Estate of Stone v. Comm'r

T.C. Memo. 2003-309

UNITED STATES TAX COURT

ESTATE OF EUGENE E. STONE, III, DECEASED, C. RIVERS STONE, E.E.
STONE, IV, MARY STONE FRASER & ROSALIE STONE MORRIS, CO-PERSONAL
REPRESENTATIVES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

ESTATE OF ALLENE W. STONE, DECEASED, C. RIVERS STONE, INDEPENDENT
EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 13647-01, 14195-01. Filed November 7, 2003.

John W. Porter, Stephanie Loomis-Price, and Robert E.

August, for petitioners.

J. Craig Young, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined deficiencies in

Federal estate tax (estate tax) with respect to the Estate of
 - 2 -

Eugene Earle Stone, III (Mr. Stone’s estate), and the Estate of

Allene W. Stone (Ms. Stone’s estate) in the amounts of $3,268,401

and $741,809, respectively. The only issue remaining for deci-

sion in the case of Mr. Stone’s estate is whether certain assets

owned by each of five family limited partnerships (Five Partner-

ships) are includible in his gross estate under section

2036(a)(1).1 We hold that none of the assets owned by any of

the Five Partnerships is includible in Mr. Stone’s gross estate

under section 2036(a)(1). There are two issues remaining for

decision in the case of Ms. Stone’s estate. The first issue is

whether certain assets owned by each of the Five Partnerships are

includible in her gross estate under section 2036(a)(1). We hold

that none of the assets owned by any of the Five Partnerships is

includible in Ms. Stone’s gross estate under section 2036(a)(1).

The second issue is whether certain assets owned by one of the

Five Partnerships is includible in Ms. Stone’s gross estate under

section 2044. We hold that none of the assets owned by that

partnership is includible in Ms. Stone’s gross estate under

section 2044.

FINDINGS OF FACT

Many of the facts have been stipulated and are so found

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect on the respective dates of
the deaths of Eugene Earle Stone, III (Mr. Stone), and Allene W.
Stone (Ms. Stone). All Rule references are to the Tax Court
Rules of Practice and Procedure.
 - 3 -

except as discussed below.

Mr. Stone was a resident of South Carolina at the time of

his death on June 5, 1997. Ms. Stone was a resident of South

Carolina at the time of her death on October 16, 1998.

Mr. and Ms. Stone had four children (children): Eugene

Earle Stone, IV, C. Rivers Stone, Rosalie Stone Morris (Ms.

Morris), and Mary Stone Fraser (Ms. Fraser). At the time the

respective petitions in these consolidated cases were filed,

Eugene Earle Stone, IV, C. Rivers Stone, and Ms. Fraser resided

in South Carolina, and Ms. Morris resided in Georgia.

In 1933, Mr. and Ms. Stone founded several successful

ventures in the apparel industry. Thereafter, at a time before

1976 not disclosed by the record, those ventures became Stone

Manufacturing Co. (Stone Manufacturing), a global manufacturer

and distributor of apparel, located in Greenville, South

Carolina. At least as early as the 1980s, Stone Manufacturing

focused on sports apparel and in particular soccer apparel.

In 1939, Mr. Stone purchased approximately 60 acres of real

property known as Cherrydale (Cherrydale property), located in

Greenville County, South Carolina, for the purpose of relocating

the manufacturing facilities of Mr. and Ms. Stone’s apparel-

industry business to that property. Shortly after purchasing the

Cherrydale property, Mr. and Ms. Stone began to use it, except

for the Cherrydale residence discussed below, as the location for
 - 4 -

the operations of that business.2

Around 1950, after having made the repairs necessary to make

it habitable, Mr. and Ms. Stone along with their children (col-

lectively, the Stone family) began residing in the house situated

on the Cherrydale property, which had been built in the 1840s.

(We shall refer to the house and the approximately four acres of

surrounding land on the Cherrydale property where the Stone

family began residing around 1950 as the Cherrydale residence.)

From at least as early as 1994 until their respective

deaths, Mr. Stone lived in North Carolina on a 582.672-acre

parcel of land located on certain real property known as Cedar

Mountain (Cedar Mountain property),3 and Ms. Stone lived in a

villa in The Cypress of Hilton Head (Cypress villa) on Hilton

Head Island, South Carolina.

By the late 1980s or the early 1990s, the Cherrydale resi-

dence had begun to deteriorate, although the Cherrydale property

was still being used as the location for Stone Manufacturing’s

2
Although not altogether clear from the record, it appears
that at some time after Mr. Stone purchased the Cherrydale
property he transferred that property, except for the Cherrydale
residence discussed below, to Stone Manufacturing.
3
Mr. and Ms. Stone’s Cedar Mountain property, located in
Little River Township, N.C., north of Greenville, S.C., consisted
at least as early as 1994 of a 582.672-acre parcel, a 1054.415-
acre parcel, and a .338-acre parcel, which they accumulated over
approximately a 50-year period. During that time, Mr. and Ms.
Stone carried out their vision of developing the Cedar Mountain
property by, inter alia, building various lakes and bridges and
at least one residence on that property.
 - 5 -

operations. Because those operations were in such close proxim-

ity to the Cherrydale residence, Mr. Stone and Stone Manufactur-

ing decided that that residence could serve as a place to house

out-of-town business visitors to its facilities. To that end, in

late summer 1995, renovation work commenced on the Cherrydale

residence and was completed in the fall of 1997. During that

renovation, the Cherrydale residence was uninhabitable.

In 1976, Mr. Stone formed Stones, Inc., as a holding company

of Stone Manufacturing and owned 100 percent of the common stock

of that holding company. (For convenience, we shall sometimes

refer to Stones, Inc., and Stone Manufacturing, separately and

collectively, as the Company.) From 1976 until April 1997, Mr.

Stone owned a preferred stock interest in Stones, Inc.

On December 30, 1976, Mr. Stone made a gift of 2,250 shares,

or 50 percent, of the common stock of Stones, Inc., to each of

two trusts (collectively, the trusts) that he established, one

for the benefit of his children and one for the benefit of his

grandchildren. At the time the trusts were formed, Stones, Inc.,

owned 83.4 percent of the common stock of Stone Manufacturing.

At that time, C. Rivers Stone, who became president of Stone

Manufacturing shortly before Mr. Stone established the trusts,4

4
C. Rivers Stone, who as a teenager began working for Stone
Manufacturing during the summers, remained president of Stone
Manufacturing until around 1999 when he stopped working for the
Company.
 - 6 -

and John J. Brausch (Mr. Brausch), a senior executive officer of

Stone Manufacturing, were trustees of the trusts.

At least as early as April 28, 1992, Stones, Inc., owned

83.4 percent, each of the children owned 4.1 percent, and Ms.

Stone owned the remaining .2 percent of the common stock of Stone

Manufacturing. At least as early as that date, Eugene Earle

Stone, IV, who became a vice president of Stone Manufacturing in

1978 and became its chief executive officer in 1982,5 C. Rivers

Stone, and Mr. Brausch, all of whom were also officers and

directors of Stones, Inc., were trustees of the trusts.

At all relevant times, Ms. Morris and her husband, Charles

H. Morris (Mr. Morris), were involved in the newspaper business

in Savannah, Georgia. Ms. Fraser and her husband, Charles Fraser

(Mr. Fraser), were, along with C. Rivers Stone, involved in the

development of Sea Pines Plantation located on Hilton Head

Island, South Carolina. At no relevant time were Ms. Morris and

Ms. Fraser involved in the day-to-day affairs of the Company.

At least as early as around the late 1980s, Mr. Stone and

Ms. Stone were serving as directors of the Company, but they were

no longer involved in the day-to-day affairs of its business. At

least as early as the last six months of 1995, Mr. Stone and Ms.

Stone were in control of their respective assets, but they no

5
Eugene Earle Stone, IV, remained chief executive officer of
Stone Manufacturing at all relevant times.
 - 7 -

longer were interested or actively involved in managing those

assets and wanted their children to become actively involved in

the management of those assets.

During the 1980s, Stone Manufacturing, which employed about

4,000 people, acquired from Umbro, an internationally known

manufacturer and distributor of soccer apparel, the right to

distribute Umbro’s products within the United States. In late

1991, Stone Manufacturing began discussions regarding the possi-

bility of acquiring from Umbro the right to distribute Umbro’s

products internationally. On April 28, 1992, Stone Manufacturing

and the owners of Umbro signed a purchase agreement under which

Stone Manufacturing agreed to acquire the right to distribute

Umbro’s products internationally.

On April 28, 1992, Ms. Morris, Ms. Fraser, and their respec-

tive children filed a petition (petition) in a Probate Court in

South Carolina (Probate Court) against Eugene Earle Stone, IV, C.

Rivers Stone, and Mr. Brausch, as trustees of the trusts, and

against the children of C. Rivers Stone, as beneficiaries of one

of the trusts. (We shall refer to that litigation as the litiga-

tion among the children and to all the parties in that litigation

as the parties in the litigation among the children.) Eugene

Earle Stone, IV, discussed the litigation among the children with

his parents, but neither Ms. Stone nor Mr. Stone was or became a

party in that litigation.
 - 8 -

The petition in the litigation among the children included

claims against the trustees for an accounting, breach of trust,

breach of fiduciary duties, abuse of discretion, negligence, and

self-dealing and sought the removal of Eugene Earle Stone, IV, C.

Rivers Stone, and Mr. Brausch as trustees of the trusts. The

petition alleged in part as follows:

1. Petitioners are beneficiaries of a certain
Agreement and Declaration of Trust, dated December 30,
1976 and entered by and between Respondents, E.E.
Stone, IV, C. Rivers Stone, and John J. Brausch, as
Trustees, (Hereinafter “Trustees”) for two Trusts
established and funded by Eugene E. Stone, III. * * *.

* * * * * * *

9. As Trustees of the two Trusts, Respondents,
Trustees, control 100% of the shares of Stones, Inc.

* * * * * * *

11. In their positions as Trustees, Respondents
control, and have controlled since the inception of the
Trusts on December 30, 1976, and for a period of six-
teen (16) years, the election and appointment [sic]
officers and directors of Stone Manufacturing Company,
Inc., by virtue of their control of all of the stock of
Stones, Inc. and, by reason thereof, 83.4% of shares of
stock of Stones [sic] Manufacturing Company, Inc.

* * * * * * *

16. Respondents’, Trustees’, control of the
companies has allowed them to appoint themselves as
directors and officers of Stone Manufacturing Company,
Inc.

17. E.E. STONE, IV, C. RIVERS STONE and JOHN
BRAUSCH are the officers and directors for Stones, Inc.

* * * * * * *

21. Respondent Trustees, for sixteen (16) years
 - 9 -

have failed to manage the Trusts’ assets in a fashion
designed to generate income for the Trusts in an amount
sufficient to enable the Trustees to distribute di-
rectly to all adult beneficiaries (and to the par-
ent/guardians of beneficiaries who are minors) income
in an amount sufficient to meet the “standard” as set
forth in Article II and Article III as the 1976 Decla-
ration of Trust to each and every beneficiary each
year, such “standard” being stated in such 1976 Trust
as follows:

(1) “reasonable health care”

(2) “support in his or her accustomed manner
of living”

(3) “maintenance”

Since 1976, the Trustees have produced no
income whatsoever to the Trusts from Trust investments
and have made no distributions to the beneficiaries to
meet the “standard” for such annual distributions as
quoted above.
* * * * * * *

26. Notwithstanding the substantial net earnings
of Stone Manufacturing Company, Inc., * * * the Direc-
tors have neglected, failed and refused to ever declare
a dividend for distribution of profits to shareholders.

* * * * * * *

28. While Respondents, E.E. STONE, IV and C.
RIVERS STONE, as officers and directors of Stone Manu-
facturing Company, Inc., have taken and received sub-
stantial income and benefits for themselves, from
Stone Manufacturing Company, Inc., they have, in their
positions as Trustees, withheld and denied any similar
income and benefits to the shareholders of the company
and the beneficiaries of the Trusts.

On April 28, 1992, Ms. Morris, Ms. Fraser, and their respec-

tive children filed a motion in the Probate Court for immediate

restraining orders precluding Eugene Earle Stone, IV, C. Rivers
 - 10 -

Stone, and Mr. Brausch from taking certain actions as trustees of

the trusts. On April 28, 1992, the Probate Court granted that

motion.

Around May 7, 1992, Stone Manufacturing filed a motion to

intervene in the litigation among the children. By order dated

June 18, 1992, the Probate Court made Stone Manufacturing a party

in that litigation.

On a date not disclosed by the record between April 28 and

July 22, 1992, Stones, Inc., became a party in the litigation

among the children.

On July 22, 1992, Ms. Morris, Ms. Fraser, and their respec-

tive children filed in the Probate Court what was identified as

an amended complaint (amended complaint). The amended complaint

sought, inter alia, to enjoin Eugene Earle Stone, IV, C. Rivers

Stone, and Mr. Brausch, as trustees of the trusts, from, inter

alia, purchasing from Umbro the right to distribute Umbro’s

products internationally. As grounds for granting such an

injunction, the amended complaint alleged that any such purchase

would necessitate the incurrence of considerable debt by Stone

Manufacturing and delay the payment to the trusts of any divi-

dends from the Company.

On September 13, 1993, C. Rivers Stone filed a petition in

the Probate Court (C. Rivers Stone’s petition). C. Rivers

Stone’s petition alleged in part as follows:
 - 11 -

Your petitioner, C. Rivers Stone, would respect-
fully show unto the court:

1. That he is a Respondent in the * * * action
which is pending before this Court.

* * * * * * *

5. That E.E. Stone, IV, is a Director and Chief
Executive officer of Stone Manufacturing Company.

* * * * * * *

7. That E.E. Stone, IV, has never been properly
named or elected as a director of Stones, Inc.

8. That on Friday, September 10, 1993, E.E.
Stone, IV called a meeting of Stones, Inc., and pro-
posed that the Board of Stone Manufacturing Company be
reduced from five directors to three directors and that
E.E. Stone, IV vote the stock on behalf of Stones, Inc.

9. That proper notice was not given to the
directors of this proposed change of the Directors and
for E.E. Stone, IV to vote the stocks of Stones, Inc.
as required by law and by the Company’s by-laws.

10. That the Petitioner, C. Rivers Stone, is a
Director and President of Stones, Inc., and as presi-
dent has always voted the stock of Stone Manufacturing
Company.

* * * * * * *

16. That the Petitioner is informed and believes
that E.E. Stone, IV is not a properly elected Trustee
of the children’s trust or the grandchildren’s trust.

* * * * * * *

19. That the moves undertaken by E.E. Stone, IV
with the cooperation of John J. Brausch * * * are to
take total and complete control of the Trustees and
thereby totally control and dominate the family corpo-
rations.

* * * * * * *
 - 12 -

22. That the Petitioner believes that he will be
removed as President and Director of Stone Manufactur-
ing with great loss in salary and will cause him irrep-
arable harm.

* * * * * * *

WHEREFORE, having fully petitioned the Court, the
Petitioner, C. Rivers Stone, prays that the Court issue
its Order restraining E.E. Stone, IV, John J. Brausch,
Stone Manufacturing Company and Stones, Inc. from:

1. Withdrawing or reducing the compensation of the
Petitioner, C. Rivers Stone * * *

2. Removing the Petitioner, C. Rivers Stone, as Pres-
ident of Stone Manufacturing Company and Stones,
Inc.;

3. Removing the Petitioner, C. Rivers Stone, as a
Director of Stone Manufacturing Company and
Stones, Inc.; and

4. Allowing E.E. Stone, IV from voting the stock on
behalf of Stones, Inc.

On September 13, 1993, C. Rivers Stone filed a motion (C.

Rivers Stone’s motion) in the Probate Court seeking an immediate

restraining order, as requested in C. Rivers Stone’s petition,

against Eugene Earle Stone, IV, Mr. Brausch, Stone Manufacturing,

and Stones, Inc. On September 13, 1993, the Probate Court

granted C. Rivers Stone’s motion.

The parties in the litigation among the children attempted

to minimize any publicity about that litigation. However, that

litigation was hotly contested and became very bitter.6 As a

6
The litigation among the children was so contentious that
even Ms. Morris and Ms. Fraser, who, along with their respective
(continued...)
 - 13 -

result, the local business community, including the customers and

the suppliers of the Company and the financial institutions that

dealt with it, as well as the Company’s employees, became aware

of that litigation and concerned about its impact on them. The

litigation among the children resulted in total legal fees for

the parties in that litigation of between $2 million and $3

million.

