.    The
                               - 19 -

fourth, fifth, and sixth distributions all occurred on December

30, 1994.   Mark Bongard, Rhonda Notermann, and Beth Akerberg were

the recipients of 85, 151, and 58 shares of Empak stock,

respectively, all of which were apparently redeemed by Empak.

Following these six distributions, ISA Trust held 3,626 shares of

Empak stock which represented a 12.45-percent ownership interest.

     On January 5, 1995, Mr. Welter appointed Mark Bongard and

Mr. Boyle as cotrustees of ISA Trust; he then resigned as

trustee.    Mark Bongard and Mr. Boyle accepted their appointments

on January 10 and 18, 1995, respectively.    Mr. Boyle and Mark

Bongard later reappointed Mr. Bernards as an additional ISA Trust

trustee on October 1, 1997.

     When Empak’s stock was split 223 to 1 on April 18, 1996, ISA

Trust’s number of Empak shares increased to 808,598.    When Empak

distributed to decedent its Emplast stock on July 31, 1996, ISA

Trust continued to hold 808,598 shares of Empak.    ISA Trust’s

ownership percentage of Empak was 13.61 percent at that time.

     B.    Bongard Family Limited Partnership

     On December 28, 1996, decedent signed a letter that was

written by Mr. Fullmer and addressed to decedent’s children.      The

letter expressed some reasons for forming WCB Holdings and BFLP.

The letter explained that the entities provided, among other

things, a method for giving assets to decedent’s family members

without deterring them from working hard and becoming educated,
                              - 20 -

protection of his estate from frivolous lawsuits and creditors,

greater flexibility than trusts, a means to limit expenses if any

lawsuits should arise, tutelage with respect to managing the

family’s assets, and tax benefits with respect to transfer taxes.

     On December 29, 1996, decedent contributed all of his

4,621,166 WCB Holdings class B governance and 4,621,166 WCB

Holdings class B financial units to BFLP in exchange for a 99-

percent limited partnership interest in BFLP.   ISA Trust

contributed 46,678 WCB Holdings class B governance and 46,678 WCB

Holdings class B financial units to BFLP and received a 1-percent

general partnership interest in exchange.   Mr. Boyle (as trustee

of ISA Trust), decedent, and Mr. Fullmer (as decedent’s estate

planning counsel) negotiated the terms of the partnership, and

explained the partnership to Mark Bongard (cotrustee of ISA

Trust) before the partnership agreement was executed.   Pursuant

to the partnership agreement, either decedent, as limited

partner, or ISA Trust, as general partner, could propose

amendments to the partnership.   For a proposed amendment to be

adopted, both the general partner, ISA Trust, and 60 percent of

the limited partnership interests needed to vote in favor of the

amendment.   BFLP was validly created and existing under Minnesota

law until decedent’s death.

     In the event BFLP liquidated, its assets were first to be

allocated to satisfy its creditors, other than the general
                                - 21 -

partner, limited partners, or assignees, second, to satisfy any

liabilities owed to the interest holders,7 and third, to satisfy

any liabilities owed to the general partner.     Any remaining

assets were to be allocated among the general partner, limited

partners, or assignees in accordance with their respective

capital accounts.

     C.     Additional Trusts Created by Decedent

         On December 28, 1996, decedent created the Wayne C. Bongard

Children’s Trust (CH Trust), and appointed Mark Bongard and Mr.

Bernards as trustees.     Decedent initially funded the CH Trust on

March 15, 1997, with 77,262 class A governance and 77,262 class A

financial units in WCB Holdings.

     On December 30, 1996, decedent created the Wayne C. Bongard

Grandchildren’s Trust (GC Trust).     The trust agreement was

drafted by Mr. Fullmer.     Decedent appointed Del Jensen and Mr.

Eitel, both of whom were employed by Empak, as trustees.

Decedent funded GC Trust on March 15, 1997, by transferring

77,262 class A governance and 77,262 class A financial units in

WCB Holdings.     Decedent’s children and issue were the named

beneficiaries of GC Trust.




     7
      Pursuant to the partnership agreement, an interest holder
is a holder of an “interest”. An “interest” is “an ownership
interest in the Partnership [held] by a Limited Partner (or an
assignee)”.
                               - 22 -

     On December 30, 1996, decedent created the Cynthia F.

Bongard Qualified Terminable Interest Property Trust (QTIP

Trust).   The QTIP Trust agreement was drafted by Mr. Fullmer.

Gary Bongard (decedent’s brother) and Gary Brown (decedent’s

friend) were appointed trustees of this trust.    The named

beneficiaries of QTIP Trust were Cynthia Bongard, decedent’s

children, and their issue.   On March 15, 1997, QTIP Trust was

funded by decedent with 71,319 class A governance and 71,319

class A financial units in WCB Holdings.

     Decedent formed the Wayne C. Bongard Revocable Trust

(Revocable Trust) on December 28, 1996.    Decedent appointed

himself trustee, Mr. Bernards successor trustee, and Mark Bongard

second successor trustee.    According to decedent’s last will and

testament dated December 28, 1996, all of his property was to go

to the Revocable Trust, except his personal property was to go to

Cynthia Bongard.

     Decedent’s funding of GC Trust, CH Trust, and QTIP Trust

changed the ownership interests in WCB Holdings so that they were

held as follows:
                                    - 23 -

  WCB           Class A         Class A         Class B           Class B
Holdings      governance       financial       governance        financial
 member      units/percent   units/percent   units/percent     units/percent
Decedent    287,620/48.39    287,620/48.39          0/0              0/0
ISA          80,860/13.61    80,860/13.61     681,060/12.73    681,060/12.73
  Trust
BFLP               0/0            0/0        4,667,844/87.27   4,667,844/87.27
CH Trust     77,262/13       77,262/13              0/0               0/0
GC Trust     77,262/13       77,262/13              0/0               0/0
QTIP         71,319/12       71,319/12              0/0               0/0
  Trust
   Total    594,323/100      594,323/100     5,348,904/100     5,348,904/100

       Decedent reported the funding of CH Trust, GC Trust, and

QTIP trust on a Federal gift tax return for 1997.              The values

reported on the gift tax return were consistent with a valuation

report prepared as of December 15, 1996, before WCB Holdings’s

formation.

       D.   Decedent’s Transfer of BFLP Interest to Cynthia Bongard

       On December 10, 1997, decedent made a gift representing a

7.72-percent ownership interest in BFLP to Cynthia Bongard.

BFLP’s ownership was then as follows:

                  BFLP partner       Partnership interest &
                                              type

                 ISA Trust           1%, general partner
                 Decedent            91.28%, limited
                                      partner1
                 Cynthia            7.72%, limited
                                    partner
            1
                Decedent owned this interest until his death.
                                 - 24 -

Decedent did not report this gift on his gift tax return filed

for taxable year 1997, as the marital gift tax exclusion was

applicable.     Cynthia Bongard and decedent entered into a

postmarital agreement contemporaneously with the transfer.      This

agreement was “in full discharge, settlement, and satisfaction of

all such rights and claims [either spouse may have possessed

against the other], in the event of the termination of their

marital relationship or after the death of the first of them to

die”.

     E.      Purpose and Function of BFLP

        From its inception until decedent’s death, BFLP did not

perform any activities, never acted to diversify its assets, or

make any distributions.      The WCB Holdings membership units in

BFLP were nonvoting, and decedent determined whether the Empak

shares held by WCB Holdings would be redeemed.      WCB Holdings did

not redeem any of its class B membership units held by BFLP

before decedent’s death.

        F.   1998 ISA Trust Distribution

        In early 1998, decedent suggested that ISA Trust make

distributions to each of his children to see how maturely they

would handle the funds.      A series of transactions occurred in

which Empak redeemed 52,924 of its outstanding shares from WCB

Holdings, and WCB Holdings then redeemed 21,345 of its class A

and class B financial units from ISA Trust.      This redemption
                                             - 25 -

generated $747,816.12.             After covering tax liabilities of all WCB

Holdings members, WCB Holdings and in turn ISA Trust distributed

$400,000 in four equal shares to decedent’s four children.                              The

ownership interests in WCB Holdings were changed so that they

were held as follows:

  WCB              Class A            Class A               Class B           Class B
Holdings          governance         financial             governance       financial
 member        units/percentage   units/percentage      units/percentage   units/percentage

Decedent       287,620/ 48.39%    287,620/ 50.2                 0/   0             0/   0

ISA             80,860/ 13.61      59,515/ 10.39          681,060/ 12.73     659,715/ 12.38
  Trust

BFLP                 0/   0             0/    0         4,667,884/ 87.27   4,667,864/ 87.62

CH Trust        77,262/ 13         77,262/ 13.48                0/   0             0/   0

GC Trust        77,262/ 13         77,262/ 13.48                0/   0             0/   0

QTIP            71,319/ 12         71,319/ 12.45                0/   0             0/   0
  Trust

      Total    594,323/100        572,978/100           5,348,944/100       5,327,579/100

IV.     The Estate of Wayne C. Bongard

        The estate filed a Federal estate tax return on February 15,

2000.         For Federal estate tax purposes, the estate elected the

alternate valuation date of May 16, 1999.                      On February 15, 2000,

the estate completed a Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, which reported that the

Federal estate tax owed was $17,004,363.                      The estate attached

Schedule F, Other Miscellaneous Property Not Reportable Under Any

Other Schedule, to its Form 706.                     Schedule F showed the alternate

values of decedent’s WCB Holdings class A membership units and

his 91.28-percent limited partnership interest in BFLP to be

$4,193,000 and $41,329,838, respectively.                      On February 4, 2003,
                              - 26 -

respondent issued to the estate a notice of deficiency, that

determined a Federal estate tax deficiency of $52,878,785.     In

the notice of deficiency, respondent adjusted the values attached

by the estate to many assets in decedent’s gross estate.     In

addition, respondent determined that the 5,134,629 shares of

Empak stock decedent transferred to WCB Holdings were includable

in decedent’s gross estate because decedent had retained sections

2035(a) and 2036(a) and/or (b) rights and interests in the

transferred property.   On the estate tax return, the estate

reported values of the WCB Holdings class A units and BFLP

interest held by decedent at his death totaling $45,523,338.

Respondent in the notice of deficiency included in the gross

estate a value for decedent’s Empak shares that had been

transferred to WCB Holdings totaling $141,621,428.8   This

resulted in an adjustment increasing the gross estate by

$96,098,120.

     Prior to trial, respondent amended the answer to seek an

increased deficiency based upon the parties’ agreement that the

starting price of Empak shares before any discounts was $32.24.




     8
      This adjustment would include in the gross estate the value
of the Empak shares previously held by decedent and transferred
to WCB Holdings, including the Empak share value related to the
WCB Holdings class B membership units that were transferred to
BFLP.
                                - 27 -

Using this value, respondent’s counsel estimated the revised

adjustment to decedent’s gross estate could be as high as $160

million.

                                OPINION

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

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

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

the value of the taxable estate with specified adjustments made.

Sec. 2001(b).    A decedent’s taxable estate is determined by the

value of the decedent’s gross estate less enumerated deductions.

Sec. 2051.    The value of a gross estate includes all of a

decedent’s property to the extent provided under sections 2033

through 2045.    Sec. 2033.   At issue here is whether certain

property decedent transferred during his lifetime is included in

his gross estate under sections 2035(a) and 2036(a) and (b).

I.   Burden of Proof

      The estate argues that under section 7491(a) the burden of

proof has shifted to respondent.       Conversely, respondent contends

the burden has not shifted because the estate was not cooperative

within the meaning of section 7491(a), and because the estate

failed to introduce credible evidence necessary for the burden to

shift.     It is unnecessary for us to address the parties’

disagreements and to determine whether the burden of proof has

shifted because the outcome of this case is determined on the
                               - 28 -

preponderance of the evidence and is unaffected by section 7491.

See Blodgett v. Commissioner, 394 F.3d 1030, 1035 (8th Cir.

2005), affg. T.C. Memo. 2003-212; Estate of Stone v.

Commissioner, T.C. Memo. 2003-309.

II.   Sections 2035(a) and 2036(a)

      The purpose of section 2036 is to include in a deceased

taxpayer’s gross estate inter vivos transfers that were

testamentary in nature.    United States v. Estate of Grace, 395

U.S. 316 (1969).    Section 2036(a)9 generally provides that if a

decedent makes an inter vivos transfer of property, other than a

bona fide sale for adequate and full consideration, and retains

certain enumerated rights or interests in the property which are


      9
       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.
                              - 29 -

not relinquished until death, the full value of the transferred

property will be included in the decedent’s gross estate.

Section 2036(a) is applicable when three conditions are met:     (1)

the decedent made an inter vivos transfer of property; (2) the

decedent’s transfer was not a bona fide sale for adequate and

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

right enumerated in section 2036(a)(1) or (2) or (b)10 in the

transferred property which he did not relinquish before his

death.

     Additionally, pursuant to section 2035(a) a decedent’s gross

estate includes the value of any property in respect of which the

decedent made a transfer or relinquished a power within 3 years

of his death if the value of such property would have been

included in the decedent’s gross estate under section 2036 but

for the decedent’s transfer of an interest in the property or the

decedent’s relinquishment of a power with respect to the

property.

     This case focuses on each aspect of section 2036(a).    The

estate argues that decedent’s transfer of Empak stock to WCB

Holdings and decedent’s transfer of WCB Holdings class B

membership units to BFLP:   (1) did not constitute “transfers”



     10
       Sec. 2036(b) instructs that the retention of the right to
vote shares of a controlled corporation that were transferred by
a decedent is the retention of the enjoyment of the transferred
property.
                               - 30 -

under section 2036, (2) satisfied the bona fide sale exemption,

and (3) did not include the retention of section 2036 interests.

     A.    “Transfer” and Section 2036(a)

     The first question is whether decedent, in fact, made a

lifetime transfer.    See United States v. O’Malley, 383 U.S. 627,

631 (1966) (stating the purpose behind the predecessor to section

2036(a) was to tax all property that had been the “subject of an

incomplete inter vivos transfer”).

     The term “transfer”, as used in section 2036, is broadly

defined.    See Helvering v. Hallock, 309 U.S. 106, n.7 (1940);

Estate of Shafer v. Commissioner, 749 F.2d 1216, 1221-1222 (6th

Cir. 1984), affg. 80 T.C. 1145 (1983); Guynn v. United States,

437 F.2d 1148, 1150 (4th Cir. 1971) (stating that section 2036

“describes a broad scheme of inclusion in the gross estate, not

limited by the form of the transaction, but concerned with all

inter vivos transfers where outright disposition of the property

is delayed until the transferor’s death”).   The interpretation of

the term “transfer” must reflect the purpose of section 2036(a),

which is to include in a decedent’s gross estate all property he

transferred but retained an interest therein during his lifetime.

See United States v. Estate of Grace, supra at 322; Ray v. United

States, 762 F.2d 1361, 1362 (9th Cir. 1985) (citing United States

v. Estate of Grace, supra at 320); Estate of Shafer v.

Commissioner, supra (citing Foster v. United States, 303 U.S.
                                - 31 -

118, 120 (1938)).    Thus, the caselaw does not support a narrow

definition of the term “transfer”, but instead indicates a

section 2036 analysis should begin by determining whether the

decedent made an inter vivos voluntary act of transferring

property.     Estate of DiMarco v. Commissioner, 87 T.C. 653, 662-

663 (1986).     Any such act, including decedent’s transfer of his

Empak shares to WCB Holdings and decedent’s transfer of his WCB

Holdings class B financial and class B governance units, is

included in a broad interpretation of the term “transfer”.

     B.     The Bona Fide Sale Exception

     As previously stated, Congress excepted from section 2036(a)

any transfer made in a “bona fide sale for an adequate and full

consideration” (the bona fide sale exception).    Respondent argues

that decedent’s inter vivos transfers to WCB Holdings and BFLP

should not be allowed to deplete the gross estate because

sections 2035(a) and 2036(a) and (b) are applicable.    The estate

urges us to respect the transfers, arguing each satisfied the

bona fide sale exception.     This exception has frequently been the

grist of judicial interpretation.

     In Estate of Harrison v. Commissioner, T.C. Memo. 1987-8, we

determined that a partnership agreement was not a substitute for

a testamentary disposition since the decedent received “adequate

consideration for his transfer to the partnership.”     On June 10,

1975, the decedent was in poor health and executed a power of
                               - 32 -

attorney appointing his son as his attorney-in-fact.   On August

1, 1979, the decedent’s son, acting individually and under the

power of attorney, organized a family limited partnership for

purposes of consolidating and preserving the decedent’s assets.

