                          T.C. Memo. 1997-390



                       UNITED STATES TAX COURT



  ESTATE OF BIRNIE M. DAVENPORT, DECEASED, PATRICIA L. VESTAL,
             PERSONAL REPRESENTATIVE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 22900-94, 23011-94.            Filed August 25, 1997.



     Thomas G. Potts, for petitioner.

     Elizabeth Downs and Bruce K. Meneely, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined the following

deficiencies in, and addition to, petitioner's taxes:

              Gift Tax       Estate Tax         Addition to Tax
     Year    Deficiency      Deficiency            Sec. 6651

     1980    $1,422,154           ---              $355,538
     1991        ---            $25,131               ---
                               - 2 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code as in effect during 1980, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     Respondent determined a gift tax deficiency for the estate

of Birnie M. Davenport on the ground that Birnie M. Davenport

(Birnie) made taxable gifts in 1980 of shares of stock in Hondo

Drilling Co., Inc. (Hondo).   Respondent also determined a

deficiency in petitioner's estate tax due to an increase in

adjusted taxable gifts made in previous years.1

     The primary issues for decision are:

     (1)   Whether Birnie owned stock of Hondo during her

lifetime; and if so,

     (2)   whether Birnie transferred stock of Hondo to Gordon

Davenport, Patricia Vestal, and Charles Botefuhr in July of 1980;

and if so,

     (3)   whether Birnie's transfer of Hondo stock in July of

1980 constituted a gift for Federal gift tax purposes;

     (4)   whether the 1980 Federal gift tax return filed by the

Estate of Birnie M. Davenport was delinquently filed; and

     (5)   whether the period of limitations for assessing a gift

tax deficiency in this case has expired.

     1
        The cases involving the estate tax and the gift tax
deficiencies were consolidated for purposes of trial, briefing,
and opinion. The parties do not address the estate tax
deficiency on brief. We assume, therefore, that the parties
agree that our resolution of the gift tax issue will also resolve
the estate tax deficiency.
                               - 3 -

     As a preliminary matter, we must decide whether certain

documents submitted by respondent during the trial of this case

should be admitted into evidence.   Prior to trial, petitioner

submitted two motions seeking to exclude these documents from

evidence.   At trial, respondent sought to admit four of the

documents which were, inter alia, referenced in those motions.

Petitioner maintained its objections to the challenged documents

at trial.   The documents which are the subject of petitioner's

motions and subsequent objections are:

     1.   An agreement executed by Patricia Vestal, Gordon

Davenport, and Charles Botefuhr on November 28, 1980, which

references transfers made by Birnie Davenport to Patricia Vestal,

Gordon Davenport, and Charles Botefuhr (Exh. AD).

     2.   A letter dated April 11, 1984, from John H. Conway, Jr.,

Esq., and Charles B. Tetrick, Esq., addressed to Mr. Gordon

Davenport and Mrs. Pat Vestal regarding the settlement of the

estate of Elizabeth G. Davenport Tax Court case (Exh. AF).

     3.   An agreement dated April 22, 1984, involving the

Commissioner and the Estate of Elizabeth G. Davenport, Deceased,

Gordon E. Davenport, and Patricia Vestal, Executors (Exh. AE).

     4.   A letter dated August 3, 1991, from Edward Botefuhr to

Corrine Childs in response to a letter from Ms. Childs requesting

information on a gift tax return that was allegedly to be filed

by Mr. Botefuhr on behalf of Birnie (Exh. AG).
                                   - 4 -

        Petitioner argues that Exhibits AF and AE are not admissible

pursuant to Federal Rules of Evidence 408 (hereinafter rule 408)

and section 7121, and that Exhibits AD and AG are not admissible

pursuant to this Court's standing pretrial order.       Over

petitioner's objection, these items were offered at trial subject

to the parties' arguing their admissibility on brief.

Exhibits AF and AE

        Petitioner contends that Exhibits AF and AE should be

excluded from evidence pursuant to Federal Rules of Evidence

408.2       Petitioner argues that these exhibits are inadmissible

evidence of settlement negotiations.       Petitioner contends that

these exhibits relate to issues raised in connection with a case

before this Court titled Estate of Davenport v. Commissioner,

docket No. 26022-83.       That case involved the issues of (1)

