                        T.C. Memo. 2010-21



                      UNITED STATES TAX COURT



 ESTATE OF CHARLENE B. SHURTZ, DECEASED, BONNIE K. CASE, a.k.a.
         BONNIE CATHLEEN CASE, EXECUTRIX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6076-07.                Filed February 3, 2010.


     Harris H. Barnes III, for petitioner.

     Gwendolyn C. Walker, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   Respondent determined a deficiency in

Federal estate tax of $4,737,934 and an addition to tax pursuant

to section 6651(a)(1) of $1,184,484 against the Estate of

Charlene B. Shurtz (the estate).   The issues for decision are:

(1) Whether the values of assets transferred by Charlene B.

Shurtz (hereinafter referred to as Mrs. Shurtz or decedent) 6
                               - 2 -

years before her death to her family limited partnership (Doulos

L.P.) are included in the value of her gross estate pursuant to

section 2036(a) and/or 2035(a); (2) if the values of the assets

transferred to Doulos L.P. are includable in the value of

decedent’s gross estate, then (a) the values of the assets

transferred, and (b) whether the values of assets that are

included in the value of decedent’s gross estate under section

2036(a) qualify for the marital deduction under section 2056(a)

as property included in the gross estate, and (3) whether the

estate is liable for an addition to tax under section 6651(a)(1).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the date of decedent’s

death.

                          FINDINGS OF FACT

I.   Charlene B. Shurtz

     Mrs. Shurtz died testate on January 21, 2002, at the age of

76 in California.   She was survived by her husband, the Reverend

Richard Shurtz (Reverend Shurtz), and her two adult children,

Bonnie K. Case (Kathy Case), and Richard L. Shurtz (Rick

Shurtz).1   Kathy Case is the executrix of the estate; she resided

in California at all relevant times.




     1
      Reverend Richard Shurtz died on Sept. 18, 2006.
                                - 3 -

     Decedent was one of three children of Charles A. Barge and

Bonnie Inez Barge (the Barges).   The Barges and their descendants

(the Barge family) owned and managed, first directly and then

indirectly through family partnerships, timberland in the State

of Mississippi (the Barge timberland).

     Mrs. Shurtz grew up in Mississippi with her two siblings,

Charles Richard Barge (Richard Barge) and Betty Morris.   Theirs

was a religious household, and their religious beliefs strongly

influenced how they lived.   The Barge family felt that the land

was given to them by providence, and hence they were stewards of

the land and should use its bounty to do God’s work.

     From 1954 to 1986 Mrs. Shurtz and her family (the Shurtzes)

lived outside the United States, performing missionary work in

Brazil and Mexico.   They returned to the United States when

Reverend Shurtz became the pastor of a church in Montebello,

California.

     Although Mrs. Shurtz was wealthy (her wealth coming from

gifts and inheritance from her parents), the Shurtzes lived

modestly.   By 1996 the Shurtzes’ net worth was approximately $7

million.    In keeping with their philosophy, Mrs. Shurtz and her

husband used their wealth to contribute to a broad range of

charities, including evangelical missions, humanitarian aid

groups, church construction, and groups that assisted orphans.
                                - 4 -

Between 1989 and 2001, Mrs. Shurtz and Reverend Shurtz donated

approximately $972,000 to charity.

      In 1986 Mrs. Shurtz developed Parkinson’s disease.    She was

able to manage her condition with medication and her illness did

not affect her cognitive abilities.     In 1996, when Doulos L.P.

was established, see infra pp. 6-7, Mrs. Shurtz’s Parkinson’s

disease was under control.    She was able to maintain her home in

California, travel to Mississippi every year, and perform

missionary work in several African countries.

II.   The Family Business:   C.A. Barge Timberlands L.P.

      The Barge family increased through the generations, and more

members of the family acquired ownership interests in the Barge

timberland.   By 1993 at least 14 family members held separate

undivided interests in the Barge timberland.     Walter Gomel, an

attorney, informed the Barge family that having numerous

undivided interests in the Barge timberland could create

difficulties in the operation and management of the business.       At

trial, Richard Barge testified that Mr. Gomel told him:

      You’re going to have a problem because if you make a timber
      sale, you’ve got to have the signatures of all these people,
      and he said, your business is not going to function the way
      it’s set up. And he suggested a partnership, limited
      partnership.