Some of the assets the decedent contributed included oil and gas

assets, which required active management.   The decedent’s 77.8-

percent limited partnership interest and 1-percent general

partnership interest were proportionate to the value of the

property he transferred.    The decedent’s sons each received 10.6-

percent general partnership interests.   The decedent died on

January 14, 1980.   We held that the formation of the partnership

was not a testamentary disposition for two reasons significant to

this discussion.    First, the decedent received adequate and full

consideration for his transfer.   Second, because the estate was

able to show that the partnership was created for the business

purpose of providing the necessary and proper management of the

decedent’s properties.

     In Estate of Harper v. Commissioner, T.C. Memo. 2002-121,

the Court held the bona fide sale exception was not satisfied.

On December 18, 1990, the decedent created a revocable trust.

The trust instrument named the decedent the initial trustee.    The

decedent formed a limited partnership in which his two children

received a combined 1-percent general partnership interest and

the trust received a 99-percent limited partnership interest.
                               - 33 -

The decedent never consulted with his children regarding how the

partnership was going to be operated or structured.

     As part of the analysis the Court stated that the

applicability of the bona fide sale exception depends on two

requirements: “(1) A bona fide sale, meaning an arm’s-length

transaction, and (2) adequate and full consideration.”      The

alleged nontax purpose for creating the partnership was to manage

and invest the assets contributed.      However, the facts revealed

that no new investment strategies were employed by the

partnership, nor did any of the assets constitute working assets

as in Estate of Harrison v. Commissioner, supra.      Moreover, the

estate failed to identify the property, if any, the decedent’s

children transferred to him or the partnership in exchange for

their partnership interests.   See Estate of Reichardt v.

Commissioner, 114 T.C. 144, 155 (2000) (holding that there was no

adequate and full consideration where, among other things, the

decedent’s children transferred nothing to him or the

partnership).   A circuitous recycling of value occurred because

the pooled assets were significantly composed of the same

property contributed by the trust to the partnership.

     In Estate of Thompson v. Commissioner, T.C. Memo. 2002-246,

affd. 382 F.3d 367 (3d Cir. 2004), we again held the bona fide

sale exception was not applicable.      On January 16, 1969, the

decedent established a revocable trust.      The trust agreement was
                               - 34 -

amended, and the trust was funded with securities and cash on

March 17, 1993.   The decedent received income from the securities

held in the trust.   In early 1993, the decedent’s children and

the decedent met with a financial adviser and an attorney who

described for the decedent an estate plan that used family

limited partnerships.    The decedent agreed to form two limited

partnerships to benefit his two children.     Two new corporations

were incorporated, each serving as general partner to one of the

partnerships.   The decedent received shares of stock that

represented a 49-percent ownership interest in each newly formed

corporation.    Before forming the partnerships and corporations,

the decedent and his two children agreed that he would be taken

care of financially.    Additionally, they wanted decedent to have

access to money in each partnership in order to continue making

gifts to his family.    With respect to the adequate and full

consideration prong, the substance of the transaction revealed

that there was not a true pooling of assets.     The income from

some of the properties each partner contributed was allocated to

that partner.   The partnerships also failed to change the

investment strategy of their principal assets--the stocks and

bonds contributed by the decedent.      The lack of nontax business

reasons for the transfer further supported the conclusion that

the decedent did not receive adequate and full consideration

within the meaning of section 2036(a).     Finally, the Court
                              - 35 -

determined that the partnership was conducted in a testamentary

manner, rather than in a businesslike manner, because the

decedent’s money was used to finance the needs of individual

family members including himself.   On these findings, we held

that the bona fide sale exception was not applicable.

     In Estate of Strangi v. Commissioner, T.C. Memo. 2003-145,

the decedent executed a power of attorney in 1988 that named his

son-in-law, Mr. Gulig, his attorney-in-fact.   In 1993, the

decedent’s health began to deteriorate, and Mr. Gulig took over

the decedent’s personal affairs.    On August 12, 1994, Mr. Gulig,

as the decedent’s attorney-in-fact, independently created the

Strangi Family Limited Partnership (SFLP) and Stranco, Inc.

(Stranco), the corporate general partner of SFLP.   Mr. Gulig

singlehandedly determined how the SFLP would be structured and

operated.   Mr. Gulig assigned 98 percent of the decedent’s wealth

to the SFLP in exchange for a 99-percent limited partnership

interest.   The assets contributed by the decedent included, among

other things, his personal residence, securities, and insurance

policies.   The decedent and Mrs. Gulig (the decedent’s daughter

and Mr. Gulig’s wife), purchased Stranco shares for cash.     The

decedent purchased a 47-percent interest in Stranco.    Stranco

contributed the cash to SFLP for a 1-percent general partnership

interest.   The Stranco shareholders acting in concert delegated
                               - 36 -

its managing powers to Mr. Gulig.   The decedent died on October

14, 1994.

     We determined that the formation of the SFLP was not an

arm’s-length transaction because Mr. Gulig, as the decedent’s

attorney-in-fact, established and operated SFLP without any

meaningful negotiations, essentially standing on both sides of

the transaction.   Moreover, the Court determined that Mr. Gulig

recycled the value of the decedent’s assets through the

partnership or corporate solution since the decedent contributed

more than 99 percent of the total combined property in SFLP and

Stranco and received an interest with a value derived “almost

exclusively” from the assets he contributed rather than from a

true pooling of assets.   None of the contributed assets were

found to be of the sort qualifying as a “functioning business

enterprise” as discussed in Estate of Harrison v. Commissioner,

T.C. Memo. 1987-8.   Accordingly, in Strangi we held that the bona

fide sale exception was not satisfied.

     Shortly thereafter, the Court in Estate of Stone v.

Commissioner, T.C. Memo. 2003-309, held that the bona fide sale

exception in section 2036(a) was satisfied.   In Estate of Stone,

the decedent spouses (the Stones) had operated a successful

closely held business for a number of years and created five

family limited partnerships.   We rejected the Commissioner’s

argument that the formation of each of the family limited
                               - 37 -

partnerships was not “motivated primarily by legitimate business

concerns”.    A reason for employing the limited partnership

concept was to resolve the Stones’ children’s concerns.    There

were significant intrafamily disputes with regard to the Stones’

assets which led to litigation.

     The Court found that the future management of the Stones’

assets by the children qualified as a legitimate business concern

since they were going to succeed their parents in operating the

business.    The children actively managed the assets that were

contributed to the partnership in which they had their respective

interests.    These facts supported a finding that each partnership

had economic substance and was not merely a circuitous recycling

of value.    Additionally, the Stones were both in good health for

most of the time the negotiations concerning the formation of the

partnerships were taking place, and they retained sufficient

assets outside of the partnerships to meet their personal needs.

We also concluded that the terms of the transactions reflected

arm’s-length dealing.    The Stones determined which assets would

be contributed to the partnerships, and Mr. Stone’s attorney

drafted the partnership agreements, but the children each had

counsel representing their individual interests.

     The adequate and full consideration prong was also deemed

satisfied.    All partners in each partnership received interests

proportionate to the fair market value of the assets they each
                               - 38 -

transferred, and partnership legal formalities were respected.

We rejected the Commissioner’s argument that valuation discounts

attached to the partnership interest the decedent received

precluded the adequate and full consideration prong from being

satisfied.   We reasoned that the Commissioner’s argument

effectively read “out of section 2036(a) the exception that

Congress expressly prescribed when it enacted that statute”.      We

found that the partnerships had economic substance as a joint

venture for profit in which there was a genuine pooling of

property and services.

     This Court had another opportunity to consider the

application of section 2036(a) and the bona fide sale exception

in Estate of Hillgren v. Commissioner, T.C. Memo. 2004-46.       The

decedent’s estate argued that the creation of the limited

partnership was motivated by a business purpose and premarital

protection of the decedent’s assets.    The Court rejected the

estate’s contention that the partnership served as a means of

premarital asset protection.   On that point, the Court determined

that because title to the properties remained in the decedent’s

name until after her death, and she was financially dependent on

the distributions from the partnership, the transaction was not a

bona fide sale, but rather was a paper transaction.   The estate

was unable to establish a credible nontax reason for engaging in

the transaction, nor was it able to explain how the decedent’s
                               - 39 -

relationship to the properties allegedly transferred to the

partnership was altered.

     In the context of family limited partnerships, the bona fide

sale for adequate and full consideration exception is met where

the record establishes the existence of a legitimate and

significant nontax reason for creating the family limited

partnership, and the transferors received partnership interests

proportionate to the value of the property transferred.     See,

e.g., Estate of Stone v. Commissioner, supra; Estate of Harrison

v. Commissioner, supra.    The objective evidence must indicate

that the nontax reason was a significant factor that motivated

the partnership’s creation.    See Estate of Harper v.

Commissioner, T.C. Memo. 2002-121; Estate of Harrison v.

Commissioner, supra.   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.    See

Estate of Hillgren v. Commissioner, supra; Estate of Thompson v.

Commissioner, supra; Estate of Harper v. Commissioner, supra; see

also Estate of Reichardt v. Commissioner, 114 T.C. 144 (2000).     A

list of factors that support such a finding includes the taxpayer

standing on both sides of the transaction, Estate of Hillgren v.

Commissioner, supra; the taxpayer’s financial dependence on
                                - 40 -

distributions from the partnership, Estate of Thompson v.

Commissioner, supra; Estate of Harper v. Commissioner, supra; the

partners’ commingling of partnership funds with their own, Estate

of Harper v. Commissioner, supra, and the taxpayer’s actual

failure to transfer the property to the partnership, Estate of

Hillgren v. Commissioner, supra.

     The Court of Appeals for the Fifth Circuit recently decided

a case in this area, Kimbell v. United States, 371 F.3d 257, 258

(5th Cir. 2004).    In Kimbell, the decedent transferred assets

including $2.5 million in cash, an active oil and gas business,

and royalties to a trust.     The trust contributed the property to

a family limited partnership and received a 99-percent pro rata

partnership interest in return.     The other partner was a limited

liability company (the LLC) owned by the decedent, her son, and

his wife.   The LLC contributed $25,500 in exchange for a 1-

percent general partnership interest.    The oil and gas working

assets constituted 11 percent of the partnership’s assets.     The

decedent retained over $450,000 in assets for her personal

expenses.

     The court separated 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.     The court first examined the adequate and full

consideration language and set forth an objective inquiry.     Id.
                               - 41 -

at 262.    The court stated that the proper question in examining

the adequate and full consideration prong was whether the sale

depleted the gross estate.    Id. (citing Wheeler v. United States,

116 F.3d 749, 759 (5th Cir. 1997)); see Estate of Frothingham v.

Commissioner, 60 T.C. 211, 215-216 (1973).

       The Court of Appeals disagreed with the District Court’s

determination that a sale between members of the same family

cannot be a bona fide one.    Kimbell v. United States, supra at

267.    A transaction between family members is, however, subjected

to heightened scrutiny to ensure that it is not a sham or

disguised gift.    Applying its test to the facts, the Court of

Appeals held in Kimbell that the pro rata partnership interest

the decedent received was adequate and full consideration.    The

court also found that the decedent’s transfer met the bona fide

sale exception because the partnership was in actual possession

of the assets transferred, partnership formalities were

satisfied, she retained sufficient assets outside of the

partnership to meet her personal needs, some of the assets

contributed were active business assets, and she had nontax

business reasons for creating the partnership.    Id.   The nontax

business reasons included, among others, the protection of the

taxpayer from personal liability with regard to the oil and gas

properties contributed, the pooling of all of the decedent’s

assets to provide greater financial growth than splitting the
                                - 42 -

assets up, and the establishment of a centralized management

structure.   Additionally, the court rejected the Commissioner’s

argument that the LLC’s interest was de minimis since it found no

principle in partnership law that required partners to own “a

minimum percentage interest in the partnership for the entity to

be legitimate”.   Id. at 268.

     Recently, the Court of Appeals for the Third Circuit

affirmed Estate of Thompson v. Commissioner, supra, in Estate of

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

on the adequate and full consideration language, the court stated

an inter vivos transfer in exchange for assets of a lesser value

should trigger heightened scrutiny into the substance of the

transaction.   Id. at 381.    The Third Circuit found that neither

partnership engaged in transactions rising to the level of

legitimate business operations that provided the decedent with a

substantive nontax benefit.     Id. at 379.   This determination was

supported by the partnerships’ allocating income produced by

certain assets to the contributing partner, and the testamentary

nature of one of the partnership’s lending practices.     Even

though the estate presented evidence that one of the partnerships

engaged in a real estate investment, the testamentary nature of

the transfer and the subsequent operation of the partnership

outweighed any legitimizing effect of that investment.     In

addition, the Court of Appeals found that the decedent
                              - 43 -

contributed marketable securities to the partnerships, but the

partnerships failed to sell or diversify them.   Other than

favorable estate tax treatment resulting from this change in

form, the court was unable to identify a legitimate and

significant nontax reason for the transfer.   See id. at 380.     The

court therefore held that there was no adequate consideration

within the meaning of section 2036(a).

     The Court of Appeals also concluded that the decedent’s

transfers to the family limited partnerships did not constitute

bona fide sales within the meaning of section 2036(a).    The Third

Circuit noted that it is important to scrutinize the substance of

an intrafamily transaction because “‘the family relationship

often makes it possible for one to shift tax incidence by surface

changes of ownership without disturbing in the least his dominion

and control over the subject of the gift or the purposes for

which the income from the property is used.’”    Id. at 382

(quoting Commissioner v. Culbertson, 337 U.S. 733 (1949)).

     C.   Decedent’s Transfer of Empak Stock to WCB Holdings

     Respondent contends that decedent’s transfer of Empak stock

to WCB Holdings was not a bona fide sale for adequate and full

consideration in money or money’s worth.   The estate’s position

is that decedent’s transfer of Empak stock to WCB Holdings was a

bona fide sale for adequate and full consideration.   As stated

above, a finding to that effect would preclude the application of
                               - 44 -

section 2036; thus, the Empak stock decedent transferred to WCB

Holdings would not be included his gross estate under section

2036(a).    Moreover, if section 2036(a) does not apply to

decedent’s transfer, section 2035(a) cannot apply to the gifts he

made of WCB Holdings class A governance units to CH Trust, GC

Trust, and QTIP Trust.    Essentially, the question is whether

decedent’s gross estate includes, via the application of section

2036(a), the Empak stock decedent transferred to WCB Holdings.

      In order to answer this question, we must separate the true

nontax reasons for the entity’s formation from those that merely

clothe transfer tax savings motives.    Legitimate nontax purposes

are often inextricably interwoven with testamentary objectives.

See, e.g., Bommer Revocable Trust v. Commissioner, T.C. Memo.

1997-380.

     In 1995, decedent, while in good health, met with his

advisers, Messrs. Boyle, Bernards, and Eitel, to discuss how

Empak could remain successful and competitive.    These discussions

determined that Empak needed to develop additional means for

acquiring capital to remain successful and competitive.      Mr.

Bernards testified that for Empak to grow, “additional capital

other than through bank debt and through [reinvesting its]

earnings” was needed.    It was believed that positioning Empak for

either a public or private offering (a corporate liquidity event)

would accomplish this goal.    Decedent and his advisers discussed
                               - 45 -

how to facilitate a corporate liquidity event for Empak.    Mr.

Boyle drafted a memo and a checklist detailing the specific steps

of the plan to position Empak for a corporate liquidity event.

     Many of the steps in the checklist were completed.    First,

Empak formed Emplast, and Empak distributed its stock to

decedent.    Second, incentive stock options were established.

Third, decedent and ISA Trust transferred their stock in Empak to

WCB Holdings, and in exchange each received interests in WCB

Holdings proportionate to the number of Empak shares they had

contributed.   Fourth, Empak International merged into Empak.

Decedent was in good health until his sudden death in 1998; never

was his health a reason to accelerate the completion of these

steps.

     The positioning and structuring of Empak to facilitate a

corporate liquidity event was also beneficial for decedent and

ISA Trust.   ISA Trust held a single asset, Empak stock.   The

value of the shares held by both decedent and ISA Trust was

maximized by positioning Empak to attract potential investors.

Moreover, the potential market for the Empak shares was

increased.   These facts together support that positioning Empak

for a corporate liquidity event was a legitimate and significant

nontax reason that motivated the Empak shareholders to create WCB

Holdings.
                                - 46 -

          1. Bona Fide Sale

     Respondent argues that the creation of WCB Holdings did not

occur as the result of an arm’s-length transaction, and

consequently, was not a bona fide sale.   In Estate of Harper v.