Throughout the course of the litigation among the children,

the children had certain concerns regarding Mr. Stone’s assets

and Ms. Stone’s assets (the children’s concerns regarding Mr.

Stone’s and Ms. Stone’s assets), which presented potential

grounds for additional litigation among the children. The

children’s concerns regarding Mr. Stone’s and Ms. Stone’s assets

included concerns relating to (1) the management of those assets

(a) during their parents’ lives, which became a very serious

concern at least as early as the last six months of 1995 when

their parents no longer were interested or actively involved in

managing such assets, and (b) after their parents died;

(2) certain charitable gifts that Mr. Stone had made, including a

gift to Furman University in December 1994 for the design and

6
(...continued)
children, had filed the petition instituting that litigation,
disagreed on certain matters, as is evidenced by the fact that at
a time not disclosed by the record Ms. Morris, but not Ms.
Fraser, sought to settle that litigation as it pertained to Ms.
Morris and her children.
 - 14 -

construction of a permanent soccer facility to be named the

Eugene E. Stone, III, Soccer Stadium; (3) Ms. Stone’s living

arrangements; and (4) the use of Ms. Stone’s credit cards.

With respect to the children’s concerns relating to the

management during their parents’ lives and thereafter of their

parents’ respective assets, Eugene Earle Stone, IV, had a partic-

ular interest in managing, and maintaining the value of, the

preferred stock of Stones, Inc. C. Rivers Stone was very inter-

ested and involved in real estate development7 and had a particu-

lar interest in managing Mr. Stone’s real property known as Piney

Mountain (Piney Mountain property).8 Ms. Morris, who had sub-

stantial expertise in business and financial matters, had a

particular interest in managing certain of her parents’ stocks

and securities, including at least some of Mr. Stone’s preferred

stock in Stones, Inc. Ms. Fraser, who had developed a deep

attachment to her parents’ Cedar Mountain property, had a partic-

7
C. Rivers Stone pursued on a fulltime basis his strong
interest in real estate development after he stopped serving as
president of Stone Manufacturing around 1999. C. Rivers Stone’s
first exposure to real estate development was at the age of 13
when he helped his father build two 50-acre lakes on the Cedar
Mountain property. At the time of the trial in the instant
cases, C. Rivers Stone had been involved in five major real
estate development projects.
8
Mr. Stone’s Piney Mountain property, located in Greenville,
S.C., consisted at least as early as 1994 of approximately 370
acres, which he accumulated over approximately 20 to 30 years.
During that time, Mr. and Ms. Stone maintained a vision as to how
the Piney Mountain property should be developed. C. Rivers Stone
shared that vision.
 - 15 -

ular interest in managing that property and envisioned that it

would be used some day as a site for religious activities.9 All

of the children had a particular interest in the Cherrydale

residence, which had been the site of their home starting around

1950 and thereafter while they were living with their parents and

which Mr. Stone and the Company decided could serve as a place to

house out-of-town business visitors to Stone Manufacturing’s

operating facilities located on the Cherrydale property.

Mr. Stone and Ms. Stone found their children’s desires to

become actively involved during their parents’ lives in managing

certain assets that their parents owned to be consistent with

their own wishes. That is because, as discussed above, at least

as early as the last six months of 1995 Mr. Stone and Ms. Stone,

although in control of their respective assets, no longer were

interested or actively involved in managing those assets. As a

result, the prospect of having their children become actively

involved in the management of their respective assets was very

appealing to Mr. Stone and Ms. Stone. To that end, Mr. Stone and

Ms. Stone encouraged their children to attempt to come to an

agreement among themselves as to the particular assets that each

child wanted to become actively involved in managing. Mr. and

Ms. Stone believed that any such agreement, if one could be

9
When Ms. Fraser was a child, she spent a lot of time at,
and developed a strong connection to, the Cedar Mountain prop-
erty.
 - 16 -

reached, would be of assistance to them in deciding which of

their respective assets they wanted each of their children to

become actively involved in managing.

The parties in the litigation among the children engaged in

extensive discussions to settle that litigation and to resolve

the children’s concerns regarding Mr. Stone’s and Ms. Stone’s

assets so as to avoid any future litigation as to such concerns.

Those parties intended and agreed that any agreements that they

were able to reach were to be comprehensive and to cover every

possible issue that might arise among them as to those matters.

On June 3, 1994, the parties in the litigation among the children

and their respective attorneys executed a plan (1994 plan for

settlement) to settle that litigation and to resolve the various

issues relating to the children’s concerns regarding Mr. Stone’s

and Ms. Stone’s assets. Ms. Stone and Mr. Stone were not parties

to the 1994 plan for settlement, and neither of them signed that

document.

With respect to the issues relating to the trusts, the 1994

plan for settlement provided in part as follows:

I. TRUSTS
The existing trusts will remain as two
(2) trusts administered by three (3) inde-
pendent, qualified Trustees.

A. THREE TRUSTEES TO ADMINISTER EXISTING TRUSTS
There will be three independent, quali-
fied Trustees (“Trustees”) who shall adminis-
ter the two existing trusts (“Existing
Trusts”) in accordance with the terms of the
 - 17 -

1976 Trust Agreement, as clarified by this
Plan for Settlement. The term “independent”
for purposes of the two existing trusts
(Children’s and Grandchildren’s trust) shall
mean a person who:
(1) is not related by blood or marriage to
any child, grandchild or spouse;
(2) is not and has not been employed by such
child, grandchild or spouse, or any
company which has employed such child,
grandchild or spouse;
(3) is not now and has not been engaged in
any common business effort with such
child, grandchild or spouse;
(4) has not acted as attorney or accountant
for such child, grandchild or spouse or
any company which has employed such
child, grandchild or spouse; and,
(5) agrees never to do business with or
purchase stock in the Company.
(6) has sole allegiance to the management of
the Trust in accordance with the written
provision of the Trust Agreement, as
clarified by this Plan for Settlement,
and to the impartial protection of the
interest of the beneficiaries.

The term “qualified” shall mean a person who
has been active in a senior management role
in a for-profit business within the last
three (3) years.

Any action taken by the Trustees of the Ex-
isting Trusts shall require majority vote and
contemporaneous minutes of such action shall
be circulated to the adult beneficiaries.

* * * * * * *

B. SELECTION OF TRUSTEES
Each child shall anonymously nominate
one independent, qualified trustee candidate.
The Probate Court shall select the three
Trustees from the four nominated. * * *

* * * * * * *
 - 18 -

H. RESIGNATION AS TRUSTEES
E.E. Stone, IV, C. Rivers Stone, and
John Brausch will resign as trustees to fa-
cilitate the implementation of this Article
I, effective with the selection of and accep-
tance by the Trustees of the Existing Trusts.

With respect to the issues relating to the children’s

concerns regarding Mr. Stone’s and Ms. Stone’s assets, the 1994

plan for settlement provided in part as follows:

VI. ESTATE ISSUES

The four children and John Brausch shall
cooperate in an attempt to have E.E. Stone, III,
and Allene W. Stone make the following changes in
their respective estate plans:

A. PREFERRED STOCK
E.E. Stone, III, would convey or assign
directly or indirectly equally to each of the
four children, the right to one-fourth (1/4)
of the dividends from * * * [his] preferred
stock for a period of fifteen (15) years
(which time period is set forth herein to
allow a proper valuation) and make an immedi-
ate donation of his preferred stock to the
Stone Foundation, such assignment(s) to be
effectuated in a tax efficient manner. There
would be no further charitable donation under
his will. The Company [defined in the 1994
plan for settlement as Umbro International,
Inc., the name of the company resulting from
a proposed merger of Stones, Inc., and Stone
Manufacturing] shall be entitled to call the
preferred stock any time.

B. TESTAMENTARY TRUSTS
There would be no trusts for descendants
under E.E. Stone, III or Allene W. Stone’s
wills. After E.E. Stone, III’s death, the
portion of his estate not going to Allene W.
Stone, after payment of estate taxes, will be
distributed equally and directly to each of
the four children or that Child’s designated
beneficiaries. After Allene W. Stone’s
 - 19 -

death, the remaining E.E. Stone, III/Allene
W. Stone estate after estate taxes would be
distributed equally to the four children or
that Child’s designated beneficiaries.

C. FAMILY SETTLEMENT AGREEMENT
The Children and Grandchildren (or their
guardians ad litem) and the Stone Foundation
(if necessary) shall execute a Family Settle-
ment Agreement (pursuant to S.C. Code § 62-3-
1101 et seq.) which provides for a division
inter se [sic], in the manner set forth in *
* * [other parts of this agreement] in the
event E.E. Stone, III, or Allene W. Stone
fail to change or maintain their Wills in the
same manner.

* * * * * * *

F. POWERS OF ATTORNEY
All existing powers of attorney for E.E.
Stone, III and Allene W. Stone will be re-
voked and new, limited, permanent powers of
attorney executed that have been pre-approved
by all four children to provide management of
parents’ monthly cash needs, management of
the maintenance of houses, cars, health care,
etc., of both parents. All accounts relative
to the parents will be audited by the Trust-
ees’ accounting firm.

* * * * * * *

H. ARBITRATION
The Children shall use their best efforts to
agree on the allocation of the property of the
estate of E.E. Stone, III and Allene W. Stone.

It is agreed that Rivers Stone shall receive
Piney Mountain from the estate of E.E. Stone,
III and Allene W. Stone provided, however,
Rivers Stone shall not be entitled to receive
more than one-fourth of the total value of
the net estates after estate taxes.

It is further agreed that Mary Fraser shall
receive one-half (½) of the Cedar Mountain
property from the estate of E.E. Stone, III
 - 20 -

and Allene W. Stone; Rosalie Morris and E.E.
Stone, IV shall each receive one-fourth (¼)
of Cedar Mountain. Notwithstanding the fore-
going, neither Mary Fraser, Jack Stone [Eu-
gene Earle Stone, IV], nor Rosalie Morris
shall be entitled to receive more than one-
fourth (¼) of the total value of the net
estates after estate taxes. The parties will
use their best efforts to agree on the dimen-
sions and appurtenances to the same prior to
the final Court approval of the settlement.

* * * * * * *

Any disagreement over the provisions in this
Section VI shall be submitted to binding
arbitration before the American Arbitration
Association or before an arbitrator appointed
by the Probate Court of South Carolina.

* * * * * * *

VII. IMPLEMENTATION AND JURISDICTION

* * * * * * *

B. CONTINUING JURISDICTION
The Probate Court * * * shall maintain
continuing jurisdiction to resolve any dis-
putes which shall arise during the implemen-
tation and enforcement of this settlement
agreement. * * *

The 1994 plan for settlement also provided in part as

follows:

THE FOUR CHILDREN UNDERSTAND THAT ANY RESOLUTION OF THE
ESTATE ISSUES MUST INCLUDE A COMPLETELY DEFINITIVE
APPROACH TO THE DIVISION OF THE ASSETS OF THE PARENT’S
[sic] ESTATES. THE SETTLEMENT SHALL NOT BE FINALIZED
UNTIL THE CHILDREN HAVE DETERMINED THE WILLINGNESS OF
THEIR FATHER TO ADDRESS THESE ESTATE ISSUES AND ANY
CHILD MAY REFUSE TO FINALIZE THE AGREEMENT IF E.E.
STONE, III REFUSES TO MAKE THE CHANGES TO HIS ESTATE
PLAN PROVIDED FOR HEREIN. * * *

The parties in the litigation among the children included the
 - 21 -

above-quoted paragraph in the 1994 plan for settlement because

the children were concerned about whether their parents would

treat them, as a group, fairly when they decided how to divide

their respective assets among their children. As reflected in

the above-quoted paragraph, the children intended and agreed that

they would not settle and resolve any of the issues involved in

the litigation among the children and the children’s concerns

regarding Mr. Stone’s and Ms. Stone’s assets unless their parents

agreed to make changes to their respective estate plans that were

consistent with the provisions of the 1994 plan for settlement

relating to such concerns.

In the summer of 1994, Mr. Stone retained David A. Merline

(Mr. Merline) to prepare a will for him. Ms. Stone did not

retain Mr. Merline; at all relevant times she had her own coun-

sel.

After execution of the 1994 plan for settlement, issues

arose with respect to the scope of the authority of the three

independent, qualified trustees whom, according to the 1994 plan

for settlement, the Probate Court was to select from the four

candidates nominated by the children. Issues also arose with

respect to whether such three independent, qualified trustees

would be fully indemnified in the event of any further litigation

against such trustees by any of the children. Because of the

unresolved issues relating to the scope of authority and indemni-
 - 22 -

fication of the trustees and the fact that the litigation among

the children was so hotly contested and bitter, the children were

unable to find candidates who were willing to serve as independ-

ent trustees of the trusts, and the 1994 plan for settlement did

not result in settlement and dismissal of the litigation among

the children.

During a period of time starting at least as early as 1994

that is not disclosed by the record, C. Rivers Stone was a member

of three organizations: the Young Presidents Organization, the

World Presidents Organization, and the Chief Executive Organiza-

tion (collectively, Management Organizations). At the respective

membership meetings of those organizations, various members

discussed, inter alia, certain problems that they were having and

other members suggested different ways of dealing with such

problems. C. Rivers Stone had very close friends who were also

members of the Management Organizations and who were aware of the

litigation among the children and the children’s concerns regard-

ing Mr. Stone’s and Ms. Stone’s assets. At certain of the

respective meetings of those organizations, the members discussed

that litigation and those concerns and various ways of dealing

with them. Sometime during 1995, certain members of the Manage-

ment Organizations who were friends of C. Rivers Stone suggested

that the children utilize family limited partnerships as a way of

resolving the litigation among the children and the children’s
 - 23 -

concerns regarding Mr. Stone’s and Ms. Stone’s assets. During

that year, C. Rivers Stone informed Mr. Stone, Ms. Stone, and C.

Rivers Stone’s siblings about that suggestion, and the Stone

family became very interested in exploring it.

The primary reason why the Stone family became very inter-

ested in exploring the use of family limited partnerships was to

resolve the children’s concerns regarding Mr. Stone’s and Ms.

Stone’s assets. The Stone family wanted to explore whether such

concerns could be resolved by: (1) Actively involving each of

the children in the management of certain of their parents’

assets during their parents’ lives by giving each child the

opportunity, through ownership of a general partnership interest

in a different family limited partnership, to manage such assets

in which such child was interested; and (2) actively involving

all of the children in the management of certain of their par-

ents’ other assets during their parents’ lives by giving all of

them the opportunity, through ownership of general partnership

interests in a fifth family limited partnership, to manage such

assets in which they all were interested. Another very important

reason why the Stone family desired to explore the use of family

limited partnerships was to settle and bring an end to the

litigation among the children. Finally, the Stone family also

wanted to explore the use of family limited partnerships as a way

to help avoid disputes among the children regarding the ultimate
 - 24 -

division of their parents’ respective assets after their parents

died, although that was not the primary reason for the Stone

family’s interest in exploring the use of such types of partner-

ships.

On August 16, 1995, Ms. Fraser and C. Rivers Stone filed a

motion in the Probate Court for the following relief:

(a) The appointment of an arbitrator to divide the
Cedar Mountain Property;
(b) To appoint receivers for the Stone Trusts and the
Stone Corporations;
(c) To compel compliance with the * * * [1994 plan for
settlement]; and
(d) For other related relief.

During the last six months of 1995, Mr. Merline and Mr.

Stone discussed the suggestion of C. Rivers Stone’s friends

regarding the use of family limited partnerships as a means of

dealing with the litigation among the children and the children’s

concerns regarding Mr. Stone’s and Ms. Stone’s assets. Mr.

Merline pointed out to Mr. Stone that the use of family limited

partnerships also had potential transfer tax benefits. Mr.

Merline explained to Mr. Stone that if Mr. Stone and Ms. Stone

were to decide to use family limited partnerships, any assets

that he and Ms. Stone decided to transfer to such partnerships

would no longer be available to them for their own unfettered,

personal use. Instead, as explained to Mr. Stone by Mr. Merline,

any assets that he and Ms. Stone decided to transfer to such

partnerships would belong to such partnerships and would be
 - 25 -

subject to the respective partnership agreements for such part-

nerships.

On March 28, 1996, the parties in the litigation among the

children and their respective attorneys executed an amendment to

the 1994 plan for settlement (1996 amendment to the 1994 plan for

settlement). At the time they executed that 1996 amendment, the

parties in the litigation among the children contemplated signing

a third settlement agreement in which they would amend and

restate both the 1994 plan for settlement and the 1996 amendment

to that plan, which, as discussed below, they did. Ms. Stone and

Mr. Stone were not parties to the 1996 amendment to the 1994 plan

for settlement, and neither of them signed that document.