      Consequently, on June 25, 1993, C.A. Barge Timberlands, L.P.

(Timberlands L.P.), was established as the entity to operate the
                                 - 5 -

family timber business.    All of the persons and trusts having an

interest in the Barge timberland joined Timberlands L.P.      At its

inception the ownership of Timberlands L.P. was:

  General Partner          Capital Account      Ownership Percentage

Barge Timberlands
  Management, Inc. (BTM)       $127,623              2 percent

  Limited Partners         Capital Account      Ownership Percentage

Bonnie Inez Barge                $26,717             25   percent
Richard Barge                  1,492,207             16   percent
Betty Morris                   1,346,115             16   percent
Mrs. Shurtz                      979,575             16   percent
Trusts for grandchildren       2,408,979             25   percent

BTM was incorporated to be the general partner of Timberlands

L.P.    BTM’s sole asset was a 2-percent general partnership

interest in Timberlands L.P.    The shareholders of BTM were Mrs.

Shurtz, Richard Barge, and Betty Morris.     Mrs. Shurtz owned one-

third of BTM’s stock at the time of her death; Richard Barge and

Betty Morris each owned a one-third interest as well.

       On the date of Mrs. Shurtz’s death, Timberlands L.P.’s

principal asset was 45,197 acres of Mississippi timberland.

       The partnership agreement of Timberlands L.P. required the

partnership to distribute not less than 40 percent of its net

income to its partners each year.    The reason for this

requirement was to enable the partners to have funds to pay taxes

on their distributive shares of Timberlands L.P.’s profits.
                                - 6 -

III.    The Shurtz Family Limited Partnership--Doulos L.P.

       Not long after the establishment of Timberlands L.P., Mrs.

Shurtz, Richard Barge, Betty Morris, and their respective spouses

approached James Dossett, an experienced tax attorney, and one of

his partners, Leonard Martin, to obtain tax and business advice.

They had several concerns, the first of which was the protection

of the family’s interest in the Barge timberland.    Specifically,

because of the “jackpot justice” that the Barge family members

and their spouses believed existed in Mississippi, they were

concerned that were they to be sued and a judgment entered

against them, they could lose control of the family business.      To

avoid this problem, Mr. Dossett recommended that each family hold

its Timberlands L.P. interest in a limited partnership.      Mr.

Dossett informed them that if they followed this recommendation,

the family timber business could be protected since a judgment

creditor would not be able to seize the underlying timberland,

but rather would have only a right to distributions made by

Timberlands L.P. to its partners.

       Mrs. Shurtz wanted to give her children and grandchildren

interests in the 748.2 acres of timberland that she had acquired

from her parents.    On the basis of her experience with

Timberlands L.P., Mrs. Shurtz had concerns with respect to the

creation of a large number of undivided interests in the

timberland.    Further, Mrs. Shurtz and Reverend Shurtz wanted to
                                   - 7 -

minimize (or if possible eliminate) estate taxes with respect to

the value of these assets upon Mrs. Shurtz’s death.       Mr. Dossett

informed Mrs. Shurtz that using a family limited partnership

would also mitigate these concerns.

     Thus, to alleviate the Shurtzes’ concerns, Mrs. and Reverend

Shurtz formed Doulos L.P. on November 15, 1996.2      A project

planning note drafted by Reverend Shurtz on June 3, 1997, stated

that the purpose of the project was to build Doulos L.P. into a

functioning limited partnership in order to:

     1. Reduce the estate;

     2. provide asset protection;

     3. provide for heirs;

     4. provide for the Lord’s work.