Commissioner, T.C. Memo. 2002-121, relying partially on Estate of

Goetchius v. Commissioner, 17 T.C. 495, 503 (1951), we determined

that the bona fide sale exception in section 2036(a) is

applicable only where there was an arm’s-length transaction.

     Respondent appears to assert that an arm’s-length

transaction cannot occur between related parties.   An arm’s-

length transaction has been defined as “A transaction between two

unrelated and unaffiliated parties”, or alternatively, a

transaction “between two parties, however closely related they

may be, conducted as if the parties were strangers, so that no

conflict of interest arises.”    Black’s Law Dictionary 1535 (8th

ed. 2004).   A previous edition of Black’s Law Dictionary stated

that an arm’s-length transaction was the standard for testing

whether the resulting terms and conditions of a transaction were

the same as if unrelated parties had engaged in the same

transaction.   See Black’s Law Dictionary 100 (5th ed. 1979)

(stating that “in testing whether $10,000 is an ‘arm’s length’

price [for the sale of property] it must be ascertained for how

much the corporation could have sold the property to a

disinterested third party in a bargained transaction”); see also
                              - 47 -

Dauth v. Commissioner, 42 B.T.A. 1181, 1189 (1940) (stating “The

test to determine whether a transaction is a bona fide

transaction [for Federal income tax purposes] is described by the

term ‘arm’s length’, or, in other words, Was the transaction

carried out in the way that the ordinary parties to a business

transaction would deal with each other?”).     The bona fide sale

exception has not been limited to transactions involving

unrelated parties as respondent’s argument implies.    See Estate

of Stone v. Commissioner, T.C. Memo. 2003-309.

     It is axiomatic that intrafamily transactions are subjected

to a higher level of scrutiny, but this heightened scrutiny is

not tantamount to an absolute bar.     In that connection, we have

already concluded that decedent and ISA Trust had mutual

legitimate and significant nontax reasons for forming WCB

Holdings.   In addition, both decedent and ISA Trust received

interests in WCB Holdings proportionate to the number of shares

transferred.   We believe that had this transaction occurred

between two unrelated parties the majority interest holder in

Empak would have received similar powers to those the decedent

received via WCB Holdings’s member control agreement.    An

important purpose for creating WCB Holdings was to position Empak

for a corporate liquidity event, and the record does not contain

any credible evidence that unrelated parties would not have

agreed to the same terms and conditions.    Given these facts, we
                                - 48 -

cannot hold that the terms of the transaction differed from those

of two unrelated parties negotiating at arm’s length.

     Respondent’s final argument is that the formation of WCB

Holdings was not a bona fide sale because there was not a true

pooling of assets.    WCB Holdings’s purpose was to pool the

Bongard family’s Empak stock within a single entity, which

decedent and ISA Trust satisfied through their respective

contributions.    WCB Holdings’s creation was part of a much

grander plan, to attract potential investors or to stimulate a

corporate liquidity event to facilitate Empak’s growth.

Moreover, when WCB Holdings was capitalized, the members’ capital

accounts were properly credited and maintained, WCB Holdings’s

funds were not commingled with decedent’s, and all distributions

during decedent’s life were pro rata.    The amalgamation of these

facts evinces that this transaction resulted in a true pooling of

assets.

            2.   Full and Adequate Consideration

     The factual circumstances of this case further establish

that decedent and ISA Trust each received an interest in WCB

Holdings that represented adequate and full consideration

reducible to money value.    See Estate of Stone v. Commissioner,

T.C. Memo. 2003-309; Estate of Higgins v. Commissioner, T.C.

Memo. 1991-47; see also secs. 20.2036-1(a), 20.2043-1(a), Estate

Tax Regs.    Decedent and ISA Trust received interests in WCB
                                - 49 -

Holdings proportionate to the number of Empak shares each

contributed.   Although by itself this may not be sufficient

evidence to meet the adequate and full consideration requirement,

two additional facts do support such a finding.    We have

determined that the respective assets contributed by the members

were properly credited to the respective capital accounts of each

contributing member, and distributions from WCB Holdings required

a negative adjustment in the distributee member’s capital

account.   Most importantly, we have found the presence of a

legitimate and significant nontax business reason for engaging in

this transaction.

     Respondent nonetheless argues that decedent did not receive

adequate and full consideration since decedent contributed 86.31

percent of Empak’s outstanding stock without receiving a control

premium for his contribution.    Decedent did not need to receive a

control premium because he retained effective control over Empak

after he contributed his Empak stock to WCB Holdings.   True,

decedent was not the chief manager of WCB Holdings, but the

86.31-percent interest in the class A governance units he

received in the exchange provided him with the power to remove

the WCB Holdings chief manager and appoint himself as chief

manager, to take any action the chief manager himself could take,

and to approve any significant action the chief manager could

take, including selling more than $10,000 worth of any security
                                - 50 -

in any 12-month period and the voting of any security held by WCB

Holdings.    See also Estate of Thompson v. Commissioner, 382 F.3d

at 381 (agreeing that the dissipated value resulting from a

transfer to a closely held entity does not automatically

constitute inadequate consideration for section 2036(a) purposes,

but such dissipation triggers heightened scrutiny into the

substance of the transaction and whether there was a true

business purpose).

             3.    Conclusion

     We hold that decedent’s transfer of Empak stock to WCB

Holdings satisfies the bona fide sale exception of section

2036(a).     Therefore, we need not determine whether decedent

retained a section 2036(a) or (b) interest in the transferred

property.     This holding further precludes the application of

section 2035(a) to decedent’s gifts of WCB Holdings class A

membership units to CH Trust, GC Trust, and QTIP Trust as they

were outright gifts, not gifts of retained section 2036(a)

interests.     See Kisling v. Commissioner, 32 F.3d 1222, 1225 (8th

Cir. 1994), revg. T.C. Memo. 1993-262; Estate of Jalkut v.

Commissioner, 96 T.C. 675, 679 (1991); Estate of Frank v.

Commissioner, T.C. Memo. 1995-132.

     D.     BFLP

     The estate argues that section 2036(a) is not applicable to

decedent’s transfer of WCB Holdings class B membership units to
                                - 51 -

BFLP since that transfer was also a bona fide sale for adequate

and full consideration.   The estate contends that the creation of

BFLP was motivated by nontax reasons.    The BFLP agreement

provides that BFLP was established to “acquire, own and sell from

time to time stocks (including closely held stocks), bonds,

options, mutual funds and other securities.”    At trial, Mr.

Fullmer testified that BFLP was established to provide another

layer of credit protection for decedent.    Additionally, the

estate asserts that BFLP facilitated decedent’s and Cynthia

Bongard’s postmarital agreement.    Messrs. Bernards and Fullmer

both also testified that BFLP was established, in part, to make

gifts.   On December 10, 1997, decedent made a gift of a 7.72-

percent ownership interest in BFLP to Cynthia Bongard.    This gift

was the sole transfer of a BFLP partnership interest by decedent

during his life.   BFLP also never diversified its assets during

decedent’s life, never had an investment plan, and never

functioned as a business enterprise or otherwise engaged in any

meaningful economic activity.

            Bona Fide Sale Exception

     In determining whether the bona fide sale exception in

section 2036(a) applies to an intrafamily transaction, the

substance of the transaction is subject to a higher level of

scrutiny.    See Estate of Thompson v. Commissioner, supra at 383.
                              - 52 -

Both parties set forth facts supporting their respective

positions regarding decedent’s transfer of WCB Holdings class B

membership units to BFLP.

     In support of its contention that decedent’s transfer to

BFLP satisfied the bona fide sale exception, the estate asserts

that ISA Trust was adequately and independently represented in

negotiating the terms of the BFLP transaction.    Mr. Boyle

explained to Mark Bongard, the other trustee of ISA Trust, the

terms and reasons for engaging in the partnership.    In addition,

after BFLP was formed, partnership formalities were complied

with.

     Conversely, respondent asserts that BFLP was “simply a paper

transaction designed to facilitate the distribution of family

wealth both before and after death while leaving decedent’s

lifetime control of Empak unimpaired.”11    In support of his

position, respondent asserts that decedent’s and ISA Trust’s

contributions to BFLP were not a true pooling of assets because

decedent’s relationship to the contributed assets remained the

same before and after the contribution.    Following decedent’s

contribution to BFLP and until his death, BFLP never engaged in

any investment transactions or decisions.    BFLP had neither an

investment plan nor a diversification strategy.


     11
      Respondent has not challenged whether BFLP is a
partnership that should be recognized for tax purposes under sec.
761(a) or 7701(a)(2), so we do not reach that issue in this case.
                               - 53 -

     Estate tax savings did play an important role in motivating

the transfer to BFLP.   The record does not support that the

nontax reasons for BFLP’s existence were significant motivating

factors.    The formation of WCB Holdings eliminated direct stock

ownership in Empak and allowed decedent to make gifts without

diversifying the direct ownership of Empak.    Messrs. Fullmer and

Bernards testified that an impetus for forming BFLP was to

continue decedent’s gift giving.    Decedent, in fact, made

numerous gifts after the formation of BFLP, but not of his BFLP

interest.   All of the gifts decedent made were of WCB Holdings

class A membership units, except for the 7.72-percent limited

partnership interest he gave to Cynthia Bongard in 1997.      At the

time of BFLP’s formation and at the time of his death, any

additional gifts decedent had contemplated were speculative and

indefinite at best.   There was no immediate or definite plan for

such gifts.   Such intent is not sufficient to establish that the

transfer of membership units to BFLP was motivated by a

significant nontax reason.

     Decedent and Cynthia Bongard entered into a postmarital

agreement on December 10, 1997.    For a postmarital agreement to

be valid under Minnesota Statutes section 519.11 (West 1990 &

Supp. 2004), in effect at the time the agreement was entered

into, each spouse needed to have titled in that spouse’s name

property with a total net value exceeding $1,200,000.   Attached
                               - 54 -

to the postmarital agreement was Cynthia Bongard’s financial

statement, which included the value of her interest in BFLP and

QTIP Trust.   QTIP Trust was funded by decedent’s giving it WCB

Holdings class A membership units on March 15, 1997.     Decedent’s

gift of a small portion of his BFLP interest to his wife does not

establish that his prior transfer of all of his class B

membership units to BFLP had a significant nontax motive.

Decedent’s gift of the 7.72-percent BFLP interest to Cynthia

Bongard does not establish a significant nontax reason for

decedent to transfer all 4,621,166 WCB Holdings class B

membership units he owned to BFLP.      The motive for the transfer

of all of decedent’s class B membership units to BFLP was not to

fund the postmarital agreement.    Rather, decedent used part of

his BFLP interest to fund the postmarital agreement simply

because that was where the assets rested when the agreement was

completed.    The vast majority of decedent’s BFLP interest was

never transferred in the almost 2 years before his death.

     The estate’s credit protection argument is also unpersuasive

because WCB Holdings served this function for decedent.     In fact,

decedent via letter stated that “by holding a majority of my

assets in the limited liability company or the limited

partnership, I will be providing a greater amount of protection

for those assets from both creditors and lawsuits.”      Decedent

contributed his Empak stock to WCB Holdings in exchange for WCB
                              - 55 -

Holdings membership units, which he then contributed to BFLP in

exchange for his limited partnership interest.     Decedent’s

initial transfer of his Empak shares to WCB Holdings accorded him

the credit protection he sought.   Any additional benefit provided

by BFLP was not significant to the transfer to BFLP because

decedent’s class A membership units, with their voting power,

remained in WCB Holdings with only the protection provided by

that entity.

     Moreover, we find unpersuasive the estate’s argument that

decedent wanted to create BFLP because of the greater flexibility

it would provide him as compared to the trusts he had previously

created.   Decedent in fact established three trusts within days

of BFLP’s creation.   These trusts were funded months after BFLP

was created with very large gifts.     Clearly, decedent was not

adverse to establishing trusts, nor is there evidence that would

establish how a limited partnership interest in BFLP provided

decedent with greater flexibility than he already possessed by

holding WCB Holdings membership units outright.

     Additionally, BFLP did not perform a management function for

the assets it received.   BFLP never engaged in any businesslike

transactions, either before or after decedent contributed his WCB

Holdings class B membership units to BFLP.     Until decedent’s

death, BFLP’s only ownership interest was in WCB Holdings, and 99

percent of that interest was contributed by decedent.     Similarly,
                               - 56 -

BFLP never attempted to invest or diversify its assets.    As a

practical matter, decedent did not receive any benefit beyond

transfer tax savings from placing his WCB Holdings class B

membership units in BFLP.   In Estate of Harper v. Commissioner,

T.C. Memo. 2002-121, we found that the decedent only recycled the

value of the property he transferred to the partnership.    A

recycling of value has occurred if “all decedent did was to

change the form in which he held his beneficial interest in the

contributed property.”   Id.   The partnership in Estate of Harper,

like the partnership here, did not establish a different

investment plan with respect to its assets.   In this case,

decedent recycled the value of his WCB Holdings class B

membership units by contributing them to BFLP.

     Under these facts, decedent’s transfer of WCB Holdings class

B membership units to BFLP did not satisfy the bona fide sale

exception.

III. Whether Decedent Retained a Section 2036(a) Interest in BFLP

     Our determination that the bona fide sale exception does not

apply to decedent’s transfer to BFLP does not end the inquiry.

As pertinent here, section 2036(a) includes in a decedent’s gross

estate “all property to the extent of any interest therein” of

which the decedent has made a transfer wherein he “has retained

for his life” either “(1) the possession or enjoyment of, or the

right to the income from, the property, or (2) the right, either
                                 - 57 -

alone or in conjunction with any person, to designate the persons

who shall possess or enjoy the property or the income therefrom.”

Section 7701(a)(1) defines “person” to include “an individual, a

trust, estate, partnership, association, company or corporation.”

          A.   Section 2036(a)

     “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 at 375; Estate of McNichol v.

Commissioner, 265 F.2d 667, 671 (3d Cir. 1959).     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.   See Estate of

Thompson v. Commissioner, supra at 376; Estate of Reichardt v.

Commissioner, 114 T.C. 144, 151 (2000).

     The decedent did not need the membership interest in WCB

Holdings class B shares to continue his lifestyle.    However,

decedent retained ownership of more than 91 percent of his BFLP

interest and did not make gifts of such interest prior to his

death.   More importantly, decedent controlled whether BFLP could
                              - 58 -

transform its sole asset, the class B WCB Holdings membership

units, into a liquid asset.   Decedent as CEO and sole member of

Empak’s board of directors determined when Empak redeemed its

stock in each of the seven instances of redemptions prior to his

death, including the last redemption of about $750,000 worth of

Empak stock in 1998 after WCB Holdings was formed.   None of the

seven redemptions reduced the membership units owned by BFLP.      In

order for BFLP to be able to diversify or take any steps other

than simply holding the class B membership units, decedent would

have had to cause the membership units and the underlying Empak

stock to be redeemed.   He chose not to do this.   By not redeeming

the WCB membership units held by BFLP, decedent ensured that BFLP

would not engage in asset management.   Thereby, decedent

exercised practical control over BFLP and limited its function to

simply holding title to the class B membership units.    Whether

decedent caused the WCB membership units held by BFLP and the

underlying Empak stock to be redeemed or not, his ability to

decide whether that event would occur demonstrates the

understanding of the parties involved that decedent retained the

right to control the units transferred to BFLP.

     The estate’s argument that the general partner’s fiduciary

duties prevents a finding of an implied agreement is overcome by

the lack of activity following BFLP’s formation and BFLP’s
                               - 59 -

failure to perform any meaningful functions as an entity.12      We

conclude that decedent’s transfer to BFLP for a 99-percent

ownership interest in the partnership did not alter his control

of the WCB Holdings class B membership units transferred to BFLP.

See Estate of Thompson v. Commissioner, 382 F.3d at 376-377

(finding “nothing beyond formal title changed in decedent’s

relationship to his assets” where the practical effect on his

relationship to the transferred assets during decedent’s life was

minimal).