With respect to the issues relating to the trusts, the 1996

amendment to the 1994 plan for settlement did not change any of

the provisions of that plan relating to such issues.

With respect to the issues relating to the children’s

concerns regarding Mr. Stone’s and Ms. Stone’s assets, the 1996

amendment to the 1994 plan for settlement provided in part as

follows:

3. CEDAR MOUNTAIN DIVISION

In implementation of * * * [the paragraph of]
the June 3, 1994 Plan of Settlement [requiring arbitra-
tion of any disputes among the children regarding
section VI of that plan], the parties agree as follows:

(i) The parties agree to the two-page Cedar Moun-
tain division map * * * which has been signed
by * * * [the children].
 - 26 -

(ii) The deeds to 1,054.415 acres [of the Cedar
Mountain property] from E.E. Stone III to the
Mary Fraser Limited Partnership will reserve
for the 1,054.415-acre tract a * * * quali-
fied road right-of-way and utility permanent
easements through the adjacent 582.672-acre
Life Estate Tract following the route of the
existing roads * * *.

* * * * * * *

(iv) The parties * * * agree to the * * * Piney
Mountain [and] Cedar Mountain * * * land
appraisals.

4. Family Settlement Estate Planning: The New
Limited Partnerships Plan for the Estate.

The parties shall use their reasonable best
efforts to encourage E.E. Stone III and Allene W. Stone
to establish the five Family Limited Partnerships
contemplated by the New Plan for Mr. and Mrs. Stone’s
estate.

Based upon an analysis of Mr. and Mrs.
Stone’s assets and expenses, the Children agree to use
their reasonable best efforts to encourage Mr. Stone to
transfer $1,600,000 of his preferred stock in Stones,
Inc. to the Mary Fraser and Rosalie Morris Family
Limited Partnerships, in accordance with the “Family
Limited Partnership” distribution schedule (the
“Chart”)[10] hand dated April 12, 1996 * * *.

In the event that assets remaining in E.E.
Stone, III’s and Allene W. Stone’s Limited Partnership
(the “Parents’ L.P.”) as shown in column 7 of the
Chart, together with column 8, 9, and 10 and assets of
E.E. Stone, III, as managed by E.E. Stone, IV, are not
sufficient to pay (a) Mr. and Mrs. Stone’s health,
maintenance, and other reasonable (1995 standard)
expenses; together with (b) estate taxes and expenses
of administration payable after their deaths, the
deficit shall first be offset by contributions of Jack

10
The “Chart” identified in the 1996 amendment to the 1994
plan for settlement is not attached to the Court’s copy of that
amendment and is not otherwise part of the record in these cases.
 - 27 -

Stone equal to any future gifts made from such column
8, 9, and 10 assets in the Exhibit “A” Chart, before
calling on the other three children for parental care
contributions, with each Child agreeing to contribute a
pro rata share of any remaining shortfall from either
personal assets, or * * * assigned income rights from
his or her respective Limited Partnership Interests.
Provided however, that any further gifts made from such
assets now shown on the chart shall first be offset by
contributions of Jack Stone Family Limited Partnership.

* * * * * * *

In order to protect Mary Fraser on the Cedar
Mountain Division, a provision will be included in the
Family Settlement Agreement recognizing the Children’s
agreement that Mary Stone Fraser or her Limited Part-
nership will receive the 1,045.415-acre * * * parcel
* * * and that the remainder interest in the remaining
582.672 acres will be given to one or more 501-C-3
charitable organizations recommended by Mary Fraser
which are mutually agreeable to Mr. Stone and the other
Children, with Mr. Stone retaining a life estate in the
582.672 acres. The Children shall use their reasonable
best efforts to encourage Mr. Stone to convey the
582.672-acre Cedar Mountain property remainder interest
according to the foregoing provision.

The Family Settlement Agreement will acknowl-
edge that in the event Mr. Stone executes a new Will,
Codicil or other agreement which does not conform to
the distribution outlined in the Chart, the Children
nonetheless agree to abide by the terms of such distri-
bution in the Chart as a Family Settlement Agreement
pursuant to SC Code Sec. 62-3-1101, et seq.; and * * *
to include whatever provisions are necessary to pre-
serve any applicable marital deductions.

The 1996 amendment to the 1994 plan for settlement also

provided in part as follows:

9. The Family Estate Plan set forth herein
represents a compromise by the parties. There shall be
no implementation of the Family Estate Plan * * *
unless and until there is an agreement between the
parties [in the litigation among the children] to an
Amended and Restated Plan for Settlement.
 - 28 -

After execution of the 1996 amendment to the 1994 plan for

settlement, the children entered into intense negotiations

regarding the particular assets that each child wanted their

parents to transfer to a family limited partnership in which such

child, as well as each of their parents, would hold a partnership

interest.

Between the last six months of 1995 and April 1997, Mr.

Merline met with Mr. Stone approximately a dozen times to discuss

the use of family limited partnerships, the status of the chil-

dren’s negotiations, and why each child had an interest in

certain of the respective assets of Mr. Stone and Ms. Stone.

Around April 1996, Mr. Stone and Ms. Stone decided to proceed

with forming five family limited partnerships. To that end, at

Mr. Stone’s request, Mr. Merline drafted five partnership agree-

ments (draft partnership agreements) and circulated those draft

partnership agreements among Mr. Stone, Ms. Stone, the children,

and their respective attorneys. The children and their respec-

tive attorneys, inter alia, made comments on the draft partner-

ship agreements that Mr. Merline had sent them and suggested

changes to those agreements. The primary reason for the changes

suggested by the children to the draft partnership agreements was

the desire of the children to ensure that their parents, and in

particular Mr. Stone, would not be unduly influenced by anyone to

act in a manner inconsistent with each child’s interest in
 - 29 -

managing particular assets of their parents during their parents’

lives and thereafter.

Mr. Stone agreed with certain of the children’s comments and

certain of their suggested changes to the draft partnership

agreements that Mr. Merline had prepared for Mr. Stone, and Mr.

Merline made changes to those draft partnership agreements in

order to incorporate such comments and suggested changes. For

example, one new provision incorporated into all five of the

draft partnership agreements prevented anyone who obtained a

power of attorney on behalf of Mr. Stone from using that power of

attorney to vote any general partnership interest that Mr. Stone

was to receive in each of the proposed five family limited

partnerships. Another example was a new provision included only

in the draft partnership agreement for the proposed partnership

in which C. Rivers Stone was to hold a general partnership

interest and in the draft partnership agreement for the proposed

partnership in which Ms. Fraser was to hold a general partnership

interest. That new provision required the unanimous consent of

all the prospective general partners of each such prospective

partnership in order to authorize such partnership to sell,

transfer, assign, exchange, lease, convey, subdivide, partition,

or encumber certain of the Piney Mountain property in the case of

the proposed partnership in which C. Rivers Stone was to own a

general partnership interest and certain of the Cedar Mountain
 - 30 -

property in the case of the proposed partnership in which Ms.

Fraser was to own a general partnership interest.

On May 9, 1996, Mr. Stone and Eugene Earle Stone, IV, as

both general partners and limited partners, and Ms. Stone, as a

limited partner, executed a partnership agreement for a limited

partnership that the Stone family intended to name The Eugene E.

Stone, III, Limited Partnership (ES3LP).

On May 9, 1996, Mr. Stone and Eugene Earle Stone, IV, as

both general partners and limited partners, and Anne M. Stone,11

as a general partner, executed a partnership agreement for a

limited partnership that the Stone family intended to name The

E.E. Stone, IV, Limited Partnership (ES4LP).

On May 9, 1996, Mr. Stone, C. Rivers Stone, and Charles

Rivers Stone, Jr.,12 as both general partners and limited part-

ners, and Frances O. Stone,13 as a limited partner, executed a

partnership agreement for a limited partnership that the Stone

family intended to name The C. Rivers Stone Limited Partnership

(CRSLP).

On May 9, 1996, Mr. Stone and Ms. Morris, as both general

partners and limited partners, Mr. Morris, as a general partner,

11
Anne M. Stone is the spouse of Eugene Earle Stone, IV.
12
Charles Rivers Stone, Jr., is the son of C. Rivers Stone.
13
Frances O. Stone is the daughter of C. Rivers Stone.
 - 31 -

and Charles H. Morris, Jr.,14 and Ms. Morris as custodian for

Rosalie S. Morris, II,15 as limited partners, executed a partner-

ship agreement for a limited partnership that the Stone family

intended to name The Rosalie Stone Morris Limited Partnership

(RSMLP).

On May 9, 1996, Mr. Stone, Ms. Fraser, Wyman Fraser Davis

(Ms. Davis),16 and Laura Lawton Fraser Arnal (Ms. Arnal),17 as

both general partners and limited partners, executed a partner-

ship agreement for a limited partnership that the Stone family

intended to name The Mary Stone Fraser Limited Partnership

(MSFLP).

Each of the partnership agreements for the Five Partnerships

set forth the following purposes of each such partnership:

to consolidate the management of certain property of
the family of EUGENE E. STONE, III (the “Family”); to
make a profit; to avoid the division of the property of
the Family which is in the Partnership in order to
promote the greater sales potential of the property; to
avoid potential expensive litigation and disputes over
the property of the Family by defining the roles and
rights of Family members in the property, and providing
procedures to resolve disputes; to restrict the trans-
fer of interests in the property to non-Family members;
to establish protection of Family interests from inter-
ference and disruption resulting from claims by poten-

14
Charles H. Morris, Jr., is the son of Ms. Morris.
15
Rosalie S. Morris, II, is the daughter of Ms. Morris.
16
Wyman Fraser Davis, also known as Mary Wyman Stone Fraser
Davis, is the daughter of Ms. Fraser.
17
Ms. Arnal is the daughter of Ms. Fraser.
 - 32 -

tial creditors of any Family member; to establish a
combined investment policy for the Partnership; to
reduce the mechanics and costs of administration of
investments; * * * to facilitate the administration and
reduce the costs associated with the probate of the
estates of Family members; * * * to provide flexibility
in business and estate planning not available through
trusts, corporations or other business entities; to
reduce transaction costs and multiple deeds in trans-
ferring property among Family members; * * * and ac-
quiring, financing, developing, subdividing, managing,
improving, operating, leasing, mortgaging, refinancing,
pledging, selling or otherwise dealing with the Part-
nership Property * * *.

Each of the partnership agreements for the Five Partnerships

provided that distributions to partners may be made from each

such partnership only after, inter alia, determining whether the

financial condition of each such partnership permitted such

distributions. Each of the partnership agreements for the Five

Partnerships further provided that all distributions to the

partners of each such partnership must, “Unless otherwise agreed

by all the Partners in writing, * * * be made simultaneously to

each of the Partners and must be made in proportion to the

Partners’ Partnership Units.”

The children understood that Mr. Stone and Ms. Stone would

make the ultimate decision as to which, if any, of their parents’

respective assets their parents would transfer to each of the

Five Partnerships. In this connection, although Mr. Stone and

Ms. Stone agreed to form the Five Partnerships, they did not

intend to transfer all of the respective assets that they owned

to such partnerships in exchange for partnership interests. That
 - 33 -

was because they wanted to retain sufficient assets to enable

them to maintain their respective accustomed standards of living.

To that end, Mr. and Ms. Stone retained certain accountants to

advise them as to what assets they should retain, and not trans-

fer, to each of the Five Partnerships. In order to formulate

such advice, those accountants performed various cashflow analy-

ses and appraisals, using different assumptions regarding the

respective life expectancies of Mr. Stone and Ms. Stone and the

anticipated returns on their respective investments. The accoun-

tants retained by Mr. Stone and Ms. Stone recommended that they

retain, and not transfer, to the Five Partnerships total assets

that would yield a monthly total cashflow of between $12,000 and

$15,000.

The Stone family intended and agreed that all the partners

of each of the Five Partnerships were to receive respective

partnership interests in each such partnership that were propor-

tionate to the fair market value of the assets that such partners

respectively transferred to such partnership. To that end,

during the period May 1996 through March 1997, before any of the

partners of each of the Five Partnerships transferred any assets

to such partnership, the process (prefunding process) of identi-

fying, describing, and obtaining various appraisals of the

respective assets of Mr. Stone and Ms. Stone took place. That

process was critical to enabling Mr. Stone, Ms. Stone, and the
 - 34 -

children to make decisions about what assets to transfer to each

of the Five Partnerships. During the prefunding process, various

disputes arose regarding, inter alia, the appraisals of certain

assets and the desire of Ms. Fraser, which her three siblings

strongly opposed, that Mr. and Ms. Stone make Anne Logan Minis-

tries a charitable beneficiary of certain of the Cedar Mountain

property. Those disputes took time to resolve, and, in the case

of the disputes regarding the appraisals of certain assets of Mr.

Stone and Ms. Stone, new appraisals had to be obtained. Until

resolution of all of the disputes that arose during the

prefunding process, (1) the parties in the litigation among the

children did not enter into the third settlement agreement that

they contemplated when they executed the 1996 amendment to the

1994 plan for settlement, and (2) the partners of each of the

Five Partnerships were not able to determine what assets were to

be transferred to each such partnership.

On October 15, 1996, Mr. Stone and Eugene Earle Stone, IV,

as general partners, filed a certificate of limited partnership

for ES3LP with the Secretary of State of South Carolina (S.C.

Secretary of State), thereby forming ES3LP under the laws of that

State.

On October 15, 1996, Mr. Stone, Eugene Earle Stone, IV, and

Anne M. Stone, as general partners, filed a certificate of

limited partnership for ES4LP with the S.C. Secretary of State,
 - 35 -

thereby forming ES4LP under the laws of the State of South

Carolina.

On October 15, 1996, Mr. Stone, C. Rivers Stone, and Charles

Rivers Stone, Jr., as general partners, filed a certificate of

limited partnership for CRSLP with the S.C. Secretary of State,

thereby forming CRSLP under the laws of the State of South

Carolina.

On October 15, 1996, Mr. Stone, Ms. Morris, and Mr. Morris,

as general partners, filed a certificate of limited partnership

for RSMLP with the S.C. Secretary of State, thereby forming RSMLP

under the laws of the State of South Carolina.

On October 15, 1996, Mr. Stone, Ms. Fraser, Ms. Davis, and

Ms. Arnal, as general partners, filed a certificate of limited

partnership for MSFLP with the S.C. Secretary of State, thereby

forming MSFLP under the laws of the State of South Carolina.

On January 31, 1997, Mr. Stone was diagnosed with cancer of

the gallbladder. Prior to that time, Mr. Stone had been in good

health, did not have any known serious health problems, and was

active and alert. After Mr. Stone was diagnosed with cancer, it

was the doctors’ prognosis that he would live a period of months.

By late March 1997, Mr. and Ms. Stone had become satisfied

that the amount of assets that their accountants had recommended

they retain, and not transfer to, each of the Five Partnerships

was sufficient to enable them to maintain their respective
 - 36 -

accustomed standards of living, and they decided to follow their

accountants’ recommendations. By that time, all of the disputes

that arose during the prefunding process had been resolved, and

Mr. Stone, Ms. Stone, and the other partners of each of the Five

Partnerships had agreed on the identities and the values of the

assets that they would transfer to each such partnership. Eugene

Earle Stone, IV, had a particular interest in managing, and

maintaining the value of, the preferred stock of Stones, Inc.,

and it was decided that approximately $1 million18 of such stock,

as well as certain other property, was to be transferred to

ES4LP. C. Rivers Stone had a particular interest in managing Mr.

Stone’s Piney Mountain property, and it was decided that various

parcels of that property totaling 366.097 acres, as well as

certain other property, were to be transferred to CRSLP.19 Ms.

18
The record does not disclose the precise value of each of
the assets transferred to each of the Five Partnerships as of the
date of each such transfer to each such partnership. However,
the record establishes the precise value of each of the assets
owned by each such partnership on the respective dates of the
deaths of Mr. Stone and Ms. Stone. The parties agree that, after
the gifts by Mr. Stone of certain partnership interests in ES4LP,
CRSLP, RSMLP, and MSFLP (described below) to Eugene Stone, IV, C.
Rivers Stone, Ms. Morris, and Ms. Fraser, respectively, all the
partners of each of those four partnerships (as well as ES3LP)
received, as the Stone family intended and agreed, respective
percentage interests in each such partnership that were propor-
tionate to the fair market value of the assets that such partners
respectively transferred to each such partnership.
19
The parties stipulated that a one-percent interest in each
of various parcels totaling 366.949 acres of the Piney Mountain
property was transferred from Mr. Stone to C. Rivers Stone and
(continued...)
 - 37 -

Morris had a particular interest in managing certain of her

parents’ stock and securities, including at least some of Mr.

