Estate of Holland v. Commissioner

T.C. Memo. 1997-302

UNITED STATES TAX COURT

ESTATE OF CAROLYN W. HOLLAND, DECEASED,
JACK K. HOLLAND, LEWIS G. HOLLAND, SR., AND
BETTY H. KANN, EXECUTORS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7397-94. Filed June 30, 1997.

S. Jarvin Levison, for petitioner.

Clinton M. Fried, for respondent.

MEMORANDUM OPINION

PARR, Judge: Respondent determined a deficiency of $388,074

in the Federal estate tax of Carolyn W. Holland (decedent), who

died on November 25, 1989. Respondent also determined an
 -2-

accuracy-related penalty of $77,615 pursuant to section 6662.1

After concessions,2 the issues for decision are: (1)

Whether decedent transferred the life estate she held in a house

when she attempted to convey fractional fee simple interests to

her children as gifts in 1984, 1985, and 1986. We hold she did.

(2) Whether the 12 $10,000 annual gifts decedent made in each of

the years 1985 through 1988 were transfers of present interests

that qualify for the exclusion under section 2503(b). We hold

they are completed transfers of present interests that may be

excluded from decedent's taxable gifts, as set out below. (3)

Whether 12 checks decedent wrote and delivered to her agent 4

days before she died were completed gifts, or in the alternative

claims against the estate that may be deducted under section

2053(a)(3). We hold they are neither completed gifts nor claims

against the estate. (4) Whether decedent had an enforceable,

personal obligation to repay two transfers of $50,000 that she

received from the J. Kurt Holland Residual Trust so that $100,000

1
All section references are to the Internal Revenue Code
in effect as of the date of decedent's death, and all Rule
references are to the Tax Court Rules of Practice and Procedure,
unless otherwise indicated. All dollar amounts are rounded to
the nearest dollar, unless otherwise indicated.
2
Petitioner deducted $61,081 on Schedule L, Form 706, as
an expense of administering decedent's interest in a condominium.
Prior to trial, petitioner conceded that $40,580 of these
expenses were not allowable; the remaining amount, $20,501, is at
issue.
Respondent determined that the value of decedent's interest
in the condominium at the date of her death was $500,000. Prior
to trial, respondent conceded that the value was only $300,000.
 -3-

may be deducted from the value of the gross estate under section

2053(a)(3). We hold she did not. (5) Whether the expense of 5

years of maid service may be deducted from the gross value of the

estate as an administration expense pursuant to section

2053(a)(2). We hold it may not. (6) Whether petitioner is

subject to an accuracy-related penalty under section 6662. We

hold it is, to the extent set out below.

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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.

Petitioner is the estate of Carolyn W. Holland (decedent),

who died testate, on November 25, 1989, in Atlanta, Georgia

(Atlanta). Lewis G. Holland, Sr. (Lewis), Betty H. Kann

(Betty),3 and Jack K. Holland (Jack) (the executors) are the

executors of the estate. The executors had a mailing address in

Atlanta at the time the petition in this case was filed. For

convenience, we present a general background section and combine

our findings of fact with our opinion under each separate issue

heading.

A. General Background

Decedent

Decedent was born in Atlanta, on July 21, 1914. She was

married to the late J. Kurt Holland (Holland), an attorney who

practiced law in Atlanta. Decedent is survived by three

3
At the time of decedent's death, Betty Kann was known
as Betty Koblitz.
 -4-

children, Lewis, Betty, and Jack, and by eight grandchildren.

Lewis and Betty each have three children, and Jack has two

children.

Jack Holland

Jack, the youngest son of decedent, is an attorney who

formerly worked in the National Office of the Internal Revenue

Service (IRS) in Washington, D.C., for 3 years. He has practiced

law in Atlanta since 1973, and at the time of trial was a partner

in the firm of Arnall Golden & Gregory. Jack's practice includes

estate planning and general tax services.

Decedent gave Jack a power of attorney on May 21, 1982.

Jack is a coexecutor of decedent's estate, and cotrustee for the

Carolyn W. Holland Trust (the Carolyn Trust), the eight Weinstock

Trusts created by decedent's mother for decedent's grandchildren,

and the J. Kurt Holland Residual Trust (the JKH Trust). He is

also the agent for decedent and each of the beneficiaries of the

trusts.

On February 25, 1991, Jack, as one of the executors, filed a

United States Estate (and Generation-Skipping Transfer) Tax

Return (Form 706) with the Atlanta Service Center of the IRS.

The Weinstock Property

Decedent's mother, Mrs. Paula M. Weinstock (Weinstock),

owned approximately 50 acres of land (the Weinstock Property)

between Roswell Road and Lake Forrest Drive in Fulton County,

Georgia. Decedent's father, Jack Weinstock, operated a florist

business on a portion of the property facing Roswell Road. On
 -5-

another portion of the property, with access to Lake Forrest

Drive, the Weinstocks built a house.

Weinstock sold approximately 2 acres of the Weinstock

Property to Holland, where the Hollands built a house. Later,

the Hollands gave a 1-acre portion of their property to their

daughter, Betty Kann (then Koblitz), who built a house on her

parcel.

Sometime during the 1950's the Weinstocks gave their home

and approximately 11 acres to decedent's sister, Mrs. Nathan,

which she used as a residence for her family. The Weinstocks

then built a smaller residence on a different portion of the

Weinstock Property (the Weinstock Residence).

The Weinstock Residence consisted of a house and 1.58 acres

of land on Lake Forrest Drive. The executors of the Weinstock

estate conveyed a life estate in the Weinstock Residence to

decedent on August 10, 1984. Item IV of Weinstock's will

provided that decedent had the right to sell in fee simple the

Weinstock Residence; however, if she did not reinvest the

proceeds in another home, the proceeds were required to be

delivered to and held in trust by the trustees of the Carolyn

Trust. The Carolyn Trust was created by Weinstock's will. If

decedent did purchase another home with the proceeds of the sale

of the Weinstock Residence, decedent's interest in the new home

would continue in the same manner as it existed before such sale;

that is, she would have a life estate in the new home.
 -6-

Although decedent was devised a life estate in the Weinstock

Residence, due to a careless reading of the will she believed

that she had received a fee simple absolute. At the date of the

devise, the fair market value of the property was $90,000, and

decedent's life estate had a value of $54,470.4

On several occasions prior to 1980, Weinstock gave decedent

and Mrs. Nathan undivided interests in the Weinstock Property.

At the time of her death, on March 3, 1984, Weinstock owned 65

percent and decedent and Mrs. Nathan each owned 17 ½ percent of

an undivided interest in approximately 28.75 acres of the

Weinstock Property. Weinstock's interest in the 28.75 acres was

devised in equal shares to two trusts created by her will, the

Carolyn Trust and the Betty W. Nathan Trust (the Nathan Trust).

The Weinstock Trusts

On December 5, 1982, Weinstock created trusts for each of

her 10 great-grandchildren (the Weinstock Trusts).5 Each of the

10 trusts were identical except for the name of the beneficiary,

and provided in relevant part:

I. Additional Property. Either the Grantor or any
person, with the consent of the Trustee, may add other
properties to the trust hereby created by transferring such
property to or making such insurance payable to the Trustee
hereunder by deed, assignment, bequest or devise, and if so

4
On Aug. 10, 1984, decedent was 70 years of age. The
value of her life estate is calculated by multiplying the value
of the property by 0.60522. Sec. 20.2031-7A(d)(6), Estate Tax
Regs.
5
Decedent had eight grandchildren, and Mrs. Nathan had
two grandchildren.
 -7-

added such property shall be covered by the provisions
hereof the same as if originally hereunder.

II. Dispositive Provisions. The Trustee shall hold,
manage, invest and reinvest the assets of the trust, collect
the rents, interest, dividends and other income therefrom,
deduct the costs and expenses thereof and administer the
trust as follows:
(a) At any time and from time to time during each
calendar year the Beneficiary may demand by written
instrument delivered to the Trustee up to the value of any
gifts transferred hereto during that year, payable by the
Trustee upon receipt of demand made. If the Beneficiary
fails to exercise this right during any calendar year, this
right as to that calendar year shall lapse and shall not be
cumulative. If the Beneficiary is a minor or otherwise is
laboring under any legal disability, the Beneficiary's
guardian, or if no guardian exists, the person having
custody over such Beneficiary, shall be authorized but not
required to make such written demand on behalf of the
Beneficiary, and the property received pursuant to such
written demand shall be held by the guardian or custodian
for the benefit and use of such Beneficiary.
Whenever any transfer of property is made to the
Trustee hereunder, the Trustee shall give immediate written
notice of the withdrawal rights hereunder, and any such
transfer, to the Beneficiary or, if the Beneficiary of
Grantor is under legal disability, to his or her legal
guardian or, in case no legal guardian has been appointed
for the Beneficiary, to the person having custody of such
Beneficiary. The Beneficiary (or his guardian or custodian)
may exercise the withdrawal right granted hereunder by
delivering a written instrument to the Trustee at any time
on or before the sixtieth (60th) day after receipt of notice
from the Trustee, or the last day of such calendar year,
whichever shall first occur. The Trustee shall be
authorized in satisfying any withdrawal right to distribute
cash or other property of the trust.

Issue 1. Whether Decedent Transferred Her Life Estate in the
Weinstock Residence When She Attempted To Give Fractional Fee
Simple Interests to Her Children in 1984, 1985, and 1986

Transfers of the Weinstock Residence

Decedent wanted to reduce her taxable estate and discussed

with her family and her attorney various methods of doing so.

Beginning in 1984, decedent decided to avail herself of the
 -8-

annual exclusion from taxable gifts provided by section 2503(b)

to make a series of annual gifts with a fair market value of

$10,000 to each of her three children. After a discussion with

her children, decedent agreed to transfer to each child, and each

child agreed to accept, one-ninth of her interest in the

Weinstock Residence in 1984, 1985, and 1986 (a transfer of one-

ninth of her interest each year to each child).

In August 1984, due to an error in drafting the conveyance,

decedent transferred by deed her entire interest in the Weinstock

Residence to her three children. That is, decedent transferred

nine-ninths of her interest, described in the deed as an interest

in fee simple, instead of the three-ninths she intended to

transfer. Unaware of the error, the transferees recorded this

deed on January 22, 1985. Decedent executed deeds in 1985 and

1986 that purported in each of those years to convey an

additional one-ninth of her interest to each child. The 1985 and

1986 deeds were not recorded by the children-transferees.

The Sale of the Weinstock Property

In May 1987, all of the parties owning interests in the

Weinstock Property entered into an agreement to sell the entire

Weinstock Property to a potential buyer (Purchaser). At the time

of the agreement, the owners of the 28.75-acre portion, and their

ownership percentages, were as follows: the Carolyn Trust, 32.5

percent, the Nathan Trust, 32.5 percent, decedent, 17.5 percent,

and Mrs. Nathan, 17.5 percent. The remaining acreage was owned

by decedent, individually, Mrs. Nathan, individually, and the JKH
 -9-

Trust. In addition, Lewis, Betty, and Jack entered into the

agreement as the owners of the Weinstock Residence.