ownership of shares of Hondo, and (2) the value attributable to

that stock.        Respondent contends that respondent does not seek

to introduce the documents to prove liability for, validity or

invalidity of, or the amount of the claim which was the subject


        2
             Fed. R. Evid. 408 provides, inter alia:

             Evidence of (1) furnishing or offering or
        promising to furnish, or (2) accepting or offering or
        promising to accept, a valuable consideration in
        compromising or attempting to compromise a claim which
        was disputed as to either validity or amount, is not
        admissible to prove liability for or invalidity of the
        claim or its amount. Evidence of conduct or statements
        made in compromise negotiations is likewise not
        admissible. * * *
                                - 5 -

of the parties' dispute with respect to the estate of Elizabeth

Davenport.   Respondent contends that Exhibit AE was introduced to

show that only 1,610 shares of Hondo stock were included in the

estate of Elizabeth Davenport for Federal tax purposes and that

Exhibit AF was introduced to show that respondent conceded the

joint ownership issue with respect to the estate of Elizabeth

Davenport.   Additionally, one of the fiduciaries who signed the

estate tax return, and prosecuted the petition, on behalf of that

estate, namely Patricia Vestal, is the personal representative of

Birnie's estate.

     The obvious purpose of rule 408 of the Federal Rules of

Evidence is to promote settlements.     Evidence of settlement

negotiations or of other attempts to     compromise a claim is

inadmissible if offered to show liability for the claim or that

the claim is invalid.   Fed. R. Evid. 408; Wentz v. Commissioner,

105 T.C. 1, 5-6 (1995).

     We agree with respondent that Exhibits AE and AF were not

offered to show liability for any claim against the estate of

Elizabeth Davenport, nor were they being offered to show the

invalidity of any such claim.   Consequently, we find that rule

408 does not preclude the admission of those exhibits.

     Alternatively, petitioner argues that Exhibit AE should be

excluded pursuant to section 7121, which provides, inter alia:

     SEC. 7121(a). Authorization.--The Secretary is
     authorized to enter into an agreement in writing with
     any person relating to the liability of such person (or
                                - 6 -

     of the person or estate for whom he acts) in respect of
     any internal revenue tax for any taxable period.

Petitioner contends that Exhibit AE is a closing agreement and

that under section 7121 a closing agreement is relevant to the

tax liability only of the person (or estate) named in the closing

agreement.   Respondent fails to address this argument on either

opening or reply brief.

     Exhibit AE is not a closing agreement within the scope of

section 7121.   See Klein v. Commissioner, 899 F.2d 1149, 1152

(11th Cir. 1990).    Accordingly, we shall deny petitioner's motion

and overrule petitioner's objections to the admission of Exhibits

AE and AF.

Exhibits AD and AG

     Petitioner contends that Exhibits AD and AG should be

excluded from evidence pursuant to this Court's standing pretrial

order which reads, in relevant part:

     Any documents or materials which a party expects to
     utilize in the event of trial (except for impeachment),
     but which are not stipulated, shall be identified in
     writing and exchanged by the parties at least 15 days
     before the first day of the trial session. The Court
     may refuse to receive in evidence any document or
     material not so stipulated or exchanged, unless
     otherwise agreed by the parties or allowed by the Court
     for good cause shown.

Petitioner objected to the admission of these exhibits on the

grounds that they were not exchanged prior to 15 days before

trial as required by the standing pretrial order.
                                 - 7 -

     Petitioner first informed respondent on March 6, 1996, that

it intended to argue that Birnie never owned the Hondo stock in

issue.   On March 11, 1996, respondent filed a trial memorandum

with this Court.   In the trial memorandum, respondent states that


     petitioner has raised a new issue regarding the
     decedent's ownership of the property which is the
     subject of the gift tax, of which respondent received
     notice on March 6, 1996. The new issue has not been
     fully articulated by the petitioner and the respondent
     has not had the opportunity to evaluate the argument or
     respond to it.


On March 21, 1996, 4 days before the calendar call which included

the instant case, respondent faxed, inter alia, Exhibits AD and

AG to petitioner's counsel and indicated that they should be

included in a supplemental stipulation of facts.      These documents

relate to petitioner's new argument.      Petitioner claims that

respondent purposely delayed presenting these documents and that

they should be excluded from evidence pursuant to the pretrial

order.   We disagree.

     The purpose of the pretrial order is to avoid surprise,

promote stipulation of uncontroverted facts and exhibits, and

shorten trial time.     Respondent responded to petitioner's new

argument within a reasonable time.       Petitioner was presented with

these documents prior to the start of the trial and had

sufficient time to prepare a response.      Additionally, these
                               - 8 -

documents were initially provided to respondent by petitioner.3

Fundamental fairness dictates that respondent be allowed the

opportunity to offer into evidence these documents which

respondent claims will refute petitioner's position.   See Moretti

v. Commissioner, 77 F.3d 637, 644 (2d Cir. 1996).    Where, as in

this case, a party has shown good cause for any failure to comply

with this Court's standing pretrial order, we may excuse such

noncompliance.   Accordingly, we shall overrule petitioner's

objection to the admission of Exhibits AD and AG and deny

petitioner's motion in opposition to admission of documentary

evidence as it relates to those exhibits.