Stone’s preferred stock in Stones, Inc., and it was decided that

various stock and securities, including approximately $642,000 of

such preferred stock, as well as certain other property, was to

be transferred to RSMLP. Ms. Fraser had a particular interest in

managing her parents’ Cedar Mountain property, and it was decided

that the 1054.415-acre parcel of that property, as well as

certain other property, was to be transferred to MSFLP. All of

the children had a particular interest in the Cherrydale resi-

dence, and it was decided that that property, as well as certain

other property, was to be transferred to ES3LP.

On April 4, 1997, Mr. Stone, as both a general partner and a

limited partner, Eugene Earle Stone, IV,20 C. Rivers Stone, Ms.

Morris, and Ms. Fraser, as general partners, and Ms. Stone, as a

limited partner, executed an amended and restated partnership

19
(...continued)
that Mr. Stone and C. Rivers Stone transferred to CRSLP their
respective interests in those 366.949 acres of that property.
Those stipulations are clearly contrary to the deeds relating to
such transfers, and we shall disregard such stipulations. See
Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989).
Those deeds show that a total of 366.097 acres of various parcels
of the Piney Mountain property was the subject of such transfers.
20
As of Apr. 4, 1997, Eugene Earle Stone, IV, was no longer
both a general partner and a limited partner of ES3LP; he was
only a general partner.
 - 38 -

agreement for ES3LP.21 The purpose of that amended and restated

partnership agreement was to make C. Rivers Stone, Ms. Morris,

and Ms. Fraser general partners of ES3LP.

On April 5, 1997, the parties in the litigation among the

children and their respective attorneys executed two documents22

dated as of March 31, 1997, the purpose of which was to settle

that litigation and to resolve the issues relating to the chil-

dren’s concerns regarding Mr. Stone’s and Ms. Stone’s assets

(collectively, the 1997 amended and restated plan for settle-

ment). The 1997 amended and restated plan for settlement amended

and restated the 1994 plan for settlement and the 1996 amendment

to that plan. Ms. Stone was not a party to the 1997 amended and

restated plan for settlement, and she did not sign those docu-

ments. Mr. Stone signed the 1997 amended and restated plan for

settlement--trusts and estate only in his capacity as a preferred

stockholder of Stones, Inc.23 Mr. Stone signed the 1997 amend

21
On Apr. 11, 1997, Mr. Stone, Eugene Earle Stone, IV, C.
Rivers Stone, Ms. Morris, and Ms. Fraser, as general partners,
filed a first amendment to the certificate of limited partnership
for ES3LP with the S.C. Secretary of State, which reflected the
amended and restated partnership agreement for ES3LP executed on
Apr. 4, 1997.
22
The two documents were referred to as “Amended and Re-
stated Plan for Settlement-Trusts and Estate” (1997 amended and
restated plan for settlement--trusts and estate) and “Amended and
Restated Plan for Settlement-Company (1997 amended and restated
plan for settlement--Company).
23
It was necessary for Mr. Stone to sign the 1997 amended
(continued...)
 - 39 -

ment and restated plan for settlement--Company only in his

capacity as a preferred stockholder of Stones, Inc.24

With respect to the issues relating to the trusts, the 1997

23
(...continued)
and restated plan for settlement--trusts and estate in his
capacity as a preferred stockholder of Stones, Inc., because that
document provided:

E.E. Stone, III will convey or assign directly or
indirectly the preferred stock * * * to the Limited
Partnerships [ES4LP, RSMLP, and MSFLP] created as part
of the New Plan for Estate in accordance with the Chart
referenced in paragraph III.H. The preferred stock
shall be changed to eliminate its voting rights, or, if
not so changed at the time of the conveyance or assign-
ment, then the Children and Grandchildren shall use
their reasonable best efforts to persuade E.E. Stone,
III, in his capacity as General Partner of the respec-
tive Limited Partnerships, to consent to these changes.
24
It was necessary for Mr. Stone to sign the 1997 amended
and restated plan for settlement--Company in his capacity as a
preferred stockholder of Stones, Inc., because that document
provided:

The Company shall offer to exchange the preferred
stock in Stones [Inc.] currently held by E.E. Stone,
III for new preferred stock in Stones [Inc.] which
shall be classified as non-voting stock in all events
(“New Preferred Stock”). * * *

The Company shall have the right beginning in 1999
and for each year thereafter to redeem New Preferred
Stock equal to 20% of the New Preferred Stock outstand-
ing on January 1, 1999 on a pro rata basis until all
New Preferred Stock has been redeemed. The New Pre-
ferred Stock if redeemed by the Company, in its sole
discretion, shall be redeemed based on a 1996 appraised
value of the preferred stock by Houlihan, Lokey, which
estimates the value of the 5,100 shares of preferred
stock at $4,462,500, so that the redemption price of
any redeemed share shall at all times be $875.00 per
share plus any dividends declared but not yet paid.
 - 40 -

amended and restated plan for settlement--trusts and estate

provided in part as follows:

II. TRUST ISSUES

A. EXISTING TRUSTS
(a) Administrative Transfer to New Trusts
The existing trusts established by the
1976 Agreement and Declaration of Trust
(“Existing Trusts”) will remain in exis-
tence as two (2) trusts. Upon receipt
by the parties of a favorable Private
Letter Ruling * * * the Probate Court
shall release * * * [documents relating
to the administrative division of the
Trusts] from escrow, and thereby admin-
istratively establish eleven New Trusts
* * *.

It is the intent of the parties that the
release of the Trust-related Plan Docu-
ments implements the Trust-related as-
pects of the settlement and that no
further action by the parties shall be
necessary to effect the administrative
division of the two Existing Trusts into
eleven New Trusts (as defined herein),
the installation of the New Trustees (as
defined herein) and the funding of these
New Trusts or that any such action be
ministerial and not discretionary in
nature.

The failure of a beneficiary to identify
an Independent Trustee who has executed
the Certification and Acceptance and is
willing to serve over his or her New
Trust shall not delay the release or
implementation of the Trust-related Plan
Documents. In the event an Independent
Trustee selected by a beneficiary cannot
be installed over a New Trust at the
time the Probate Court releases the
Trust-related Plan Documents from es-
crow, that beneficiary’s New Trust shall
be administered by the Existing Trustees
until such time as that beneficiary
 - 41 -

obtains an Independent Trustee who is
willing to serve as the Independent
Trustee of that beneficiary’s New Trust
on the terms and conditions set forth in
the Amended Plan and Trust-related Plan
Documents.

* * * * * * *

(b) For purposes of this Amended Plan, a Trustee
of a New Trust is “qualified” if he or she is
a capable and responsible individual; a
Trustee of a New Trust is “Independent” if
that individual is not related by blood or
marriage to any Child or Grandchild (herein-
after “Independent Trustee”). * * *

* * * * * * *

H. UNDERSTANDING OF DISTRIBUTION PROVISIONS

The distributions from the New Trusts shall
be in accordance with the provision of the Exist-
ing Trusts. In this respect, there has been a
legitimate dispute as to the interpretation of the
Existing Trust provisions. The parties acknowl-
edge that the language, intent and circumstances
relating to the Existing Trusts are such that any
income received or generated by the New Trusts
shall be distributed in accordance with the dis-
tribution standards and provisions of the 1976
Trust Agreement, as restated in the New Trusts.
* * *

With respect to the issues relating to the children’s

concerns regarding Mr. Stone’s and Ms. Stone’s assets, the 1997

amended and restated plan for settlement--trusts and estate

provided in part as follows:

III. ESTATE ISSUES

A. GENERAL
It is contemplated that prior to the
release of the Amended Plan and Plan Docu-
 - 42 -

ments from escrow,[25] the estate matters set
forth in this Section will have been agreed
to by E.E. Stone, III and Allene W. Stone and
all documents necessary to fully fund the
Family Limited Partnerships and to otherwise
implement the Estate Section of the Amended
Plan will have been executed and placed in
escrow * * *. The parties understand that
E.E. Stone, III and Allene W. Stone have the
right to make such estate decisions as they
deem appropriate. In the event they do not
adopt the estate plan set forth in this Sec-
tion, the Amended Plan shall not be effective
unless and until an alternative estate plan
is agreed to.

B. TESTAMENTARY TRUSTS
There shall be no trusts for descendants
under the Wills of E.E. Stone, III or Allene
W. Stone. After the death of the first of
E.E. Stone, III or Allene W. Stone, the por-
tion of the estate not going to the surviving
spouse shall, after payment of estate taxes
and expenses of administration, be distrib-
uted equally and directly to each of the four
Children or that Child’s estate, provided,
however, that the decedent’s interest in each
of the Children’s Limited Partnerships shall
be distributed directly to the Child for
whose Partnership such interest is held.
After the death of the surviving spouse, the
assets remaining in the estate of E.E. Stone,

25
With respect to the “escrow” referred to in paragraph A of
section III of the 1997 amended and restated plan for settlement-
-trusts and estate, that plan provided in part as follows:

Executed copies of * * * [this amended plan] and all
documents specified therein (“Plan Documents”) shall be
placed in escrow with the Probate Court. * * * [this
amended plan] and Plan Documents shall not be effective
unless and until they are released from escrow by the
Probate Court * * *.

As discussed below, on Apr. 5, 1997, the Probate Court entered an
order approving the 1997 amended and restated plan for settle-
ment.
 - 43 -

III and/or Allene W. Stone shall, after pay-
ment of estate taxes and expenses of adminis-
tration, be distributed equally to the four
Children or that Child’s estate, subject,
however, to the provision that the decedent’s
interest in each of the Children’s Limited
Partnerships shall be distributed directly to
the Child for whose Partnership such interest
is held.

C. FAMILY SETTLEMENT AGREEMENT
The Children and Grandchildren (or their
guardians ad litem) and the Stone Foundation
(if necessary) have executed a Family Settle-
ment Agreement (pursuant to S.C. Code § 62-3-
1101 et seq.) which provides for a division
inter se [sic] of the estates of E.E. Stone,
III and Allene W. Stone in the manner set
forth in this Section III in the event E.E.
Stone, III or Allene W. Stone fail to main-
tain their Wills in the same manner. The
Family Settlement Agreement acknowledges that
in the event E.E. Stone, III executes a new
Will, Codicil or other agreement which does
not conform to the distribution outline in
the “Stone Family Limited Partnership Distri-
bution Schedule” dated April 3, 1997 and
attached hereto as Exhibit “J” (“the Chart”)
and in this Amended Plan, the Children none-
theless agree (a) the distribution outlined
in such Chart and in this Amended Plan is
fair and equitable; (b) to abide by the terms
of such distribution as a Family Settlement
Agreement pursuant to South Carolina Code §
62-3-1101, et seq.; and (c) to include what-
ever provisions are necessary to preserve any
applicable marital deductions. * * *

* * * * * * *

E. STONE FOUNDATION
The Stone Foundation shall be divided
into four separate, equal, and entirely inde-
pendent foundations with each Child (and/or
designee) as one of the trustees(s) of one
separate foundation, but with 20% of the
required income to be distributed by E.E.
Stone, III to his favorite church, and/or
 - 44 -

other charities during his lifetime. The
parties shall take all steps necessary to
establish and fund the four foundations with-
in ten (10) business days of the entry of the
Escrow Order.

* * * * * * *

H. NEW PLAN FOR ESTATES

* * * * * * *

In the event that assets remaining in
the Parents’ L.P. [ES3LP] as shown in column
G,[26] together with assets listed in column H
and other assets of E.E. Stone, III are not
sufficient to pay health, maintenance, and
other reasonable (1995 standard) expenses for
E.E. Stone, III and Allene W. Stone, the
deficit shall [be] borne equally by assets in
the four Children’s Limited Partnerships. If
the assets in the residuary estate of E.E.
Stone, III and the Parents’ L.P. are insuffi-
cient to pay estate tax or expenses of admin-
istration payable after their deaths, any
remaining estate tax or expenses of adminis-
tration shall be borne equally by assets in
the four Children’s Limited Partnerships.

* * * * * * *

The Children shall use their reasonable
best efforts to encourage E.E. Stone, III, to
agree to the following: (a) to rent the
Cherrydale house to Stone Manufacturing Co.
until it is sold to Stone Manufacturing Co.
for its fair market value as determined by a
competent appraiser (which appraisal shall
include, among other things the cost of the
rennovation [sic] and the new furniture and
fixtures) agreed to by the Buyer and Seller
and (b) to revise his Will accordingly. Upon
the * * * death of E.E. Stone, III, the nec-

26
It is not clear from the record the columns to which
paragraph H of section III of the 1997 amended and restated plan
for settlement--trusts and estate referred.
 - 45 -

essary portion of the proceeds from the life
insurance policy maintained on E.E. Stone,
III, by Stone Manufacturing Co. shall be
reserved and used by Stone Manufacturing Co.
to consumate [sic] the purchase of the
Cherrydale house.

[I.] CEDAR MOUNTAIN DIVISION
The division of Cedar Mountain for
purposes of the Chart and the Mary Fra-
ser Limited Partnership shall be as
follows:

(1) The parties agree to the two-page
Cedar Mountain division map * * *
which has been signed by * * * [the
children]. * * *

(2) The deeds to 1,054.415 acres from
E.E. Stone, III, to the Mary Fraser
Limited Partnership will reserve
for the 1,054.415-acre tract a
* * * qualified road right-of-way
and utility permanent easements
through the adjacent 582.672-acre
Life Estate Tract following the
route of the existing roads * * *.

(3) A provision shall be included in
the Family Settlement Agreement
acknowledging the Children’s agree-
ment that the Mary Fraser Limited
Partnership shall receive the Mary
Fraser Parcel, and that the remain-
der interest in the Life Estate
Parcel shall be given to Ann [sic]
Logan Ministries, Inc., a 501(c)(3)
charitable organization, with E.E.
Stone, III, retaining a life estate
in the Life Estate Parcel.

* * * * * * *

L. MAINTENANCE OF PARENTS
The four Children, shall jointly bear
the responsibility for the financial mainte-
nance of E.E. Stone, III and Allene W. Stone
during their lives, utilizing the assets
 - 46 -

available to the parents (“Parental Assets”)
for such maintenance in the same or better
manner as in recent years. * * *

* * * Mary Stone Fraser shall be dele-
gated responsibility for the management of
the care for Allene W. Stone, supported by
others. Allene W. Stone may be moved with
Mary Fraser, including to the residence of
E.E. Stone, III if he is ever incapacitated
and unable to occupy the residence * * *.

The 1997 amended and restated plan for settlement--trusts

and estate further provided in part as follows:

IV. IMPLEMENTATION AND JURISDICTION

* * * * * * *

B. CONTINUING JURISDICTION
The Probate Court * * * shall maintain
continuing jurisdiction to resolve any Trust-
related disputes which shall arise during the
implementation and enforcement of this set-
tlement agreement. The parties will seek to
have a hearing on the Amended Plan as soon as
practicable after its execution.

Neither Mr. and Ms. Stone nor the children anticipated that

their parents would need any financial assistance during their

parents’ respective lives. As discussed above, after consulting

with their accountants, Mr. Stone and Ms. Stone retained, and did

not transfer to the Five Partnerships, total assets that they

believed would enable them to maintain their respective accus-

tomed standards of living. Nonetheless, the parties in the

litigation among the children included paragraphs H and L of

section III in the 1997 amended and restated plan for settlement-

-trusts and estate in order to address and resolve the possibil-
 - 47 -

ity that their parents might need financial assistance during

their parents’ respective lives. Those paragraphs reflected the

children’s agreement that, in the unlikely event that the total

assets held by ES3LP and the total assets owned by Mr. Stone and

Ms. Stone were insufficient to enable them to maintain their

respective accustomed standards of living, the children, as a

group, would share equally in providing for the maintenance of

their parents at such standards of living through distributions

of equal amounts from ES4LP, CRSLP, RSMLP, and MSFLP, respec-

tively.