            B.   Conclusion

     Under the circumstances of this case, an implied agreement

existed that allowed decedent to retain the enjoyment of the

property held by BFLP.    Therefore, under section 2036(a)(1),

decedent’s gross estate includes the value of the WCB Holdings

class B membership units held by BFLP on decedent’s death that is



     12
      Under Minnesota law, the relationship of partners is
fiduciary in character, and each partner owes the other partners
the highest degree of integrity, loyalty, and good faith. Prince
v. Sonnesyn, 222 Minn. 528, 535 (1946); Margeson v. Margeson, 376
N.W.2d 269 (Minn. Ct. App. 1985). In a limited partnership, a
general partner can be liable to the limited partners for breach
of fiduciary duty. Minn. Stat. Ann. sec. 322A.33 (West 2004);
see also Minn. Stat. Ann. sec. 323.20 (West 1995), repealed by
Laws 1997, ch. 174, art. 12, sec. 68, effective Jan. 1, 2002, but
replaced by Minn. Stat. Ann. secs. 323A.4-04 and 323A.4-05,
effective Jan. 1, 1999 (West 2004). In addition, the ISA Trust
trustees owed fiduciary duties to its beneficiaries. See Minn.
Stat. Ann. sec. 501B.10 (West. Supp. 1990), repealed by Laws
1996, ch. 314, sec. 8, eff. Jan. 1, 1997, replaced by Minn. Stat.
Ann. sec. 501B.151, effective Jan. 1, 1997 (West 2002 & Supp.
2004); Minn. Stat. Ann. sec. 501B.60 (West 1990).
                               - 60 -

proportionate to decedent’s 91.28-percent limited partnership

interest.    Given this finding, it is unnecessary to determine

whether the terms of the BFLP agreement provided decedent

explicit rights to control the property.

IV.   Section 2035(a) and Decedent’s Gift to Cynthia Bongard

      As pertinent here, section 2035(a) provides that a

decedent’s gross estate includes the value of any property or

interest therein if “(1) the decedent made a transfer * * * [of

an interest in such property] during the 3-year period ending on

the date of the decedent’s death, and (2) the value of such

property (or an interest therein) would have been included in the

decedent’s gross estate under section 2036 * * * if such

transferred interest * * * had been retained by the decedent on

the date of his death”.    In this case, decedent transferred a

7.72-percent partnership interest in BFLP to Cynthia Bongard

within 3 years of his death.    The issue is whether the value of

the partnership interest decedent gave to Cynthia Bongard would

have been included in his gross estate had he retained it until

his death.

      As stated previously, decedent retained a section 2036(a)(1)

interest in the WCB Holdings class B membership units he

transferred to BFLP because we found the existence of an implied

agreement between decedent and ISA Trust.    Decedent’s gift of a

limited partnership interest to Cynthia Bongard decreased his
                              - 61 -

ownership interest in BFLP.   Because the partnership interest

decedent gave to Cynthia Bongard consisted of a portion of the

property that triggered the application of section 2036(a)(1) we

find that section 2035(a) is applicable to decedent’s transfer of

the 7.72-percent limited partnership interest in BFLP.   Thus,

decedent’s gross estate includes the value of the WCB Holdings

class B membership units held by BFLP on decedent’s death that is

proportionate to the 7.72-percent limited partnership interest.

V.   Discounts Applicable to Decedent’s Membership Units in WCB
      Holdings

      The relevant part of section 2031 provides that any property

included in a decedent’s gross estate is included at its fair

market value.   See also sec. 20.2031-1(b), Estate Tax Regs.    The

parties stipulated that on the alternate valuation date, May 16,

1999, Empak’s stock per share value was $32.24.   This was used as

the starting point by the parties to determine the value of the

decedent’s interests in WCB Holdings and BFLP and was then

decreased by stipulated discounts depending upon this Court’s

determinations regarding the application of section 2036.

      We apply the discounts provided by the parties in their

stipulation of settled issues with respect to the WCB Holdings

membership units.   If section 2036 was not applied to the

transfers to WCB Holdings, the parties stipulated to a 13-percent

lack of control discount and a 17.5-percent lack of marketability

discount.   We are left to apply the stipulation to the value of
                              - 62 -

decedent’s 287,620 WCB Holdings class A membership units and

4,621,166 WCB Holdings class B membership units.

      The stipulation provides that the value of decedent’s WCB

Holdings class A membership units is equal to $32.24 less the

stipulated discounts for lack of control and lack of

marketability, multiplied by 287,620 (the total number of class A

governance and financial membership units decedent owned on the

alternate valuation date).   As such, the value of decedent’s WCB

Holdings class A membership units was $6,655,527, as calculated

below.

[{$32.24 - ($32.24 x .13)} - {($32.24 - ($32.24 x .13)) x .175}]=
$23.14 x 287,620 = $6,655,527
     We read the stipulation to further provide the WCB Holdings

class B membership units an additional 5-percent lack-of-voting-

rights discount.   Given the stipulation and our holdings herein,

we find that the value of decedent’s WCB Holdings class B

membership units on the alternate valuation date was

$101,573,229,13 as calculated below.

  [$23.14 - ($23.14 x .05)]= $21.98 x 4,621,166 = $101,573,229




     13
      We note that decedent’s estate may be entitled to a
deduction under sec. 2056 for his inter vivos gift of WCB
Holdings class B membership units to Cynthia Bongard that was
pulled back into his gross estate under sec. 2035(a).
                              - 63 -

     To reflect the foregoing and give effect to the parties’

stipulations,

                                   Decision will be entered

                              under Rule 155.


     Reviewed by the Court.

     GERBER, SWIFT, COLVIN, VASQUEZ, THORNTON, HAINES, WHERRY,
KROUPA, AND HOLMES, JJ., agree with this majority opinion.

     GALE, J., concurs in result only.
                              - 64 -

     LARO, J., concurring in result:    I concur only because I am

uncomfortable with the analysis used by the majority in arriving

at its result.   That analysis applies a new test that the

majority has created to decide whether a transfer to a family

limited partnership should be respected for Federal tax purposes.

The majority applies its test in lieu of deeply ingrained caselaw

that conditions satisfaction of the “bona fide sale for an

adequate and full consideration in money or money’s worth”

exception of section 2036(a) (adequate and full consideration

exception) on the transferor’s receipt of property equal in value

to that of the property transferred by the transferor.    In other

words, under that caselaw, the adequate and full consideration

exception may apply only where the transferor’s receipt of

consideration is of a sufficient value to prevent the transfer

from depleting the transferor’s gross estate.

     The majority states its test as follows:    “In the context of

family limited partnerships, the bona fide sale for adequate and

full consideration exception is met where [1] the record

establishes the existence of a legitimate and significant nontax

reason for creating the family limited partnership, and [2] the

transferors received partnership interests proportionate to the

value of the property transferred.”    Majority op. p. 39.    I

disagree with both prongs of this test.    I believe that a

transferor satisfies the adequate and full consideration
                              - 65 -

exception in the context of a transfer to a partnership only

when:   (1) The record establishes either that (i) in return for

the transfer, the transferor received a partnership interest and

any other consideration with an aggregate fair market value equal

to the fair market value of the transferor’s transferred

property, or (ii) the transfer was an ordinary commercial

transaction (in which case, the transferred property and the

consideration received in return are considered to have the same

fair market values), and (2) the transfer was made with a

business purpose or, in other words, a “useful nontax purpose

that is plausible in light of the taxpayer’s [transferor’s]

conduct and useful in light of the taxpayer’s economic situation

and intentions.”   ACM Pship. v. Commissioner, T.C. Memo.

1997-115, affd. in part and revd. in part on an issue not

relevant herein 157 F.3d 231 (3d Cir. 1998); see also CMA

Consol., Inc. v. Commissioner, T.C. Memo. 2005-16; Salina Pship.,

L.P. v. Commissioner, T.C. Memo. 2000-352.

          1. Majority’s Conclusion That Transferors Receive
     Partnership Interests Proportionate to the Value of the
     Property Transferred

     Where the record establishes the existence of a legitimate

and significant nontax reason for creating a family limited

partnership, the majority concludes that the adequate and full

consideration exception is met if the transferors received

partnership interests proportionate to the value of the property
                               - 66 -

transferred.    I disagree with this conclusion.   Section 2036(a)

provides:

          SEC. 2036(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. [Emphasis
            added.]

Firmly established caselaw holds that the emphasized text, the

adequate and full consideration exception, is satisfied only when

a transferor receives consideration in money or money’s worth

equal to the value of the property transferred by the transferor;

i.e., consideration with a value sufficient to prevent the

transfer from depleting the transferor’s gross estate.      E.g.,

Estate of Wheeler v. United States, 116 F.3d 749, 761 (5th Cir.

1997) (“unless a transfer that depletes the transferor’s estate

is joined with a transfer that augments the estate by a

commensurate (monetary) amount, there is no ‘adequate and full

consideration’ for the purposes of either the estate or gift

tax”); Estate of D’Ambrosio v. Commissioner, 101 F.3d 309, 312
                              - 67 -

(3d Cir. 1996) (“consideration should be measured against the

value that would have been drawn into the gross estate absent the

transfer”), revg. 105 T.C. 252 (1995); United States v. Past,

347 F.2d 7, 12 (9th Cir. 1965) (“The value of what the decedent

received under the trust must be measured against the value of

the property she transferred to the trust”); United States v.

Allen, 293 F.2d 916, 917-918 (10th Cir. 1961) (consideration is

“adequate and full” only if it equals or exceeds the value of the

property that would otherwise be included in the gross estate

absent the transfer); Estate of Frothingham v. Commissioner,

60 T.C. 211, 215-216 (1973) (“unless replaced by property of

equal value that could be exposed to inclusion in the decedent’s

gross estate, the property transferred in a testamentary

transaction of the type described in the statute must be included

in his gross estate”); see also Commissioner v. Wemyss, 324 U.S.

303, 307 (1945); Estate of Gregory v. Commissioner, 39 T.C. 1012

(1963).   The adequacy of consideration for purposes of the

adequate and full consideration exception is measured by the

value of the property that would have otherwise been included in

the transferor’s gross estate had the transferor died immediately

before the transfer.   Estate of D’Ambrosio v. Commissioner, supra

at 313.   Because transfers of assets under facts similar to those

here are typically motivated primarily (if not entirely) by

testamentary concerns, section 2036(a) preserves the integrity of
                               - 68 -

the Federal estate tax system by preventing a depletion of an

estate by testamentary-like inter vivos transfers for less than

an adequate and full consideration.     See United States v. Estate

of Grace, 395 U.S. 316 (1969).

     Whether the value of consideration received in the form of

an interest in a partnership is “adequate and full” within the

meaning of section 2036(a) is a valuation issue.    For this

purpose, I believe that the Court must determine the fair market

value of the partnership interest as of the date of the transfer,

applying the well-established valuation principles that take into

account discounts and/or premiums inhering in that fair market

value.1   The value of the transferred property that would have

been included in the transferor’s gross estate absent the

transfer would have been determined under such a valuation

approach.   I believe it only natural to conclude that the same

approach should apply to determine the value of the consideration

that would have replaced the transferred property in the

transferor’s gross estate had the transferor died immediately



     1
       The Court need not determine this fair market value,
however, if the record establishes that the partnership interest
was received in an ordinary commercial transaction. In that
case, the values of the transferred and received properties would
be considered to be equal. See sec. 25.2512-8, Gift Tax Regs.
(transfers “made in the ordinary course of business (a
transaction which is bona fide, at arm’s length, and free from
any donative intent), will be considered as made for an adequate
and full consideration in money or money’s worth”); see also
Harper v. Commissioner, T.C. Memo. 2002-121.
                                  - 69 -

after the transfer.

     Moreover, the phrase “adequate and full consideration” has

the same meaning in both gift and estate tax cases, Merrill v.

Fahs, 324 U.S. 308, 309-311 (1945); Estate of Friedman v.

Commissioner, 40 T.C. 714, 718-719 (1963), and this Court has

previously applied such a valuation approach in a gift tax case,

Estate of Trenchard v. Commissioner, T.C. Memo. 1995-121, arising

under section 2512(b) from a transfer of property to a

corporation upon its formation.2       In Estate of Trenchard, the

decedents (husband and wife), their daughter, and her three

children (the six of whom are collectively referred to as the

subscribers) each transferred property to a newly formed

corporation in exchange for debt and stock; the decedents’

daughter and her three children were the only ones who received

common stock.   The Court determined that the fair market value of



     2
       As is true in sec. 2036(a), sec. 2512(b) refers to “value”
and “adequate and full consideration in money or money’s worth”.
Specifically, sec. 2512(b) provides:

          SEC. 2512.       VALUATION OF GIFTS.

                *      *      *    *    *    *    *

                (b) Where property is transferred for
          less than an adequate and full consideration
          in money or money’s worth, then the amount by
          which the value of the property exceeded the
          value of the consideration shall be deemed a
          gift, and shall be included in computing the
          amount of gifts made during the calendar
          year.
                              - 70 -

the property that each decedent transferred to the corporation

exceeded the fair market value of the stock and debt that they

each received in return.   The Court determined the fair market

value of that stock noting that a marketability discount inhered

in it and that a premium for control also inhered in the fair

market value of the decedent/husband’s shares.   Consistent with

the test applied in this case by the majority, the executrix

argued that the excess values were not gifts from each of the

decedents to the common shareholders because the decedents’

proportionate interests in all of the property transferred to the

corporation did not exceed their interests in the total

consideration that the subscribers had received in return.    The

Court disagreed.   The Court held that the excess values were a

gift from the decedents to the common shareholders in that the

excess values accrued to the benefit of the common shareholders

and increased the value of the interests received by them.

     With but a passing reference to language in Estate of Stone

v. Commissioner, T.C. Memo. 2003-309, the majority declines to

address whether valuation discounts are taken into account for

purposes of valuing the consideration received by the decedent

from the Bongard Family Limited Partnership (BFLP).   See majority

op. pp. 37-38.   Nor does the majority mention that this

referenced language was recently rejected by a majority of a

panel of the Court of Appeals for the Third Circuit in Estate of
                              - 71 -

Thompson v. Commissioner, 382 F.3d 367, 386-387 (3d Cir. 2004)

(Greenberg, J., concurring and joined by Rosenn, J.),3 affg. T.C.

Memo. 2002-246.   This majority in Thompson (Thompson majority)

“reject[ed] Stone on the quoted point [the referenced language]

as the Commissioner’s position [that the valuation of partnership

interests for purposes of section 2036(a) must take into account

valuation discounts] in no way reads the [adequate and full

consideration] exception out of section 2036(a) and the Tax Court

does not explain why it does.”   Id.   The Thompson majority went



     3
       I have found no law setting the precedential value of a
concurring opinion that garners a second vote so as also to be a
majority opinion of a Court of Appeals panel. Cf. Hunt v. Natl.
Broadcasting Co., Inc., 872 F.2d 289, 296 (9th Cir. 1989)
(recognizing the issue, but stating that it was unnecessary to
decide there). To my mind, such a concurring opinion is entitled
to the same respect as any other majority opinion of a panel.
See Greene v. Massey, 706 F.2d 548, 550 (5th Cir. 1983) (in
response to certification from the U.S. Court of Appeals for the
Fifth Circuit, the Supreme Court of Florida answered that a
concurring opinion by a Justice of that Court is the law of the
case if joined by a majority of that Court’s Justices); Detroit
v. Mich. Pub. Utils. Commn., 286 N.W. 368, 379 (Mich. 1939) (“It
is true that the views of Justice Fellows were expressed in a
separate concurring opinion. Views, however, expressed in
separate concurring opinions are the views of the court, when it
appears that the majority of the court concurred in such
separately expressed views”); Anderson v. Sutton, 293 S.W. 770,
773 (Mo. 1927)(“Views expressed in a separate concurring opinion
of an individual judge are not the views of the court, unless it
appears that the majority of the court concurred in such
separately expressed views”); see also State v. Dowe, 352 N.W.2d
660, 662 (Wis. 1984) (“In Outlaw [State v. Outlaw, 321 N.W.2d 145
(Wis. 1982)], the lead opinion represents the majority and is
controlling on the issues of the state’s burden and the existence
of abuse of discretion by that circuit court. However, the
concurring opinions represent the majority on the issue of the
test to be applied and therefore control on this point”).
                               - 72 -

on to explain that the Commissioner merely “seeks to apply the

exception precisely as written as his position should not be

applied in ordinary commercial circumstances even though the

decedent may be said to have enjoyed the property until his

death.”   Id. at 387.   The majority in this case does not address

the Thompson majority’s conclusion that valuation discounts may

be taken into account for purposes of the adequate and full

consideration exception.   Nor does the majority in this case

attempt to answer the Thompson majority’s query as to why

applying valuation discounts for such a purpose reads the

adequate and full consideration exception out of section 2036(a).