     The Doulos L.P. partnership agreement contained language to

restrict an outsider from acquiring an interest in the

partnership.       To this end, section 11.5, Substituted Limited

Partner, of the partnership agreement provides:

     No transferee of the whole or any portion of a Partnership
     interest owned as a Limited Partner who is not already a
     Partner in the Partnership shall have to right to become a
     substituted Limited Partner in place of the assignor unless:

               *           *         *         *         *

     (b) the written consent of the General Partners to such
     substitution shall be obtained which consent may be given or


     2
      Richard Barge and Betty Morris and their families similarly
formed family limited partnerships.
                               - 8 -

     withheld in the sole and absolute discretion of the General
     Partners; * * * [3]

Section 11.6, Further Restrictions on Transfers, of the

partnership agreement provides that if any member of Mrs. and

Reverend Shurtz’s immediate family marries and that family member

dies or divorces, then the surviving or divorced spouse of the

immediate family member “shall offer to sell all partnership

interest owned by such surviving or divorced spouse” back to the

Shurtz family.   Section 11.6(b) further provides that if there is

a transfer of any partnership interest in any voluntary or

involuntary manner under judicial order, legal process,

execution, attachment, or other legal action, the person who

acquired the interest shall offer to sell the interest to the

Shurtz family.

     Because the 748.2 acres of timberland were owned only by

Mrs. Shurtz, in order to create a partnership (i.e., Doulos L.P.)

to hold the property it was necessary for her to transfer an

interest in the 748.2 acres to another person.   Consequently, on

December 16, 1996, Mrs. Shurtz transferred a 6.6-percent interest

in the 748.2 acres to Reverend Shurtz.4   On December 17, 1996,


     3
      Sec. 11.8 of the partnership agreement provides that if a
general partner’s partnership interest is seized by a creditor it
will be automatically converted to a limited partnership
interest.
     4
      A valuation study conducted by Leonard Martin determined
that the contribution of an undivided 6.6-percent interest in the
                                                   (continued...)
                                - 9 -

Reverend Shurtz contributed his 6.6-percent interest in the 748.2

acres to Doulos L.P. for a 1-percent general partnership

interest.    Also, on December 17, 1996, Mrs. Shurtz contributed

her then-undivided 93.4-percent interest in the 748.2 acres, as

well as her 16-percent limited partnership interest in

Timberlands L.P., to Doulos L.P. for a 1-percent general

partnership interest and a 98-percent limited partnership

interest.

     Mrs. and Reverend Shurtz used the services of Gordon

Romberger, a certified public accountant, beginning in 1988 or

1989.    Mr. Romberger prepared Mrs. and Reverend Shurtz’s Federal

and State tax returns at all times thereafter.    Mr. Romberger

drafted a schedule, apparently for purposes of trial, that was

based on Mrs. and Reverend Shurtz’s personal income tax returns

and reflected Mrs. and Reverend Shurtz’s Federal and Mississippi

incomes as reported on their tax returns from 1996 through 2002.

Mrs. and Reverend Shurtz’s Mississippi income (averaging $766,629

per year) was generated from their interests in Doulos L.P. and

from a Mississippi bank account.    Mrs. and Reverend Shurtz had

non-Mississippi income that averaged $81,349 per year.5


     4
      (...continued)
748.2 acres was equivalent to a 1-percent general partnership
interest.
     5
      Respondent drafted a schedule designed to show Mrs.
Shurtz’s income and expenses after removing Doulos-L.P.-related
                                                   (continued...)
                              - 10 -

     Between 1996 and 2000 Mrs. Shurtz made a total of 26 gifts

of .4-percent limited partnership interests in Doulos L.P. to her

children and to trusts for her grandchildren.6    Each of these

gifts was valued at $19,700 or less.   At the time Mrs. Shurtz

died in 2002, Mrs. Shurtz and Reverend Shurtz each held a 1-

percent general partnership interest in Doulos L.P.     Mrs. Shurtz

also held an 87.6-percent limited partnership interest in Doulos

L.P.; the remaining 10.4 percent was divided among limited

partnership interests held by Mrs. Shurtz’s children and trusts

for her grandchildren.

     Doulos L.P. maintained a capital account for each partner

and issued Schedules K-1 (Form 1065), Partner’s Share of Income,

Credits, Deductions, etc.   Doulos L.P. filed Form 1065, U.S.