The parties in the litigation among the children also

addressed in paragraph H of section III of the 1997 amended and

restated plan an issue relating to estate taxes and estate

administration expenses payable after Mr. Stone and Ms. Stone

died. Those parties resolved that issue by agreeing in that

paragraph that, in the event the total assets in Mr. Stone’s

residuary estate and the total assets owned by ES3LP were not

sufficient to pay estate taxes and estate administration expenses

owing as a result of their parents’ respective deaths, the

children, as a group, would share equally in paying any such

taxes and expenses through distributions of equal amounts from

ES4LP, CRSLP, RSMLP, and MSFLP, respectively.

The 1997 amended and restated plan for settlement--Company

provided in part as follows:
 - 48 -

PREAMBLE

This “Amended and Restated Plan for Settlement-
Company” sets forth the provisions of the parties’
settlement relating to Stones, Inc. (“Stones”) and
Stone Manufacturing Co. (“SMC”) (and their subsidiar-
ies) and amends and restates the Plan for Settlement
dated June 3, 1994 and the First Amendment dated as of
March 28, 1996 among the same parties.

I. EFFECT OF THE AMENDED PLAN

(a) Executed copies of this Amended and Restated
Plan for Settlement - Company and all docu-
ments specified herein (“Plan Documents”)
shall be placed in escrow with the Probate
Court and shall not be effective unless and
until they are released from escrow by the
Probate Court * * *.

II. COMPANY

A. GENERAL
Stones and SMC may be merged * * * provided
such merger does not violate the provisions
of any agreement for borrowed money to which
Stones or SMC is a party, but no merger is
required. In the event the merger does oc-
cur, any reference contained in this Amended
Plan to the “Company”, its Board, its offi-
cers, its shareholders, its Common Stock and
its obligations shall refer to the surviving
entity of the merger, its Board, its Nominat-
ing Committee, its officers, its sharehold-
ers, its Common Stock and its obligations.
In the event the merger does not occur and
Stones and SMC continue to exist as separate
entities, except to the extent otherwise
provided herein, any reference contained in
this Amended Plan to the “Company”, its
Board, its Nominating Committee, its offi-
cers, its shareholders, its Common Stock and
its obligations shall refer to each of Stones
and SMC separately, as to its own Board, its
Nominating Committee, its officers, its
shareholders, its Common Stock and its obli-
gations.
 - 49 -

* * * * * * *

C. BOARD OF DIRECTORS - SELECTION OF DIRECTORS
E.E. Stone, IV and C. Rivers Stone shall
both be selected as initial members of the
Board. At least three members of the Board
shall be independent outside directors; pro-
vided, however, that the Board initially may
be comprised solely of management representa-
tives * * * prior to the proposed initial
public offering of equity securities (“IPO”)
of Stones, SMC or the surviving entity of the
merger * * *.

* * * * * * *

IV. OWNERSHIP OF COMPANY

A. MERGER OF STONES AND SMC
Stones and SMC may be merged * * *. The
shareholders agree to vote their stock in favor of
any such merger that is recommended by the Board.

* * * * * * *

B. SHARE EXCHANGE
The shares of Common Stock of SMC, now held
by E.E. Stone, IV, C. Rivers Stone, Mary Stone
Fraser and Rosalie Stone Morris, the shares of
Common Stock of Stones, held by the Existing
Trusts * * * may be exchanged or otherwise changed
to align their shares * * * at the Stones corpo-
rate level in a transaction recommended by the
Board. * * *

* * * * * * *

The shareholders agree to vote their stock in
favor of a share exchange consistent with this
provision that is recommended by the Board and to
exchange their shares as required.

* * * * * * *

I. PREFERENTIAL RIGHT TO SELL COMMON STOCK
The New Trusts for Mary Stone Fraser, Mary
Wyman Stone Fraser Davis and Laura Lawton Stone
Fraser Arnal (the “Fraser New Trusts”), the New
 - 50 -

Trusts for Rosalie Stone Morris, Charles Hill
Morris, Jr., and Rosalie Morris (the “Morris New
Trusts”), and the New Trusts for Chris Stone,
Frances Stone and Rosalie Stone shall have the
right (but not the obligation) to dispose of their
entire holding of Common Stock in the IPO and in a
subsequent offering, should they choose to do so.
Mary Stone Fraser and Rosalie Stone Morris shall
have the right to sell their directly owned shares
in either the initial or subsequent offering.
* * *

J. SALE OF THE COMPANY
The Board, with the approval of the share-
holders * * * may effect a sale of the Company or
other sale involving all of the stock or substan-
tially all of the assets of the Company upon such
terms and conditions as shall be determined by the
Board.

* * * * * * *

M. DIVIDEND PAYMENTS
(a) To the extent actually permitted under
all financing arrangements to which SMC
is a party, SMC shall pay a dividend to
the shareholders in 1997 of $1 million
for fiscal year 1996 to shareholders of
record as of December 31, 1996. * * *

(b) Mandatory dividends on all Common Stock
of SMC shall be determined, and to the
extent permitted under all financing
arrangements to which SMC is a party
paid to the shareholders as soon as
practicable after the end of each fiscal
year in which consolidated net after-tax
earnings * * * for that year exceed $5
million * * *.

* * * * * * *

VII. IMPLEMENTATION AND JURISDICTION

* * * * * * *

B. CONTINUING JURISDICTION AND FURTHER ASSURANCES
The parties agree to take whatever additional
 - 51 -

actions and execute whatever additional documents
are reasonably necessary to accomplish the provi-
sions hereof * * *. The Probate Court * * * shall
maintain exclusive continuing jurisdiction to
resolve any disputes which shall arise during the
implementation and enforcement of the Amended Plan
and the Company-related Plan Documents. The par-
ties will seek to have a hearing on the Amended
Plan as soon as practicable after its execution.

Because, as discussed above, the Probate Court continued to

retain jurisdiction over any issues relevant to the litigation

among the children, the parties in that litigation submitted the

1997 amended and restated plan for settlement to the Probate

Court for approval. Until and unless the Probate Court approved

that plan, none of the partnerships was to be funded. On April

5, 1997, the Probate Court entered an order approving the 1997

amended and restated plan for settlement, finding it to be fair

and equitable to all of the parties to that plan and consistent

with South Carolina law.

On April 5, 1997, the children and their respective children

entered into a family settlement agreement, as provided for in

the 1997 amended and restated plan for settlement--trusts and

estate. That agreement provided in part as follows:

WHEREAS, in furtherance of an estate plan which
has been developed for Mr. and Mrs. Stone, the parties
to this Family Settlement Agreement entered into an
Amended and Restated Plan For Settlement, (the “Plan”)
[the 1997 amended and restated plan for settlement],
* * *

WHEREAS, pursuant to the Plan, the Family per-
suaded Mr. and Mrs. Stone to execute new Wills, (col-
lectively the “New Wills”) [Mr. Stone’s will executed
 - 52 -

on April 5, 1997, discussed below, and Ms. Stone’s will
executed on May 3, 1997, discussed below] * * *.

WHEREAS, being mindful that Mr. and Mrs. Stone
could subsequently execute other wills or codicils and
revoke or amend the New Wills, the Family has agreed,
pursuant to the Plan, to enter into this Family Settle-
ment Agreement, the terms and provisions of which are
consistent with the New Wills and the Plan, and which
is intended to resolve the * * * [litigation among the
children and the children’s concerns regarding Mr.
Stone’s and Ms. Stone’s assets] as it relates to any
future will contest concerning the proper disposition
of Mr. Stone’s estate and Mrs. Stone’s estate upon
their respective deaths.

* * * * * * *

2. Terms of Family Settlement Agreement include
those of the Plan and New Wills. If either Mr. or Mrs.
Stone executes any subsequent will or codicil, or
otherwise effectively revokes the New Wills, which
would cause a distribution from their estates to the
Family in a manner inconsistent with the Plan or the
New Wills, then that portion of their estates which was
left to the Family under the subsequent will or codicil
shall pass to the Family according to the provisions of
the Plan and the New Wills [Mr. and Ms. Stone’s New
Wills] as set forth in Exhibits A, B and C and this
Family Settlement Agreement. * * *

3. State Law to Govern. This Family Settlement
Agreement shall be construed, regulated and governed by
and in accordance with the laws of the State of South
Carolina, notwithstanding the residence in any other
jurisdiction of any member of the Family.

On April 5, 1997, Mr. Stone executed his last will and

testament (Mr. Stone’s will). Mr. Stone’s will provided in part

as follows:

(1) Prior Wills. I hereby revoke all other wills
and codicils heretofore made by me.

(2) Debts, Expenses and Mortgages. I direct my
Personal Representative to pay my legal debts, my
 - 53 -

funeral expenses, any unpaid expenses of my last ill-
ness, and the cost of a suitable tombstone or marker
for my grave. Such debts and expenses shall first be
paid out of and charged against the EUGENE E. STONE,
III LIMITED PARTNERSHIP, or any proceeds received by my
estate from any individual retirement account or de-
ferred compensation. In the event these sources of
funds are insufficient to pay such debts and expenses,
then such remaining debts and expenses shall be paid
out of and charged equally against the limited partner-
ships established by me for my children. In the event
there are insufficient assets in a limited partnership
established by me for a child of mine to pay an equal
amount of such remaining debts and expenses, then the
child of mine who received or receives an interest in
such limited partnership, or such child’s estate, as
the case may be, shall be responsible for the payment
of an equal amount of any such remaining debts and
expenses. * * *

(3) Taxes. * * *

(a) Except as provided * * * below, I direct that
all estate, generation-skipping transfer,
inheritance, transfer, succession, death, or
similar taxes which may be assessed or im-
posed upon or with respect to any interest in
a limited partnership established by me for a
child of mine which is included in my gross
estate for the purpose of such taxes * * *
shall be paid out of and charged against such
limited partnership, and shall not be charged
against the marital deduction. In the event
there are insufficient assets in a limited
partnership established by me for a child of
mine to pay such taxes, then the child of
mine who received or receives an interest in
such limited partnership, or such child’s
estate, as the case may be, shall be respon-
sible for the payment of any such remaining
taxes.

(b) Except as provided in Paragraph (3)(c) below,
I direct that any taxes which may be assessed
or imposed by Section 2035(c) of the Internal
Revenue Code, as amended, or corresponding
provision of state law, including any inter-
est or penalties thereon, as a result of any
 - 54 -

gift tax paid or payable with respect to any
interest in any limited partnerships estab-
lished by me for my children which were the
subject of any gifts made by me during my
lifetime, shall be paid out of and charged
equally against such limited partnerships,
and shall not be charged against the marital
deduction. In the event there are insuffi-
cient assets in a limited partnership estab-
lished by me for a child of mine to pay an
equal amount of such taxes, then the child of
mine who received a gift of an interest in
such limited partnership, or such child’s
estate, as the case may be, shall be respon-
sible for the payment of an equal amount of
any such remaining taxes.

(c) In the event the Internal Revenue Service or
any other taxing authority changes the value
attributable to (i) any assets I have con-
tributed to a limited partnership established
by me for a child of mine * * * then I direct
that all gift, estate, generation-skipping
transfer, inheritance, transfer, succession,
death, or similar taxes which may be assessed
or imposed as a result of such change in
value, * * * shall be paid out of and charged
against the limited partnership that received
such contribution * * * and shall not be
charged against the marital deduction. In
the event there are insufficient assets in a
limited partnership established by me for a
child of mine to pay such taxes, then the
child of mine who received such gift, or
whose limited partnership received such con-
tribution, or such child’s estate, as the
case may be, shall be responsible for the
payment of any such remaining taxes.

(d) I direct that all other estate, generation-
skipping transfer, inheritance, transfer,
succession, death, or similar taxes, includ-
ing any interest or penalties thereon, pay-
able by reason of my death * * * or assessed
or imposed with respect to my estate, or any
part thereof, whether or not passing under
this will, or any codicil thereto, including
all policies of insurance on my life, all
 - 55 -

bequests and devises, all transfers made by
me during my lifetime, all jointly held prop-
erty, all pension and profit-sharing bene-
fits, deferred compensation benefits and
individual retirement accounts, and all pow-
ers, rights, or other interests in property
included in my gross estate for the purpose
of such taxes, shall first be paid out of and
charged against my residuary estate. In the
event there are insufficient assets in my
residuary estate to pay such taxes, then such
remaining taxes shall be paid out of and
charged equally against the limited partner-
ships established by me for my children. In
the event there are insufficient assets in a
limited partnership established by me for a
child of mine to pay an equal amount of such
remaining taxes, then the child of mine who
received or receives an interest in such
limited partnership, or such child’s estate,
as the case may be, shall be responsible for
the payment of an equal amount of any such
remaining taxes. * * *

* * * * * * *

(4) Specific Bequests. I hereby make the follow-
ing specific bequests:

(a) I give, devise and bequeath all of my tangi-
ble personal effects * * * to my children * * *.

(b) If my wife * * * survives me, I give, devise
and bequeath any interest that I may own at the time of
my death in the EUGENE E. STONE, III LIMITED PARTNER-
SHIP, or its successor, and any proceeds, net of taxes,
received by my estate from any individual retirement
account or deferred compensation * * * to be held in
the ALLENE WYMAN STONE TRUST * * *. If my wife * * *
does not survive me, then I give, devise and bequeath
any interest that I may own at the time of my death in
* * * [ES3LP] to my children * * *.

(c) I give, devise and bequeath any interest that
I may own at the time of my death in the C. RIVERS
STONE LIMITED PARTNERSHIP, or its successor, to my son,
C. RIVERS STONE, if he survives me, to be his abso-
lutely, but if he does not survive me, to my said son’s
 - 56 -

estate.

(d) I give, devise and bequeath any interest that
I may own at the time of my death in the E.E. STONE, IV
LIMITED PARTNERSHIP, or its successor, to my son, E.E.
STONE, IV, if he survives me, to be his absolutely, but
if he does not survive me, to my said son’s estate.

(e) I give, devise and bequeath any interest that
I may own at the time of my death in the MARY STONE
FRASER LIMITED PARTNERSHIP, or its successor, to my
daughter, MARY S. FRASER, if she survives me, to be
hers absolutely, but if she does not survive me, to my
said daughter’s estate.

(f) I give, devise and bequeath any interest that
I may own at the time of my death in the ROSALIE STONE
MORRIS LIMITED PARTNERSHIP, or its successor, to my
daughter, ROSALIE S. MORRIS, if she survives me, to be
hers absolutely, but if she does not survive me, to my
said daughter’s estate.

* * * * * * *

(5) Allene Wyman Stone Trust. THE ALLENE WYMAN
STONE TRUST shall be held, managed, invested and rein-
vested, administered and distributed upon the following
terms and conditions and for the following uses and
purposes:

(a) If my wife * * * survives me, then * * * my
Trustee shall pay all of the net income from
this trust, at least quarterly, to or for the
benefit of my wife * * * for and during the
term of her life. * * *

(b) Upon the death of my wife * * * the remaining
principal of this trust shall be distributed
to my children. * * *

(c) My Personal Representative shall, in its
discretion, determine whether to elect under
Section 2056(b)(7) of the Internal Revenue
Code * * * to qualify any specific portion or
all of this trust for the estate tax marital
deduction. * * *

* * * * * * *
 - 57 -

(e) * * * It is my intention that my wife under
the provisions of this trust have substan-
tially that degree of beneficial enjoyment of
this trust during her lifetime which the
principles of the law of trusts accord to a
person who is unqualifiedly designated as the
life beneficiary of a trust, and my Trustee
shall not exercise its discretion in a manner
which is not in accord with this expressed
intention. It is also my intention that my
Trustee shall invest this trust so that it
will produce for my wife during her lifetime
an income which is consistent with the value
of the trust property and with its preserva-
tion. Therefore, non-income producing prop-
erty shall not be held as a part of this
trust for more than a reasonable period of
time without the approval of my wife. In
addition, my wife may require my Trustee at
any time to either make any nonproductive
property of this trust productive or to con-
vert such nonproductive property to produc-
tive property within a reasonable period of
time. It is expressly provided that my
Trustee shall not in the exercise of its
discretion make any determination inconsis-
tent with the foregoing.