     I recognize that the Court of Appeals for the Fifth Circuit

in Kimbell v. United States, 371 F.3d 257, 266 (5th Cir. 2004),

stated that valuation principles should not be equated with the

test of “adequate and full consideration” because business or

other financial considerations may enter into a transferor’s

decision to receive an interest in a limited partnership that may

not be immediately sold for 100 cents on the dollar.   While I do

not disagree that these considerations may cause a transferor to

accept such an interest in a partnership, the issue as I see it

is whether the inability to realize the 100 cents is attributable

to (1) an actual difference in value between the transferred and

received properties or (2) the presence of one or more intangible

assets the sales price of which is subject to dispute.   Under the
                              - 73 -

caselaw referenced above, the adequate and full consideration

exception does not apply where a difference in value between

transferred and received properties causes a depletion in the

transferor’s gross estate.   Nor does Kimbell v. United States,

supra, hold otherwise.   As the Thompson majority observed as to

Kimbell:

     Kimbell does not take into account that to avoid the
     recapture provision of section 2036(a) the property
     transferred must be replaced by property of equal value
     that could be exposed to inclusion in the decedent’s
     gross estate * * * on a money or money’s worth basis.
     [Estate of Thompson v. Commissioner, supra at 387 n.24
     (Greenberg, J., concurring and joined by Rosenn, J.);
     citations and quotation marks omitted.]

          2. Majority’s Conclusion That the Record Establishes
     the Existence of a Legitimate and Significant Nontax Reason
     for Creating a Family Limited Partnership

     Where the transferors received family limited partnership

interests proportionate to the value of property transferred to

the partnership, the majority concludes that the adequate and

full consideration exception is satisfied if there was a

legitimate and significant nontax reason for creating the

partnership.   I disagree with this conclusion for three reasons.

     First, I disagree with the use of the majority’s “legitimate

and significant nontax reason” test.   See majority op. p. 39.    I

would apply the longstanding and well-known business purpose test

of Gregory v. Helvering, 293 U.S. 465 (1935).   Indeed, the Court

of Appeals for the Third Circuit used that business purpose test

in Estate of Thompson v. Commissioner, supra at 383, when it
                              - 74 -

stated:

     A “good faith” transfer to a family limited partnership
     must provide the transferor some potential for benefit
     other than the potential estate tax advantages that
     might result from holding assets in the partnership
     form. Even when all the “i’s are dotted and t’s are
     crossed,” a transaction motivated solely by tax
     planning and with “no business or corporate purpose ...
     is nothing more than a contrivance.” Gregory v.
     Helvering, 293 U.S. 465, 469 (1935). * * *

The Court of Appeals for the Eighth Circuit, the court to which

an appeal of this case would most likely lie, also has regularly

used a business purpose/economic substance test in Federal tax

matters, e.g., IES Indus., Inc. v. United States, 253 F.3d 350

(8th Cir. 2001); Bergman v. United States, 174 F.3d 928 (8th Cir.

1999), including matters dealing with estate and gift taxes,

e.g., Estate of Schuler v. Commissioner, 282 F.3d 575 (8th Cir.

2002), affg. T.C. Memo. 2000-392; Sather v. Commissioner, 251

F.3d 1168 (8th Cir. 2001), affg. in part and revg. in part on the

applicability of accuracy-related penalties T.C. Memo. 1999-309.

     Second, the words “legitimate” and “significant” are

ambiguous and subject to various interpretations.   For example,

as I read the meaning of the adjective “legitimate” in

Merriam-Webster’s Collegiate Dictionary 665 (10th ed. 1999), I am

unsure which of those meanings the majority intends to give to

that word.   The only possible meanings are:   “2 : being exactly

as purposed: neither spurious nor false”; “3 a : accordant with

law or with established legal forms and requirements”; and “4 :
                              - 75 -

conforming to recognized principles or accepted rules and

standards”.   An uncertainty in the meaning of the words

“legitimate” and “significant” may result in applications not

intended by the majority.

     Third, the majority requires only that the creation of the

partnership be supported by a legitimate and significant nontax

reason.   Under the majority’s analysis, therefore, the adequate

and full consideration exception would seem to be satisfied as to

all property transferred to a partnership as long as the record

establishes the requisite legitimate and significant nontax

reason and that the transferors received partnership interests

proportionate to the value of the transferred property.    Where,

as here, the legitimacy of a partnership is not at issue,4 I do

not believe that the Court’s analysis should rest solely on the

transferor’s reason for forming the partnership; the Court’s

analysis should also include an inquiry as to the business

purpose for the transfers to the partnership.   In fact, as I read

the relevant text underlying the adequate and full consideration

exception, that text speaks only to a “sale” of property and

makes no specific statement as to the purchaser of that property.

     MARVEL, J., agrees with this concurring in result opinion.




     4
       The majority states that it is not deciding whether BFLP
is a partnership that should be recognized for Federal tax
purposes. Majority op. p. 52 n.11.
                              - 76 -

      HALPERN, J., concurring in part and dissenting in part.1

I.   Introduction

      I write separately to express my disagreement with the

majority’s interpretation of the bona fide sale exception found

in section 2036(a).2

      The majority states:

           In the context of family limited partnerships, the
      bona fide sale for adequate and full consideration
      exception is met where the record establishes [1] the
      existence of a legitimate and significant nontax reason
      for creating the family limited partnership, and [2]
      the transferors received partnership interests
      proportionate to the value of the property transferred.
      [Majority op. p. 39]

I believe that the majority has strayed from the traditional

interpretation of the bona fide sale exception by incorporating

into the exception an inappropriate motive test (“a legitimate

and significant nontax reason”), and by concluding that a

partnership interest “proportionate” to the value of the property

transferred constitutes adequate and full consideration in money

or money’s worth.



      1
        I concur with the majority insofar as it decides that the
value of the shares of Empak, Inc., transferred by decedent to
WCB Holdings, LLC (WCB Holdings), is not included in the value of
the gross estate (although I do not agree with the reasoning the
majority uses to reach that result). I disagree with the
majority that the value of the WCB Holdings membership units
transferred to the Bongard Family Limited Partnership is included
in that value.
      2
        I have not joined Judge Laro’s separate opinion because,
in important particulars, I disagree with his stated views.
                                 - 77 -

II.   Bona Fide Sale Exception

      A.   Introduction

      Section 2036 is entitled “Transfers with retained life

estate”, and subsection (a) thereof provides the following

general rule:

           SEC. 2036(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. [Emphasis added.]

Thus, even if a transferor of property retains lifetime

possession, enjoyment, income, or control of the property, the

value of the property will not show up in her gross estate if the

transfer was a bona fide sale within the meaning of the

underscored language (the bona fide sale exception).

      With respect to at least that portion of the bona fide sale

exception that requires “adequate and full consideration in money

or money’s worth” (for short, sometimes, full consideration), the

identical language appears in section 2512(b), which provides

that a gift occurs when property is transferred for insufficient
                                  - 78 -

consideration.3   That language has the same meaning in the

respective contexts of the gift tax and the estate tax.     Estate

of Friedman v. Commissioner, 40 T.C. 714, 718-719 (1963) (“[I]f

the transfer under scrutiny is considered as made for an adequate

and full consideration for gift tax purposes, it likewise is to

be considered for estate tax purposes.”); see also Merrill v.

Fahs, 324 U.S. 308, 311 (1945) (the gift and estate taxes are in

pari materia and must be construed together).   The gift-on-

account-of-insufficient-consideration rule of section 2512(b) is

construed in section 25.2512-8, Gift Tax Regs., which, in

pertinent part, provides:

          SEC. 25.2512-8 Transfers for insufficient
     consideration.

          Transfers reached by the gift tax are not confined
     to those only which, being without a valuable
     consideration, accord with the common law concept of
     gifts, but embrace as well sales, exchanges, and other
     dispositions of property for a consideration to the
     extent that the value of the property transferred by
     the donor exceeds the value in money or money's worth
     of the consideration given therefor. However, a sale,
     exchange, or other transfer of property made in the
     ordinary course of business (a transaction which is
     bona fide, at arm's length, and free from any donative


     3
         Sec. 2512(b) provides:

           SEC. 2512(b). Where property is transferred for
     less than an adequate and full consideration in money
     or money's worth, then the amount by which the value of
     the property exceeded the value of the consideration
     shall be deemed a gift, and shall be included in
     computing the amount of gifts made during the calendar
     year.
                               - 79 -

     intent), will be considered as made for an adequate and
     full consideration in money or money's worth. * * *

Under that regulation, transfers of property reached by the gift

tax include transfers where (and to the extent) the value of the

property transferred by the donor exceeds the value in money or

money’s worth (cash value) of the consideration given in exchange

therefor.4   A presumption of full consideration arises, however,

in the case of a transfer of property made in the ordinary course

of business; i.e., a transfer that is “bona fide, at arm’s

length, and free from any donative intent”.   Id.   One consequence

of satisfying the ordinary-course-of-business test is that the

inquiry as to full consideration is avoided (and the actual fair

market value of the consideration given for the transferred

property is irrelevant).

     B.   Approach of the Majority

     On pages 19-20 of its report, the majority makes the

following finding:

          On December 28, 1996, decedent signed a letter
     that was written by Mr. Fullmer and addressed to


     4
        As we have recently said: “The meaning of the phrase ‘in
money or money's worth’, when it follows ‘adequate and full
consideration’, has been interpreted to confine the scope of
‘consideration’ to money or its equivalent; i.e., to exclude a
mere promise or agreement as consideration.” Abeid v.
Commissioner, 122 T.C. 404, 409 n.7 (2004); see also sec.
25.2512-8, Gift Tax Regs. (“A consideration not reducible to a
value in money or money’s worth, as love and affection, promise
of marriage, etc., is to be wholly disregarded [in determining
adequate and full consideration], and the entire value of the
property transferred constitutes the amount of the gift.”).
                               - 80 -

     decedent’s children. The letter expressed some reasons
     for forming WCB Holdings and BFLP. The letter
     explained that the entities provided, among other
     things, a method for giving assets to decedent’s family
     members without deterring them from working hard and
     becoming educated, protection of his estate from
     frivolous lawsuits and creditors, greater flexibility
     than trusts, a means to limit expenses if any lawsuits
     should arise, tutelage with respect to managing the
     family’s assets, and tax benefits with respect to
     transfer taxes.

Mr. Fullmer was decedent’s estate planning attorney, see majority

op. p. 12, and among the reasons set forth by decedent for

forming WCB Holdings, LLC (WCB Holdings) and the Bongard Family

Limited Partnership (BFLP) are family gifts and the achievement

of transfer tax benefits (read, “savings”).    The transfer tax

savings result from the loss in value (giving rise to a valuation

discount) that petitioner claims accompanied decedent’s

sequential packaging of (1) his Empak, Inc. (Empak), stock in WCB

Holdings and (2) his WCH Holdings Class B units in BFLP.      The

lost value, of course, was not beyond reclamation:    It would be

restored if BFLP and WCB Holdings were unpacked, which seems

likely once decedent’s interests in the two entities passed

through decedent’s estate and the Empak shares became more

liquid.   The transfer tax savings that decedent admitted were his

objective thus serve only to increase by the amount of those

savings (less, of course, transaction costs, such as lawyer’s

fees) the size of decedent’s estate passing into the hands of his

heirs.    The achievement of transfer tax savings evidences
                                - 81 -

donative intent because such savings translate almost dollar for

dollar into the enhancement of the net value that decedent could

gratuitously transfer to family members.     Consequently, the

transfers to WCB Holdings and BFLP (together, the transfers) were

not free of donative intent.     That being the case, the transfers

were not, in the terms of section 25.2512-8, Gift Tax Regs., made

in the ordinary course of business, and there is no presumption

that either the WCB Holdings membership units received by

decedent for his Empak shares or the 99-percent limited

partnership interest in BFLP received by decedent for his WCB

class B membership units constituted full consideration for those

transfers.   Id.

     Therefore, to establish that the transfers were for full

consideration, petitioner must, for each transfer, establish that

the value of the property transferred by decedent did not exceed

the cash value of the property received by him.     Id.   By the

explicit terms of section 25.2512-8, Gift Tax Regs., the

resulting inquiry is limited to an economic calculus, and there

is no room for any inquiry as to the transferor’s (decedent’s)

state of mind.     Yet the majority makes his state of mind

critical:

     Decedent * * * received [an interest] in WCB Holdings
     proportionate to the number of Empak shares * * * [he]
     contributed. Although by itself this may not be
     sufficient evidence to meet the adequate and full
     consideration requirement, two additional facts do
     support such a finding. We have determined that the
                             - 82 -

     respective assets contributed by the members were
     properly credited to the respective capital accounts of
     each contributing member, and distributions from WCB
     Holdings required a negative adjustment in the
     distributee member’s capital account. Most
     importantly, we have found the presence of a legitimate
     and significant nontax business reason for engaging in
     this transaction. [Majority op. pp. 48-49; emphasis
     added.]

Certainly, decedent’s state of mind (i.e., his intent) is

important in determining whether the ordinary-course-of-business

exception applies (was the transfer “free of any donative

intent”), but once it is determined that the transfer in question

was not made in the ordinary course of business, intent is no

longer relevant to the determination of whether the transfer was

for full consideration.

     I also disagree with the implication of the majority opinion

that, in the context of a transfer to an entity (here, transfers

to both a limited liability company and a family limited

partnership), the full consideration requirement can be met by a

showing that the transferor received an entity interest (e.g., a

limited partnership interest) proportionate to the value of the

property contributed to the entity.   While an inquiry as to

proportionality may have some bearing on whether the transfer was

in the ordinary course of business, within the meaning of section

25.2512-8, Gift Tax Regs. (e.g., was at arm’s length5), I fail to


     5
        I do not wish to suggest that proportionality (as
discussed in the text) is determinative that a transaction is at
                                                    (continued...)
                               - 83 -

see how proportionality aids the inquiry as to whether the value

of the property transferred exceeded the cash value of the

consideration received in exchange.     See id.   Here, because of

the presence of donative intent, the transfers cannot be

considered in the ordinary course of business, as that term is

used in section 25.2512-8, Gift Tax Regs., and proportionality is

irrelevant.

     Finally, as I read the majority’s approach to the bona fide

sale exception, the majority has added to the exception the

requirement that the taxpayer show that the decedent’s transfer

to the entity was motivated “by a legitimate and significant

nontax purpose.”   Majority op. p. 39.6   If, indeed, that is the

majority’s approach, then even if an objective analysis indicates

that the transferor received full consideration, the bona fide

sale exception presumably would not be satisfied if a subjective

analysis reveals that the transaction did not have a legitimate

and significant nontax purpose.   According to the majority,

indicators of the lack of such purpose include (1) that the


     5
      (...continued)
arm’s length. Unless a gift motive is conceded or some secret
knowledge is presumed, I am not persuaded that a rational person
dealing at arm’s length would ever knowingly exchange assets
worth $300 for an interest in an entity worth $200, with no right
to control the entity or compel a distribution of her share of
the entity’s assets.
     6
        As I see it, the addition of that separate test is not
necessary here, since petitioner has not otherwise shown that the
transfers satisfy the bona fide sale exception.
                               - 84 -

transferor stood on both sides of the transaction, (2)

commingling of the transferor’s and the transferee’s funds, and

(3) the failure of the transferor actually to make a transfer.

Majority op. p. 39.   Certainly, the “bona fide sale” portion of

the bona fide sale exception would exclude transfers that were

shams or based on illusory consideration.   See, e.g., Wheeler v.

United States, 116 F.3d 749, 764 (5th Cir. 1997).   Beyond that,

however, so long as an objective analysis demonstrates that, in

exchange for the transferred property, the transferor received

consideration with at least an equal cash value, no depletion of

the transferor’s wealth has occurred, and it is difficult to see

any policy reason to bring back into the gross estate the value

of the property transferred.   As we reasoned in Estate of

Frothingham v. Commissioner, 60 T.C. 211, 215-216 (1973)

(emphasis added):

     [W]here the transferred property is replaced by other
     property of equal value received in exchange, there is
     no reason to impose an estate tax in respect of the
     transferred property, for it is reasonable to assume
     that the property acquired in exchange will find its
     way into the decedent’s gross estate at his death
     unless consumed or otherwise disposed of in a
     nontestamentary transaction in much the same manner as
     would the transferred property itself had the transfer
     not taken place. * * *

          In short, unless replaced by property of equal
     value that could be exposed to inclusion in the
     decedent’s gross estate, the property transferred in a
     testamentary transaction of the type described in the
     statute must be included in his gross estate. * * *
                             - 85 -

See also Kimbell v. United States, 371 F.3d 257, 262 (5th Cir.

2004) (citing Wheeler v. United States, supra); Magnin v.