Return of Partnership Income, each year.

     Doulos L.P. did not maintain books of account, as required

by section 4.5 of the partnership agreement.     Instead, Mr.

Romberger created his own “work papers like a trial balance” in

creating the partnership’s tax returns.




     5
      (...continued)
income items. However, in contrast to Mr. Romberger’s schedule,
respondent’s schedule did not show how and why adjustments were
made to Mrs. Shurtz’s income. Additionally, while respondent
removed Doulos L.P.’s related income items, respondent’s schedule
included Doulos L.P.’s related expense items.
     6
      The .4-percent transfers were designed to use the annual
gift tax exemption.
                               - 11 -

      Doulos L.P. was laggard in opening a bank account; it did

not establish one until April 11, 1997, nearly 4 months after the

partnership was established.    The Doulos L.P. bank account was

initially a checking account, but on June 17, 1997, it was

changed to a money market account.      Inasmuch as only a limited

number of checks each month could be written from the money

market account, Mrs. and Reverend Shurtz paid some of Doulos

L.P.’s disbursements from their personal bank accounts.      Doulos

L.P. reimbursed the Shurtzes for some of these payments.

Payments made by Mrs. and Reverend Shurtz that were not

reimbursed were credited to their capital accounts.

      Distributions from Doulos L.P. to its partners were not

always proportional.    In 1997 Mrs. Shurtz was the only partner to

receive a distribution; in 1999 only Mrs. Shurtz and Reverend

Shurtz received distributions; and in 2000 Mrs. Shurtz received a

distribution greater than her proportionate share of the

partnership’s income.   However, the partnership made up the

missed distributions in subsequent years.

IV.   The Management of Doulos L.P. and Timberlands L.P.

      The entire Barge family was conscientious about managing the

family timber business.    The Barge family even had a mission

statement.   In order that each adult family member could

participate in the management of the Barge timberland, and then

Timberlands L.P., beginning in the mid-1980s the Barge family
                                - 12 -

held annual meetings in Mississippi.     Topics discussed at the

meetings included the establishment of a saw mill to process the

large trees grown on the Barge timberland, land maintenance

strategies, and harvesting strategies.7    Minutes of these

meetings were kept even though under Mississippi law there was no

requirement to do so.

     Mrs. and Reverend Shurtz regularly attended, and actively

participated in, these meetings.    Indeed, it was Barge family

policy that everyone be consulted before any major decision was

made.

     After Mrs. and Reverend Shurtz established Doulos L.P., they

combined the Doulos L.P. annual meeting with the annual meeting

of Timberlands L.P.   The timberland Doulos L.P. owned was once a

part of the Barge timberland.    Doulos L.P.’s timberland required

active management similar to that required by the timberland

owned by Timberlands L.P.   Specifically, the timberland of both

partnerships required planting, reforestation, and general

maintenance.




     7
      There is a substantial amount of work involved in keeping
timber healthy. Roads and culverts must be built and maintained
in order to properly support the growth of the timber, the trees
must be thinned so that the growing trees do not interfere with
each other, pests must be controlled, and, sometimes, trees must
be planted because they do not reseed naturally.
                              - 13 -

V.   Mrs. Shurtz’s Estate Planning

     In 1998 the Shurtzes decided to review their estate plan.

To that end, they approached the Dallas Seminary Foundation, an

organization affiliated with the Dallas Theological Seminary (the

seminary) that assists individuals in designing estate and

charitable gift plans to maximize their charitable bequests.    The

seminary referred them to Lewis Wall, an attorney who focuses on

estate planning.   Mr. Wall drafted a revocable trust agreement

(entitled the Shurtz Family Trust Agreement) to take effect upon

the death of either Mrs. Shurtz or Reverend Shurtz.   The Shurtz

Family Trust was intended to achieve the following goals:

     (1) Assure to the extent possible that there was no Federal

tax payable at the death of the first spouse;

     (2) minimize Federal estate taxes at the surviving spouse’s

death through proper use of the available unified credit

(exemption) amount, coupled with use of each of the survivor’s

remaining generation-skipping exemption amounts to the extent

possible;

     (3) assure that the decedent’s interest in Doulos L.P.

remained in the family;

     (4) provide for the remainder of the estate (upon the death

of the survivor spouse) to pass into a charitable lead annuity

trust which would provide for a 12-percent-per-year annuity to

charity for a term sufficient that the remainder interest to the
                              - 14 -

family members would be valued at zero or as close to zero as

possible.