Prior to closing, Purchaser performed a title search and

discovered that Lewis, Betty, and Jack could convey no greater

interest in the Weinstock Residence than a life estate pur autre

vie, which was measured by the life of decedent. To quickly

remedy the defect, and effect the sale, Lewis, Betty, and Jack

conveyed their interests in the Weinstock Residence by quitclaim

deed to the Carolyn Trust on July 23, 1987.

Due to reasons unrelated to the problem with the title to

the Weinstock Residence, Purchaser did not purchase the entire

Weinstock Property; instead it bought only the 28.75-acre portion

for $6,000,000.

Shortly after Lewis, Betty, and Jack conveyed their

interests in the Weinstock Residence to the Carolyn Trust,

decedent transferred $90,000 to them. In the following year, on

July 15, 1988, the remaining acreage of the Weinstock Property

was sold to a different buyer. The JKH Trust sold its interest

for $50,000, the Carolyn Trust sold the Weinstock Residence for

$90,000, and decedent sold her residence on Lake Forrest Drive

for $600,000.

Respondent determined that decedent made an unreported gift

to Lewis, Betty, and Jack of her entire interest in the Weinstock

Residence in 1984, or in the alternative, respondent asserted by

an amendment to the answer, that the transfer in 1984 was void

and that decedent made an unreported taxable gift of $90,000 to
 -10-

the children "in some later year." Petitioner asserts in its

petition that decedent transferred one-ninth of her interest in

the Weinstock Residence to each of the transferees in 1984, 1985,

and 1986, and that in 1987 they conveyed by quitclaim deed their

interests to the Carolyn Trust.6

The question before us is to what extent, if any, decedent

made gifts of her interest in the Weinstock Residence in 1984,

1985, and 1986. We must look to the law of Georgia, where the

real property is located, for the answer to the problem thus

posed. Our determination in this regard should, according to the

mandate of the Supreme Court of the United States in Commissioner

v. Estate of Bosch, 387 U.S. 456 (1967), be predicated on State

law, and the State's highest court is the best authority on its

own law. If there be no decision by that court then Federal

authorities must apply what they find to be the State law after

giving "proper regard" to relevant rulings of other courts of the

State. Id. at 465.

Under the law of Georgia, an executor of a will cannot

convey a greater interest in property than what the terms of the

will provide. Ham v. Watkins, 181 S.E.2d 490, 492 (Ga. 1971).

6
At trial, and in its reply brief, petitioner abandoned
the position taken in its petition and argued that decedent's
entire interest in the Weinstock Residence was transferred in
1984, and that the transfers by deed in 1985 and 1986 were
"effectively meaningless." In response to petitioner's argument,
respondent argued that the 1984 transfer was a nullity, and the
$90,000 transfer in 1987 was an unreported taxable gift. Both
parties thus appear to have abandoned their original positions
and to have adopted instead continuously moving targets.
 -11-

Nor can a life tenant convey any greater title than he or she may

own. Mason v. Carter, 153 S.E.2d 162, 164 (Ga. 1967); Rigdon v.

Cooper, 47 S.E.2d 633, 637 (Ga. 1948). Thus, it is clear that

although decedent intended each year to transfer fractional fee

simple interests in the Weinstock Residence, she could have

conveyed no more than interests in her life estate.

The fact that decedent actually owned a lesser estate in the

property than what she thought she was devised, and intended to

transfer, does not invalidate the transfers. McDaniel v. Bagby,

51 S.E.2d 805, 809 (Ga. 1949) (should the holder of a life estate

undertake to convey the entire estate in lands, he would simply

convey his estate for life). Each year, decedent intended to

give one-ninth of the entirety of her interest in the Weinstock

Residence to each of her three children, and the children agreed

to accept that amount. Decedent's transfers of fractional

interests in a lesser estate than a fee simple absolute is not

inconsistent with this intent.

Furthermore, the fact that the deed recorded in 1984 recited

a greater estate in the property than what decedent actually

owned does not void the transfer. A deed which conveys any

estate in realty, if valid as to the estate conveyed, cannot be

canceled in its entirety because the deed may be invalid as to

some other estate sought to be conveyed therein. McDaniel v.

Bagby, supra at 810; see also, McLemore v. Wilborn, 383 S.E.2d

892 (Ga. 1989) (delivery of otherwise valid deed is sufficient to

sustain inter vivos gift of real estate); Rogers v. Pitchford,
 -12-

184 S.E. 623, 624 (Ga. 1936) (the crucial test to determine

whether deed conveys title to land is the intention of the

parties, which is determined by looking at the whole deed).

Decedent, however, did not intend to convey nine-ninths of

her interest in the property in 1984. Rather, the fact that she

deeded additional fractional interests in 1985 and 1986 is clear

and unequivocal evidence that she intended to convey three-ninths

of her entire interest in each of the 3 years. See Dodge v.

United States, 413 F.2d 1239, 1243 (5th Cir. 1969) (it is

unnecessary to consider the reformation agreement as an operative

instrument; its only function is the evidentiary one of

supporting the factual finding that the transferor was mistaken).

Thus, the question for Federal gift tax purposes, is whether

decedent's entire interest in the property was transferred in

1984, or were fractional interests conveyed in 1984, 1985, and

1986? The answer to this question turns on whether decedent had

a right to reform the deed to conform to the parties' intentions.

Dodge v. United States, supra; Touche v. Commissioner, 58 T.C.

565 (1972).

A gift is subject to tax only when the donor has so parted

with dominion and control as to leave him no power to change its

disposition. Sec. 25.2511-2(b), Gift Tax Regs. The gift tax is

not applicable to a transfer of bare legal title, but only to a

transfer of a beneficial interest in property. Sec. 25.2511-

1(g)(1), Gift Tax Regs. Any gift in which the donor reserves the

right to revest the beneficial title in himself is incomplete.
 -13-

Sec. 25.2511-2(c), Gift Tax Regs. Thus, for the purposes of the

gift tax, a "gift is not consummate until put beyond recall."

Burnett v. Guggenheim, 288 U.S. 280, 286 (1933).

Previously, under facts similar to those now before us, this

Court has held that because the taxpayer had, in the years then

before us, the right to reform the deeds of gift and revest title

in herself, no completed gift was made during those taxable years

for the portion of the property transferred in error. Touche v.

Commissioner, supra at 569; Bergeron v. Commissioner, T.C. Memo.

1986-587; Dodge v. Commissioner, T.C. Memo. 1968-238 (finding a

right to reform gifts to convent in amounts larger than intended

by donor or expected by recipients); see also Dodge v. United

States, 413 F.2d at 1242 (adopting the analysis of the Tax Court

in Dodge v. Commissioner, T.C. Memo. 1968-238).7 As to the

portion of the property that was transferred according to the

intent of the donor, however, this Court found that the transfer

was a completed gift. Touche v. Commissioner, supra; Bergeron v.

7
In Dodge v. United States, 292 F.Supp. 573, 576 (S.D.
Fla. 1968), affd. 413 F.2d 1239 (5th Cir. 1969), the District
Court held that a deed executed by the taxpayer purporting on its
face to transfer a greater number of acres than what the donor
intended, was and could be properly reformed under the laws of
the State of Minnesota (the State in which the property was
located) on the basis of mutual mistake of the donors and the
donee. On appeal the Court of Appeals for the Fifth Circuit
confined itself to legal issues centering on the existence of a
unilateral error. The court, expressing its belief that the
State of Minnesota would not depart from the prevailing rule
allowing reformation, affirmed. Dodge v. United States, 413 F.2d
at 1243.
 -14-

Commissioner, supra; Dodge v. Commissioner, T.C. Memo. 1968-238;

see also Dodge v. United States, 413 F.2d at 1243.

Under Georgia law, equity may intervene and reform a

conveyance when the instrument fails to express accurately the

intention of the parties. Ga. Code Ann. sec. 23-2-25, 23-2-30

(1982); Curry v. Curry, 473 S.E.2d 760, 761 (Ga. 1996); Fox v.

Washburn, 449 S.E.2d 513, 514 (Ga. 1994); Sheldon v. Hargrose,

100 S.E.2d 898, 900 (Ga. 1957); McCollum v. Loveless, 200 S.E.

115, 117 (Ga. 1938). Reformation as applied to a contract is a

remedy cognizable in equity for the purpose of correcting an

instrument so as to make it express the true intention of the

parties, where from some cause, such as fraud, accident, or

mistake, it does not express such intention. The remedy is not

available for the purpose of making a new and different contract

for the parties, but is confined to establishment of the actual

agreement. Cotton Sales Mut. Ins. Co. v. Woodruff, 451 S.E.2d

106, 107 (Ga. Ct. App. 1994). The cause of the defect is

immaterial so long as the mistake is common to both parties to

the transaction. Curry v. Curry, supra; Sheldon v. Hargrose,

supra. A petition for reformation will lie where by mistake of

the scrivener and by oversight of the parties, the writing does

not embody or fully express the real contract of the parties.

Curry v. Curry, supra; McLoon v. McLoon, 136 S.E.2d 740 (Ga.

1964). In order to justify relief in equity to a party claiming

mistake, the evidence must be clear, unequivocal, and decisive as

to the mistake. Scurry v. Cook, 59 S.E.2d 371 (Ga. 1950). The
 -15-

negligence of the complaining party will not defeat her right to

reformation if the other party has not been prejudiced. McCollum

v. Loveless, supra at 118 (no prejudice in reformation of deed

"so as to make it speak the truth").

In Curry v. Curry, 473 S.E.2d 760 (Ga. 1996), Cordelia

Simmons (Cordelia) told her attorney that she wanted to give her

grandson, Enos Curry (Enos), the "property 'where * * * [her]

house sits'", and instructed her attorney to prepare a deed

conveying it to him. Id. at 761. When she signed the deed, the

space for the property description was blank. Her attorney added

a description of an adjoining lot that Cordelia had previously

conveyed, and then delivered the deed to Enos, who recorded it.

Neither Cordelia nor Enos read the deed at any time. Id. Later,

after Cordelia was declared incompetent, Cordelia's guardian,

James Curry (James), filed a complaint against Enos, seeking

ejectment and a declaratory judgment. It was only after James

filed this ejectment action that the grantee learned that the

deed conveyed the wrong lot. Id. at 762.

The issue before the Supreme Court of Georgia was whether

Enos was entitled to reformation of the deed based on the

mistaken description of the property. The court found that the

error in the deed describing a lot that Cordelia had already

conveyed was a mistake common to both parties, and it held that

Enos was entitled to reformation of the deed to correct its

erroneous description. Id.
 -16-

Under the facts and circumstances of the case before this

Court, we find that the mistake in the 1984 deed conveying

decedent's entire interest in the Weinstock Residence was a

scrivener's error which was not noted by either of the parties at

the time of execution of the deed. Moreover, this mistake

violated the manifest intention of the parties to the deed. We

do not think that a scrivener's error in describing the

fractional interest to be conveyed in a gratuitous transfer of

real estate, as in the case at bar, is so different from the

scrivener's error in describing the particular lot to be conveyed

in the gratuitous transfer in Curry. We believe that the Supreme

Court of Georgia would, under the facts and circumstances of this

case, find that the original 1984 transfer passed only bare legal

title to decedent's entire interest in the property and that,

immediately after such transfer, decedent had the unqualified

right, as against the donees, to defeat the transfer as to the

extent of six-ninths thereof. Therefore, under the law of

Georgia, we find that decedent would have had a right to reform

the deed to express the agreement of the parties.