                         FINDINGS OF FACT

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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.   At the time the instant petitions were

filed, Patricia L. Vestal, the personal representative of the

Estate of Birnie M. Davenport, resided in Tulsa, Oklahoma.

     Birnie, decedent, died at the age of 85 on February 6, 1991,

in Tulsa, Oklahoma.   Decedent died testate.   Decedent's last will

and testament was admitted to probate on April 4, 1991.    Patricia

L. Vestal, decedent's niece, and Gordon E. Davenport and Charles

E. Botefuhr, decedent's nephews, were appointed by the probate

     3
        Respondent argues on brief that these documents were
originally provided by petitioner, and petitioner does not
dispute this on reply brief. We therefore conclude that these
documents were provided by petitioner.
                                 - 9 -

court to act as co-personal representatives of the estate of

Birnie M. Davenport.   A Form 706 United States Estate Tax Return

for the Estate of Birnie M. Davenport was filed timely on

November 7, 1991.   The estate tax return filed on behalf of

petitioner was signed by Patricia L. Vestal and Gordon E.

Davenport as co-personal representatives of the estate.    The

estate tax return showed tax due of $144,030, which was paid at

the time the return was filed.

     A Form 709, United States Quarterly Gift Tax Return for 1980

(1980 gift tax return), was filed on behalf of Birnie

simultaneously with the estate tax return, on November 7, 1991.

The 1980 gift tax return was signed by Patricia L. Vestal and

Gordon E. Davenport.   The 1980 gift tax return reflected a gift

of 537 shares of Hondo stock made on July 7, 1980, by Birnie to

Charles Botefuhr.   For purposes of computation of the 1980 gift

tax, the estate valued the 537 shares of Hondo stock at $804 per

share.   The 1980 gift tax return reflected a gift tax due in the

amount of $95,322, which was paid at the time that the return was

filed.

     Birnie lived most of her adult life with her older sister,

Elizabeth Davenport (Elizabeth).    Both Birnie and Elizabeth

remained unmarried and pursued careers with oil and gas

companies--Birnie as a legal secretary and Elizabeth as an

assistant to senior corporate executives.    Both Birnie and

Elizabeth had extensive business experience.
                               - 10 -

     Pursuant to an oral agreement4 of at least 30 years prior to

the death of Elizabeth, Birnie and Elizabeth commingled all of

their earnings and assets.   Birnie and Elizabeth maintained joint

checking and savings accounts.   Birnie and Elizabeth built a home

together, sharing equally in the costs of construction and

maintenance.   Title to the sisters' house was held in both of

their names.   Pursuant to the sisters' oral agreement, legal

title to shared assets was held in Elizabeth's name.   Birnie and

Elizabeth shared the costs of all investments and considered all

investments to be equally and jointly owned.   The sisters' shared

assets included all stocks and bonds held in the name of

Elizabeth.

     Birnie and Elizabeth both participated in making investment

decisions and agreed that each of them owned one-half of all

property acquired by them regardless of the name in which title

was held.    These assets included 3,220 shares of stock of Hondo.

Birnie considered   1,610 shares of the Hondo stock her own

property notwithstanding that the shares were held in Elizabeth's

name.

     Birnie prepared the Federal and State income tax returns for

both herself and Elizabeth until 1965.   In accordance with their


     4
        Petitioner asserts that this oral agreement created a
business partnership between the two sisters. We shall address
this assertion in our discussion; for convenience, however, in
our findings of fact we shall refer to it as either the agreement
or the arrangement.
                             - 11 -

joint ownership agreement, on the Federal and State income tax

returns which Birnie prepared for herself and her sister, Birnie

reported one-half of all investment income as being hers and one-

half as being Elizabeth's.

     Birnie and Elizabeth maintained an office in their home from

which they conducted their investment activities.   Birnie

reported one-half of the allowable deductions with respect to

such office on her own Federal income tax returns and one-half on

Elizabeth's Federal income tax returns.   After 1965, the Federal

and State income tax returns of Birnie and Elizabeth were

prepared by Corrine Childs, C.P.A., a licensed attorney, tax

adviser, and tax return preparer.   Birnie and Elizabeth informed

Ms. Childs of their joint ownership agreement and of the manner

in which they had been reporting their income, deductions, gains,

and losses with respect to their investments.   On the returns

which Ms. Childs subsequently prepared for Birnie and Elizabeth,

income, deductions, gains, and losses with respect to investments

were reported one-half on the return of Birnie and one-half on

the return of Elizabeth.