     Form 706, United States Estate (and Generation-Skipping

Transfer) Tax Return, for the estate was due by April 21, 2003;

however it was not filed until December 2003.

     Mrs. Shurtz’s gross estate was valued at $8,768,059.03.    The

assets having the greatest values making up the gross estate

were:

     1. An 87.6-percent limited partnership interest in Doulos
        L.P. valued at $6,116,670;

     2. a 1-percent general partnership interest in Doulos L.P
        valued at $73,500;8

     3. 100 shares of BTM valued at $383,700; and

     4. one-third of the residue of the Estate of Bonnie Barge
        valued at $1,126,190.

Mrs. Shurtz’s estate plan was designed to minimize or eliminate

the payment of estate tax.   To achieve this objective, $345,800

went to a unified credit trust and $7,674,143.03 went to trusts

qualifying for the marital deduction.   Deductible expenses of the

estate totaled $93,916.   Hence, after giving consideration to the

remaining amount of lifetime unified credit available to Mrs.

Shurtz, the estate’s tax advisers believed that no estate tax was




     8
      The underlying asset of Doulos L.P. (the 16-percent limited
partnership interest in Timberlands L.P.) was valued by the
estate at $$9,993,280.
                                - 15 -

due and therefore they were not overly concerned that Form 706

was not timely filed.

                                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.       Sec.

2001(b).    The value of a decedent’s taxable estate is the value

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

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

the decedent’s property to the extent provided under sections

2031 through 2046.

I.   Contentions of the Parties

        Respondent contends that the values of the assets

contributed to Doulos L.P. are includable in the value of Mrs.

Shurtz’s gross estate by reason of her retention of the control,

use, and benefit of the transferred assets within the meaning of

sections 2036 and/or 2035(a).     On the other hand, respondent

contends that for purposes of section 2056(a), the value of Mrs.

Shurtz’s interest in Doulos L.P. should be used to determine the

amount of the marital deduction.

        Petitioner posits that Mrs. Shurtz left no taxable estate

because her entire estate was left first to a unified credit

trust (formed to use the unified (exemption) credit) and then to
                                - 16 -

various marital trusts.    Further, petitioner contends that

section 2036(a) does not apply because Mrs. Shurtz’s transfer of

assets to Doulos L.P. constituted a “bona fide sale for an

adequate and full consideration” within the meaning of that

provision.

II.   Property Included in the Gross Estate Pursuant to Section
      2036(a)

      We first examine whether the values of assets Mrs. Shurtz

transferred to Doulos L.P., i.e., her interest in Timberlands

L.P. and the 748.2 acres of timberland, are included in the value

of Mrs. Shurtz’s gross estate under section 2036(a).    If these

asset values are not so includable, there is no estate tax

deficiency.

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

avoiding the estate tax by means of testamentary substitutes that

permit a transferor to retain lifetime enjoyment of purportedly

transferred property.”     Strangi v. Commissioner, 417 F.3d 468,

476 (5th Cir. 2005), affg. T.C. Memo. 2003-145, petition for

rehearing granted on other grounds 429 F.3d 1154 (5th Cir. 2005).

Inter vivos transfers that are testamentary in nature, “i.e.,

transfers which leave the transferor a significant interest in or

control over the property transferred during his lifetime”, are

included in the value of the gross estate pursuant to section

2036(a).     United States v. Estate of Grace, 395 U.S. 316, 320

(1969).    Section 2036 provides in pertinent part:
                              - 17 -

     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.

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

     In sum, 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) in the transferred property.9   See Estate of Bongard v.