Thus, we find that in 1984 the donees were given complete

ownership of three-ninths of decedent's interest in the property

and bare legal title to the other six-ninths. Decedent had the

right, after the 1984 transfer, to revest in herself title to

that six-ninths interest. She could take it back at will. The

fact that her power was dehors the instrument, rather than

expressed in the instrument itself, is immaterial. Helvering v.
 -17-

Hemholz, 296 U.S. 93 (1935); Burnet v. Guggenheim, 288 U.S. 280

(1933); Dodge v. Commissioner, T.C. Memo. 1968-238. It follows

that, inasmuch as decedent had, during 1984, the power to revest

title in herself as to six-ninths of the property, six-ninths of

decedent's transfer in 1984 was illusory and therefore did not

have the necessary degree of completeness to be recognized for

Federal tax purposes. Burnet v. Guggenheim, supra; sec. 25.2511-

2(c), Gift Tax Regs.

We are satisfied, as our findings of fact show, that

decedent transferred three-ninths of her interest in the

Weinstock Residence in 1984. With respect to 1985 and 1986, the

situation is very similar. Deeds of three-ninths interests for

1985 and 1986 were submitted in evidence. Accordingly, we find

that in 1985, the donees were given complete ownership of an

additional three-ninths of decedent's interest in the property,

and decedent had the right to revest title in herself as to the

remaining three-ninths defeasible interest. Cf. Dodge v.

Commissioner, T.C. Memo. 1968-238 (Court could not find taxpayer

transferred his retained interest in the property where he

offered no persuasive evidence of the transfer). Thus, after her

transfer in 1985, only three-ninths of decedent's transfer in

1984 was illusory and did not have the necessary degree of

completeness to be recognized for Federal tax purposes. Burnet

v. Guggenheim, supra; sec. 25.2511-2(c), Gift Tax Regs.

Finally, in 1986 decedent deeded the last of her interest in

the property to her children, and decedent's right to revest
 -18-

title in herself and the residue of her dominion and control over

the Weinstock Residence terminated. Thus, we find that decedent

made gifts of one-ninth of her interest in the Weinstock

Residence to each of her three children in 1984, 1985, and 1986.

Respondent pleads, by amendment to the answer, that if this

Court should find that decedent did not make a gift with a value

of $90,000 in 1984, that decedent made a gift of $90,000 in "some

later year." This pleading is a new matter; thus, the burden of

proof is upon respondent. Rule 142(a).

The issue is whether the $90,000 that decedent transferred

to her children after they quitclaimed their interests in the

Weinstock Residence to the Carolyn Trust was in consideration of

the conveyance, or if it was a gratuitous transfer without

consideration.

Respondent was unable to introduce evidence of exactly when

decedent transferred $90,000 to her three children; however,

respondent did submit into evidence two letters he received from

petitioner's attorney which state that "[Decedent] repurchased

the house in 1987 from her children for $90,000 in order to

satisfy the purchasers of that part of the property." In

addition, Jack testified at trial that decedent borrowed $120,000

and gave each of the children-transferees $30,000 shortly after

they transferred their interests in the Weinstock Residence to

the Carolyn Trust.

The evidence submitted by respondent does not support the

determination; thus, respondent has failed to meet his burden of
 -19-

proving that the $90,000 transfer was a gift. To the contrary,

the evidence, both that submitted by respondent and the testimony

of Jack, supports a finding that, in substance, decedent

purchased the interests held by her children in the property and

conveyed them to the Carolyn Trust.

Furthermore, in 1986, the family decided to offer the whole

of its property, including the Weinstock Residence and the

undeveloped property, for sale as a single contiguous unit. For

some time prior to that decision, decedent's cash requirements

were being met by a series of loans, and it is undeniable that

she expected the substantial gain she would realize on the sale

of the property to allow her to retire the loans and eliminate

her liquidity problems. The facts, therefore, show that decedent

had a substantial interest in the sale of the whole property

proceeding unimpeded by minor problems with title to a small

portion of it.

Accordingly, we find, based on the facts and circumstances,

that decedent's transfer of $90,000 to Lewis, Betty, and Jack in

1987 was paid in consideration of the transfer of their interests

in the Weinstock Residence to the Carolyn Trust.

Issue 2. Whether the 12 $10,000 Annual Gifts Decedent Made in
Each of the Years of 1985 Through 1988 Were Transfers of Present
Interests That Qualify for the Exclusion under Section 2503(b)

In 1985, decedent began a program of making annual gifts to

Lewis, Betty, and Jack, and her daughter-in-law, Ellen, and the

eight Weinstock Trusts that benefited her grandchildren
 -20-

(collectively, the donees).8 Each year, from 1985 through 1988,

decedent made checks for $10,000 payable to each of the donees

and gave them to her agent, Jack, for delivery.

In each of the years, decedent did not have enough cash to

fund the gifts, so she arranged, through her agent, to borrow the

funds from First National Bank of Atlanta (First National).9

The Loan Process

Decedent borrowed $120,000 in 1985, 1986, 1987, and 1988 to

fund the gifts. Typically, each year shortly before making the

gifts, decedent wrote out checks for $10,000 to each of the

donees, and signed a note for $120,000. She gave the checks and

the signed note to her agent, Jack, who went to First National

and executed the loan on her behalf. First National issued a

cashier's check for $120,000 to decedent, which Jack deposited in

decedent's checking account at the Trust Company Bank. Although

the loans were unsecured, Jack guaranteed the notes, both

personally and as agent for decedent.

After the loan proceeds were deposited in decedent's

account, the trustees for the Weinstock Trusts, Jack and Lewis,

8
Decedent's daughter-in-law, Ellen, is the wife of Jack;
the eight Weinstock Trusts that were created to benefit
decedent's grandchildren are: The Carolyn A. Holland Trust, The
Beth R. Holland Trust, The Lynn P. Holland Trust, The Richard L.
Holland Trust, The Lewis G. Holland, Jr. Trust, The Alan P.
Koblitz Trust, The Richard S. Koblitz Trust, and The Jeffrey L.
Koblitz Trust.
9
First National Bank of Atlanta later changed its name
to Wachovia Bank. Decedent did business with the bank under both
of its names.
 -21-

endorsed the checks payable to the eight Weinstock Trusts, and

each of the other donees endorsed the checks payable to them.

The endorsed checks were deposited into the Jack K. Holland-Agent

account (Holland-Agent account) at First National. A check for

$120,000 was then drawn on that account to purchase a $120,000

certificate of deposit (CD) for the donees. Jack then pledged

the CD as security for his guarantee as decedent's agent.

The Certificates of Deposit

Decedent, Lewis, Betty, and Jack discussed how the gifts

were to be used prior to decedent's taking out the loan or making

the gifts. Although the issuance of the loan proceeds, the

pooling of the gifts, and the execution of the pledge all

occurred during the same visit to First National, both the

parents of the minor beneficiaries and the adult beneficiaries of

the Weinstock Trusts were given actual notice that the gifts were

being made, and that they had the right to the immediate use of

the money.10 The donees unanimously agreed to pool their gifts

in order to realize a greater return on their investments.

Pooling the gifts to purchase the CD and pledging it to

secure Jack's guarantee of the note benefited both the donees and

the donor. The interest rate paid on a $120,000 CD was higher

than the interest rate paid on a CD in an amount less than

$100,000. Thus, by pooling their gifts, the donees were able to

10
Decedent's children are the parents of the
beneficiaries of the eight Weinstock Trusts.
 -22-

receive a greater rate of interest than if they had each bought a

CD in the amount of the individual gifts.

Pledging the CD's as security for Jack's guarantee benefited

decedent by lowering her cost of borrowing. When Jack executed

the loan agreement on behalf of decedent, he negotiated the rate

of interest that the bank would charge for the loan with the

bank's representative, Mr. Marshall Wellborn (Wellborn).

Wellborn and Jack were friends, and the bank regarded the Holland

family as a valuable account. Accordingly, the bank accepted

Jack's strategy to make the loan "self-funding" by accepting his

pledge of the CD as security for his guarantee. The interest

rate on a self-funded loan was only 1-½ percent above the

interest rate paid on the $120,000 CD. First National did not

require the CD to be pledged for it to make the loan; however,

without the pledge the interest rate on the loan would have been

higher. Therefore, the purpose of pledging the CD as security

for Jack's guarantee of decedent's unsecured loan was to reduce

decedent's cost of borrowing.

Decedent paid the interest on the loans when it became due,

and the donees received the interest paid each month by First

National on the CD's. Each year, Jack issued a Form 1099 to each

donee reporting the amount of interest paid, and each of the

Weinstock Trusts filed Federal and State income tax returns for

1985, 1986, 1987, 1988, and 1989, reporting the interest received

on the CD's.
 -23-

Decedent renewed the notes each year, until she paid them on

June 9, 1988, following the sale of 28.75 acres of Weinstock

property. Until decedent paid off the loans, Jack purchased new

CD's each year to replace the ones that matured.

First National continued to hold the CD's after decedent

paid her indebtedness to the bank. As the CD's matured, the

proceeds were deposited into the Holland-Agent account, and then

distributed to the donees. After the distribution of the

proceeds, some of the Weinstock Trusts purchased new CD's from

First National, and some made other investments.

Respondent determined that the donees never had dominion and

control over any of the CD's pledged as security for decedent's

agent's guarantee of the unsecured notes, and therefore that the

transfers were incomplete gifts of future interests.

Furthermore, respondent determined that the $10,000 gifts that

decedent made each year in 1985, 1986, 1987, and 1988, were

completed in 1988 when decedent paid off the bank loans and the

CD's were no longer pledged to secure Jack's guarantee.

Respondent added the value of all of these transfers to the

taxable estate as adjusted taxable gifts for purposes of

determining the tentative estate tax. Accordingly, respondent

increased the value of the taxable estate by $480,000.

Petitioner asserts that the annual gifts were gifts of present

interests that decedent properly excluded from her taxable gifts

under section 2503(b).
 -24-

Under section 2503(b), a donor shall exclude the first

$10,000 of gifts made to each of her donees from the total amount

of gifts for a calendar year made to each donee. Sec. 2503(b).

However, a parenthetical provision in the section forecloses any

exclusion for gifts of future interests in property. Id. A

future interest is one that is "limited to commence in use,

possession, or enjoyment at some future date or time." Sec.

25.2503-3(a), Gift Tax Regs. The Supreme Court stated in Fondren

v. Commissioner, 324 U.S. 18, 20 (1945):

it is not enough to bring the exclusion into force that the
donee has vested rights. In addition he must have the right
presently to use, possess or enjoy the property. These
terms are not words of art, like 'fee' in the law of seizin
* * * , but connote the right to substantial present
economic benefit. The question is of time, not when title
vests, but when enjoyment begins. * * *

Petitioner cites Foley v. Allen, 170 F.2d 434 (5th Cir.

1948),11 as support for its argument that the transfers by

decedent were completed gifts. In Foley, a mother gave her son a

gift of 200 shares of stock that she had pledged to First

National Bank of Atlanta as security for loans the bank had

earlier made to her. The Commissioner contended that the mother

retained dominion and control over the property as it remained

pledged to the bank for her indebtedness at the time of transfer.