     Throughout the period of their agreement, Birnie and

Elizabeth filed their Federal and State income tax returns

reporting their wage earnings separately and sharing equally in

the profits and losses resulting from their various investments.

Several of the Federal income tax returns filed by Birnie and

Elizabeth during the period 1965 through 1979 were audited.    Upon
                              - 12 -

explanation of the joint ownership arrangement between the

sisters, their split of investment income and expenses and

reporting of 50 percent of said income and expenses on each of

their returns was accepted by the Internal Revenue Service (IRS).

     Elizabeth died on December 2, 1979.   Gordon Davenport and

Patricia Vestal were appointed the coexecutors of Elizabeth's

estate.   Charles Botefuhr also was appointed a coexecutor of the

estate of Elizabeth Davenport.   Mr. Botefuhr resigned as a

coexecutor of Elizabeth's estate in September, 1980, over a

dispute on how to report assets titled in Elizabeth's name.

     The estate of Elizabeth Davenport filed Federal and State

estate tax returns which included one-half of the value of the

stocks and bonds, the legal title to which was held in

Elizabeth's name at the time of her death, in Elizabeth's gross

estate.   These stocks included 1,610 shares of Hondo stock,

valued at $804 per share.   The remaining one-half of the stock of

Hondo was considered by the coexecutors of Elizabeth's estate to

be Birnie's property pursuant to the sisters' oral agreement.

     The Federal estate tax return for the Estate of Elizabeth

Davenport was prepared by Ms. Childs and was signed and filed by

Patricia Vestal and Gordon Davenport.   The estate tax return for

the Estate of Elizabeth Davenport was examined by the IRS.     The

IRS took the position that the entire value of all assets held in

Elizabeth's name should be included in her gross estate, and that

the 3,220 shares of Hondo stock should be valued at $3,019 per
                               - 13 -

share.   The IRS issued a notice of deficiency, and the estate of

Elizabeth Davenport petitioned this Court.    That case was

captioned Estate of Davenport v. Commissioner, docket No.

26022-83.    For purposes of the Tax Court litigation, the estate

of Elizabeth Davenport was represented by Patricia Vestal and

Gordon Davenport.    Elizabeth's Federal estate tax case was

settled by the parties without trial, and an agreed decision was

entered on May 24, 1984.

     An agreement was signed by Gordon Davenport on April 18,

1984, and by Patricia Vestal on April 22, 1984, in which the

basis of the settlement agreement with regard to stock of Hondo

was set forth.   In settling the case, the parties agreed that

1,610 shares of Hondo stock would be included in the gross estate

of Elizabeth at a value of $2,400 per share.    The Commissioner

conceded the ownership issue, recognizing the split of ownership

of assets by Elizabeth and Birnie.

     Birnie's last will and testament was drafted by Ms. Childs

and was executed by Birnie on January 26, 1970.    Elizabeth's last

will and testament was drafted by Ms. Childs and was executed by

Elizabeth on January 26, 1970.    The sisters' wills contained

mirror provisions.   Both wills contained provisions for the

distribution of each sister's respective interest in Hondo stock.

The provision for distribution of Hondo stock in each of the

sisters' wills was consistent with their joint ownership

agreement.
                              - 14 -

     Birnie, Elizabeth, and Ms. Childs knew at all times relevant

to this case that Elizabeth was the nominal owner of the 3,220

shares of stock of Hondo.   Patricia Vestal, Gordon Davenport, and

Charles Botefuhr also knew at all times relevant to this case,

from at least the date of Elizabeth's death, that Elizabeth was

the nominal owner of 3,220 shares of Hondo stock.

     Upon the death of Elizabeth in December 1979, the district

court of Tulsa County undertook the probate of her estate.    As

part of the probate of Elizabeth's estate, the court investigated

the validity of the joint ownership of property by Elizabeth and

Birnie.   On February 14, 1983, the district court of Tulsa County

determined that while Elizabeth was the record owner of certain

real and personal property, she owned only an undivided 50-

percent interest in such property, and held an undivided 50-

percent interest in such property for her sister Birnie.5    The

district court of Tulsa County determined that each sister owned

an undivided 50-percent interest in real and personal properties

described in the attachment to its order.   The district court

found that Elizabeth and Birnie each owned an undivided 50-


     5
        Petitioner, objecting to this finding of fact, states on
brief that “This Order, along with an affidavit signed by Birnie
M. Davenport, were both obtained to influence the then pending
Protest and subsequent Tax Court case involving the Estate of
Elizabeth G. Davenport with Respondent's predecessor.” We assume
that petitioner is implying that, in her affidavit, Birnie
misstated the facts or omitted relevant facts which caused the
court to reach an incorrect conclusion. Petitioner's objection
is unfounded.
                              - 15 -

percent interest in the 3,220 shares of Hondo stock.   The court

ordered, on February 14, 1983, that the coexecutors of

Elizabeth's estate were to assign and convey to Birnie her 50-

percent interest in the described real and personal property.