* * * * * * *

(8) Powers of * * * Trustee. In addition to such
powers as my * * * Trustee may have by law, I authorize
each of them, in their discretion, to exercise the
following powers, which at all times shall be exercised
in a fiduciary capacity for the benefit of the benefi-
ciaries herein: * * * to sell, exchange, grant options
and dispose of said property, real, personal, tangible
or intangible at such prices and on such terms as they
deem proper; * * * to invest and reinvest in any kind
of property, real, personal, tangible or intangible,
including, but not limited to, common trust funds,
stocks, options, futures, contracts, rights, warrants,
puts, calls, bonds, notes, mortgages, general or lim-
ited partnership interests, limited liability compa-
nies, savings accounts and certificates of deposit, and
similar liquid funds, mutual funds, real estate, and
stock of any corporate fiduciary serving hereunder or
 - 58 -

the holding company of such corporate fiduciary; * * *
to make distributions in cash or in kind, * * * to
continue and operate any business owned by me at my
death in the form either of a sole proprietorship,
partnership, limited liability company or corporation,
and to do any and all things deemed needful or appro-
priate by my * * * Trustee, including the power to
incorporate or form the business and to put additional
capital into the business, for such time as they shall
deem advisable, without liability for loss resulting
from the continuance or operation of the business
except for their own negligence; * * * and to do all
other acts which in their discretion may be necessary
or appropriate for the proper and advantageous manage-
ment, investment and distribution of my estate or any
trust hereunder, all of which may be done without order
of or application to any court. Notwithstanding any
provision in this will to the contrary, any duty or
power granted to my * * * Trustee shall be absolutely
void to the extent that the right to perform such duty,
or to exercise such power, or the performance or exer-
cise thereof would in any way cause my estate to lose
all or any part of the tax benefits afforded by the
marital deduction or any exemption allowed pursuant to
the generation-skipping transfer tax provisions under
either federal or state laws * * *.

* * * * * * *

(15) * * * Trustee. * * * I * * * nominate,
constitute and appoint my children * * * as Co-Trustees
of all trusts created in this will. * * *

On May 3, 1997, Ms. Stone executed her last will and testa-

ment (Ms. Stone’s will). Ms. Stone’s will provided as follows:

I, ALLENE WYMAN STONE, a resident of and domiciled
in Greenville County, South Carolina, do hereby make,
publish and declare this writing to be and contain my
Last Will and Testament, hereby revoking any and all
other Wills or Codicils to Wills at any time heretofore
made by me.

ITEM I

I direct that all of my just debts, secured and
unsecured, be paid as soon as practicable after my
 - 59 -

death; however, I direct that my Personal Representa-
tive may cause any debt to be carried, renewed and
refinanced from time to time upon such terms and with
such securities for its repayment as my Personal Repre-
sentative may deem advisable taking into consideration
the best interest of the beneficiaries hereunder.

ITEM II

I direct that all estate, inheritance, succession,
death or similar taxes (except generation-skipping
transfer taxes) assessed with respect to my estate
herein disposed of, or any part thereof, or on any
bequest or devise contained in this my Last Will and
Testament (which term wherever used herein shall in-
clude any codicil hereto), or on any insurance upon my
life or on any property held jointly by me with another
or on any transfer made by me during my lifetime or on
any other property or interest in property included in
my estate shall be paid out of my residuary estate and
shall not be charged against the marital deduction. In
the event there are insufficient assets in my residuary
estate which are not selected for the marital deduction
to my estate taxes, then my Personal Representative may
charge any such remaining tax payments against the
marital deduction. Notwithstanding the foregoing, if
any such tax (including any interest or penalties
thereon) is imposed on property includible in my gross
estate by reason of Section 2044 of the Internal Reve-
nue Code, as amended, or corresponding provision of
state law, I direct my Personal Representative to
recover such tax as provided in Section 2207A of the
Internal Revenue Code, as amended, or corresponding
provision of state law.

ITEM III

* * * * * * *

* * * I give and devise all of my tangible per-
sonal effects and household effects of every kind * * *
to my children * * *, in equal shares * * *.

* * * * * * *

ITEM IV

If my husband * * * survives me, I give, devise
 - 60 -

and bequeath any interest that I may own at the time of
my death in * * * [ES3LP] to be held in trust pursuant
to the terms of Item V of this Will. If my husband * *
* does not survive me, then I give, devise and bequeath
any interest that I may own at the time of my death in
* * * [ES3LP] * * * to my children * * *, in equal
shares * * *.

* * * * * * *

ITEM VI

I give, devise and bequeath all the rest, residue
and remainder of my property of every kind and descrip-
tion * * * to my children * * *.

On June 14, 1997, Ms. Stone executed a first codicil to Ms.

Stone’s will (Ms. Stone’s codicil). Ms. Stone’s codicil deleted

Item II and Item IV of Ms. Stone’s will and replaced them with

the following new Item II and Item IV:

ITEM II

I direct that all estate, inheritance, transfer,
succession, death, or similar taxes, including any
interest or penalties thereon, payable by reason of my
death, or assessed or imposed with respect to my es-
tate, or any part thereof, whether or not passing under
this Will, or any codicil thereto, shall be paid as
follows:

(a) Except as provided * * * below, I direct that
all estate, generation-skipping transfer,
inheritance, transfer, succession, death, or
similar taxes which may be assessed or im-
posed upon or with respect to any interest in
a limited partnership established for a child
of mine which is included in my gross estate
for the purpose of such taxes * * * shall be
paid out of and charged against such limited
partnership. In the event there are insuffi-
cient assets in a limited partnership estab-
lished for a child of mine to pay such taxes,
then the child of mine who received or re-
ceives an interest in such limited partner-
 - 61 -

ship, or such child’s estate, as the case may
be, shall be responsible for the payment of
any such remaining taxes.

(b) Except as provided in subparagraph (c) below,
I direct that any taxes which may be assessed
or imposed by Section 2035(c) of the Internal
Revenue Code, as amended, or corresponding
provision of state law, including any inter-
est or penalties thereon, as a result of any
gift tax paid or payable with respect to any
interest in any limited partnerships estab-
lished for my children which were the subject
of any gifts made by me during my lifetime,
shall be paid out of and charged equally
against such limited partnerships. In the
event there are insufficient assets in a
limited partnership established for a child
of mine to pay an equal amount of such taxes,
then the child of mine who received a gift of
an interest in such limited partnership, or
such child’s estate, as the case may be,
shall be responsible for the payment of an
equal amount of any such remaining taxes.

(c) In the event the Internal Revenue Service or
any other taxing authority changes the value
attributable to (i) any assets I have con-
tributed to a limited partnership established
for a child of mine * * * then I direct that
all gift, estate, generation-skipping trans-
fer, inheritance, transfer, succession, death
or similar taxes which may be assessed or
imposed as a result of such change in value,
* * * shall be paid out of and charged
against the limited partnership that received
such contribution, or was the subject of such
gift, as the case may be. In the event there
are insufficient assets in a limited partner-
ship established for a child of mine to pay
such taxes, then the child of mine who re-
ceived such gift, or whose limited partner-
ship received such contribution, or such
child’s estate, as the case may be, shall be
responsible for the payment of any such re-
maining taxes.

(d) I direct that all other estate, generation-
 - 62 -

skipping transfer, inheritance, transfer,
succession, death, or similar taxes, includ-
ing any interest or penalties thereon, pay-
able by reason of my death * * * or assessed
or imposed with respect to my estate, or any
part thereof, whether or not passing under
this Will, or any codicil thereto, including
all policies of insurance on my life, all
bequests and devises, all transfers made by
me during my lifetime, all jointly held prop-
erty, all pension and profit-sharing bene-
fits, deferred compensation benefits and
individual retirement accounts, and all pow-
ers, rights, or other interests in property
included in my gross estate for the purpose
of such taxes, shall first be paid out of and
charged against my residuary estate. In the
event there are insufficient assets in my
residuary estate to pay such taxes, then such
remaining taxes shall be paid out of and
charged equally against the limited partner-
ships established for my children. In the
event there are insufficient assets in a
limited partnership established for a child
of mine to pay an equal amount of such re-
maining taxes, then the child of mine who
received or receives an interest in such
limited partnership, or such child’s estate,
as the case may be, shall be responsible for
the payment of an equal amount of any such
remaining taxes. * * *

ITEM IV

I hereby make the following specific bequests:

(a) I give, devise and bequeath any interest that
I may own at the time of my death in the
EUGENE E. STONE, III LIMITED PARTNERSHIP, or
its successor, to my children * * * in equal
shares * * *.

(b) I give, devise and bequeath any interest that
I may own at the time of my death in the C.
RIVERS STONE LIMITED PARTNERSHIP, or its
successor, to my son, C. RIVERS STONE, if he
survives me, to be his absolutely, but if he
does not survive me, to my said son’s estate.
 - 63 -

(c) I give, devise and bequeath any interest that
I may own at the time of my death in the E.E.
STONE, IV LIMITED PARTNERSHIP, or its succes-
sor, to my son, E.E. STONE, IV, if he sur-
vives me, to be his absolutely, but if he
does not survive me, to my said son’s estate.

(d) I give, devise and bequeath any interest that
I may own at the time of my death in the MARY
STONE FRASER LIMITED PARTNERSHIP, or its
successor, to my daughter, MARY S. FRASER, if
she survives me, to be hers absolutely, but
if she does not survive me, to my said daugh-
ter’s estate.

(e) I give, devise and bequeath any interest that
I may own at the time of my death in the
ROSALIE STONE MORRIS LIMITED PARTNERSHIP, or
its successor, to my daughter, ROSALIE S.
MORRIS, if she survives me, to be hers abso-
lutely, but if she does not survive me, to my
said daughter’s estate.

On April 8, 1997, Mr. Stone gave to each of the children an

undivided .25-percent interest in the Cherrydale residence. On

April 8, 1997, Mr. Stone gave to Eugene Earle Stone, IV, an

undivided one-percent interest in 11.603 acres of land located on

Keith Drive, in Greenville County, South Carolina (Keith Drive

property). On April 8, 1997, Mr. Stone gave to C. Rivers Stone

an undivided one-percent interest in each of various parcels

totaling 366.097 acres of the Piney Mountain property. On April

8, 1997, Mr. Stone gave to Ms. Morris an undivided one-percent

interest in a 4.263-acre parcel and an undivided one-percent

interest in a .333-acre parcel of the Piney Mountain property.

On April 8, 1997, Mr. and Ms. Stone gave to Ms. Fraser, an
 - 64 -

undivided one-percent interest in the 1054.415-acre parcel of the

Cedar Mountain property.

Around the middle of September 1998, Mr. Stone’s estate

filed on behalf of the deceased Mr. Stone Form 709, United States

Gift (& Generation-Skipping Transfer) Tax Return, for the taxable

year 1997 (1997 gift tax return), in which the above-described

gifts, as well as certain other gifts including those discussed

below, were reported.

In April 1997, the partners of ES3LP made bona fide, arm’s-

length transfers to that partnership, as follows. On April 9,

1997, Mr. Stone transferred to ES3LP the interest that he owned

in the Cherrydale residence and certain other property in ex-

change for both general and limited partnership interests, and

the children transferred to ES3LP the respective interests that

they owned in the Cherrydale residence in exchange for general

partnership interests.27 At a time not disclosed by the record

in April 1997, Ms. Stone transferred certain property that she

owned to ES3LP in exchange for a limited partnership interest.

When the partners of ES3LP formed and funded that partnership,

they contemplated and intended that ES3LP operate as a joint

enterprise for profit for the management of its assets and that

the children contribute their services in providing such manage-

27
Although not altogether clear from the record, it appears
that each of the children also transferred certain other property
to ES3LP in exchange for a general partnership interest.
 - 65 -

ment.

Neither Mr. Stone nor Ms. Stone intended to, or did, live at

the Cherrydale residence after Mr. Stone and the children trans-

ferred their respective interests in that residence to ES3LP. If

Mr. Stone or Ms. Stone had desired to live at the Cherrydale

residence after Mr. Stone and the children transferred their

respective interests in the Cherrydale residence to ES3LP, the

children, as the other partners of ES3LP, would not have ob-

jected, provided that Mr. Stone or Ms. Stone, as the case may be,

used personal funds to pay rent to ES3LP.

After the partners of ES3LP transferred the respective

assets that they owned to ES3LP in exchange for certain partner-

ship interests, the children actively managed the assets of

ES3LP, as Mr. and Ms. Stone intended. In this connection, during

1998, after renovation of the Cherrydale residence was completed

in the fall of 1997, ES3LP rented it to, and received rental

income from, Stone Manufacturing, which used that residence to

house a management team that it decided to retain in order to

assist the Company in addressing certain economic difficulties

that it was having.28 In addition, the respective partnership

28
In Form 1065, U.S. Partnership Return of Income (partner-
ship return), that ES3LP filed for 1998, ES3LP reported gross
rents of $34,650 from Stone Manufacturing for the rental of the
Cherrydale residence. Neither before nor after Mr. Stone and the
children transferred their respective interests in the Cherrydale
residence to ES3LP did Mr. Stone or Ms. Stone report any rental
(continued...)
 - 66 -

returns that ES3LP filed for 1998 and 1999 reflected that ES3LP

made investment decisions to sell some of its assets, including

certain stock that it purchased on May 7, 1997, and that it sold

approximately two years later for a substantial gain.29 ES3LP

also hired advisors and accountants who at all times were differ-

ent from those of ES4LP, CRSLP, RSMLP, and MSFLP. At no time did

the partners of ES3LP, including Mr. Stone and Ms. Stone, commin-

gle the assets that ES3LP owned with their respective personal

assets. At all times, ES3LP was respected by the Stone family as

a separate entity.

In April 1997, the partners of ES4LP made bona fide, arm’s-

length transfers to that partnership, as follows. On April 9,

28
(...continued)
income from that residence in any Federal income tax return. In
Form 1040, U.S. Individual Income Tax Return (Form 1040), that
Mr. and Ms. Stone filed jointly for their taxable year 1995 (1995
joint return), they reported “Rents received” from “various”
rental properties totaling $92,798. The depreciation schedules
attached to the 1995 joint return identify those “various” rental
properties as properties other than the Cherrydale residence. In
Mr. and Ms. Stone’s joint returns for their taxable years 1996
(1996 joint return) and 1997 (1997 joint return), they reported
“Rents received” from “various” rental properties totaling
$99,435 and $34,440, respectively. The respective depreciation
schedules attached to the 1996 joint return and the 1997 joint
return identify those “various” rental properties as properties
other than the Cherrydale residence and as the same properties
from which Mr. and Ms. Stone reported rents in the 1995 joint
return. In Form 1040 that Ms. Stone filed for the taxable year
1998 (Ms. Stone’s 1998 return), Ms. Stone did not report any
rental income.
29
Although not altogether clear from the record, it appears
that ES3LP reinvested the proceeds from the sale of its assets.
 - 67 -

1997, Mr. Stone transferred to ES4LP some of his preferred stock

of Stones, Inc., his interest in the Keith Drive property, and

certain other property, and Eugene Earle Stone, IV, transferred

to ES4LP his interest in the Keith Drive property, in exchange

for both general and limited partnership interests.30 At a time

not disclosed by the record in April 1997, Anne M. Stone trans-

ferred certain property that she owned to ES4LP in exchange for a

general partnership interest. On April 15, 1997, Ms. Stone

transferred certain property that she owned to ES4LP in exchange

for a limited partnership interest. When the partners of ES4LP

formed and funded that partnership, they contemplated and in-

tended that ES4LP operate as a joint enterprise for profit for

the management of its assets and that Eugene Earle Stone, IV,

contribute his services in providing such management.

After the partners of ES4LP transferred the respective

assets that they owned to ES4LP in exchange for certain partner-

ship interests, Eugene Earle Stone, IV, began actively managing

the assets of ES4LP, as Mr. and Ms. Stone intended. In this

connection, Eugene Earle Stone, IV, on behalf of ES4LP,

managed, and made investment decisions with respect to, ES4LP’s

assets. The respective partnership returns that ES4LP filed for

30
Although not altogether clear from the record, it appears
that Eugene Earle Stone, IV, also transferred certain other
property to ES4LP in exchange for general and limited partnership
interests.
 - 68 -

1997 and 1999 reflected that ES4LP sold certain of its stock for

substantial gains.31 Eugene Earle Stone, IV, also hired on

behalf of ES4LP advisors and accountants who at all times were

different from those of ES3LP, CRSLP, RSMLP, and MSFLP. At no

time did the partners of ES4LP, including Mr. Stone and Ms.

Stone, commingle the assets that ES4LP owned with their respec-

tive personal assets. At all times, ES4LP was respected by the

Stone family as a separate entity.

In April 1997, the partners of CRSLP made bona fide, arm’s-

length transfers to that partnership, as follows. On April 9,

1997, Mr. Stone transferred to CRSLP his interest in each of

various parcels totaling 366.097 acres of the Piney Mountain

property and certain other property, and C. Rivers Stone trans-

ferred to CRSLP his interest in each of those parcels, in ex-

change for both general and limited partnership interests.32 At

a time not disclosed by the record in April 1997, Charles R.