Therefore, according to the Commissioner, there was no completed

11
In Bonner v. City of Prichard, 661 F.2d 1206, 1209
(11th Cir. 1981) (en banc), the Court of Appeals for the Eleventh
Circuit adopted as binding precedent all of the decisions of the
former Court of Appeals for the Fifth Circuit handed down prior
to the close of business on Sept. 30, 1981.
 -25-

gift. Id. at 436. In finding that, under the law of the State

of Georgia, the donor made a completed gift, the court stated

that it was aware of no rule or principle that prevents the donor

from making a valid gift of personal property that is subject to

a lien or that theretofore had been pledged to secure an

indebtedness. The court held:

The fact, * * * , that the donee, without being required to
do so as a condition of the gift, consents for the subject
of the gift to remain pledged for the use and benefit of the
donor until the debt is paid is not, in our judgment,
repugnant to a valid gift nor would such consent constitute
a retention of dominion and control by the donor over the
property donated. [Id. at 437.]

Under the facts of the instant case, we find that decedent's

annual transfers to the donees were completed gifts. The gifts

were complete when the checks for $10,000 were cashed.12 It is

indisputable that the loan for $120,000 had to be executed before

the checks could be cashed by the donees. It is also

indisputable that the donees had to receive and endorse the

checks, and then return them to Jack, as their agent, before he

could deposit the checks in the agency account and purchase the

CD. Only after Jack purchased the donees' CD could he pledge it

as security for his guarantee as decedent's agent for her

unsecured loan. Thus, the loan was executed before the CD was

pledged, or even purchased. The gifts, and the donees' interests

12
See the discussion of when a gift of a check is
complete infra Issue 3.
 -26-

in the gifts, were therefore separate and independent from the

pledge of the CD.

Moreover, it was not the donor who pledged the CD, but the

agent of the recipients. Thus, pledging the CD's was a voluntary

act. Therefore, both the recipients and First National treated

the CD's as the recipients' present interest.

Finally, decedent bore the burden of paying the bank the

interest on the loans when it became due, and the donees enjoyed

the present benefit of the interest on the CD's paid to them by

the bank; therefore, the transfers were complete in substance as

well as in form. Thus, at least as to the individual recipients,

decedent relinquished, and the donees acquired, dominion and

control over the gifts. Muserlian v. Commissioner, T.C. Memo.

1989-493 (in prearranged transfers among family members the issue

is whether the taxpayer retained all valuable incidents of

ownership, control, and enjoyment of the funds while making the

semblance of a gift), affd. 932 F.2d 109 (2d Cir. 1991); Elbert

v. Commissioner, 45 B.T.A. 685 (1941). (The effect on the trusts

is discussed below.)

Deductibility of the Annual Gifts to the Individual Donees

We hold that the gifts of $10,000 made each year in 1985,

1986, 1987, and 1988 to Lewis, Betty, Jack, and Jack's wife,

Ellen, were completed gifts in which the donees had a present

interest.

This holding, however, is not a holding that the $10,000

transfers in 1985 and 1986 to Lewis, Betty, and Jack are excluded
 -27-

under section 2503(b) from decedent's taxable gifts. Section

2503(b) excludes from taxable gifts only the first $10,000 of

gifts made by a donor to a person in a calendar year. We found

in supra Issue 1. that decedent transferred fractions of her

interest in the Weinstock Residence to Lewis, Betty, and Jack in

1984, 1985, and 1986. Neither the specific dates in 1985 and

1986 of the transfers,13 nor the value of decedent's interest in

the Weinstock Residence on those dates,14 are in the record. The

$10,000 cash transfers to the children in 1985 and 1986 were

completed gifts when the checks were paid by the drawee on

December 17, 1985, and January 14, 1986, respectively.15

Section 2503(b) does not exclude from taxable gifts the amount

by which the sum of the value of the one-ninth interest in

decedent's life estate plus the $10,000 in cash transferred to

each child exceeds $10,000.

Respondent's Additional Arguments Regarding the Annual Gifts
to the Eight Weinstock Trusts

Although we have concluded that the annual gifts to the

decedent's children and her daughter-in-law were gifts of present

13
The 1985 and 1986 deeds are undated except for the
year.
14
The age of decedent on the dates on which the interests
in the Weinstock Residence were transferred will determine the
value of those interests. See supra note 4; sec. 20.2031-
7A(d)(6), Estate Tax Regs.
15
A gift made by check is not complete until the check is
honored by the drawee. See discussion supra Issue 3.
 -28-

interests, respondent raises an additional issue whether the

transfers decedent made in trust were gifts of present interests.

The trustees of the eight Weinstock Trusts are Jack and

Lewis. The beneficiaries of the Weinstock Trusts, and their ages

at the time of the 1985 transfers in trust, were Lewis's

children: Richard, Lewis, Jr., and Lynn, age 22, 21, and 15,

respectively; Betty's children: Jeffrey, Alan, and Richard, age

23, 21, and 18, respectively; and Jack's children: Beth and

Carolyn, age 9 and 6, respectively.

The eight Weinstock Trusts were identical except for the

name of the beneficiary and in Paragraph II(a) each trust

provided the beneficiaries the legal right to make a demand upon

the trustees for payment up to the value of any gifts transferred

to the trust during the year of the transfer. Respondent,

however, contends that the gifts were not gifts of present

interests for two additional reasons: (1) The beneficiaries were

not provided written notice of the gifts and their right to

withdraw as required by the trust (the notice issue); and (2)

decedent and the donees had an agreement that the beneficiaries

would not withdraw the gifts from the trusts (the agreement

issue). We disagree with respondent's contentions and address

them in order.

The seminal cases on the issue of whether a transfer in

trust is a gift of a present interest are Crummey v.

Commissioner, 397 F.2d 82 (9th Cir. 1968), affg. in part and
 -29-

revg. on this issue T.C. Memo. 1966-144, and Estate of Cristofani

v. Commissioner, 97 T.C. 74 (1991).

In Crummey v. Commissioner, supra, the settlors created an

irrevocable living trust for the benefit of their four children,

some of whom were minors. The trust provided that the trustee

could receive any real or personal property from the trustors or

anyone else or any other source. With respect to such additions

to the corpus, each child was given an absolute power to withdraw

up to $4,000 in cash by making a written demand upon the trustee

prior to the end of the calendar year of the addition.

Relying on this power, the settlors claimed the section

2503(b) exclusion on transfers of property to the trust for each

trust beneficiary. Respondent allowed the exclusion with respect

to the gifts in trust for the beneficiaries who were adults, but

disallowed the exclusion for the minor beneficiaries. The ground

for the disallowance was that the minors' powers were not gifts

of present interests.

In deciding whether the minor beneficiaries received a

present interest, the Court of Appeals for the Ninth Circuit

specifically rejected any test based upon the likelihood that the

minor beneficiaries would actually receive present enjoyment of

the property. In fact, the court stated that "it is likely that

some, if not all, of the beneficiaries did not even know that

they had any right to demand funds from the trust." Id. at 88.

Instead, the court concluded that all exclusions should be
 -30-

allowed under the test in Perkins v. Commissioner, 27 T.C. 601

(1956), or the "right to enjoy" test in Gilmore v. Commissioner,

213 F.2d 520 (6th Cir. 1954), revg. 20 T.C. 579 (1953). Crummey

v. Commissioner, supra at 88. The Court of Appeals interpreted

Perkins to hold that all that is necessary is to find that the

demand could not be "legally resisted." Id.

The Notice Issue

The Weinstock Trusts require that whenever any transfer of

property is made to the trusts, the trustee shall give written

notice to the beneficiary of his or her withdrawal rights.

However, neither Jack nor Lewis ever gave the adult

beneficiaries, or the parents of the minor beneficiaries, written

notice. The trustees' failure to comply with this trust

provision, however, does not require a finding that the

beneficiaries did not have present interests in the gifts.

The sufficiency of the notice given the beneficiaries is a

factor in the likelihood that the right of withdrawal will be

exercised; it is not a factor in the legal right to demand

payment from the trustee. Crummey v. Commissioner, 397 F.2d at

88; Estate of Cristofani v. Commissioner, supra at 80-81.

Furthermore, during the years of the transfers, the only minor

beneficiaries of the Weinstock Trusts were the children of the

trustees.16 We do not think that the failure of a trustee to

16
In general, the age of legal majority in the State of
(continued...)
 -31-

give written notice to himself should require a finding that

notice was not given.

Finally, convincing testimony was heard at trial that the

adult beneficiaries were given actual notice of the gifts and

their right to immediately withdraw the money. For instance,

Richard Holland, the adult son of Lewis, testified that he did

not receive written notice of the gifts, but that he discussed

the gifts with decedent, as well as with Jack, and he was aware

that he had the use of the money if he wanted it.

The Agreement Issue

In Estate of Cristofani v. Commissioner, supra, this Court

held in a reviewed decision that the donor's transfers in trust

for her minor grandchildren, who held unexercised demand rights

and contingent remainder interests in the trust, qualified as

gifts of present interests under section 2503(b). Following the

decision of the Court of Appeals for the Ninth Circuit in Crummey

v. Commissioner, supra, we stated that the correct test in

deciding whether the minor beneficiaries received a present

interest is whether they have a legal right to make a demand for

16
(...continued)
Georgia is 18 years. Ga. Code Ann. sec. 39-1-1(a) (1988). An
exception to this general rule is the definition of "minor" under
The Georgia Transfers to Minors Act (the Act). Under the Act,
the term "minor" means an individual who has not yet attained the
age of 21 years. Ga. Code Ann. sec. 44-5-111(11) (1988); 1972
Ga. Laws, sec. 10. Neither party in this action submitted
evidence that the transfers in trust were made in conformity with
the Act. In view of this lack of evidence, we are unwilling to
assume an exception to the general rule for the transfers at
issue.
 -32-

payment upon the trustee; not whether it is likely that the minor

beneficiary is to receive any present enjoyment of the property.

Id. at 80-81. Furthermore, we found no agreement or

understanding between the grantor, the trustees, and the

beneficiaries17 that the grandchildren would not exercise their

withdrawal rights following a contribution to the children's

trust. Id. at 77, 83.

In Estate of Cristofani the transfers at issue were the

transfers in trust to the secondary beneficiaries who had only

contingent remainder interests in the trusts. The interests in

issue in the instant case, however, are the interests of the

primary beneficiaries, whose interests are not contingent. Thus,

Estate of Christofani is distinguishable from the case at bar.

That distinction notwithstanding, we agree with respondent

that if the beneficiaries, trustees, and donor had an agreement

or understanding that limited the ability, in a legal sense, of

the beneficiaries to exercise their right to withdraw trust

corpus, then the beneficiaries may not have received gifts of a

present interest.

Respondent contends that there was an agreement between the

decedent, the trustees, and the beneficiaries that denied the

trust beneficiaries a present interest in the transfers. In

17
In Estate of Cristofani v. Commissioner, 97 T.C. 74
(1991), the children of the grantor were the trustees and also
the primary trust beneficiaries. The grandchildren of the
grantor were the children of the trustees and also were the
contingent remainder beneficiaries. Id. at 75-76.
 -33-

respondent's view, the fact that the family discussed how the

children would use the gifts prior to decedent's making the

transfers, and then pooled the gifts to buy a CD that Jack

pledged as security for his guarantee, is evidence of this

agreement. We disagree.