     In 1980, shortly after Elizabeth died, Birnie decided to

transfer all of her 1,610 shares of Hondo stock, in approximately

equal portions to her niece and two nephews.   In order to

transfer, among other items, the Hondo stock, Birnie entered into

sales agreements with both Patricia Vestal and Gordon Davenport

on July 2, 1980.   The sales agreements were dated July 2, 1980,

but were executed by Birnie on September 26, 1980.   Pursuant to

the sales agreements, Birnie sold 537 and 536 shares of Hondo

stock to Gordon Davenport and Patricia Vestal, respectively.    As

part of the sales agreements, Birnie, as seller, represented and

covenanted that she was the sole owner of and had the right to

sell all the shares of stock referred to in the sales agreements.

In the sales agreements, Birnie, as seller, stated that the

shares of stock referred to in the agreements were not to be

disposed of except pursuant to the terms of the agreements.     In

the sales agreements, Birnie promised to deliver good and

marketable title to the shares of stock referred to in the sales

agreements.   By the terms of the sales agreements, Birnie

transferred to Patricia Vestal and Gordon Davenport the right to

receive dividends paid after the date of the agreements with

respect to the shares of stock transferred and the right to vote
                              - 16 -

the stock covered by the sales agreements.   In consideration for

the transfer of stock to them by Birnie, Gordon Davenport and

Patricia Vestal executed installment notes, dated July 2, 1980,

in the amounts of $449,175.50 and $448,353.50, respectively.6

Patricia Vestal and Gordon Davenport each made downpayments in

the amount of $1,000 to Birnie with respect to the transfer to

them of Hondo stock and other stock, pursuant to the sales

agreements and notes.   Patricia Vestal and Gordon Davenport made

interest payments due from them to Birnie under the terms of the

sales agreement and installment notes until approximately March

of 1982.   On March 5, 1982, Birnie forgave the debts of Patricia

Vestal and Gordon Davenport owed to her under the installment

notes.   On March 31, 1983, Birnie filed a Federal gift tax return

for 1982 reflecting the forgiveness of the installment notes.

     On July 7, 1980, Birnie executed a document titled Deed of

Gift, memorializing her gift of 537 shares of Hondo stock to her

nephew Charles Botefuhr.   The deed of gift was made part of the

public record by filing it in Tulsa County, Oklahoma.   After the

date of Elizabeth's death, but prior to July 1980, dividends paid

with respect to Birnie's 1,610 shares of Hondo stock were paid

out of Elizabeth's estate to Birnie.   The payment of dividends

with respect to Birnie's 1,610 shares of Hondo stock was not

considered to be a distribution of property of Elizabeth's

     6
        This represents a purchase price of $804 per share for
the Hondo stock.
                              - 17 -

estate, as these dividends were considered to be Birnie's

property, pursuant to the sisters' joint ownership agreement.

Birnie reported the receipt of dividends paid in 1980, prior to

July 1980, with respect to the 1,610 shares of Hondo stock on her

1980 Federal income tax return.   After July of 1980, and before

April of 1981, dividends paid with respect to the 1,610 shares of

Hondo stock transferred by Birnie to her niece and two nephews

were paid out of Elizabeth's estate directly to Patricia Vestal,

Gordon Davenport, and Charles Botefuhr, in proportion to the

stock they had received pursuant to the sales agreements and

gift.   Hondo typically paid dividends on or about March 1 of each

year, in May of each year, and on or about August 31 of each

year.   The record ownership of 1,610 shares of Hondo stock was

transferred on the stock ledger of Hondo from the name of

Elizabeth Davenport to the names of Patricia Vestal (536 shares),

Gordon Davenport (537 shares), and Charles Botefuhr (537 shares),

on April 14, 1981.   This transfer of ownership on Hondo's stock

ledger of the 1,610 shares of stock was made pursuant to the

direction of Gordon Davenport and Patricia Vestal.   The transfer

of title to the 1,610 shares of Hondo stock, 536 shares to

Patricia Vestal, and 537 shares each to Gordon Davenport and

Charles Botefuhr, was made to accomplish Birnie's intentions, and

to complete the transfers made by the sales agreements and Deed

of Gift.   Patricia Vestal, Gordon Davenport, and Charles Botefuhr
                              - 18 -

received their interests in stock of Hondo from Birnie in July of

1980.