Commissioner, 184 F.3d 1074, 1079 (9th Cir. 1999), revg. T.C.

Memo. 1996-25; Estate of D’Ambrosio v. Commissioner, 101 F.3d

309, 312 (3d Cir. 1996), revg. and remanding 105 T.C. 252 (1995).7




     7
        Two commentators on the family limited partnership scene
add the following with respect to meaning of the “bona fide sale”
portion of the bona fide sale exception:

          Treas. reg. section 20.2036-1 indicates that the
     exception applies where there is “adequate and full
     consideration.” It does not mention any requirement
     that the sale also be a bona fide one. It does,
     however, cross-reference Treas. reg. section
     20.2043-1(a), which does appear to contemplate the need
     to satisfy two conditions for the exception to apply:
     that the sale be a bona fide one and that the
     consideration be adequate. Nonetheless, the latter
     regulation is not inconsistent with the traditional
     (Wheeler’s [Wheeler v. United States, 116 F.3d 749, 764
     (5th Cir. 1997)]) understanding of the exception. Its
     use of the phrase “bona fide” is obviously designed to
     do nothing more than make certain that the
     consideration was actually supplied and not an illusory
     one. Indeed, the last sentence of the provision
     confirms this reading. It provides that, if the value
     at the time of death of the transferred asset to be
     included under section 2036 (or similar section)
     exceeds the consideration received by the decedent,
     only the excess is included in the gross estate. The
     failure to require that the sale be a bona fide one to
     qualify for treatment under this last sentence makes it
     clear that it was intended to embrace the traditional
     understanding of the exception.

Gans & Blattmachr, “Strangi: A Critical Analysis and Planning
Suggestions”, 100 Tax Notes 1153, 1162, n.78 (Sept. 1, 2003).
                                - 86 -

       C.   Conclusion

       I would approach the question of whether the value of

property transferred by a decedent is included in the gross

estate on account of section 2036 by, first, determining whether

the decedent retained lifetime possession, enjoyment, income, or

control of transferred property.     Only after answering that

question in the affirmative would I proceed to determine whether

the bona fide sale exception applies to the transfer.     In

determining whether the bona fide sale exception applies, I would

first determine whether the transfer was made in the ordinary

course of business, as that term is used in section 25.2512-8,

Gift Tax Regs.     If not, I would determine whether the transfer

was made for full value (i.e., whether the value of the

transferred property at most equaled the cash value of the

consideration received therefor).     If not, then I would find that

the value of the transferred property was included in the value

of the gross estate pursuant to section 2036.     Motive would only

play the limited role I have outlined above (i.e., determining

donative intent for purposes of the ordinary-course-of-business

test).

III.    Gift on Formation

       The foregoing analysis suggests that, in forming a family-

owned entity (e.g., a family limited partnership), one or more of

the transfers to the entity might be deemed gifts, within the
                              - 87 -

meaning of section 2512, because the transfers were for

insufficient consideration, within the meaning of section

25.2512-8, Gift Tax Regs.   I believe that a transfer to a family-

owned entity may constitute a taxable gift, even if the size of

the entity interest received by each transferor is deemed

proportional to the value of the property contributed by that

transferor.8

     Consider the following hypothetical situation:9

          Father, son, and daughter (F, S, and D) join in
     the formation of a family limited partnership (FLP),
     father making the bulk of the total contribution and
     receiving a limited partnership interest, S and D
     making smaller contributions and receiving general and


     8
        Judge Ruwe suggests a gift-on-formation analysis in his
dissenting opinion in Estate of Strangi v. Commissioner, 115 T.C.
478, 496 (Ruwe, J., dissenting), affd. in part and revd. in part
293 F.3d 279 (5th Cir. 2002). The Estate of Strangi majority
opinion, which I joined, rejects that possibility, at least on
the facts presented, on the grounds that Mr. Strangi (the
decedent) did not give up control of the assets he contributed to
the family limited partnership (for a 99 percent limited
partnership interest) and his contribution was allocated to his
capital account: “Realistically, in this case, the disparity
between the value of the assets in the hands of decedent and the
alleged value of his partnership interest reflects on the
credibility of the claimed discount applicable to the partnership
interest. It does not reflect a taxable gift.” Id. at 490.
Similarly, in Estate of Jones v. Commissioner, 116 T.C. 121, 128
(2001), we said: “All of the contributions of property were
properly reflected in the capital accounts of decedent, and the
value of the other partners’ interests was not enhanced by the
contributions of decedent. Therefore, the contributions do not
reflect taxable gifts.”
     9
        The hypothetical and some of the following analysis are
suggested by Professor Leo L. Schmolka; Schmolka, “FLPs and
GRATs: What to do?”, 86 Tax Notes 1473 (Special Supplement, Mar.
13, 2000).
                              - 88 -

     limited interests. Each transferor receives a
     percentage interest in profits, losses, and capital
     that is strictly proportionate to the value that each
     contributes (in relation to the total value
     contributed). Based on claims of lack of
     marketability, loss of control, and other value
     diminishing factors, each interest is accorded some
     loss of value (in comparison to the value of the
     property exchanged therefore). F’s will and other
     testamentary-type documents are executed
     contemporaneously with the partnership agreement. They
     disclose that F’s interest in FLP ultimately will pass
     to S, D, and their children.

     Does any of the transferors make a gift on account of his or

her contribution to the partnership for an interest of lesser

value?   Most likely, S and D do not.   The reason is that, in

pertinent part, section 25.2512-8, Gift Tax Regs., provides:

“[A] sale, exchange, or other transfer of property made in the

ordinary course of business (a transaction which is bona fide, at

arm's length, and free from any donative intent), will be

considered as made for an adequate and full consideration in

money or money's worth.”   From S’s and D’s viewpoints, the

transfers to FLP are made in the ordinary course of business, at

least as that term is used in section 25.2512-8, Gift Tax Regs.

See Rosenthal v. Commissioner, 205 F.2d 505, 509 (2d Cir. 1953)

(“even a family transaction may for gift tax purposes be treated

as one ‘in the ordinary course of business’ as defined in * * *

[the predecessor to sec. 25.2512-8, Estate Tax Regs.] if each of

the parenthetical criteria is fully met”), revg. and remanding 17

T.C. 1047 (1951).   For S and D, the transfers are motivated
                              - 89 -

strictly by self-interest and are free from donative intent.

They have agreed to form a partnership that they believe will

serve as a vehicle for the delivery of F’s property to them and

their children through a process whereby the transfer tax cost of

the delivery will be substantially reduced through various

valuation discounts.   They agree to suffer a temporary loss of

independence and control (and perhaps some loss of fair market

value) in order to facilitate the reduction of transfer tax, the

burden of which ultimately would fall on them.   For them, the

transfers are motivated by an acquisitive motive, not a donative

motive.   They make no gifts because they are deemed to have

received full value under the ordinary-course-of-business test

found in section 25.2512-8, Gift Tax Regs.

     So long as it can be shown that F’s contribution was not

free of donative intent, the result is different for F.   F’s

purpose (not necessarily his sole purpose, but an important one)

is to pass his property to his family with a reduction in

transfer tax cost that translates dollar for dollar into an

enhancement of the net value that the family will receive.     F

cannot, therefore, pass the ordinary-course-of-business test in

section 25.2512-8, Gift Tax Regs., and, because of the valuation

discounts claimed, cannot show full consideration.   F, therefore,

has made gifts within the meaning of section 2512 and section

25.2512-8, Gift Tax Regs.   The measure of the gifts is not the
                               - 90 -

transfer tax reduction but is the inadequacy of the cash value of

the limited partnership interest that F received in consideration

for his contribution to FLP.   See sec. 25.2512-8, Gift Tax Regs.

It is precisely that debasement in value that F sought to achieve

as his means of generating the transfer tax saving, and it is

appropriate that that be the measure of his gift.

     The fact that S, D, and their children may not realize the

measure of F’s gift (the difference between the inside and

outside value of F’s interest in FLP) until, by bequests, they

receive his interest is not an impediment to concluding that F

made a gift.   Section 25.2511-2(a), Gift Tax Regs., provides:

     Sec. 25.2511-2 Cessation of donor's dominion and
     control.

          (a) The gift tax is not imposed upon the receipt
     of the property by the donee, nor is it necessarily
     determined by the measure of enrichment resulting to
     the donee from the transfer, nor is it conditioned upon
     ability to identify the donee at the time of the
     transfer. On the contrary, the tax is a primary and
     personal liability of the donor, is an excise upon his
     act of making the transfer, is measured by the value of
     the property passing from the donor, and attaches
     regardless of the fact that the identity of the donee
     may not then be known or ascertainable.

In Commissioner v. Wemyss, 324 U.S. 303, 307 (1945), the Supreme

Court said:    “The section taxing as gifts transfers that are not

made for ‘adequate and full (money) consideration’ aims to reach

those transfers which are withdrawn from the donor's estate.”

The value discounts obtained by F on the transfer to FLP withdrew

from his estate amounts that will (and are intended to) reappear
                               - 91 -

in the hands of his heirs.   Taxation of those amounts under

section 2512 is appropriate.
                               - 92 -

     CHIECHI, J., concurring in part1 and dissenting in part:     The

majority opinion acknowledges that section 2036(a)(1) will not

apply unless:   (1) Decedent made a transfer; (2) such transfer

was not a bona fide sale for an adequate and full consideration

in money or money's worth; and (3) under such transfer decedent

retained for his life the possession or enjoyment of, or the

right to the income from, the property transferred.   The majority

opinion holds that decedent’s transfer to the Bongard Family

Limited Partnership (BFLP) of his WCB Holdings class B membership

units was a transfer which was not a bona fide sale for an

adequate and full consideration in money or money’s worth and

under which decedent retained for his life the enjoyment of such

units.2   Consequently, according to the majority opinion, section



     1
      I concur in the holdings of the majority opinion that
decedent made a transfer to WCB Holdings of his Empak stock that
was a bona fide sale for an adequate and full consideration in
money or money’s worth within the meaning of sec. 2036(a) and
that consequently sec. 2036(a) does not apply with respect to
that transfer. I also concur in the holdings of the majority
opinion that, as a result of the foregoing holdings under sec.
2036(a), sec. 2035(a) does not apply with respect to decedent’s
respective gifts of certain class A membership units in WCB
Holdings to the Wayne C. Bongard Children’s Trust (Children’s
Trust), the Wayne C. Bongard Grandchildren’s Trust
(Grandchildren’s Trust), and the Cynthia F. Bongard Qualified
Terminal Interest Property Trust (QTIP Trust).
     2
      The majority opinion does not hold that decedent retained
for his life the possession of, or the right to the income from,
the WCB Holdings class B membership units that he transferred to
BFLP. Thus, the focus herein is on whether decedent retained for
his life the enjoyment of such units within the meaning of sec.
2036(a)(1).
                              - 93 -

2036(a)(1) requires decedent’s gross estate to include the value

of such units owned on the date of decedent’s death by BFLP that

is proportionate to the 91.28-percent BFLP limited partnership

interest owned on that date by decedent.3   I dissent.4   The

majority opinion’s holding that decedent’s transfer to BFLP of

his WCB Holdings class B membership units is subject to section

2036(a)(1), which respondent does not even advocate,5 is rejected

by the statute and by United States v. Byrum, 408 U.S. 125


     3
      Because the majority opinion holds that decedent’s transfer
to BFLP of his WCB Holdings class B membership units satisfies
sec. 2036(a)(1), the majority opinion indicates that it need not
address whether such transfer satisfies sec. 2036(a)(2), on which
respondent relies. See infra note 5.
     4
      I also dissent from the majority opinion’s holding that
sec. 2035(a) requires decedent’s gross estate to include the
value as of the date of decedent’s death of the WCB Holdings
class B membership units owned on that date by BFLP that is
proportionate to the 7.72-percent BFLP limited partnership
interest owned on that date by his wife Cynthia Bongard, which
she received from decedent as a gift on Dec. 10, 1997, less than
a year before he died. That erroneous holding flows from the
majority opinion’s erroneous holding under sec. 2036(a)(1).
     5
      Respondent relies only on sec. 2036(a)(2), and not on sec.
2036(a)(1), with respect to decedent’s transfer to BFLP of his
WCB Holdings class B membership units. Respondent argues with
respect to that transfer that, under the partnership agreement
governing BFLP, decedent had the right, in conjunction with the
Wayne C. Bongard Irrevocable Stock Accumulation Trust (ISA
Trust), the general partner of BFLP, to liquidate BFLP and to
amend that agreement. Consequently, according to respondent,
decedent retained the right under sec. 2036(a)(2), either alone
or in conjunction with any person, to designate the persons who
shall possess or enjoy the property that he transferred to BFLP
or the income therefrom, and sec. 2036(a)(2) requires decedent’s
gross estate to include the value of certain WCB Holdings class B
membership units owned by BFLP on the date of decedent’s death.
See supra note 3.
                                - 94 -

(1972), which the majority opinion does not even cite.

     At the core of the majority opinion's holdings under section

2036(a)(1) are its conclusions (1) that “The record does not

support that the nontax reasons for BFLP’s existence were

significant motivating factors”, majority op. p. 53, and (2) that

decedent had the ability to cause Empak to redeem the Empak stock

owned by WCB Holdings and to cause WCB Holdings to redeem the WCB

Holdings class B membership units owned by BFLP.

     I have serious reservations about the propriety of the

majority opinion’s conclusion that “The record does not support

that the nontax reasons for BFLP’s existence were significant

motivating factors.”     Majority op. p. 53.   However, for purposes

of my dissent, I shall proceed on the assumption that that

conclusion is proper.6    Nonetheless, even if, as the majority

opinion concludes, the record does not show that “the nontax

reasons for BFLP’s existence were significant motivating

factors”, majority op. p. 53, neither section 2036(a)(1) nor the

caselaw under that section supports the majority opinion’s

inference that the absence of any significant nontax reason for

the formation of BFLP, standing alone, establishes that decedent



     6
      Since I shall proceed herein on that assumption, I shall
not address the majority opinion’s holding that decedent made a
transfer to BFLP of his WCB Holdings class B membership units
that was not a bona fide sale for an adequate and full
consideration in money or money’s worth within the meaning of
sec. 2036(a).
                              - 95 -

retained for his life the enjoyment of the WCB Holdings class B

membership units that he transferred to BFLP within the meaning

of section 2036(a)(1).7

     I have serious disagreements with the majority opinion’s

conclusions that decedent had the ability to cause Empak to

redeem the Empak stock owned by WCB Holdings and to cause WCB

Holdings to redeem the WCB Holdings class B membership units

owned by BFLP.   I shall discuss those disagreements below.

     With the foregoing in mind, I shall now address the majority

opinion’s holding under section 2036(a)(1) that “an implied

agreement existed that allowed decedent to retain the enjoyment

of the property held by BFLP”.   Majority op. p. 59.   In support

of that holding, the majority opinion constructs the following


     7
      The absence of a nontax reason for the creation of an
entity, standing alone, might permit disregarding that entity for
Federal tax purposes under, for example, a sham analysis.
However, the majority opinion does not rely on a sham analysis,
or any other analysis, that would result in disregarding BFLP for
Federal tax purposes. See, e.g., secs. 761(a), 7701(a)(2); cf.
Moline Props., Inc. v. Commissioner, 319 U.S. 436 (1943). That
is because, according to the majority opinion, “Respondent has
not challenged whether BFLP is a partnership that should be
recognized for tax purposes”. Majority op. p. 52 note 11. As
discussed supra note 5, respondent does not argue that sec.
2036(a)(1) applies to decedent’s transfer to BFLP of his WCB
Holdings class B membership units; respondent argues only that
sec. 2036(a)(2) applies to that transfer. Nonetheless, the
majority opinion applies sec. 2036(a)(1) in reaching its holdings
with respect to the transfer at issue to BFLP. In reaching those
holdings, not only does the majority opinion rely on a section of
the Internal Revenue Code on which respondent does not rely, it
constructs a rationale under that section which respondent does
not advance and to which the Estate of Wayne C. Bongard (estate)
did not have the opportunity to respond.
                             - 96 -

rationale (majority opinion’s rationale):

          The decedent did not need the membership interest
     in WCB Holdings class B shares to continue his
     lifestyle. However, decedent retained ownership of
     over 91 percent of his BFLP interest and did not make
     gifts of such interest prior to his death. More
     importantly, decedent controlled whether BFLP could
     transform its sole asset, the class B WCB Holdings
     membership units, into a liquid asset. Decedent as CEO
     and sole member of Empak’s board of directors
     determined when Empak redeemed its stock in each of the
     seven instances of redemptions prior to his death,
     including the last redemption of about $750,000 worth
     of Empak stock in 1998 after WCB Holdings was formed.
     None of the seven redemptions reduced the membership
     units owned by BFLP. In order for BFLP to be able to
     diversify or take any steps other than simply holding
     the class B membership units, decedent would have had
     to cause the membership units and the underlying Empak
     stock to be redeemed. He chose not to do this. By not
     redeeming the WCB membership units held by BFLP,
     decedent insured that BFLP would not engage in asset
     management. Thereby, decedent exercised practical
     control over BFLP and limited its function to simply
     holding title to the class B membership units. Whether
     decedent caused the WCB membership units held by BFLP
     and the underlying Empak stock to be redeemed or not,
     his ability to decide if that event would occur
     demonstrates the understanding of the parties involved
     that decedent retained the right to control the units
     transferred to BFLP.