There is no evidence to support a finding that the donees'

legal ability to demand payment from the trustees was limited by

their informal agreement to purchase a CD after the gifts were

made. Nor is there any evidence that decedent would not have

made the gifts to any donee who did not agree to invest rather

than spend the gift.

To the contrary, the facts of this case support a finding

that the family was investment orientated, that they discussed

various investment choices, and they agreed that the best choice

was to pool their gifts to purchase a larger CD that paid a

higher rate of interest than the rate they would have received if

they had each bought a smaller CD in the amount of the individual

gifts. The fact that Jack was able to pledge the CD after the

donees purchased it to lower decedent's cost of borrowing in no

way limited the donees' legal ability to demand payment from the

trustees before the CD was purchased.

We hold, therefore, that the $10,000 annual transfers

decedent made to each of the eight Weinstock Trusts in 1985,

1986, 1987, and 1988, were transfers of present interests.
 -34-

Issue 3. Whether 12 Checks Decedent Wrote and Delivered to Her
Agent 4 Days Before She Died Were Completed Gifts; If Not,
Whether the Checks Are Claims Against the Estate That May Be
Deducted Under Section 2053

Decedent intended to make gifts of $10,000 to each of her

children and grandchildren during 1989. On November 21, 1989,

she wrote 12 checks, each for $10,000 (total $120,000), and gave

them to her son, Jack, to deliver to the donees. Unlike the

gifts she made in prior years, these checks were made to each of

the donees personally, and none were payable to the Weinstock

Trusts. At the time decedent wrote the checks, she had $89,799 in

her checking account. Jack placed the checks in his desk at home

for safekeeping, and then went to Florida with his family for

Thanksgiving. Jack intended to arrange a bank loan for the

amount of the checks when he returned, and then to deliver the

checks to the donees.

On November 25, 1989, while Jack was still in Florida,

decedent was killed in an automobile accident. After the demise

of decedent, Jack replaced the 12 checks signed by decedent with

12 new checks drawn on the estate account, which he signed as a

coexecutor.18 Jack delivered the replacement checks to the 12

payees of the checks signed by decedent, and the payees cashed

these replacement checks. The 12 checks signed by decedent were

never delivered to the intended donees nor deposited, and

18
The $10,000 check to Jack was written and signed by his
brother, Lewis, who was also an executor of the estate.
 -35-

remained in Jack's possession. Petitioner excluded the amount of

the 12 checks, $120,000, from the value of the estate in the

Federal estate tax return filed on February 25, 1991.

Respondent determined that decedent died before the transfer

of the 12 checks was completed, and that the $120,000 is

therefore includable in the value of the estate. Petitioner

asserts that the gifts were completed when decedent handed the

checks to Jack for delivery, are nontaxable gifts under section

2503(b), and were, therefore, properly excluded from the estate.

In the alternative, petitioner asserts that the total amount of

the checks is allowed as a deduction under section 2053(a)(3) as

a claim against the estate.

Section 2001 imposes a tax on the transfer of the taxable

estate of all citizen and resident decedents. Section 2051

defines taxable estate as the gross estate less deductions. "The

value of the gross estate shall include the value of all property

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

of his death." Sec. 2033. Whether decedent had an interest in

property at the time of her death is governed by State law.

Estate of Gamble v. Commissioner, 69 T.C. 942, 948 (1978).

Petitioner has the burden of proof. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

The issue is whether the amounts represented by the checks

issued by decedent 4 days before her death, but not paid until

after her death, are properly excludable from the gross estate.
 -36-

Respondent's regulations provide:

The amount of cash belonging to the decedent at the date of
death, whether in his possession or in the possession of
another, or deposited with a bank, is included in the
decedent's gross estate. If bank checks outstanding at the
time of decedent's death and given in discharge of bona fide
legal obligations of the decedent incurred for an adequate
and full consideration in money or money's worth are
subsequently honored by the bank and charged to the
decedent's account, the balance remaining in the account may
be returned, but only if the obligations are not claimed as
deductions from the gross estate. [Sec. 20.2031-5, Estate
Tax Regs.]

Whether the Gifts Were Complete

We turn now to the question as to whether under State law

the gifts were completed prior to decedent's death so as to

exclude the amounts involved from her estate. The elements of a

valid gift are: Intention to give; a renunciation of the right

of ownership by the giver without power of revocation; and

delivery of the possession by the giver to the recipient.

Upchurch v Upchurch, 45 S.E.2d 855, 856 (Ga. Ct. App. 1947).

Under Georgia law, to constitute a valid inter vivos gift the

following criteria must be met: (1) the donor must intend to give

the gift; (2) the donee must accept the gift; and (3) the gift

must be delivered or some act which under law is accepted as a

substitute for delivery must be done. Ga. Code Ann. sec. 44-5-80

(1991); NeSmith v. Ellerbee, 416 S.E.2d 364, 366 (Ga. Ct. App.

1992).

Whether the third criterion, delivery, has been met is in

dispute. Failure of delivery invalidates the gift. Furthermore,
 -37-

without valid delivery, the intent of the donor may be in

question.

In any event, a delivery to be sufficient to support a gift

must be absolute and unqualified; it must vest the donee with,

and divest the donor of, control and dominion over the property.

Ansley v. Sunbelt Invs. Realty , Inc., 337 S.E.2d 448, 450 (Ga.

Ct. App. 1985). It is well settled that if a donor retains a

power of revocation, a valid inter vivos gift cannot be

completed. Stewart v. Stewart, 186 S.E.2d 746, 747 (Ga. 1972);

Guest v. Stone, 56 S.E.2d 247 (Ga. 1949); see also Drake v.

Wayne, 184 S.E. 339, 342 (Ga. Ct. App. 1936) ("A delivery of

property subject to be reclaimed by the donor at any time prior

to his death, * * *, does not constitute a valid gift inter

vivos.").

Under the facts of this case, the checks are not valid inter

vivos gifts due to the failure of delivery. Georgia law provides

that a customer may stop payment of a check drawn on the

customer's account prior to action by the drawee. Ga. Code Ann.

sec. 11-4-403 (1991); Hardeman v. State, 268 S.E.2d 415, 417 (Ga.

Ct. App. 1980); Fulton Natl. Bank v. Delco Corp., 195 S.E.2d 455

(Ga. Ct. App. 1973); Mason v. Blayton, 166 S.E.2d 601, 603 (Ga.

Ct. App. 1969); Stewart v. Western Union Tel. Co., 64 S.E.2d 327,

329 (Ga. Ct. App. 1951). Due to her power to stop payment of the

checks before the bank paid them, decedent retained the power to

revoke the gifts; thus, the funds still belonged to her. Because
 -38-

decedent had not relinquished complete dominion and control over

the funds before her death, the checks were not completed gifts.

Burnett v. Guggenheim, 288 U.S. at 286 (a gift is not consummate

until put beyond recall); sec. 25.2511-1(g)(1), Gift Tax Regs.

Moreover, there were insufficient funds in decedent's

account to cover the checks when they were written and when she

died. She could not have intended to relinquish control until

the borrowed funds were deposited in her account. See also

Estate of Dillingham v. Commissioner, 88 T.C. 1569, 1576 (1987)

(checks not cashed until 35 days after delivery to donees,

without explanation of the reason for the delay, casts doubt as

to whether the checks were unconditionally delivered, or whether

decedent had sufficient funds to cover the checks at the time

they were delivered), affd. 903 F.2d 760 (10th Cir. 1990).

Despite our holding that decedent retained control over the

checks, petitioner may still prevail if we agree that payment of

the replacement checks relates back to the delivery of the

original checks.

In Estate of Gagliardi v. Commissioner, 89 T.C. 1207 (1987),

we addressed the question of whether the relation-back doctrine

should apply to checks that were not cashed until after the

donor's death. Id. at 1211. Assuming the date of payment of the

checks related back to the date the checks were issued (prior to

the donor's death), the amount of the checks would be excluded

from the donor's Federal gross estate.
 -39-

We held in Estate of Gagliardi that the relation-back

doctrine does not apply where a check made payable to a

noncharitable donee is not cashed prior to the donor's death.

Id. at 1212.

However, in Estate of Metzger v. Commissioner, 100 T.C. 204

(1993), affd. 38 F.3d 118 (4th Cir. 1994), we found no reason for

refusing to apply the relation-back doctrine to noncharitable

gifts where the taxpayer is able to establish: (1) The donor's

intent to make a gift, (2) unconditional delivery of the check,

and (3) presentment of the check within the year for which

favorable tax treatment is sought and within a reasonable time of

issuance. Thus, giving due consideration of all the facts and

circumstances, we concluded that the checks in question in Estate

of Metzger were unconditionally delivered to the donees in the

year issued. Id. at 215.

In Estate of Metzger, unlike the case at bar, the donor was

alive at the time the checks were presented to the bank for

payment, the donor had sufficient funds in his account to pay the

checks, and the donees presented the checks for payment within

the year for which the favorable tax treatment was sought.

In the case at bar, decedent died before delivery was made

to the donees, decedent did not have sufficient funds in

her account to pay the checks, and the checks issued by decedent

were never presented to the bank for payment. Moreover, none of

the factors enumerated in Estate of Metzger that must all be
 -40-

present for the relation-back doctrine to apply are present in

the instant case. We, therefore, can find no support in Estate

of Metzger for petitioner's assertion that the checks decedent

gave to Jack to deliver to her donees were completed gifts

excludable under section 2503(b) at the time she gave them to

Jack.

Considering all the facts and circumstances, we conclude

that under the law of the State of Georgia the 12 $10,000 checks

issued by decedent were incomplete gifts at the time of her death

and that the 12 replacement checks cashed by the donees do not

relate back to the date decedent issued the original checks.

Whether the Checks Were Debts

Petitioner asserts in the alternative that if the checks

were not completed gifts, then they were debts owed by decedent

at the time of her death, and therefore are deductible as a claim

against the estate.

Section 2053(a) provides that the value of the gross estate

shall be determined by deducting from the value of the gross

estate the amount of the claims against the estate as are

allowable by the laws of the jurisdiction under which the estate

is being administered. Sec. 2053(a)(3). Only claims

representing enforceable, personal obligations of the decedent

existing on the date of the decedent's death are deductible as

claims against the estate. Sec. 20.2053-4, Estate Tax Regs.

Further, in order to be deductible under section 2053(a)(3),
 -41-

claims against the estate founded on a promise or agreement must

be "contracted bona fide and for an adequate and full

consideration in money or money's worth". Sec. 2053(c)(1)(A).

One purpose of the consideration requirement of section 2053(c)

is to prevent decedents from reducing their taxable estates for

Federal estate tax purposes by reflecting in contractual form

transfers which serve a donative intent. United States v. Stapf,

375 U.S. 118, 130-133 (1963); Bank of New York v. United States,

526 F.2d 1012, 1016 (3d Cir. 1975). Situations in which estate

tax deductions have been allowed under section 2053(a)(3) for

payments made to family members typically involve arm's-length

agreements that are supported by actual consideration, not by

mere donative intent. Estate of Huntington v. Commissioner, 100

T.C. 313, 316 (1993), affd. 16 F.3d 462 (1st Cir. 1994).