     On November 28, 1980, Patricia Vestal, Gordon Davenport, and

Charles Botefuhr executed an agreement.   In the agreement it was

recited that Charles Botefuhr had been given 537 shares of Hondo

stock by instrument dated July 7, 1980, executed by Birnie

Davenport.   In the agreement it was recited that Charles Botefuhr

had agreed with Birnie at the time of the gift of stock that he

would file the requisite Federal and State gift tax returns and

pay all taxes.   Pursuant to the agreement, Charles Botefuhr

agreed with Gordon Davenport and Patricia Vestal that he would

file the gift tax returns with respect to the gift of July 7,

1980, and pay any gift taxes due with respect to the gift.

Charles Botefuhr did not file any gift tax returns on behalf of

Birnie.

     Charles Botefuhr redeemed his 537 shares of Hondo stock on

July 15, 1981, for $2,190 per share.   Prior to redeeming his

stock, Charles Botefuhr received dividends in 1981 with respect

to his 537 shares of Hondo stock in the amount of $8,055.    Gordon

Davenport received dividends in 1981 with respect to his 537

shares of Hondo stock in the amount of $16,110.

     While preparing Birnie's estate's tax returns, Ms. Childs

discovered that no Federal gift tax return had been filed with

respect to the Hondo stock transfer to Charles Botefuhr on July

7, 1980.   She then prepared a gift tax return with respect to the
                                - 19 -

transaction and filed it simultaneously with the Federal estate

tax return for Birnie's estate.

     Elizabeth, Birnie, their estates, and the representatives of

their estates, consistently represented to the IRS that Elizabeth

and Birnie were joint and equal owners of various property,

including Hondo stock, title to which was in Elizabeth's name.

     Hondo stock was valued for all purposes by Elizabeth and her

estate, Birnie and her estate, Patricia Vestal, and Gordon

Davenport, at $804 per share.    The $804 price of Hondo stock was

determined by reference to the financial statement of Hondo of

the price it would pay for redemptions of its stock in the fiscal

year September 1, 1979, through August 31, 1980.7

     The statutory notices of deficiency, on which this case is

based, were mailed to petitioner on September 20, 1994.

                                OPINION

     Petitioner's primary argument is as follows:   Elizabeth and

Birnie entered into a "business partnership" in which legal title

to all of the partnership's assets was held in Elizabeth's name;

following Elizabeth's death in 1979, Birnie failed to exercise

her statutory rights as surviving partner to wind up the affairs

of the business partnership and to distribute the assets of the

partnership to the estate of her sister and herself; and finally,

     7
        For purposes of this case, if we find that Birnie did
transfer the stock in question, the parties have stipulated the
fair market value of such stock was $2,000 per share at the time
of the transfer.
                              - 20 -

that Birnie's failure to exercise her statutory rights operated

as a waiver of her rights which allowed the partnership property

to remain in Elizabeth's name subject to distribution by her

executors in accordance with the terms of her will.

Agreement Between Birnie and Elizabeth

     Respondent contends that no business partnership was formed

and that the assets that the sisters acquired were merely

personal assets which Birnie and Elizabeth jointly owned.

Petitioner argues that because the sisters created a business

partnership, Birnie's actions (or inaction) subsequent to

Elizabeth's death resulted in the partnership's assets being left

in Elizabeth's name and thus being disposed of through

Elizabeth's estate with the consequence that Birnie did not have

a sufficient interest in the Hondo stock to make a gift of that

stock.

     Section 301.7701-1(c), Proced. & Admin. Regs., provides, in

pertinent part, as follows:

     Although it is the Internal Revenue Code rather than
     local law which establishes the tests or standards
     which will be applied in determining the classification
     in which an organization belongs, local law governs in
     determining whether the legal relationships which have
     been established in the formation of an organization
     are such that the standards are met. Thus, it is local
     law which must be applied in determining such matters
     as the legal relationships of the members of the
     organization among themselves and with the public at
     large, and the interests of the members of the
     organization in its assets.
                                - 21 -

     Because this dispute revolves around the property rights

that each sister would have if the agreement created a

partnership, we must look to Oklahoma State law to see if a

partnership was created, and, if so, the consequences of such a

classification.