Stone, Jr., transferred certain property that he owned to CRSLP

in exchange for both limited and general partnership interests,

and Frances O. Stone transferred certain property that she owned

to CRSLP in exchange for a limited partnership interest. On

31
Although not altogether clear from the record, it appears
that ES4LP reinvested the proceeds from the sale of its stock in
1997 and 1999 in certain real estate.
32
Although not altogether clear from the record, it appears
that C. Rivers Stone also transferred certain other property to
CRSLP in exchange for general and limited partnership interests.
 - 69 -

April 15, 1997, Ms. Stone transferred property that she owned to

CRSLP in exchange for a limited partnership interest. When the

partners of CRSLP formed and funded that partnership, they

contemplated and intended that CRSLP operate as a joint enter-

prise for profit for the management of its assets and that C.

Rivers Stone contribute his services in providing such manage-

ment.

After the partners of CRSLP transferred the respective

assets that they owned to CRSLP in exchange for certain partner-

ship interests, C. Rivers Stone began actively managing the

assets of CRSLP, as Mr. and Ms. Stone intended. In this connec-

tion, C. Rivers Stone, on behalf of CRSLP, began a major project

to convert CRSLP’s Piney Mountain property into a high-end real

property development which was to be known as Montebello and

which was to consist of over 1,000 houses, with, inter alia,

clubhouses for meetings and weddings, as well as shopping cen-

ters. In addition, the partnership return that CRSLP filed for

1997 reflected that CRSLP made investment decisions to sell

certain of its stock for a substantial gain.33 Moreover, the

respective partnership returns that CRSLP filed for 1997, 1998,

and 1999 reflected that CRSLP rented various real properties that

it owned (other than the Piney Mountain property) from which it

33
Although not altogether clear from the record, it appears
that CRSLP reinvested the proceeds from the sale of its stock in,
inter alia, certain real estate.
 - 70 -

received and reported rental income. C. Rivers Stone also hired

on behalf of CRSLP advisors and accountants who at all times were

different from those of ES3LP, ES4LP, RSMLP, and MSFLP. At no

time did the partners of CRSLP, including Mr. Stone and Ms.

Stone, commingle the assets that CRSLP owned with their respec-

tive personal assets. At all times, CRSLP was respected by the

Stone family as a separate entity.

In April 1997, the partners of RSMLP made bona fide, arm’s-

length transfers to that partnership, as follows. On April 9,

1997, Mr. Stone transferred to RSMLP certain of his stock and

securities, including some of his preferred stock of Stones,

Inc., his interest in the 4.263-acre parcel and the .333-acre

parcel of the Piney Mountain property, and certain other prop-

erty, and Ms. Morris transferred to RSMLP her interest in each of

those parcels, in exchange for both general and limited partner-

ship interests.34 At a time not disclosed by the record in April

1997, Mr. Morris transferred certain property that he owned to

RSMLP in exchange for a general partnership interest, and Charles

H. Morris, Jr., and Rosalie S. Morris, II, transferred certain

property that they owned to RSMLP in exchange for limited part-

nership interests. On April 15, 1997, Ms. Stone transferred

certain property, including certain of her stock and securities,

34
Although not altogether clear from the record, it appears
that Ms. Morris also transferred certain other property to RSMLP
in exchange for general and limited partnership interests.
 - 71 -

that she owned to RSMLP in exchange for a limited partnership

interest. When the partners of RSMLP formed and funded that

partnership, they contemplated and intended that RSMLP operate as

a joint enterprise for profit for the management of its assets

and that Ms. Morris contribute her services in providing such

management.

After the partners of RSMLP transferred the respective

assets that they owned to RSMLP in exchange for certain partner-

ship interests, Ms. Morris began actively managing the assets of

RSMLP, as Mr. and Ms. Stone intended. In this connection, Ms.

Morris, on behalf of RSMLP, began actively managing its real

estate holdings. She also transferred certain of RSMLP’s securi-

ties from a brokerage account that it had in Greenville, South

Carolina, to a brokerage account that she opened for it in

Savannah, Georgia, where she was living. In addition, the

respective partnership returns that RSMLP filed for 1997, 1998,

and 1999 reflected that RSMLP made investment decisions to sell

certain of its stock for substantial gains.35 Those partnership

returns also reflected that RSMLP rented certain of its real

property from which it received and reported rental income. Ms.

Morris also hired on behalf of RSMLP advisors and accountants who

at all times were different from those of ES3LP, ES4LP, CRSLP,

35
Although not altogether clear from the record, it appears
that RSMLP reinvested the proceeds from the sale of its stock.
 - 72 -

and MSFLP. At no time did the partners of RSMLP, including Mr.

Stone and Ms. Stone, commingle the assets that RSMLP owned with

their respective personal assets. At all times, RSMLP was

respected by the Stone family as a separate entity.

In April 1997, the partners of MSFLP made bona fide, arm’s-

length transfers to that partnership, as follows. On April 9,

1997, Mr. Stone transferred to MSFLP his interest in the

1054.415-acre parcel of the Cedar Mountain property and certain

other property, and Ms. Fraser transferred to MSFLP her interest

in that property,36 in exchange for both general and limited

partnership interests.37 On the same date, Ms. Stone transferred

to MSFLP the interest that she owned in the 1054.415-acre parcel

of the Cedar Mountain property in exchange for a limited partner-

ship interest. At a time not disclosed by the record in April

1997, Ms. Davis and Ms. Arnal transferred certain property that

they owned to MSFLP in exchange for both general and limited

36
The record is not clear as to why the deed reflecting the
transfer to MSFLP of Ms. Fraser’s interest in the 1054.415-acre
parcel of the Cedar Mountain property showed Ms. Fraser and her
husband Mr. Fraser as the grantors, while the deed reflecting the
transfer by Mr. Stone and Ms. Stone to Ms. Fraser of such inter-
est in that parcel showed the grantee only as Ms. Fraser. We
presume that applicable State law required that not only Ms.
Fraser but also her husband Mr. Fraser be reflected as grantors
on the deed when Ms. Fraser transferred to MSFLP her interest in
the 1054.415-acre parcel of the Cedar Mountain property.
37
Although not altogether clear from the record, it appears
that Ms. Fraser also transferred certain other property to MSFLP
in exchange for general and limited partnership interests.
 - 73 -

partnership interests. When the partners of MSFLP formed and

funded that partnership, they contemplated and intended that

MSFLP operate as a joint enterprise for profit for the management

of its assets and that Ms. Fraser contribute her services in

providing such management.

After the partners of MSFLP transferred the respective

assets that they owned to MSFLP in exchange for certain partner-

ship interests, Ms. Fraser began actively managing the assets of

MSFLP, as Mr. and Ms. Stone intended. In this connection, Ms.

Fraser, on behalf of MSFLP, began actively managing MSFLP’s Cedar

Mountain property, which included maintaining the roads and lakes

that Mr. Stone had built on that property. In addition, the

respective partnership returns that MSFLP filed for 1998 and 1999

reflected that MSFLP made investment decisions to sell certain of

its stock for substantial gains.38 Ms. Fraser also hired on

behalf of MSFLP advisors and accountants who at all times were

different from those of ES3LP, ES4LP, CRSLP, and RSMLP. At no

time did the partners of MSFLP, including Mr. Stone and Ms.

Stone, commingle the assets that MSFLP owned with their respec-

tive personal assets. At all times, MSFLP was respected by the

Stone family as a separate entity.

The respective assets that Mr. Stone and Ms. Stone retained,

38
Although not altogether clear from the record, it appears
that MSFLP reinvested the proceeds from the sale of its stock.
 - 74 -

and did not transfer in April 1997 to each of the Five Partner-

ships, were sufficient to maintain their respective accustomed

standards of living. Mr. and Ms. Stone did not transfer to any

of the Five Partnerships the 582.672-acre parcel of the Cedar

Mountain property on which Mr. Stone was living in April 1997.39

Ms. Stone did not transfer to any of the Five Partnerships the

Cypress villa on Hilton Head Island in which she was living in

April 1997.

Sometime after the respective bona fide, arm’s-length

transfers of assets in April 1997 to each of ES4LP, CRSLP, RSMLP,

and MSFLP in exchange for partnership interests, the Stone family

realized that there had been an inadvertent, improper valuation

of certain of such assets (valuation errors). Those valuation

errors resulted in each of the children’s having received a total

partnership interest in each such partnership in which such child

had a partnership interest that was larger (unintended excessive

partnership interest) than the Stone family intended and agreed

each should have received had the correct valuation been used.

The Stone family did not intend or agree that a partner of any of

ES4LP, CRSLP, RSMLP, and MSFLP (or ES3LP) was to receive a larger

39
On Apr. 8, 1997, Mr. and Ms. Stone gave to Anne Logan
Ministries, Inc., a charity, the remainder interest in the
582.672-acre parcel of the Cedar Mountain property on which Mr.
Stone was living, and Mr. Stone retained a life estate in that
parcel. When Mr. Stone died, he had an ownership interest only
in the .338-acre parcel of the Cedar Mountain property.
 - 75 -

total partnership interest in each such partnership than such

partner should have received based on the value of the property

that such partner transferred to any such partnership. In order

to correct the unintended consequences of the valuation errors,

Mr. Stone made a gift as of April 9, 1997, to each of the chil-

dren of the unintended excessive partnership interest in each of

ES4LP, CRSLP, RSMLP, and MSFLP that each such child had received,

as follows:

Donee’s Description of
Name Gift Value of Gift
Eugene Earle Stone, IV 281 General Partner $10,095
Units in ES4LP
Eugene Earle Stone, IV 1 Limited Partner Unit 36
in ES4LP
C. Rivers Stone 1.02 General Partner 50
Units in CRSLP
Ms. Morris 136 General Partner 6,426
Units in RSMLP
Ms. Morris 1 Limited Partner Unit 47
in RSMLP
Ms. Fraser 34 General Partner 1,489
Units in MSFLP
Ms. Fraser 1 Limited Partner Unit 44
in MSFLP
Total Value of Gifts $18,187

After the foregoing gifts were made as of April 9, 1997,40

all the partners of each of the Five Partnerships received, as

the Stone family intended and agreed, respective percentage

interests in each such partnership that were proportionate to the

40
The above-described gifts were reported in the 1997 gift
tax return filed on behalf of the deceased Mr. Stone.
 - 76 -

fair market value of the assets that such partners respectively

transferred to each such partnership, and the respective assets

that the partners of each such partnership transferred to each

such partnership were credited to the respective capital accounts

of such partners. Upon the termination or dissolution of each of

the Five Partnerships, the partners of each such partnership were

entitled to distributions from each such partnership in amounts

equal to their respective capital accounts.

After the partners of ES3LP made bona fide, arm’s-length

transfers of the respective assets that they owned to that

partnership in exchange for certain partnership interests, the

respective partnership interests owned by the partners of ES3LP

in April 1997 were as follows:

General Limited
Partner Partner
Partner Interests Interests
Mr. Stone 1.001% 68.972%
Ms. Stone -- 29.027%
Eugene Earle Stone, IV .250% --
C. Rivers Stone .250% --
Ms. Morris .250% --
Ms. Fraser .250% --

At the time of Mr. Stone’s death on June 5, 1997, Mr. Stone

held the same percentage partnership interests in ES3LP that he

owned in April 1997. At the time of Ms. Stone’s death on October

16, 1998, Ms. Stone held the same percentage partnership interest

in ES3LP that she owned in April 1997.
 - 77 -

After the partners of ES4LP made bona fide, arm’s-length

transfers of the respective assets that they owned to that

partnership in exchange for certain partnership interests, the

respective partnership interests owned by the partners of ES4LP

in April 1997 were as follows:

General Limited
Partner Partner
Partner Interests Interests
Mr. Stone 1.003% 93.874%
Ms. Stone -- 4.120%
Eugene Earle Stone, IV 1.000% .001%
Anne M. Stone .002% --

At the time of Mr. Stone’s death on June 5, 1997, Mr. Stone

held the same percentage partnership interests in ES4LP that he

owned in April 1997. At the time of Ms. Stone’s death on October

16, 1998, Ms. Stone held the same partnership interest in ES4LP

that she owned in April 1997.

After the partners of CRSLP made bona fide, arm’s-length

transfers of the respective assets that they owned to that

partnership in exchange for certain partnership interests, the

respective partnership interests owned by the partners of CRSLP

in April 1997 were as follows:

General Limited
Partner Partner
Partner Interests Interests
Mr. Stone 1.002% 97.483%
Ms. Stone -- .510%
C. Rivers Stone 1.000% .001%
Charles R. Stone, Jr. .001% .001%
Frances O. Stone -- .002%
 - 78 -

At the time of Mr. Stone’s death on June 5, 1997, Mr. Stone

held the same percentage partnership interests in CRSLP that he

owned in April 1997. At the time of Ms. Stone’s death on October

16, 1998, Ms. Stone held the same partnership interest in CRSLP

that she owned in April 1997.

After the partners of RSMLP made bona fide, arm’s-length

transfers of the respective assets that they owned to that

partnership in exchange for certain partnership interests, the

respective partnership interests owned by the partners of RSMLP

in April 1997 were as follows:

General Limited
Partner Partner
Partner Interests Interests
Mr. Stone 1.003% 94.29725%
Ms. Stone -- 3.6935%
Ms. Morris 1.000% .001%
Mr. Morris .00175% --
Charles H. Morris, Jr. -- .00175%
Rosalie S. Morris, II -- .00175%

At the time of Mr. Stone’s death on June 5, 1997, Mr. Stone

held the same percentage partnership interests in RSMLP that he

owned in April 1997. At the time of Ms. Stone’s death on October

16, 1998, Ms. Stone held the same partnership interest in RSMLP

that she owned in April 1997.

After the partners of MSFLP made bona fide, arm’s-length

transfers of the respective assets that they owned to that

partnership in exchange for certain partnership interests, the
 - 79 -

respective partnership interests owned by the partners of MSFLP

in April 1997 were as follows:

General Limited
Partner Partner
Partner Interests Interests
Mr. Stone 1.003% 90.141%
Ms. Stone -- 7.851%
Ms. Fraser 1.000% .001%
Ms. Davis .001% .001%
Ms. Arnal .001% .001%

At the time of Mr. Stone’s death on June 5, 1997, Mr. Stone

held the same percentage partnership interests in MSFLP that he

owned in April 1997. At the time of Ms. Stone’s death on October

16, 1998, Ms. Stone held the same partnership interest in MSFLP

that she owned in April 1997.

On June 5, 1997, Mr. Stone died at the age of 89. On that

date, pursuant to Mr. Stone’s will, The Allene Wyman Stone Trust

(AWS Trust) was formed. Pursuant to that will, (1) the 1.001

percent general partnership interest and the 68.972 percent

limited partnership interest in ES3LP that Mr. Stone held on the

date of his death, (2) all the assets on that date in his indi-

vidual retirement account (Mr. Stone’s retirement account),41 and

(3) his right on that date to certain deferred compensation from

Stone Manufacturing were transferred to that trust. (We shall

sometimes refer to the assets in Mr. Stone’s retirement account

41
On the date of Mr. Stone’s death, the assets in Mr.
Stone’s retirement account consisted of numerous corporate stocks
and securities and a Government bond.
 - 80 -

and his right to certain deferred compensation from Stone Manu-

facturing as certain other property.) Ms. Stone did not transfer

any property to ES3LP in exchange for the general and limited

partnership interests in ES3LP held by the AWS Trust as of June

5, 1997, the date of Mr. Stone’s death.42

On August 5, 1997, after Mr. Stone died, Ms. Morris, and Mr.

Morris, as general partners, filed a first amendment to the

certificate of limited partnership for RSMLP with the S.C.

Secretary of State. The purpose of that amendment was to remove

Mr. Stone as a general partner of RSMLP.

On August 5, 1997, after Mr. Stone died, Ms. Fraser, Ms.

Davis, and Ms. Arnal, as general partners, filed a first amend-

ment to the certificate of limited partnership for MSFLP with the

S.C. Secretary of State. The purpose of that amendment was to

remove Mr. Stone as a general partner of MSFLP.