Petitioner offered no evidence that the checks were

"contracted bona fide and for an adequate and full consideration

in money or money's worth". Sec. 2053(c)(1)(A). To the

contrary, the facts show clearly that decedent intended the

checks to be gifts. The intent to make a gift is not an intent

to create a bona fide debt. Estate of Labombarde v.

Commissioner, 58 T.C. 745, 755 (1972). Although section 25.2511-

1(g)(1), Gift Tax Regs., provides that donative intent is not an

essential element on the part of the transferor for the

application of the gift tax to the transfer, it is also true that

"A gift in the statutory sense, * * * , proceeds from a 'detached
 -42-

and disinterested generosity,' * * * 'out of affection, respect,

admiration, charity, or like impulses,'" Commissioner v.

Duberstein, 363 U.S. 278, 285 (1960) (quoting Commissioner v.

LoBue, 151 U.S. 243, 246 (1956) and Robertson v. United States,

343 U.S. 711, 714 (1952)), which precludes a bargained-for

exchange supported by adequate and full consideration in money or

money's worth. Thus, we cannot find that the checks represent

intended payment of a bona fide debt of decedent.

We find that the 12 $10,000 checks were intended to be

gifts, and were, by the law of the State of Georgia, incomplete

gifts. As incomplete noncharitable gifts, the intended transfers

cannot create a claim against the estate. See Estate of

Gagliardi v. Commissioner, 89 T.C. at 1212-1213. We hold,

therefore, that the $120,000 was improperly excluded from the

value of the estate.

Issue 4. Whether the Transfer of $100,000 From the J. Kurt
Holland Residual Trust to Decedent Created a Debt That is
Deductible Under Section 2053

J. Kurt Holland (Holland), decedent's spouse, died on August

15, 1979. He created by will a marital deduction trust (The

Marital Trust) and a residual trust (The J. Kurt Holland Residual

Trust). The Marital Trust was created to receive the fractional

share of Holland's residuary estate which should equal the

maximum marital deduction allowable in determining the Federal

estate tax upon his estate, reduced by certain other dispositions

of his property. The J. Kurt Holland Residual Trust (the JKH
 -43-

Trust) was created to receive the residue and remainder of

Holland's estate not allocated to the Marital Trust. The

trustees of the JKH Trust were authorized to encroach upon the

corpus for the benefit of decedent, and to borrow or lend money

in the execution and management of Holland's estate or

testamentary trusts. Furthermore, the will provided that all

encroachments and distributions from the trusts were to be free

of interest.

The trustees of the JKH Trust were decedent, Lewis, and

Jack. The Holland will further provided that upon the death of

decedent, the corpus and the undistributed income of the JKH

Trust were to be divided into equal shares for Lewis, Betty, and

Jack. All of the taxable income of the JKH Trust was distributed

to decedent annually during her lifetime and included in her

taxable income.

On August 6, 1989, and again on September 25, 1989, the JKH

Trust issued checks in the amount of $50,000 payable to decedent.

The checks were deposited into an account called the Carolyn W.

Holland Special Dividend Account (the Special Account). This

account was established to receive the income from investments

owned by decedent; the account was owned by decedent, but it was

controlled by Jack.

Neither of the foregoing transfers were repaid by decedent

prior to her death on November 25, 1989. On December 18, 1989,

the executors transferred $50,000 to the JKH Trust to repay the
 -44-

August 6, 1989, transfer; the value of the gross estate was

reduced by this amount. The executors reported $50,000 on the

Form 706 as a claim against the estate for the September 25,

1989, transfer; this amount has not yet been repaid.

Respondent determined that decedent's gross estate should

not be reduced by the $50,000 reported on the Form 706, because

repayment of the transfer is not a personal obligation of

decedent that is enforceable under the jurisdiction in which the

estate is administered. Petitioner asserts the $50,000

transferred to decedent on August 6, 1989, was a loan that she

was obligated to repay. By an amendment to its petition,

petitioner increased the amount of the claimed deduction by

$50,000 to include the transfer on September 25, 1989, which it

asserts was also a loan that decedent was obligated to repay.

Respondent, in the answer to petitioner's amendment, denied the

increase on the same ground as the denial of the original amount.

As discussed before in this opinion, section 2053

provides that the value of the gross estate shall be determined

by deducting from the value of the gross estate the amount of the

claims against the estate as are allowable by the laws of the

jurisdiction under which the estate is being administered. Sec.

2053(a)(3). "The amounts that may be deducted as claims against

a decedent's estate are such only as represent personal

obligations of the decedent existing at the time of his death
 -45-

* * * Only claims enforceable against the decedent's estate may

be deducted." Sec. 20.2053-4, Estate Tax Regs. Further, in

order to be deductible under section 2053(a)(3), claims against

the estate founded on a promise or agreement must be "contracted

bona fide and for an adequate and full consideration in money or

money's worth". Sec. 2053(c)(1)(A).

At the outset, we note that the fact that the estate paid

the JKH Trust $50,000 after the date of decedent's death is not

evidence that the earlier transfer created bona fide debt, nor is

the fact that the estate did not pay $100,000 evidence that the

additional $50,000 was not bona fide debt. Propstra v. United

States, 680 F.2d 1248, 1255 (9th Cir. 1982). "The law is clear

that post-death events are relevant when computing the deduction

to be taken for disputed or contingent claims." Id. at 1253.

The estate of decedent, however, did not contest or dispute the

claim. Thus, the post-death events, i.e., the repayment of one

$50,000 transfer and the non-repayment of the other, are not

relevant in computing the amount of the deduction to be taken for

the alleged debt.

Furthermore, "when claims are for sums certain and are

legally enforceable as of the date of death, post-death events

are not relevant in computing the permissible deduction." Id. at

1254. Thus, the threshold determination to be made under section

2053(a)(3) is whether the claim in question was certain and

enforceable at the time of the decedent's death. Id.
 -46-

It is incontrovertible that decedent received the $100,000

from the JKH Trust. Thus, the issue before this Court is

whether, under State law, the trust's claim is an enforceable,

personal obligation of decedent that was contracted bona fide.

Under the law of the State of Georgia, whenever one person,

by contract or law, is liable and bound to pay another an amount

of money, certain or uncertain, the relation of debtor and

creditor exists between them. Ga. Ann. Code sec. 18-2-1 (1988).

To constitute a valid contract, there must be parties able to

contract, a consideration moving to the contract, the assent of

the parties to the terms of the contract, and a subject matter

upon which the contract can operate. Ga. Ann. Code sec. 13-3-1

(1982); Associated Muts. v. Pope Lumber Co., 37 S.E.2d 393, 396

(Ga. 1946). Until each party has assented to all the terms,

there is no binding contract. Ga. Ann. Code sec. 13-3-2 (1982).

The essence of mutual assent is the meeting of the minds of the

parties. Taylor Lumber Co. v. Clark Lumber Co., 127 S.E. 905,

906 (Ga. Ct. App. 1925). Both parties must concur in all terms

of the proposed contract, agreeing to the same thing in the same

sense. Associated Muts. v. Pope Lumber Co., supra at 398.

A transfer of money is a loan for Federal income tax

purposes if, at the time the funds were transferred, the

transferee unconditionally intended to repay the money, and the

transferor unconditionally intended to secure repayment. Haag v.

Commissioner, 88 T.C. 604, 616 (1987), affd. without published
 -47-

opinion 855 F.2d 855 (8th Cir. 1988); Litton. Bus. Sys., Inc. v.

Commissioner, 61 T.C. 367, 377 (1973); see also Haber v.

Commissioner, 52 T.C. 255, 266 (1969), affd. 422 F.2d 198 (5th

Cir. 1970); Saigh v. Commissioner, 36 T.C. 395, 419 (1961).

Thus, before the value of decedent's estate may be reduced

for the alleged debt, petitioner must prove that at the time of

each transfer, decedent and the JKH Trust agreed that decedent

would borrow $50,000, that decedent unconditionally intended to

repay that amount to the JKH Trust, and that the JKH Trust

intended to unconditionally secure repayment. Rule 142(a); Welch

v. Helvering, 290 U.S. at 115.

The determination of whether a transfer was made with a real

expectation of repayment and an intention to enforce the debt

depends on all the facts and circumstances including whether: (1)

There was a promissory note or other evidence of indebtedness,

(2) interest was charged, (3) there was security or collateral,

(4) there was a fixed maturity date, (5) a demand for repayment

was made, (6) any actual repayment was made, (7) the transferee

had the ability to repay, (8) any records maintained by the

transferor and/or the transferee reflected the transaction as a

loan, and (9) the manner in which the transaction was reported

for Federal tax is consistent with a loan. See Zimmerman v.

United States, 318 F.2d 611, 613 (9th Cir. 1963); Estate of

Maxwell v. Commissioner, 98 T.C. 594, 604 (1992), affd. 3 F.3d

591 (2d Cir. 1993); Estate of Kelley v. Commissioner, 63 T.C.
 -48-

321, 323-324 (1974); Rude v. Commissioner, 48 T.C. 165, 173

(1967); Clark v. Commissioner, 18 T.C. 780, 783 (1952), affd. 205

F.2d 353 (2d Cir. 1953). The factors are not exclusive, and no

one factor controls. Rather, our evaluation of the various

factors provides us with an evidential basis upon which we make

our ultimate factual determination of whether a bona fide

indebtedness existed. See Estate of Maxwell v. Commissioner,

supra at 604; Litton Bus. Sys., Inc. v. Commissioner, supra.

With the foregoing factors in mind, we turn to the facts and

circumstances surrounding the transfers at issue to determine

whether at the time of each transfer decedent entered into a bona

fide creditor-debtor relationship with the JKH Trust.

1. Promissory Note or Other Evidence of Indebtedness With
Respect to the Transfers at Issue.

Decedent never signed any promissory notes with respect to

the transfers at issue. While it is true that decedent never

executed a note or other singular debt instrument, we do not

consider the absence of such instrument a significant factor in

this particular case. It is quite clear that a valid debt may

exist between parties even where no formal debt instrument

exists. Litton Bus. Sys., Inc. v. Commissioner, supra. This is

particularly true in the case of related parties since formal

debt paraphernalia of this type in a closeknit family are not

necessary to insure repayment as the case may be between

unrelated entities. Id. at 377-378.
 -49-

2. Interest on the Transfers.

Neither the transfer on August 6, 1989, nor the transfer on

September 25, 1989, was to bear interest. While it is true that

neither transfer was subject to interest, we do not consider the

absence of interest to be a significant factor in this case.

Holland's will provided that all encroachments and distributions

of trust corpus were to be interest free; thus, Jack as cotrustee

was not empowered to charge decedent interest on the transfers.

3. Security or Collateral for the Transfers.

Decedent owned a one-half undivided interest as a tenant-in-

common with her sister in a new condominium which they bought in

1988. Decedent gave a mortgage on the condominium to First

National to secure a loan for $350,000, and Jack transferred the

$100,000 at issue to her so that she could pay for improvements

to it. Although the improvements were completed prior to her

death, petitioner and respondent agreed that the fair market

value of decedent's interest in the condominium at her death was

only $300,000. Therefore, the condominium could not have secured

her debt with First National and also the $100,000 transfer from

the trust.