     In determining State law we will follow the decisions of the

highest State court, but in the absence of a decision by that

court, we may look to the State's lower courts' rulings and

holdings.     Commissioner v. Estate of Bosch, 387 U.S. 456, 465

(1967).     The burden of proof lies with petitioner.   Rule 142(a).

Additionally, under Oklahoma law, the burden of proving the

existence of a partnership lies with the party which is

attempting to rely on its existence--petitioner in this case.

Byrd v. Byrd, 189 P.2d 927, 928 (Okla. 1948).     “Partnership is a

creature of voluntary agreement.     A partnership relationship can

be created by oral agreement but proof of the fact of partnership

and its terms must be established, by 'clear, unequivocal and

decisive' evidence.     Oral testimony offered to prove these facts

is not given much weight.”     Singer v. Singer, 634 P.2d 766, 770

(Okla. Ct. App. 1981) (fn. refs. omitted).      A partnership is

created by persons “for the purpose of carrying on a trade,

business, or profession”.     United States v. Neel, 235 F.2d 395,

399 (10th Cir. 1956).     Of primary importance in determining the

existence of a partnership, given all of the facts and

circumstances, is whether the parties, in good faith and with a
                               - 22 -

business purpose, intended to form a partnership.    Commissioner

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

     We find that Elizabeth and Birnie did not intend to form a

partnership but intended to share their incomes and property much

as a married couple might.    References to a business partnership

in certain documents as well as in some of the testimony

presented at trial appears to be a loose description of the

sisters' arrangement rather than an attempt to define the

arrangement in legal terms.   We find Ms. Childs' description of

the arrangement to be accurate when she stated:    “They had no

written articles of partnership, no written agreements, it's just

the way you did things.   Just as if someone in this room and I

were to open an account and each put $5,000 in it and decide to

invest it, we would just rock along and we'd each report our half

of the gains and losses and that sort of thing.”    Elizabeth and

Birnie were not engaged in a “trade, business, or profession.”

Although they combined their incomes into joint accounts and

purchased various stocks, this merely amounted to co-ownership of

the various accounts and stock.   The evidence fails to support a

conclusion that the sisters had a business relationship.     On her

1980 Federal income tax return, Birnie reported dividends from

only three companies in the amounts of $12,391, $48,300, and

$1,350 and from the Estate of Elizabeth Davenport in the amount

of $4,269.   Additionally, on her 1980 return, Birnie only

reported long-term capital gains from the sale of three different
                              - 23 -

stocks and no short-term capital gains.   On the facts presented,

we conclude that Birnie and Elizabeth were not in a business

partnership but were merely co-owners of the 3,220 shares of

Hondo stock.   See King v. Commissioner, 89 T.C. 445, 458-459

(1987) (an investor is never considered to be engaged in a trade

or business with respect to his investment activities).

     It has long been settled in Oklahoma that joint ownership of

real or personal property does not necessarily constitute a

partnership.   Logan v. Oklahoma Mill Co., 79 P. 103 (Okla. 1904).

Similarly, “Investment in oil and gas leases as cotenants or co-

owners gives no presumption of the existence of partnership.    In

fact, it is presumed, in the absence of a contrary showing, such

ownership is merely a cotenancy.”   Singer v. Singer, supra at 771

n.11 (citations omitted).

     Petitioner places great reliance on Ryza v. Commissioner,

T.C. Memo. 1977-64, in which this Court found two individuals

were engaged in a partnership for Federal tax purposes.    Ryza is

distinguishable from the instant case.    First, Ryza used Federal

tax principles to determine if a partnership existed; in the

instant case we look to Oklahoma law because the question of

whether a partnership existed is relevant to determine if Birnie

had a sufficient property interest such that she could make a

gift of Hondo stock.   Second, even if we were to look to Federal

tax cases for guidance, Ryza involved two taxpayers who conducted

several businesses (buying, repairing, and selling Volkswagens,
                              - 24 -

an illegal abortion clinic, and a building company) in which they

were each active participants in the business operations.     In the

instant case we are presented with two sisters who, through a

regimen of frugal living, were able to amass a substantial amount

of savings and assets.   We find that Ryza is of no help in

determining the existence of a partnership in this case.

Elizabeth and Birnie were mere passive co-owners of property.