          The estate’s argument that the general partner’s
     fiduciary duties prevents a finding of an implied
     agreement is overcome by the lack of activity following
     BFLP’s formation and BFLP’s failure to perform any
     meaningful functions as an entity. We conclude that
     decedent’s transfer to BFLP for a 99-percent ownership
     interest in the partnership did not alter his control
     of the WCB Holdings class B membership units
     transferred to BFLP. See Estate of Thompson v.
     Commissioner, 382 F.3d 367, 376-377 (finding “nothing
     beyond formal title changed in decedent’s relationship
     to his assets” where the practical effect on his
     relationship to the transferred assets during
     decedent’s life was minimal).
                              - 97 -

Majority op. pp. 57-59; fn. ref. omitted.

The majority opinion’s rationale is factually, logically, and

legally flawed.8

     The majority opinion’s rationale is factually flawed for

various reasons.   One reason is that it concludes that decedent

could have caused WCB Holdings to redeem the WCB Holdings class B

membership units owned by BFLP.   That conclusion is not supported

by, and is contrary to, the following findings of fact of the

majority opinion regarding the circumstances under which the

chief manager of WCB Holdings (chief manager), who was decedent’s

son Mark Bongard, was required to obtain the approval of a

majority of the WCB Holdings class A governance units before he



     8
      The majority opinion’s reliance on Estate of Thompson v.
Commissioner, 382 F.3d 367 (3d Cir. 2004), affg. T.C. Memo. 2002-
246, is misplaced, as is its reliance on certain other cases,
principally Estate of Strangi v. Commissioner, T.C. Memo. 2003-
145, and Estate of Harper v. Commissioner, T.C. Memo. 2002-121,
in support of its holdings under sec. 2036(a)(1). Each of those
cases found the existence of an agreement under which the
decedent involved retained for life the possession or enjoyment
of, or the right to the income from, the property that such
decedent transferred within the meaning of sec. 2036(a)(1). Each
of those cases is materially distinguishable from, and is not
controlling in, the instant case. For example, unlike cases
cited by the majority opinion, decedent here did not transfer to
BFLP assets needed to maintain his lifestyle; in the instant
case, decedent had millions of dollars of assets that remained
outside of BFLP (and outside of WCB Holdings) and that were more
than adequate to maintain decedent’s lifestyle during his
lifetime. In addition, in the instant case, during decedent's
lifetime there were no distributions to or on behalf of decedent
from BFLP and no commingling of BFLP's assets with decedent's
assets, as was done in cases on which the majority opinion
relies.
                              - 98 -

could take certain actions on behalf of WCB Holdings:

     the chief manager needed the approval of the members
     representing the majority of the class A governance
     units before he could issue additional membership
     units, lend, borrow, or commit WCB Holdings’s funds in
     excess of $25,000, authorize capital expenditures in
     excess of $10,000, sell any of WCB Holdings’s assets,
     including its Empak stock, worth over $10,000 in any
     twelve month period, or vote any securities, including
     its Empak stock, owned by WCB Holdings.

Majority op. p. 14; emphasis added.

     After decedent funded, by gift, on March 15, 1997, the

Children’s Trust, the Grandchildren’s Trust, and the QTIP Trust,

each with certain class A governance units and certain class A

financial units in WCB Holdings, decedent no longer owned a

majority of the class A governance units in WCB Holdings, the

only voting units in WCB Holdings.     Thus, decedent could not have

approved, and certainly could not have required, that the chief

manager commit any of WCB Holdings’s funds in excess of $25,000

for the purpose of redeeming the WCB Holdings class B membership

interests owned by BFLP.   In addition, decedent could not have

approved, and certainly could not have required, that the chief

manager sell to Empak, through a redemption by Empak, Empak stock

owned by WCB Holdings worth over $10,000 in any 12-month period.

     Another factual flaw in the majority opinion’s rationale

relates to the conclusion that decedent had the ability to cause

Empak to redeem the Empak stock owned by WCB Holdings.    That

conclusion disregards not only the implications of the majority
                              - 99 -

opinion’s finding that decedent and ISA Trust transferred their

respective shares of Empak stock to WCB Holdings in order to

position Empak for a liquidity event9 but also decedent’s

fiduciary duties as Empak’s CEO and the sole member of its board

of directors.   Depleting Empak’s assets by causing Empak to

redeem the Empak stock owned by WCB Holdings in order to be able

to diversify BFLP’s assets through a redemption by WCB Holdings

of the WCB Holdings class B membership units owned by BFLP would

not have been consistent with the objective of positioning Empak

for a liquidity event.   Indeed, given that objective, it would

have been, at best, bad business judgment on the part of decedent

and a misconception by him of what was involved in positioning

Empak for a liquidity event if he had decided to cause Empak to

redeem the Empak stock owned by WCB Holdings in order to effect a

diversification of BFLP’s assets.   Moreover, irrespective of the

objective to position Empak for a liquidity event, any decision

by decedent to deplete Empak’s assets by causing Empak to redeem

the Empak stock owned by WCB Holdings in order to effect such a

diversification would have been, at worst, a breach by decedent

of his fiduciary duties as Empak’s CEO and the sole member of its

board of directors.   Any such decision by decedent might have



     9
      That finding was critical to the majority opinion’s
holding that decedent’s transfer to WCB Holdings of his Empak
stock was a bona fide sale for an adequate and full consideration
in money or money’s worth within the meaning of sec. 2036(a).
                                - 100 -

been actionable by the stockholders of Empak, which, as of March

7, 1997, were:     (1) WCB Holdings, a 90-percent stockholder whose

class A governance unitholders, other than decedent,10 owned in

the aggregate on and after March 15, 1997, a majority of the

voting class A governance membership units in WCB Holdings; (2)

Marubeni Corp. (MC), a 6-percent stockholder and a Japanese

trading entity which had more than 700 subsidiaries and whose

stock was listed on various international stock exchanges; and

(3) Marubeni America Corp., a 4-percent stockholder and the U.S.

sales and marketing subsidiary of MC.     Cf. United States v.

Byrum, 408 U.S. at 137-143.     Thus, any ability of decedent to

cause Empak to redeem the Empak stock owned by WCB Holdings was

not unconstrained.     Instead, any such ability was subject to the

fiduciary duties imposed upon decedent as Empak’s CEO and the

sole member of its board of directors and to business and

economic realities and variables over which he had little or no

control and which he could ignore, but only at his peril.     Cf.

id.

      The majority opinion’s rationale contains other factual

flaws.     According to that rationale,

      decedent controlled whether BFLP could transform its
      sole asset, the class B WCB Holdings membership units,


      10
      On and after Mar. 15, 1997, the class A governance
unitholders of WCB Holdings, other than decedent, were the ISA
Trust, the Children’s Trust, the Grandchildren’s Trust, and the
QTIP Trust.
                             - 101 -

     into a liquid asset. * * * In order for BFLP to be able
     to diversify or take any steps other than simply
     holding the class B membership units, decedent would
     have had to cause the membership units and the
     underlying Empak stock to be redeemed.[11] He chose not
     to do this. By not redeeming the WCB membership units
     held by BFLP, decedent insured that BFLP would not
     engage in asset management. Thereby, decedent
     exercised practical control over BFLP and limited its
     function to simply holding title to the class B
     membership units. Whether decedent caused the WCB
     membership units held by BFLP and the underlying Empak


     11
      In making that assertion, the majority opinion ignores
that, upon the occurrence of a liquidity event with respect to
Empak (Empak liquidity event), BFLP, like WCB Holdings, would be
in a position to acquire liquid assets with which to engage in
economic activity, such as diversifying investments. Until an
Empak liquidity event occurred, WCB Holdings owned no assets
other than the respective shares of Empak stock transferred to it
by decedent and ISA Trust and thus owned no liquid assets with
which to engage in any economic activity. Similarly, until an
Empak liquidity event occurred, BFLP, whose only asset was WCB
Holdings class B membership units, had no liquid assets with
which to engage in economic activity, such as diversifying its
investments. The reason that during decedent’s lifetime BFLP,
like WCB Holdings, owned no liquid assets with which to engage in
any economic activity is that decedent died unexpectedly on Nov.
16, 1998, before an Empak liquidity event occurred. However, an
Empak liquidity event did occur about 19 months after decedent’s
death. Moreover, as the majority opinion acknowledges with
respect to WCB Holdings, many of the steps necessary to position
Empak for a liquidity event, and thus necessary to position both
WCB Holdings and BFLP to acquire liquid assets as a result of
such a liquidity event, were completed before decedent's death.
Other such steps were completed after decedent died. Thus, in
June 1999, Empak was consolidated with Fluoroware, which resulted
in a combined company named Entegris, Inc. (Entegris), and Empak
stockholders, including WCB Holdings which owned 90 percent of
the outstanding Empak stock, received a 40-percent ownership
interest in Entegris. In July 2000, Entegris stock split 2 for
1, and it completed an initial public offering of its stock. As
part of that initial public offering, WCB Holdings sold 1,925,000
shares of the approximately 22,000,000 shares of Entegris stock
that it owned. Thereafter, WCB Holdings distributed the proceeds
of such sales on a pro rata basis to all of the owners of its
membership units, including to BFLP.
                                 - 102 -

     stock to be redeemed or not, his ability to decide if
     that event would occur demonstrates the understanding
     of the parties involved that decedent retained the
     right to control the units transferred to BFLP.

          * * * decedent’s transfer to BFLP for a 99-percent
     ownership interest in the partnership did not alter his
     control of the WCB Holdings class B membership units
     transferred to BFLP. * * *

Majority op. pp. 57-59; emphasis added.

     As is evident from the foregoing, the majority opinion

establishes a “control” standard in applying section 2036(a)(1).

However, the majority opinion never actually tells us what it

means when it uses the terms “control” or “controlled” four times

in the above-quoted excerpt.12    Nonetheless, under any commonly

accepted meaning of those terms, it is factually incorrect for

the majority opinion to conclude that “decedent controlled

whether BFLP could transform its * * * class B WCB Holdings

membership units * * * into a liquid asset * * * [,] exercised

practical control over BFLP and * * * retained the right to

control the units transferred to BFLP” and that “decedent’s

transfer to BFLP * * * did not alter his control of the WCB

Holdings class B membership units transferred to BFLP.”    Majority

op. pp. 57-58.   After decedent and ISA Trust capitalized BFLP,

which the majority opinion acknowledges was a validly created and

existing partnership under Minnesota law, neither decedent nor


     12
      It is not even clear whether in each of the four instances
the majority opinion intends the same, or a different, meaning of
the terms “control” or “controlled”.
                              - 103 -

ISA Trust had the same relationship to the respective WCB

Holdings class B membership units that they transferred to BFLP.

Decedent owned a limited partnership interest, and ISA Trust

owned a general partnership interest, in BFLP.     BFLP, in turn,

owned such units transferred to it.     Decedent, as a limited

partner of BFLP, did not have, and did not exercise, control over

BFLP, its assets, its activities, or its general partner, ISA

Trust.

      In addition to the factual flaws in the majority opinion’s

rationale, that rationale is logically flawed.     It is a non

sequitur for the majority opinion to conclude that, because of

decedent’s alleged ability to cause Empak to redeem the Empak

stock owned by WCB Holdings and to cause WCB Holdings to redeem

the WCB Holdings class B membership units owned by BFLP,

“decedent controlled whether BFLP could transform its * * * class

B WCB Holdings membership units * * * into a liquid asset * * *

[and] exercised practical control over BFLP”.     Majority op. pp.

57-58.   It also is a non sequitur for the majority opinion to

conclude that any such alleged ability “demonstrates the

understanding of the parties involved that decedent retained the

right to control the units transferred to BFLP” and that his

transfer to BFLP of his WCB Holdings class B membership units

“did not alter his control” of such units.     Majority op. pp. 58-

59.   The alleged ability of decedent to cause Empak to redeem the
                             - 104 -

Empak stock owned by WCB Holdings and to cause WCB Holdings to

redeem the WCB Holdings class B membership units owned by BFLP

does not logically lead to any of the foregoing conclusions.    Nor

does any such alleged ability logically lead to the majority

opinion’s holding that “an implied agreement existed that allowed

decedent to retain the enjoyment of the property held by BFLP.”

Majority op. p. 59.

     The majority opinion’s rationale is also legally flawed.

The language of section 2036(a)(1)13 “plainly contemplates

retention of an attribute of the property transferred--such as a

right to income, use of the property itself, or a power of

appointment with respect either to income or principal.”     United

States v. Byrum, 408 U.S. at 149.    Moreover, the term “enjoyment”

used in section 2036(a)(1) is not a term or art; it “connote[s]

substantial present economic benefit”.    Id. at 145.   Decedent did

not retain any attribute of the WCB Holdings class B membership

units that he transferred to BFLP.   Nor was decedent’s alleged

ability to cause Empak to redeem the Empak stock owned by WCB

Holdings and to cause WCB Holdings to redeem the WCB Holdings

class B membership units owned by BFLP a substantial present

economic benefit of such units.   Any such alleged ability was not



     13
      In order for sec. 2036(a)(1) to apply, decedent must have,
inter alia, made a transfer of property under which he “retained
for his life * * * (1) the possession or enjoyment of, or the
right to the income from, the property”.
                               - 105 -

a present benefit at all; it was “a speculative and contingent

benefit which may or may not * * * [have been] realized.”14   Id.

at 150.   There simply are no circumstances surrounding decedent’s

transfer of his WCB Holdings class B membership units to BFLP and

no subsequent use of such units by decedent from which an implied

agreement may be inferred that decedent retained the enjoyment of

such units.   See Estate of Reichardt v. Commissioner, 114 T.C.

144, 151 (2000).   Section 2036(a)(1) rejects the majority

opinion’s holding that decedent retained the enjoyment of the WCB

Holdings class B membership units that he transferred to BFLP.

     The legal flaws in the majority opinion’s rationale are not

limited to its disregard of section 2036(a)(1), which, as

indicated above, the Supreme Court construed according to its

plain language.    See United States v. Byrum, supra at 145, 149.

That rationale also ignores the principles under section 2036(a)

that the Supreme Court established in Byrum and that this Court

has applied in other cases.   See, e.g., Estate of Cohen v.

Commissioner, 79 T.C. 1015 (1982); Estate of Gilman v.



     14
      It is noteworthy that any speculative and contingent
future benefit (i.e., diversification of BFLP’s assets) that
decedent might have received from his alleged ability to cause
Empak to redeem the Empak stock owned by WCB Holdings and to
cause WCB Holdings to redeem the WCB Holdings class B membership
units owned by BFLP was substantially more tenuous than the
contingent and speculative future benefits that Mr. Byrum might
have received from his power to liquidate or merge the
corporations involved in United States v. Byrum, 408 U.S. 125
(1972).
                                - 106 -

Commissioner, 65 T.C. 296 (1975), affd. per curiam 547 F.2d 32

(2d Cir. 1976).     In Byrum, the decedent Milliken C. Byrum (Mr.

Byrum) transferred to an irrevocable trust that he created shares

of stock in each of three closely held corporations.    Prior to

the transfer, Mr. Byrum owned at least 71 percent of the

outstanding stock of each corporation.    The beneficiaries of the

trust that Mr. Byrum created were his children or, in the event

of their death before termination of the trust, their surviving

children.   The trust instrument specified that there was to be a

corporate trustee, and Mr. Byrum designated an independent

corporation as sole trustee.    The trust instrument vested in the

trustee broad and detailed powers with respect to the control and

management of the trust property.    Such powers of the trustee

were exercisable in the trustee’s sole discretion, subject to the

following rights reserved by Mr. Byrum:    (1) To vote the shares

of unlisted stock held in the trust; (2) to disapprove the sale

or transfer of any trust assets, including the shares transferred

to the trust; (3) to approve investments and reinvestments; and

(4) to remove the trustee and to designate another corporate

trustee to serve as successor trustee.     United States v. Byrum,

supra at 126-127.