Commissioner, 124 T.C. 95, 112 (2005).   Courts have emphasized

that section 2036(a) “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



     9
      Sec. 2036(b), regarding the retention of voting rights with
respect to shares of controlled corporations, is not herein
applicable.
                                - 18 -

death.”    Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir.

1971).    Courts apply a higher level of scrutiny to intrafamily

transactions.     Estate of Bigelow v. Commissioner, 503 F.3d 955,

969 (9th Cir. 2007), affg. T.C. Memo. 2005-65; Kimbell v. United

States, 371 F.3d 257, 263 (5th Cir. 2004); Estate of Bongard v.

Commissioner, supra at 123.

     A.      Whether There Was a Transfer of Property by the
             Decedent

     Petitioner concedes that an inter vivos transfer was made.

     B.      Whether the Transfer Was a Bona Fide Sale for an
             Adequate and Full Consideration in Money or Money’s
             Worth

     Section 2036(a) excepts a “bona fide sale for an adequate

and full consideration in money or money’s worth” from its scope.

Section 20.2036-1(a), Estate Tax Regs., refers to the section

20.2043-1, Estate Tax Regs., definition of “a bona fide sale for

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

Section 20.2043-1(a), Estate Tax Regs., provides in pertinent

part:     “To constitute a bona fide sale for an adequate and full

consideration in money or money’s worth, the transfer must have

been made in good faith, and the price must have been an adequate

and full equivalent reducible to a money value.”     The Court of

Appeals for the Ninth Circuit, the court to which an appeal of

this case lies, has held that “In this context, we consider the

‘bona fide sale’ and ‘adequate and full consideration’ elements
                                - 19 -

as interrelated criteria.”    Estate of Bigelow v. Commissioner,

supra at 969.

       With respect to the contribution of property to a family

limited partnership, we have stated:

       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. The objective evidence must
       indicate that the nontax reason was a significant
       factor that motivated the partnership’s creation. A
       significant purpose must be an actual motivation, not a
       theoretical justification.

Estate of Bongard v. Commissioner, supra at 118 (citations

omitted); see Estate of Bigelow v. Commissioner, supra at 969;

Estate of Korby v. Commissioner, 471 F.3d 848, 854 (8th Cir.

2006), affg. T.C. Memo. 2005-102 and T.C. Memo. 2005-103.

       Further, we have held that “the bona fide sale exception in

section 2036(a) is applicable only where there was an arm’s-

length transaction.”     Estate of Bongard v. Commissioner, supra at

122.    The Court of Appeals for the Ninth Circuit has

adopted this position.    See Estate of Bigelow v. Commissioner,

supra at 969.

       In defining “arm’s-length transaction”, we have said:

       “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?”
                                - 20 -

Estate of Bongard v. Commissioner, supra at 123 (quoting Dauth v.

Commissioner, 42 B.T.A. 1181, 1189 (1940)).

     A finding that the transferor sought to save estate taxes

does not preclude a finding of a bona fide sale so long as saving

estate taxes is not the predominant motive.    Accord Estate of

Mirowski v. Commissioner, T.C. Memo. 2008-74; see Estate of

Schutt v. Commissioner, T.C. Memo. 2005-126 (“Thus, the proffered

evidence is insufficient to establish that estate tax savings

were decedent’s predominant reason for forming Schutt I and II

and to contradict the estate’s contention that a true and

significant motive for decedent’s creation of the entities was to

perpetuate his buy and hold investment philosophy.”).

          1.   Bona Fide Sale

     The record shows that decedent had several nontax reasons

for establishing Doulos L.P.    In 1996, when Mrs. Shurtz was in

good health, and with her Parkinson’s disease under control, she,

her siblings (Richard Barge and Betty Morris), and their

respective spouses determined to take action to protect

Timberlands L.P. from the litigious environment they believed

Mississippi to be.

     Mr. Dossett, the attorney who advised the family about

establishing their family limited partnerships, credibly

testified that he regularly advised his clients about the use of

limited partnerships to protect family assets from the risks
                              - 21 -

imposed by Mississippi’s litigious atmosphere.   After their

meetings with Mr. Dossett, Mrs. Shurtz and her siblings

concurrently established family limited partnerships as part of a

coordinated plan.