Cf. Vanderschraaf v. Commissioner, T.C. Memo. 1997-306

(Partnerships did not constitute mere passive co-owners of

property; partnerships entered into transactions, formed joint

ventures, operated gas wells, and engaged in various other

activities).8

     The elements of a completed gift under Oklahoma law are:

(1) Intention to give, (2) complete delivery, and (3) acceptance

by the donee.   In re Estate of Carano, 868 P.2d 699 (Okla. 1994);

McSpadden v. Mahoney, 431 P.2d 432 (Okla. 1967).   The sales

agreements and the deed of gift as well as the testimony

presented at trial convince us that Birnie intended to make full

or partial gifts to her niece and nephews.   After Birnie's


     8
        Similarly, petitioner's reliance on McCleary v. Brown,
119 P.2d 830 (Okla. 1941), is misplaced. Petitioner relies on
McCleary as authority for the proposition that a surviving
partner's failure to assert his statutory right of possession to
partnership property for dissolution constitutes a waiver of his
rights. McCleary, like Ryza v. Commissioner, T.C. Memo. 1977-64,
is distinguishable because it involves the active conduct of a
business as opposed to the instant case which involves co-
ownership of investments.
                              - 25 -

transfers, the recipients began receiving the dividends from the

Hondo stock.   Based on all of the facts and circumstances

presented in this case, we conclude that Birnie did intend to

make present and irrevocable transfers of Hondo stock in July of

1980 to her niece and nephews.   We conclude that Birnie owned a

50-percent interest in the Hondo stock in 1980.   Because Birnie

had a sufficient ownership interest9 and the intent to make a

gift of the Hondo stock, and there is no dispute as to any other

element of a gift, we find that under Oklahoma law Birnie did

make a completed gift of Hondo stock in July of 1980.

Statute of Limitations

     Section 6501(a) provides generally that assessments of tax

must be made within 3 years after the taxpayer files a return.

     The Federal estate tax return for the Estate of Birnie

Davenport was filed on November 7, 1991.   A Federal gift tax

return for the taxable year 1980, signed by the co-personal

representatives of the Estate of Birnie Davenport, was filed on

behalf of Birnie on November 7, 1991.   Respondent mailed notices




     9
        Despite Birnie's lack of legal title, we find that her
interest in the Hondo stock, like that of a tenant in common, was
capable of being transferred. See Starnes v. Miller, 505 P.2d
180, 182-183 (Okla. 1972). Also, the fact that delivery of stock
certificates was delayed did not prevent the gift from being
complete in July of 1980. Birnie, through the use of the sales
agreements and deed of gift, accomplished sufficient delivery to
put the gift beyond her dominion and control. See Richardson v.
Commissioner, T.C. Memo. 1984-595.
                                - 26 -

of deficiency regarding the estate and gift tax deficiencies on

September 20, 1994.

     Petitioner contends that

     the previous ownership position of Respondent's
     predecessor as well as notification and subsequent
     acquiescence over a 12-year period by respondent
     following the filing of extensive income and gift tax
     returns by Birnie M. Davenport and her relatives allow
     Petitioner to assert that Respondent is under a 'duty
     of consistency' or is 'quasi estopped' to assert any
     gift or estate tax deficiency against Petitioner for
     gifts of Hondo stock by Birnie M. Davenport.

  We disagree.   The filing of the Federal estate and gift tax

returns by Birnie's estate started the running of the periods of

limitations on November 7, 1991.    Respondent's notices of

deficiency were mailed to petitioner on September 20, 1994,

before the expiration of the period of limitations.    We therefore

find that the statute of limitations does not bar the assessment

of additional estate and gift tax liabilities in this case.

Addition to Tax Under Section 6651(a)(1)

     Section 6651(a)(1) imposes an addition to tax for failure to

file a return on the date prescribed (determined with regard to

any extension of time for filing), unless it is shown that such

failure is due to reasonable cause and not due to willful

neglect.   The taxpayer has the burden of proof to show the

addition is improper.   United States v. Boyle, 469 U.S. 241, 245

(1985).

     Respondent determined that a Quarterly Gift Tax Return with

respect to the July 1980 gifts was due to be filed on November
                              - 27 -

15, 1980.   Secs. 6019, 6075(b).   Petitioner has stipulated that

the co-personal representatives of Birnie's estate filed a

Federal gift tax return for the quarter ended September 30, 1980,

on November 7, 1991.   Petitioner has made no argument with

respect to the section 6651(a)(1) addition to tax, except by

implication of its argument that no gift was made.    We rejected

that argument supra, and petitioner has not proven that its

failure to file timely was due to reasonable cause.   Accordingly,

we sustain respondent's determination of the applicable addition

to tax under section 6651(a)(1).

     To reflect the foregoing,

                                            Appropriate orders will

                                     be issued, and decisions will

                                     be entered under Rule 155.