     The Government’s principal argument in Byrum was that, by

retaining voting control over the corporations whose stock he

transferred to the trust, which the Government maintained gave
                                  - 107 -

him, inter alia, control over the dividend policy of such

corporations, Mr. Byrum retained the right under section

2036(a)(2) to designate the persons who were to enjoy the income

from the transferred property.       Id. at 131-132.   The Government’s

alternative argument was that, by retaining voting control over

the corporations whose stock he transferred to the trust, which

gave him, inter alia, the power to determine whether and when

such corporations would be liquidated or merged, Mr. Byrum

retained under section 2036(a)(1) the enjoyment of the

transferred property.       Id. at 145.

     The Supreme Court rejected the Government’s principal

argument under section 2036(a)(2) and its alternative argument

under section 2036(a)(1), both of which were based on a “control”

standard advanced by the Government.        In rejecting the

Government’s arguments, the Supreme Court expressly rejected the

use of a “control” standard as “the basis per se” in applying

section 2036(a).       The Supreme Court concluded:

     The “control” rationale, urged by the Government * * *,
     would create a standard--not specified in the statute--
     so vague and amorphous as to be impossible of
     ascertainment in many instances. * * *

        *          *         *       *        *        *       *

     The Government uses the terms “control” and
     “controlling stockholder” as if they were words of art
     with a fixed and ascertainable meaning. In fact, the
     concept of “control” is a nebulous one. Although in
     this case Byrum possessed “voting control” of the three
     corporations (in view of his being able to vote more
     than 50% of the stock in each), the concept is too
                                 - 108 -

     variable and imprecise to constitute the basis per se
     for imposing tax liability under § 2036(a). * * *

Id. at 137 n.10 and 138 n.13.

     The majority opinion’s reliance on a “control” standard in

applying section 2036(a)(1) flies in the face of the Supreme

Court’s rejection of such a standard.15    Id.   The “control”

standard in the majority opinion’s rationale, like the

Government’s “control” standard in Byrum, is “too variable and

imprecise to constitute the basis per se”, id. at 138 n.13, in

applying section 2036(a)(1).16

     Not only does the majority opinion’s rationale fly in the

face of the Supreme Court’s rejection in United States v. Byrum,

408 U.S. 125, of a “control” standard under section 2036(a), that

rationale also flies in the face of other principles under

section 2036(a) that the Supreme Court established in Byrum,


     15
      Under the majority opinion’s “control” standard, because
of decedent’s alleged ability to cause Empak to redeem the Empak
stock owned by WCB Holdings and to cause WCB Holdings to redeem
the WCB Holdings class B membership units owned by BFLP, “dece-
dent controlled whether BFLP could transform its * * * class B
WCB Holdings membership units * * * into a liquid asset * * *[,]
exercised practical control over BFLP and * * * retained the
right to control the units transferred to BFLP”, and his transfer
to BFLP of his WCB Holdings class B membership units “did not
alter his control” of such units. Majority op. pp. 57-59.
Consequently, according to the majority opinion, “an implied
agreement existed that allowed decedent to retain the enjoyment
of the property held by BFLP.” Majority op. p. 59.
     16
      As discussed above, we do not even know, because the
majority opinion never tells us, what it intends by the terms
“control” and “controlled” that appear in the majority opinion’s
rationale.
                                - 109 -

including those set forth in the following excerpt from the

Supreme Court’s rejection of the Government’s arguments in that

case:

          At the outset we observe that this Court has never
     held that trust property must be included in a
     settlor’s gross estate solely because the settlor
     retained the power to manage trust assets. * * *

           *       *       *       *       *       *       *

          * * * The term “right,” certainly when used in a
     tax statute, must be given its normal and customary
     meaning. It connotes an ascertainable and legally
     enforceable power * * *. Here, the right ascribed to
     Byrum was the power to use his majority position and
     influence over the corporate directors to “regulate the
     flow of dividends” to the trust. That “right” was
     neither ascertainable nor legally enforceable and hence
     was not a right in any normal sense of that term.

          Byrum did retain the legal right to vote shares
     held by the trust and to veto investments and
     reinvestments. But the corporate trustee alone, not
     Byrum, had the right to pay out or withhold income and
     thereby to designate who among the beneficiaries
     enjoyed such income. Whatever power Byrum may have
     possessed with respect to the flow of income into the
     trust was derived not from an enforceable legal right
     specified in the trust instrument, but from the fact
     that he could elect a majority of the directors of the
     three corporations. The power to elect the directors
     conferred no legal right to command them to pay or not
     to pay dividends. A majority shareholder has a
     fiduciary duty not to misuse his power by promoting his
     personal interests at the expense of corporate
     interests. Moreover, the directors also have a
     fiduciary duty to promote the interests of the
     corporation. * * * their [the corporate directors’]
     responsibilities were to all stockholders and were
     enforceable according to legal standards entirely
     unrelated to the needs of the trust or to Byrum’s
     desires with respect thereto.

             The Government seeks to equate the de facto
        position of a controlling stockholder with the legally
                          - 110 -

enforceable “right” specified by the statute.
Retention of corporate control (through the right to
vote the shares) is said to be “tantamount to the power
to accumulate income” in the trust * * *. The
Government goes on to assert that “[t]hrough exercise
of that retained power, [Byrum] could increase or
decrease corporate dividends * * * and thereby shift or
defer the beneficial enjoyment of trust income.” This
approach seems to us not only to depart from the
specific statutory language, but also to misconceive
the realities of corporate life.

   *         *       *       *       *       *       *

     We conclude that Byrum did not have an
unconstrained de facto power to regulate the flow of
dividends to the trust, much less the “right” to
designate who was to enjoy the income from trust
property. His ability to affect, but not control,
trust income, was a qualitatively different power from
that of the settlor in [United States v.] O’Malley [383
U.S. 627 (1966)], who had a specific and enforceable
right [set forth in the controlling trust instrument]
to control the income paid to the beneficiaries. Even
had Byrum managed to flood the trust with income, he
had no way of compelling the trustee to pay it out
rather than accumulate it. Nor could he prevent the
trustee from making payments from other trust assets
* * *.

   *         *       *       *       *       *       *

     It is well settled that the terms “enjoy” and
“enjoyment,” as used in various estate tax statutes,
“are not terms of art, but connote substantial present
economic benefit rather than technical vesting of title
or estates.” * * *

   *         *       *       *       *       *       *

     * * * The statutory language [of section
2036(a)(1)] plainly contemplates retention of an
attribute of the property transferred--such as a right
to income, use of the property itself, or a power of
appointment with respect either to income or principal.


       Even if Byrum had transferred a majority of the
                              - 111 -

     stock, but had retained voting control, he would not
     have retained “substantial present economic benefit,”
     * * *. The Government points to the retention of two
     “benefits.” The first of these, the power to liquidate
     or merge, is not a present benefit; rather, it is a
     speculative and contingent benefit which may or may not
     be realized. * * *

United States v. Byrum, 408 U.S. at 132-133, 136-139, 143, 145,

149-150; fn. refs. omitted.

     The Supreme Court teaches us in United States v. Byrum, 408

U.S. 125 (1972), that section 2036(a)(1) (and section 2036(a)(2))

does not apply to a transfer by an individual to an irrevocable

trust of shares of stock in certain corporations in which the

transferor owned stock,17 where such ownership gave the transferor

the ability, inter alia, to liquidate or merge such corporations

and where the powers of the independent trustee of such trust

were subject to the following rights expressly reserved by the

transferor:   (1) To vote the shares of unlisted stock held in the

trust; (2) to disapprove the sale or transfer of any trust


     17
      After the Supreme Court decided United States v. Byrum,
408 U.S. 125 (1972), Congress enacted sec. 2036(b), which is
applicable to transfers made after June 22, 1976. Sec. 2036(b)
expands the meaning of the phrase “retained * * * enjoyment of”
the transferred property for purposes of sec. 2036(a)(1).
However, sec. 2036(b) is expressly limited to the retained right
to vote shares of stock of a controlled corporation, as defined
in sec. 2036(b)(2), and has no application to decedent’s transfer
to BFLP of his nonvoting WCB Holdings class B membership units.
Thus, the effect of Byrum on the instant case is unchanged by the
enactment of sec. 2036(b). See Rev. Rul. 81-15, 1981-1 C.B. 457,
458, where the Internal Revenue Service, in reliance on the
legislative history of sec. 2036(b), acknowledged that “the
effect of Byrum * * * is not changed by the enactment of section
2036(b)” in the case of a transfer of nonvoting stock.
                              - 112 -

assets, including the shares transferred to the trust; (3) to

approve investments and reinvestments; and (4) to remove the

trustee and to designate another corporate trustee to serve as

successor trustee.   Id. at 126-127.

     A fortiori, under the principles that the Supreme Court

established in United States v. Byrum, supra, even if in the

instant case decedent had the ability to cause Empak to redeem

the Empak stock owned by WCB Holdings and to cause WCB Holdings

to redeem the WCB Holdings class B membership units owned by

BFLP, any such ability does not demonstrate, and did not result

in, decedent’s retention of the enjoyment of the WCB Holdings

class B membership units that he transferred to BFLP within the

meaning of section 2036(a)(1).18   In reaching a contrary holding,


     18
      Although there are factual differences between United
States v. Byrum, supra, and the instant case, those differences
have no significance for purposes of determining whether sec.
2036(a)(1) applies to decedent’s transfer to BFLP of his WCB
Holdings class B membership units. In fact, many of those
differences strengthen the estate’s position in the instant case.
For example, in Byrum, Mr. Byrum expressly reserved the rights,
inter alia, to disapprove the sale or transfer of any trust
assets including the shares transferred to the trust, to approve
investments and reinvestments of the trust, and to remove the
trustee and designate another corporate trustee to serve as
successor trustee. Id. at 127. In contrast, decedent in the
instant case reserved no such rights, or any other rights, with
respect to BFLP, BFLP’s assets, or ISA Trust, BFLP’s general
partner.

     Moreover, any suggestion that the principles announced by
the Supreme Court in United States v. Byrum, supra, are limited
to trusts, and do not apply to other types of entities such as
limited partnerships like BFLP, is unfounded and disregards the
                                                    (continued...)
                              - 113 -

the majority opinion loses sight of, or chooses to disregard, the

fact that any such ability is qualitatively different from the

retention of the enjoyment (i.e., substantial present economic

benefit, id. at 145) of the WCB Holdings class B units that he

transferred to BFLP.   See id. at 143, 145.   In this connection,

assuming arguendo the propriety of the majority opinion’s

conclusions that decedent had the ability to cause Empak to

redeem the Empak stock owned by WCB Holdings and to cause WCB

Holdings to redeem the WCB Holdings class B membership units

owned by BFLP, any such ability does not demonstrate, and did not

result in, the retention by decedent of the right to compel BFLP

or ISA Trust, the general partner of BFLP, to distribute such

units to or on behalf of decedent or otherwise to permit decedent

to have substantial present economic benefit of such units.

     The majority opinion not only fails to apply section


     18
      (...continued)
respective fiduciary duties of the partners of a partnership to
each other and to the partnership (discussed below). In fact,
respondent has acknowledged in, inter alia, certain private
letter rulings that those principles apply to limited
partnerships. See, e.g., Priv. Ltr. Rul. 95-46-006 (Aug. 14,
1995); Priv. Ltr. Rul. 94-15-007 (Jan. 12, 1994); Priv. Ltr. Rul.
93-10-039 (Dec. 16, 1992). Although private letter rulings have
no precedential effect, see sec. 6110(k)(3), they “are an
instructive tool”, Thom v. United States, 283 F.3d 939, 943 n.6
(8th Cir. 2002), and “do reveal the interpretation put upon the
statute by the agency charged with the responsibility of
administering the revenue laws”, Hanover Bank v. Commissioner,
369 U.S. 672, 686 (1962); see also Wells Fargo & Co. & Subs. v.
Commissioner, 224 F.3d 874, 886 (8th Cir. 2000), affg. in part
and revg. in part Norwest Corp. v. Commissioner, 112 T.C. 89
(1999).
                                 - 114 -

2036(a)(1) and principles under section 2036(a) that the Supreme

Count established in United States v. Byrum, supra, it also fails

to apply principles established by Minnesota law regarding the

fiduciary duties of the partners of partnerships and the trustees

of trusts, which the majority opinion acknowledges exist.19    This

is evidenced by the following passage from the majority opinion’s

rationale:

          The estate’s argument that the general partner’s
     fiduciary duties prevents a finding of an implied
     agreement is overcome by the lack of activity following
     BFLP’s formation and BFLP’s failure to perform any
     meaningful functions as an entity. We conclude that
     decedent’s transfer to BFLP for a 99-percent ownership
     interest in the partnership did not alter his control
     of the WCB Holdings class B membership units
     transferred to BFLP. * * *


     19
          The majority opinion acknowledges:

     Under Minnesota law, the relationship of partners is
     fiduciary in character, and each partner owes the other
     partners the highest degree of integrity, loyalty, and
     good faith. Prince v. Sonnesyn, 222 Minn. 528, 535
     (1946); Margeson v. Margeson, 376 N.W.2d 269 (Minn. Ct.
     App. 1985). In a limited partnership, a general
     partner can be liable to the limited partners for
     breach of fiduciary duty. Minn. Stat. Ann. sec.
     322A.33 (West 2004); see also Minn. Stat. Ann. sec.
     323.20 (West 1995), repealed by Laws 1997, ch. 174,
     art. 12, sec. 68, effective Jan. 1, 2002, but replaced
     by Minn. Stat. Ann. secs. 323A.4-04 and 323A.4-05,
     effective Jan. 1, 1999 (West 2004). In addition, the
     ISA Trust trustees owed fiduciary duties to its
     beneficiaries. See Minn. Stat. Ann. sec. 501B.10
     (West. Supp. 1990), repealed by Laws 1996, ch. 314,
     sec. 8, eff. Jan. 1, 1997, replaced by Minn. Stat. Ann.
     sec. 501B.151, effective Jan. 1, 1997 (West 2002 &
     Supp. 2004); Minn. Stat. Ann. sec. 501B.60 (West 1990).

Majority op. p. 59 note 12.
                              - 115 -

Majority op. pp. 58-59; fn. ref. omitted.

     The majority opinion cites nothing in Minnesota law that

supports the above-quoted conclusions.    Irrespective of any “lack

of activity” following BFLP’s formation and any “failure [by

BFLP] to perform any meaningful functions”, majority op. pp. 58-

59, ISA Trust, as the general partner of BFLP, owed fiduciary

duties to decedent, and decedent, as a limited partner of BFLP,

owed fiduciary duties to ISA Trust.     Majority op. p. 59 note 12.

ISA Trust, as the general partner of BFLP, and decedent, as a

limited partner of BFLP, also owed fiduciary duties to BFLP.

Margeson v. Margeson, 376 N.W.2d 269, 272 (Minn. Ct. App. 1985).

In addition, the trustees of ISA trust owed fiduciary duties to

the beneficiaries of that trust.   Majority op. p. 59 note 12.

The majority opinion points to nothing in Minnesota law that

relieved decedent, ISA Trust, and its trustees of their

respective fiduciary duties because of BFLP’s “lack of activity”

or “failure to perform any meaningful functions” during

decedent’s lifetime.   Majority op. pp. 58-59.   ISA Trust and

decedent would be breaching their respective fiduciary duties to

each other and to BFLP, and the trustees of ISA Trust would be

breaching their fiduciary duties to the beneficiaries of that

trust, if they were to allow decedent to retain, as the majority

opinion concludes he did, “control over BFLP” and “control [over]

the units transferred to BFLP”, majority op. p. 58, and if, as
                             - 116 -

the majority opinion also concludes, decedent’s transfer to BFLP

for a 99-percent ownership interest in that partnership “did not

alter his control of * * * [such] units”, majority op. p. 59.

     In conclusion, the majority opinion is wrong in holding, and

section 2036(a)(1) and United States v. Byrum, 408 U.S. 125

(1972), reject the majority opinion’s holdings, that “an implied

agreement existed that allowed decedent to retain enjoyment of

the property held by BFLP”, majority op. p. 59, within the

meaning of section 2036(a)(1) and that that section applies to

decedent’s transfer to BFLP of his WCB Holdings class B

membership units.

     WELLS and FOLEY, JJ., agree with this concurring in part and
dissenting in part opinion.