Furthermore, decedent's prior loans to First National, which

totaled $600,000, were paid from her share of the proceeds from

the sale of the entire Weinstock property. Thus, except for some

cash remaining from her share of the proceeds from that sale, and

some stocks and bonds, decedent had no other assets to use as
 -50-

collateral for the transfers. None of these assets, however,

were pledged as security or collateral for the transfers.

Indeed, there is no evidence that either of the cotrustees ever

even asked decedent to secure or collateralize the transfers.

4. Fixed Maturity Date for Repayment.

There was no fixed date for repayment of the transfers.

Jack testified that he intended to transfer money from the

Special Dividend Account to the JKH Trust as the funds came in

and became available. However, there is no evidence that

decedent was aware of Jack's intention, or that she intended to

repay the transfers.

5. Demand for Repayment of the Transfers.

Consistent with the preceding factor, no demand for payment

was made by either of the cotrustees.

6. Actual Repayments.

Except for the payment on December 18, 1989, which was made

after the death of decedent, no payments were made with respect

to these transfers. Neither decedent nor her agent made payments

to the JKH Trust for either of these transfers while she was

alive.

7. Decedent's Ability to Repay.

Jack testified that he expected decedent to receive an

income tax refund of $60,000, and that he intended to apply it to

repayment of the transfers. He expected the balance of the

transfers to be repaid with the income from the stocks and bonds
 -51-

owned by decedent. However, the record does not establish that

decedent's income was sufficient to cover all of her personal

living expenses, and her obligations to First National, and her

other expenses, and also to permit her to accumulate sufficient

assets to repay the $100,000 transferred to her. Rather, the

regular and continuous borrowing of decedent is an indication

that her annual income was not sufficient to allow her to

maintain her lifestyle and repay her obligations.

Notwithstanding decedent's insufficient income as a source

of repayment, the record shows that decedent owned sufficient

assets to repay the transfers. There is no indication in the

record, however, that the cotrustees would or could have required

decedent to sell or mortgage those assets for that purpose.

On the record before us, petitioner has failed to establish

that, at the times in 1989 when Jack, as cotrustee of the JKH

Trust, transferred $50,000 (total $100,000) to decedent, he

reasonably believed that she would be able to repay those amounts

on demand.

8. Records of the Transfers as a Loan.

The only records relating to the transfers at issue that

indicate the transfers were loans is the one word notation,

"Loan", that Jack made on each of the checks. Furthermore, as

Jack deposited the checks into the Special Dividend Account

without her endorsement, there is no evidence that decedent ever
 -52-

saw or was otherwise aware that the checks had the word "Loan"

written on them.

Finally, it was only after respondent determined the gross

estate should not be reduced for the $50,000 actually paid to the

JKH Trust that the executors realized there were two transfers of

$50,000 to decedent. This is persuasive evidence that neither

the trustees of the JKH Trust nor decedent's agent ever recorded

the transfers as loans.

9. Reporting the Transactions for Federal Tax Consistent with a
Loan.

Petitioner reduced the value of the gross estate for the

$50,000 actually paid by the executors to the JKH Trust, and for

the $50,000 claimed as a debt owed by decedent. However, it was

only after respondent determined that the gross estate was

improperly reduced for the $50,000 actually paid to the JKH Trust

that petitioner amended its petition to include the second

transfer of $50,000 as a debt of decedent.

Based on our examination of the entire record, we find that

petitioner has not established that decedent entered into a bona

fide creditor-debtor relationship with the JKH Trust at the time

of the transfers at issue. We find that petitioner has failed to

satisfy its burden of proving that the transfers at issue

constituted loans or that decedent knew or had any notice that

the amounts she received from the JKH Trust were subject to

repayment. See Estate of Caplan v. Commissioner, 42 T.C. 446,
 -53-

454 (1964) (Court upheld disallowance of section 2053 deduction

for amount allegedly owed by deceased taxpayer to deceased

spouse's estate; no evidence of an express or implied promise to

repay; no proof that deceased taxpayer knew the amounts drawn by

trustee for her benefit on Special Account were not her own),

affd. sub nom. Levin v. Commissioner, 355 F.2d 987 (5th Cir.

1966). We therefore sustain respondent's determinations in this

issue.

Issue 5. Whether the Present Value of the Cost of Maid Service
for 5 Years May Be Deducted From the Value of the Estate as an
Administration Expense

At the time of her death, decedent owned an undivided one-

half interest in a condominium as a tenant-in-common with Mrs.

Nathan. The executors have not distributed decedent's interest

in the condominium, nor have they offered decedent's interest in

the condominium for sale, and out-of-town guests stay there from

time to time.

Decedent and Mrs. Nathan each employed maids; decedent had

employed her maid, Mary, for 15 years prior to her death. Mrs.

Nathan continues to occupy the condominium and continues to

employ her own maid. The executors now employ Mary to clean and

wax decedent's furniture remaining in the condominium "just so

that it [doesn't] crack", and to do "whatever [is] needed to

maintain the property."

Petitioner deducted the present value amount of 5 years of

Mary's future services, $20,501, from the gross value of the
 -54-

estate as an administration expense.19 Petitioner reported this

expense on Schedule L of Form 706 as an expense incurred for the

"Maintenance, insurance, upkeep and cleaning of condominium at

[address]".20

Respondent determined that the value of the gross estate

should not be reduced for this amount because the expenses of

maintaining the condominium are the responsibility of the

surviving co-owner and the beneficiaries of decedent's estate and

as such are not required for the administration of it.

Petitioner asserts that an administration expense of $5,000

per year for preserving and maintaining an interest in property

valued at $300,000 is reasonable, and that the 5 years estimated

to distribute the property is not a protracted period of

administration under the particular circumstances.

Section 2053(a)(2) provides that administration expenses

shall be deducted from the value of the gross estate if they are

allowable by the laws of the jurisdiction under which the estate

is being administered. Section 20.2053-3(a), Estate Tax Regs.,

provides as follows:

The amounts deductible from a decedent's gross estate as
"administration expenses" * * * are limited to such expenses
as are actually and necessarily incurred in the
administration of the decedent's estate; that is, in the

19
The executors discounted at 7 percent five 50-week
years of $100 per week payments.
20
See supra note 2.
 -55-

collection of assets, payment of debts, and distribution of
property to the persons entitled to it. * * *. Expenditures

not essential to the proper settlement of the estate, but
incurred for the individual benefit of the heirs, legatees,
or devisees, may not be taken as deductions. Administration
expenses include * * * miscellaneous expenses. * * *

Thus, for the expense to be deductible, the regulations

require that in addition to the expense's being allowable under

the state law under which the estate is being administered, it

must also be "necessarily incurred" in the administration of the

decedent's estate.

The Federal Courts of Appeals are split over whether this

additional requirement is consistent with the statutory directive

to follow State law. See Estate of Papson v. Commissioner, 73

T.C. 290, 299 n.9 (1979), and the authorities cited therein. In

Marcus v. DeWitt, 704 F.2d 1227, 1229-1230 (11th Cir. 1983), the

Court of Appeals for the Eleventh Circuit, the court to which an

appeal in this case would lie, citing Pitner v. United States,

388 F.2d 651, 659 (5th Cir. 1967),21 stated that the law is well

established for the Eleventh Circuit that the State probate court

determination is not conclusive of whether an administration

expense is allowable for purposes of the Federal estate tax

deduction. Accordingly, in resolving this issue, we shall

21
See supra note 11.
 -56-

consider whether the expense was "necessarily incurred" as

required under respondent's regulations.

Section 20.2053-3(d)(1), Estate Tax Regs., provides:

Expenses necessarily incurred in preserving and distributing
the estate are deductible, including the cost of storing or
maintaining property of the estate, if it is impossible to
effect immediate distribution to the beneficiaries.
Expenses for preserving and caring for the property * * *
may not be allowed for a longer period than the executor is
reasonably required to retain the property.

Therefore, in resolving the issue of whether the estimated

expense of maid service for 5 years is deductible from the value

of the gross estate we must find: (1) It is impossible to effect

immediate distribution of decedent's interest in the condominium

to the beneficiaries, and (2) the expense is necessarily incurred

in preserving the estate prior to distribution of property to the

persons entitled to it and not incurred for the individual

benefit of the heirs, legatees, or devisees.

At the time of trial of this case, decedent had been dead

for more than 5 years, and the executors of her estate had not

yet distributed her interest in the condominium to the

beneficiaries. Despite the extended length of time, petitioner

offered no evidence of any impediment to the distribution or sale

of the property that would explain the delay. Furthermore, Jack

testified that decedent's interest in the condominium was never

offered for sale.
 -57-

In arriving at the amount petitioner deducted for

administration expenses, Jack consulted with his accountants for

an estimate of the expense of maintaining the condominium. He

testified that the accountants advised him that it would require

approximately 5 years to determine the actual maintenance

expense. Although Jack testified how he arrived at the estimate

of the expense, he offered no persuasive evidence of why at the

time they filed the estate tax return the executors thought it

would require 5 years to dispose of the property, or of why the

distribution of the property has yet to take place. The fact

that petitioner deducted 5 years of estimated expenses for maid

service without the executors' seeking information as to how long

it would take to either distribute or sell the property, and that

the executors actually never offered the property for sale, is

evidence that the executors did not intend to distribute the

property.

Therefore, we cannot find that petitioner has met its

burden of proving that an immediate distribution of decedent's

interest in the condominium was impossible to effect.

Jack testified that Mrs. Nathan continues to live in the

condominium, and that out-of-town guests stay at the condominium

from time to time. Furthermore, although the deducted expenses

are for the maintenance of the condominium, Jack testified that

the maid's duties, which were coordinated by Mrs. Nathan with her

own maid's duties, were to clean and wax decedent's furniture
 -58-

remaining in the condominium "just so that it didn't crack", and

to do "whatever was needed to maintain the property."

On the Form 706, petitioner declared that the fair market

value of decedent's furniture and other personal property at the

date of her death was $18,330.22 Item Three of Decedent's will

provided that "All my household furniture and furnishings,

objects of art, silverware, jewelry, clothing, and other such

personal effects * * * I give and bequeath to my children who

survive me, to be divided as my Executor shall determine."

Therefore, petitioner has attempted to deduct the expense of

preserving furniture that decedent bequeathed to her children.

Petitioner offered no evidence of any impediment to the immediate

distribution of decedent's furniture.

On the basis of the evidence presented, we find that a

portion of the expense claimed as a deduction for the maintenance

of the real property was actually for the maintenance of

decedent's personal property bequeathed to her children. Thus,

the claimed expense is not deductible, because it inures to the

individual benefit of the heirs, legatees, or devisees.

22
The following property, and its value, were listed on
Schedule F of the Form 706: Bedroom furniture and decorations,
$10,440; Living room furniture, $4,850; Decorations, $1,540; and
Other personal property, $1,500. Petitioner conceded the value
of the Other personal property was actually $15,000, and that
reporting it at the lower value was the result of a typographical
error.
 -59-

Petitioner failed to present an allocation of the claimed

deduction between the expense of maintaining personalty

bequeathed to decedent's children, and the expense of maintaining

the condominium. Moreover, as the property is occupied by Mrs.