     On the totality of the evidence, we are satisfied that the

Barge family (including the Shurtzes) had a legitimate concern

about preserving the family business and that they established

family limited partnerships to address their concerns.

     Preservation of the family business is a legitimate reason

for establishing a family limited partnership.   In Kimbell v.

United States, supra at 264, the Court of Appeals for the Fifth

Circuit examined the bona fide sale exception to section 2036 in

the context of a family limited partnership.   Citing its previous

holding in Church v. United States, 2000-1 USTC par. 60,369, at

84,778, 85 AFTR 2d 2000-804, at 2000-807 (W.D. Tex. 2000), affd.

without published opinion 268 F.3d 1063 (5th Cir. 2001) (per

curiam), the court stated that “‘[P]reserving the

family ranching business for themselves and their descendants’

was a valid motivating reason to form the partnership.”

     We are mindful that the threat to the business must be more

than merely speculative.   See Estate of Bigelow v. Commissioner,

supra at 972.   As noted supra pp. 20-21, we are satisfied that

decedent and her family were actually motivated by a legitimate

concern regarding the threat of litigation that went beyond mere
                              - 22 -

speculation, that the establishment of family limited

partnerships was a customary response in Mississippi to possible

lawsuits, and that the Doulos L.P. partnership agreement was

designed to limit the exposure of the ownership interests of the

partnership (e.g., protection of limited partnership interests

from seizure and the automatic conversion of general partnership

interests to limited partnership interests).

     Moreover, the record shows that the establishment of Doulos

L.P. facilitated the management of the timberland decedent and

her husband contributed to the partnership.    The undisputed

testimony of Richard Barge demonstrates that having multiple

undivided ownership interests impeded the management of the Barge

timberland.   This problem also existed with respect to the 748.2

acres of timberland directly held by decedent.

     We are satisfied that decedent and her husband were aware

that the establishment of Timberlands L.P. eased the management

of the Barge timberland; hence, we believe it reasonable for them

to form Doulos L.P. to hold ownership of their timberland.

     Courts have found management efficiency to be a legitimate

and significant nontax reason for establishing a family limited

partnership in cases where the property required active

management.   Estate of Bigelow v. Commissioner, 503 F.3d at 972

(“efficient management might count as a credible non-tax business

purpose, but only if the business of the FLP required some kind
                               - 23 -

of active management as in Kimbell”); Kimbell v. United States,

371 F.3d at 268 (property contributed included working oil and

gas properties).   In contrast, courts have found that management

efficiency is not a legitimate and significant nontax reason for

establishing a family limited partnership where the property did

not require active management.   Estate of Bigelow v.

Commissioner, supra at 972 (property contributed consisted of a

house that was rented to a tenant); see Estate of Rosen v.

Commissioner, T.C. Memo. 2006-115 (assets contributed consisted

primarily of stocks, bonds, and cash, conducted no business

activity and had no business purpose for its existence).

     We recognize that only a portion of the property contributed

to Doulos L.P. required active management.   However, courts have

found this to be sufficient.   In Kimbell v. United States, supra

at 259, the oil and gas properties contributed amounted to only

11 percent of the total assets contributed to the family limited

partnership.   In the instant case, the value of the 748.2 acres

contributed to Doulos L.P. (which required active management) was

at least 15.8 percent of the total value of the assets

contributed to Doulos L.P.10   Although decedent did not manage



     10
      We determined this percentage by creating a ratio the
numerator of which is the stipulated value of the timberland
contributed by decedent of $2,496,500, and the denominator of
which is respondent’s calculation of the value of the Timberlands
L.P. interest contributed of $13,310,094 plus the above-mentioned
$2,496,500.
                                - 24 -

the day-to-day operations of the Doulos L.P. timberland, no major

decision was made without her approval.

     Further, Reverend Shurtz, who also was consulted before any

major decision was made, acquired an ownership interest in the

timber business.    In Kimbell, the court found that giving the

decedent’s son, who had managed the business for some time, an

ownership interest was a factor in finding that a bona fide sale

occurred.     See id. at 268.

     Finally, business activities occurred with respect to the

timberland.    In this regard, we are mindful that Doulos L.P.

annually amortized timber expenses, and in 1997 it realized gain

from the sale of timber cut from its land.11

     In conclusion, although we recognize that reducing estate

tax was a motivating factor in establishing Doulos L.P., decedent

had valid and significant nontax reasons for establishing the

partnership.    These reasons were “actual motivation” and not

merely a “theoretical justification.”    See Estate of Bongard v.

Commissioner, 124 T.C. at 118.    Hence, we find that the transfer

of property to Doulos L.P. constituted a bona fide sale.




     11
      We note that a family limited partnership may still be
valid even if it does not conduct an active trade or business.
See Estate of Thompson v. Commissioner, 382 F.3d 367, 383 (3d
Cir. 2004), affg. T.C. Memo. 2002-246; Estate of Black v.
Commissioner, 133 T.C. __, __ (2009) (slip op. at 52); Estate of
Bongard v. Commissioner, 124 T.C. 95, 124-125 (2005).
                              - 25 -

          2.    Full and Adequate Consideration

     The record shows that each partner received an interest in

Doulos L.P. that represented adequate and full consideration

reducible to money value.   In Estate of Bongard v. Commissioner,

supra at 124, we set out a list of factors by which we determined

whether full and adequate consideration was received.    Here, all

of these factors have been met.

     First, the contributors received interests in the family

limited partnership proportionate to the ownership interest each

contributed.   Decedent and her husband engaged an accountant to

calculate the value of a 1-percent general partnership interest

in Doulos L.P. based on the value of the total property being

contributed.   Reverend Shurtz contributed property equal to the

value of a 1-percent general partnership interest, and Mrs.

Shurtz contributed property equal to the value of the remaining

1-percent general partnership interest and the 98-percent limited

partnership interest.

     Second, the respective assets contributed were properly

credited to each partner’s respective capital account.   Third,

distributions from Doulos L.P. required a negative adjustment in

the distributee partner’s capital account.   Fourth, and most

importantly we have found the presence of a legitimate and

significant nontax business reason for the establishment of

Doulos L.P. by Mrs. and Reverend Shurtz.
                                - 26 -

       In sum, we are satisfied on the record before us that the

transaction being questioned (i.e., the formation of Doulos L.P.

and the contribution of property thereto) was carried out in the

way that ordinary parties to a business transaction would do

business with each other.     Consequently, we hold that the

transfer of property to Doulos L.P. was made for adequate and

full consideration.

       C.   Whether Decedent Retained an Interest or Right
            Enumerated in Section 2036(a)(1) or (2) in the
            Transferred Property

       Because we conclude that a bona fide sale for an adequate

and full consideration in money or money’s worth occurred, the

fair market value of the contributed property is not includable

in the value of decedent’s gross estate.     Consequently, we need

not address whether decedent retained an interest or right

enumerated in section 2036(a)(1) or (2) in the transferred

property.

       In sum, the fair market value of decedent’s partnership

interest in Doulos L.P., rather than the fair market value of the

contributed property, is includable in the value of her gross

estate.     See Estate of Black v. Commissioner, 133 T.C. ___, ___

(2009) (slip op. at 54).

III.    Section 2056(a) Marital Deduction

       Because we have decided that the fair market value of Mrs.

Shurtz’s partnership interest in Doulos L.P., and not the fair
                              - 27 -

market value of the contributed property, is includable in the

fair market value of the gross estate, the marital deduction to

which the estate is entitled under section 2056 is to be computed

according to the value of the partnership interest that actually

passed to Reverend Shurtz.   See Estate of Black v. Commissioner,

supra at ___ (slip op. at 54).

IV.   Conclusion

      Because the values of the assets transferred to Doulos L.P.

are not includable in the value of Mrs. Shurtz’s gross estate,

there is no estate tax deficiency and no tax due from the estate.

Consequently, the estate is not liable for an addition to tax

pursuant to section 6651(a)(1).

      To reflect the foregoing,


                                         Decision will be entered

                                    for petitioner.