Nathan and the out-of-town guests, the evidence does not support

a finding that the portion of the expense allocable to the

maintenance of the condominium, if any, does not inure to the

benefit of the heirs, legatees, or devisees. We find, therefore,

that petitioner has failed to meet its burden of proving that any

portion of the claimed deduction for the expense of a maid is for

maintaining or preserving the condominium prior to its

distribution.23

Issue 6. Whether Petitioner is Subject to an Accuracy-Related
Penalty under Section 6662

We have found that petitioner erroneously reduced the value

of the gross estate for: inter vivos gifts of $120,000 that were

not completed prior to the death of decedent, nor deductible as

claims against the estate; debts totaling $100,000 for which

there was no evidence of indebtedness; and $20,501 as an expense

for the maintenance of property prior to distribution that the

23
Respondent introduced a letter into evidence that Jack
sent to the IRS in which he stated the $100 weekly payments were
retirement payments to "Mother's housekeeper who had been with
the family for over 15 years." We have found that the claimed
expense fails to meet the requirements of sec. 20.2053-3, Estate
Tax Regs. In so finding, we do not address the question of
whether the claimed deduction was actually for the expense of
employing the maid, or for paying her retirement income.
 -60-

executors never intended to distribute, and which inured to the

benefit of the heirs.

Respondent determined that petitioner is liable for the

penalty for negligence or intentional disregard of the rules or

regulations pursuant to section 6662. Petitioner asserts that it

was neither negligent nor intentionally disregarded the rules or

regulations.

Section 6662 provides for the imposition of a penalty equal

to 20 percent of the portion of an underpayment which is

attributable to negligence or disregard of the rules or

regulations. Sec. 6662(a), (b)(1). For purposes of the section,

the term "negligence" includes any failure to make a reasonable

attempt to comply with the Internal Revenue laws, a failure to

exercise ordinary and reasonable care in the preparation of a tax

return, and a failure to keep adequate books and records or to

substantiate items properly. Sec. 1.662-3(b)(1), Income Tax

Regs. Negligence is defined as a lack of due care or failure to

do what a reasonable and ordinarily prudent person would do under

the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). The term "disregard" includes any careless, reckless, or

intentional disregard of the rules or regulations. Sec. 6662(c).

Just as with respondent's determination of deficiency, his

determination of negligence or intentional disregard of the rules

or regulations is prima facie correct with the burden of proof to

the contrary on petitioner. Neely v. Commissioner, supra.
 -61-

Petitioner bears the burden of proving that respondent's

determinations are erroneous. Rule 142(a).

We find that petitioner was negligent with respect to the

positions it took on each of these items. Jack is an attorney

whose practice includes estate planning and general tax services;

therefore, he either knew or should have known that the claimed

items are not allowable.

Section 6664(c) provides that no penalty shall be imposed

under section 6662 with respect to any portion of an underpayment
 -62-

if it is shown that there was a reasonable cause for such

position and that the taxpayer acted in good faith with respect

to such position.

Under section 1.6664-4(b)(1), Income Tax Regs., the most

important factor in determining whether a taxpayer has acted with

reasonable cause and good faith is the extent of the taxpayer's

effort to assess the taxpayer's proper tax liability.

Circumstances that may indicate reasonable cause and good faith

include an honest misunderstanding of fact or law that is

reasonable in light of the experience, knowledge, and education

of the taxpayer. Id.

We have already found that the positions taken on the return

filed by Jack, an experienced attorney in tax matters, have no

support in fact or law. Nor can we find that the positions taken

on the return are the result of an honest misunderstanding of

fact or law that is reasonable in light of the experience,

knowledge and education of the taxpayer. Thus, considering all

the facts and circumstances, we do not find that petitioner acted

with reasonable cause and in good faith.

Petitioner asserts in the alternative, that the accuracy-

related penalty should not be imposed because it disclosed its

positions on the return.

No penalty under section 6662(b)(1) may be imposed on any

portion of an underpayment that is attributable to negligence if
 -63-

the position taken is adequately disclosed,24 the position is not

"frivolous", and the taxpayer has adequate books and records and

has substantiated items properly. Sec. 1.6662-3(c), Income Tax

Regs. A "frivolous" position with respect to an item is one that

is "patently improper". Sec. 1.6662-3(b)(3), Income Tax Regs.

Respondent's regulations provide two types of disclosure

under section 6662(b)(1): Disclosure in statements attached to

the return, sec. 1.6662-4(f)(1), Income Tax Regs., and disclosure

on the return, sec. 1.6662-4(f)(2), Income Tax Regs. Petitioner

did not attach a statement to its return; therefore, we look to

the disclosure on the return to decide whether disclosure was

adequate.

The Commissioner may by annual revenue procedure (or

otherwise) prescribe the circumstances under which disclosure of

information on a return in accordance with applicable forms and

instructions is adequate.25 Sec. 1.6662-4(f)(2), Income Tax

24
The Omnibus Budget Reconciliation Act of 1993 (the
Act), Pub. L. 103-66, sec. 13251, 107 Stat. 531, made certain
changes to the accuracy-related penalties in sec. 6662 for tax
returns due (without regard to extensions) after Dec. 31, 1993.
One of the changes was that the penalty for negligence in
sec. 6662(b)(1) may not be avoided by disclosure of a return
position. H. Conf. Rept. 103-66, at 668-669 (1993), 1993-3 C.B.
393, 546-547. However, the changes to the penalties for
negligence and disregard of the rules or regulations provided by
the Act do not apply to returns (including qualified amended
returns) filed on or before Mar. 14, 1994. Sec. 1.6662-2(d)(2),
Income Tax Regs. Jack, as executor, filed this estate tax return
on Feb. 18, 1991; thus, these changes are not applicable.
25
In deciding whether petitioner's disclosure was
(continued...)
 -64-

Regs. In Notice 90-20, 1990-1 C.B. 328, the Commissioner

provided guidance on which taxpayers may rely with respect to the

negligence portions of the accuracy-related penalty imposed under

section 6662(b)(1). According to the Notice, if the disclosure

was made on the return, the return had to contain the caption

"DISCLOSURE MADE UNDER SECTION 6662" at the top of the left

corner of the return and the caption had to refer to the page or

line number containing the disclosure.26 Id. at 329.

Furthermore, the disclosure had to be full and substantive and be

clearly identified as being made to avoid imposition of the

accuracy-related penalty. Id.

In addition to deciding whether petitioner's position on

each of the erroneously reported items was adequately disclosed,

we must also find that the position was not frivolous, and that

petitioner had adequate books and records and substantiated items

properly.

The Deduction for the $120,000 of Incomplete Gifts

We find that petitioner's position with respect to the

deduction for $120,000 of incomplete inter vivos gifts was

25
(...continued)
adequate, we note that the provisions of sec. 1.6662-4(f)(2),
Income Tax Regs., which permit disclosure in accordance with
annual revenue procedures for purposes of the substantial
understatement penalty, do not apply for purposes of the penalty
for negligence or disregard of rules or regulations. Sec.
1.6662-3(c)(2), Income Tax Regs.
26
Petitioner's Form 706 did not contain the required
caption. However, assuming noncompliance with the notice in this
regard is not outcome determinative, we consider the substance of
the disclosures.
 -65-

totally lacking in merit. As a matter of State law the gifts

were not completed prior to decedent's death. The issuance of

new checks by the executors is indicative that the executors were

aware that the original checks issued by decedent were not

negotiable. Thus, petitioner's position essentially is that the

gross value of the estate should be reduced for incomplete gifts;

this position is patently improper.

Furthermore, petitioner's argument that the checks are a

deduction from the gross value of the estate as a claim against

the estate pursuant to section 2053(a)(3) is similarly flawed.

To save petitioner from a finding that its position is not

patently improper, we would have to give credence to its argument

that a promise to make a gift to one's children based on love and

affection is a bargained-for exchange supported by adequate and

full consideration in money or money's worth. This we will not

do.

Moreover, Form 706 provides Schedule K for listing the debts

of the decedent. The 12 $10,000 checks were not disclosed on

Schedule K, or anywhere else on the Form 706, as debts owed by

decedent. Thus, we do not find the checks were adequately

disclosed as debts owed by decedent at the time of her death.

We hold, therefore, that petitioner is liable for the

accuracy-related penalty on the portion of any understatement of

tax required to be shown on the return with respect to its

position on the reduction of the gross value of decedent's estate

for the $120,000 of incomplete gifts.
 -66-

The $100,000 Alleged-Debt Deduction

Petitioner deducted $100,000 from the gross value of the

estate for alleged debts of decedent for which there was no

evidence of indebtedness. Furthermore, the return disclosed a

deduction for a debt of only $50,000. The disclosure exception,

therefore, could apply to only $50,000 of alleged debt.

The disclosure exception does not apply where the taxpayer

fails to keep adequate books and records or to substantiate items

properly. Jack is a cotrustee of the JKH Trust and was the

attorney and agent of decedent. He had a fiduciary duty to both

parties, yet he maintained essentially no records. He was unable

to present records of either decedent or the JKH Trust that would

support petitioner's position that decedent entered into a bona

fide creditor-debtor relationship with the JKH Trust at the time

of the transfers at issue.

We hold, therefore, that petitioner is liable for the

accuracy-related penalty for the portion of any understatement of

the tax required to be shown on the return with respect to its

position on the reduction of the gross value of decedent's estate

for the $100,000 of alleged debt.

The Deduction for Maid Service

Petitioner deducted $20,501 as an administration expense for

the maintenance of property prior to its distribution where the

facts show that the expense inured to the benefit of the heirs

and was not properly deductible as an expense of administration.
 -67-

Petitioner claimed this expense on Schedule L of Form 706 as an

expense incurred in administering property for the "Maintenance,

insurance, upkeep and cleaning of condominium at [address]".27

The mere listing of the deduction on the Form 706 does not

disclose the fact that the expense was based on the estimated

present value of 5 years of payments to a maid whose duties, at

least in part, included cleaning and waxing personalty bequeathed

to Lewis, Betty, and Jack. Reporting a deduction for the expense

of maintaining furniture and other personal property bequeathed

to decedent's children as an expense of maintaining the

condominium is misrepresentation, not disclosure.

We hold, therefore, that petitioner is liable for the

accuracy-related penalty for the portion of any underpayment of

the tax required to be shown on the return that is due to the

deduction claimed for the expense of waxing and cleaning

decedent's personal property.

Jack testified that the balance of the expense was for

paying the maid to do "whatever was needed to maintain the

property." Not disclosed on the return, however, was the amount

of the expense allocated for this purpose, or that the executors

did not intend to distribute the property or offer it for sale.

The mere listing of this expense on the Form 706 is not a

complete, full, and substantive disclosure. See Notice 90-20,

1990 1-C.B. at 329.

27
See supra note 2.
 -68-

We hold, therefore, that petitioner is liable for the

accuracy-related penalty for the portion of any underpayment of

the tax required to be shown on the return that is due to the

deduction for the expense of maintaining the condominium.

To reflect the foregoing,

Decision will be

entered under Rule 155.