On August 7, 1997, after Mr. Stone died, C. Rivers Stone,

and Charles Rivers Stone, Jr., as general partners, filed a first

amendment to the certificate of limited partnership for CRSLP

with the S.C. Secretary of State. The purpose of that amendment

was to remove Mr. Stone as a general partner of CRSLP.43

42
As discussed above, it was Mr. Stone who transferred
certain property to ES3LP in exchange for the general and limited
partnership interests that, pursuant to his will, were trans-
ferred to the AWS Trust.
43
On Oct. 1, 1998, C. Rivers Stone, as a general partner,
(continued...)
 - 81 -

On October 1, 1997, after Mr. Stone died, Eugene Earle

Stone, IV, and Anne M. Stone, as general partners, filed a first

amendment to the certificate of limited partnership for ES4LP

with the S.C. Secretary of State. The purpose of that amendment

was to remove Mr. Stone as a general partner of ES4LP.

On January 8, 1998, after Mr. Stone died, Eugene Earle

Stone, IV, C. Rivers Stone, Ms. Morris, and Ms. Fraser, as

general partners, filed a second amendment to the certificate of

limited partnership for ES3LP with the S.C. Secretary of State.

The purpose of that amendment was to remove Mr. Stone as a

general partner of ES3LP.

After Mr. Stone’s death, all the respective partners of each

of ES4LP, CRSLP, RSMLP, and MSFLP agreed to make a distribution

from each such partnership in order to pay the portion of the

Federal estate tax and any applicable State estate tax (State

estate tax) (collectively, Federal and State estate taxes) with

respect to Mr. Stone’s estate that was attributable to the

inclusion in that estate of the total partnership interest in

each such partnership held by Mr. Stone on the date of his death.

After Mr. Stone’s death, the partners of ES3LP did not agree to,

43
(...continued)
filed a second amendment to the certificate of limited partner-
ship for CRSLP with the S.C. Secretary of State. The purpose of
that amendment was to remove Charles Rivers Stone, Jr., as a
general partner of CRSLP. The record does not disclose why
Charles Rivers Stone, Jr., withdrew as a general partner of
CRSLP.
 - 82 -

and did not, make any distributions from that partnership to pay

any Federal and State estate taxes with respect to Mr. Stone’s

estate.44

At a time not disclosed by the record after Mr. Stone’s

death, Ernst & Young, LLP (E&Y), prepared a document entitled

“Estate of E.E. Stone, III Allocation of Estate Tax” (E&Y’s

Estate tax allocation schedule). That document showed for each

of ES4LP, CRSLP, RSMLP, and MSFLP the amount of Federal and State

estate taxes that each such partnership was to pay in 1998 and

44
None of the Federal and State estate taxes with respect to
Mr. Stone’s estate was attributable to Mr. Stone’s total 69.973
percent partnership interest in ES3LP. As discussed above, that
partnership interest was transferred along with certain other
property to the AWS Trust with respect to which, as discussed
below, an election under sec. 2056(b)(7) was made.

Because of Mr. Stone’s death in 1997, in that year, as
reflected in the partnership return that ES3LP filed for 1997,
ES3LP opened a capital account for his estate (Mr. Stone’s
estate’s capital account in ES3LP), and the balances in Mr.
Stone’s capital account in ES3LP as a general partner and a
limited partner were transferred to Mr. Stone’s estate’s capital
account in ES3LP. The partnership return that ES3LP filed for
1997 reflected that ES3LP did not make distributions during that
year to any of its other partners. Because of Ms. Stone’s death
in 1998, in that year, as reflected in the partnership return
that ES3LP filed for 1998, ES3LP opened a capital account for her
estate (Ms. Stone’s estate’s capital account in ES3LP), and the
balance in Ms. Stone’s capital account in ES3LP as a limited
partner was transferred to Ms. Stone’s estate’s capital account
in ES3LP. The partnership return that ES3LP filed for 1998
reflected that ES3LP did not make distributions during that year
to any of its other partners. The partnership return that ES3LP
filed for 1999 reflected that ES3LP made pro rata distributions
during that year to its partners totaling $567,172, as follows:
$396,867 to Mr. Stone’s estate, $164,633 to Ms. Stone’s estate,
and $1,418 to each of the children. The record does not disclose
the purpose or use of those distributions.
 - 83 -

the amount of Federal and State estate taxes and interest that

each such partnership was to pay in 1999, which were attributable

to the inclusion in Mr. Stone’s estate of the total partnership

interest in each such partnership held by Mr. Stone on the date

of his death. E&Y’s Estate tax allocation schedule provided as

follows:

ES4LP CRSLP RSMLP MSFLP
1998 Federal $496,642.00 $80,000.00 $599,333.00 $461,597.00
estate tax
1998 State 133,029.00 20,000.00 160,536.00 123,642.00
estate tax ___________ _____________ ___________ ___________
1998 TOTAL $629,671.00 $100,000.00 $759,869.00 $585,239.00
Federal and
State estate
taxes
1999 Federal $371,336.72 $1,000,641.91 $571,597.34 $514,194.67
estate tax
and interest
1999 State 98,545.00 268,474.00 151,871.00 136,704.00
estate tax
and interest ___________ ____________ ___________ ___________
1999 TOTAL $469,881.72 $1,269,115.91 $723,468.34 $650,898.67
Federal and
State estate
taxes and
interest
GRAND TOTAL $1,099,552.72 $1,369,115.91 $1,483,337.34 $1,236,137.67

On March 5, 1998, the Internal Revenue Service (IRS) re-

ceived a total of $1,698,074 in payments for the anticipated

estate tax with respect to Mr. Stone’s estate. Those payments

consisted of a $60,502 check drawn on the bank account of Mr.

Stone’s estate,45 a $496,642 check drawn on ES4LP’s bank account,

45
The estate tax of $60,502 paid by Mr. Stone’s estate was
attributable to the inclusion in his estate of all the property
that he owned on the date of his death except for his properties,
including his partnership interest in ES3LP, to be held by the
(continued...)
 - 84 -

an $80,000 check drawn on CRSLP’s bank account, a $599,333 check

drawn on RSMLP’s bank account, and a $461,597 check drawn on

MSFLP’s bank account. In 1998, State estate tax totaling

$437,207 was paid with respect to Mr. Stone’s estate. Of that

total amount of State estate tax paid in 1998, ES4LP paid

$133,029, CRSLP paid $20,000, RSMLP paid $160,536, and MSFLP paid

$123,642.46 The funds used to pay Federal and State estate taxes

in 1998 with respect to Mr. Stone’s estate consisted of non pro

rata distributions to or on behalf of his estate by each of

ES4LP, CRSLP, RSMLP, and MSFLP.

The partnership return that ES4LP filed for 1998 reflected

that ES4LP made distributions during that year to its partners

totaling $639,807 (i.e., $639,288 to Mr. Stone’s estate, $418 to

Ms. Stone, and $101 to Eugene Earle Stone, IV).47

45
(...continued)
AWS Trust for the benefit of Ms. Stone and except for his respec-
tive partnership interests in ES4LP, CRSLP, RSMLP, and MSFLP
bequeathed to Eugene Earle Stone, IV, C. Rivers Stone, Ms.
Morris, and Ms. Fraser, respectively.
46
The record discloses that ES4LP paid $133,029 to the S.C.
Department of Revenue on Mar. 15, 1998. The record does not
disclose the date on which CRSLP, RSMLP, and MSFLP made State
estate tax payments with respect to Mr. Stone’s estate.
47
The only other distribution reflected in ES4LP’s partner-
ship return for 1998 was because of Ms. Stone’s death in that
year. The partnership return that ES4LP filed for 1998 reflected
that ES4LP opened a capital account for Ms. Stone’s estate (Ms.
Stone’s estate’s capital account in ES4LP), and the balance in
Ms. Stone’s capital account as a limited partner was transferred
to Ms. Stone’s estate’s capital account in ES4LP.

(continued...)
 - 85 -

ES4LP’s balance sheet for 1998 included a schedule entitled

“Eugene E. Stone IV Limited Partnership, Transaction Detail by

Date, January through December 1998" (ES4LP’s 1998 transaction

schedule). ES4LP’s 1998 transaction schedule reflected a check

dated March 15, 1998, payable to the IRS, in the amount of

$496,642 and a check dated March 15, 1998, payable to the S.C.

Department of Revenue, in the amount of $133,029.48

The partnership return that CRSLP filed for 1998 reflected

that CRSLP did not make distributions during that year to any of

its partners.49 However, CRSLP’s “Trial Balance Worksheet--Ac

47
(...continued)
Because of Mr. Stone’s death in 1997, in that year, as
reflected in the partnership return that ES4LP filed for 1997,
ES4LP opened a capital account for his estate (Mr. Stone’s
estate’s capital account in ES4LP), and the balances in Mr.
Stone’s capital accounts in ES4LP as a general partner and a
limited partner were transferred to Mr. Stone’s estate’s capital
account in ES4LP. The partnership return that ES4LP filed for
1997 showed that ES4LP made distributions during that year to
Eugene Earle Stone, IV, totaling $8,754 and that, except for the
above-discussed transfer to Mr. Stone’s estate’s capital account
in ES4LP, it did not make distributions during that year to any
of its other partners.
48
The $496,642 distribution and the $133,029 distribution on
behalf of Mr. Stone’s estate shown in ES4LP’s 1998 transaction
schedule, when totaled, equal the total amount of Federal and
State estate taxes with respect to Mr. Stone’s estate (i.e.,
$629,671) that E&Y’s Estate tax allocation schedule reflected as
payable by ES4LP in 1998.
49
Although not reflected as a distribution in CRSLP’s part-
nership return for 1998, because of Ms. Stone’s death in that
year, as reflected in the partnership return that CRSLP filed for
1998, CRSLP opened a capital account for Ms. Stone’s estate (Ms.
Stone’s estate’s capital account in CRSLP), and the balance in
(continued...)
 - 86 -

counts” for 1998 (CRSLP’s 1998 trial balance worksheets) re-

flected the following adjustments to an account identified as “C.

Rivers Stone-Draws”: $510, $26,390, $66,721, $6,063, $316, and

$100,000, or a total of $200,000 of adjustments to that account.

CRSLP’s 1998 trial balance worksheets included a schedule enti-

tled “C. Rivers Stone LLP ‘98, Montebello Actual Expenses

(2/9/99)” (CRSLP’s 1998 Montebello expense schedule). CRSLP’s

1998 Montebello expense schedule reflected in pertinent part the

following entries:

Vendor March 1998 1998 Totals
Estate Taxes $0 $0
Estate Taxes: AW Stone 4 Lots 510 510
Estate Taxes: Commercial 26,390 26,390
Estate Taxes: Residential 66,721 66,721
Estate Taxes: Securities 6,063 6,063
Estate Taxes: Tulip Street Rental 316 316

The foregoing amounts, which total $100,000,50 are identical to

49
(...continued)
Ms. Stone’s capital account as a limited partner was transferred
to Ms. Stone’s estate’s capital account in CRSLP.

Because of Mr. Stone’s death in 1997, in that year, as
reflected in the partnership return that CRSLP filed for 1997,
CRSLP opened a capital account for his estate (Mr. Stone’s
estate’s capital account in CRSLP), and the balances in Mr.
Stone’s capital accounts in CRSLP as a general partner and a
limited partner were transferred to Mr. Stone’s estate’s capital
account in CRSLP. The partnership return that CRSLP filed for
1997 showed that CRSLP did not make distributions during that
year to any of its other partners.
50
The $100,000 expenditure shown in CRSLP’s 1998 Montebello
expense schedule equals the total amount of Federal and State
estate taxes with respect to Mr. Stone’s estate that E&Y’s Estate
(continued...)
 - 87 -

five of the six adjustments to “C. Rivers Stone--Draws” that were

reflected in CRSLP’s 1998 trial balance worksheets.

The partnership return that RSMLP filed for 1998 reflected

that RSMLP made distributions during that year to Mr. Stone’s

estate of $759,869.51

The partnership return that MSFLP filed for 1998 reflected

that MSFLP made distributions during that year to its partners

totaling $654,239 (i.e., $585,239 to Mr. Stone’s estate52 and

50
(...continued)
tax allocation schedule reflected as payable by CRSLP in 1998.
51
The $759,869 distribution to Mr. Stone’s estate shown in
RSMLP’s 1998 partnership return equals the total amount of
Federal and State estate taxes with respect to Mr. Stone’s estate
that E&Y’s Estate tax allocation schedule reflected as payable by
RSMLP in 1998.

The only other distribution reflected in RSMLP’s partnership
return for 1998 was because of Ms. Stone’s death in that year.
The partnership return that RSMLP filed for 1998 reflected that
RSMLP opened a capital account for Ms. Stone’s estate (Ms.
Stone’s estate’s capital account in RSMLP), and the balance in
Ms. Stone’s capital account as a limited partner was transferred
to Ms. Stone’s estate’s capital account in RSMLP.

Because of Mr. Stone’s death in 1997, in that year, as
reflected in the partnership return that RSMLP filed for 1997,
RSMLP opened capital accounts for his estate (Mr. Stone’s es-
tate’s capital accounts in RSMLP), and the balances in Mr.
Stone’s capital accounts in RSMLP as a general partner and a
limited partner were transferred to Mr. Stone’s estate’s capital
accounts in RSMLP. The partnership return that RSMLP filed for
1997 showed that RSMLP did not make distributions during that
year to any of its other partners.
52
The $585,239 distribution to Mr. Stone’s estate shown in
MSFLP’s 1998 partnership return equals the total amount of
Federal and State estate taxes with respect to Mr. Stone’s estate
(continued...)
 - 88 -

$69,000 to Ms. Fraser).53

Financial statements for MSFLP for 1998 (MSFLP’s 1998 finan-

cial statements) reflected as an expense $585,23954 of “Estate

Taxes”.

On September 15, 1998, Mr. Stone’s estate filed Form 706,

United States Estate (and Generation-Skipping Transfer) Tax

Return (Mr. Stone’s estate tax return). Mr. Stone’s estate tax

return reported as part of the value of Mr. Stone’s gross estate,

inter alia, date-of-death values claimed for Mr. Stone’s respec-

tive partnership interests in ES3LP, ES4LP, CRSLP, RSMLP, and

52
(...continued)
that E&Y’s Estate tax allocation schedule reflected as payable by
MSFLP in 1998.
53
The only other distribution reflected in MSFLP’s partner-
ship return for 1998 was because of Ms. Stone’s death in that
year. The partnership return that MSFLP filed for 1998 reflected
that MSFLP opened a capital account for Ms. Stone’s estate (Ms.
Stone’s estate’s capital account in MSFLP), and the balance in
Ms. Stone’s capital account as a limited partner was transferred
to Ms. Stone’s estate’s capital account in MSFLP.

Because of Mr. Stone’s death in 1997, in that year, as
reflected in the partnership return that MSFLP filed for 1997,
MSFLP opened capital accounts for his estate (Mr. Stone’s es-
tate’s capital accounts in MSFLP), and the balances in Mr.
Stone’s capital accounts in MSFLP as a general partner and a
limited partner were transferred to Mr. Stone’s estate’s capital
accounts in MSFLP. The partnership return that MSFLP filed for
1997 showed that MSFLP did not make distributions during that
year to any of its other partners.
54
The $585,239 expense reflected in MSFLP’s 1998 financial
statements equals the total amount of Federal and State estate
taxes with respect to Mr. Stone’s estate that E&Y’s estate tax
allocation schedule reflected as payable by MSFLP in 1998. See
supra note 52.
 - 89 -

MSFLP and certain other property to be held by the AWS Trust

pursuant to Mr. Stone’s will. In Mr. Stone’s estate tax return,

the co-personal representatives55 of Mr. Stone’s estate made a

qualified terminable interest property (QTIP) election under

section 2056(b)(7) with respect to the AWS Trust. Consequently,

although the claimed respective date-of-death values of Mr.

Stone’s partnership interests in ES3LP and certain other property

to be held by that trust were reported in Mr. Stone’s estate tax

return as part of Mr. Stone’s estate, Mr. Stone’s estate claimed

a deduction in that return under section 2056(a) for such respec-

tive values of such partnership interests and such certain other

property. Mr. Stone’s estate tax return showed net estate tax of

$4,031,260, prior payments of $1,698,074, and a balance due of

$2,333,186.

On March 10, 1999, the IRS received $2,524,858.57 (March 10,

1999 payment) in payment of the estate tax shown due (i.e.,

$2,333,186) in Mr. Stone’s estate tax return and interest.56 Of

that total amount of estate tax and interest paid in 1999, ES4LP

paid $371,336.72, CRSLP paid $1,000,641.91, RSMLP paid

$571,597.34, and MSFLP paid $514,194.67. In 1999, State estate

55
All of the children are co-personal representatives of Mr.
Stone’s estate.
56
The March 10, 1999 payment included interest because Mr.
Stone’s estate applied for and received an extension of time
within which to pay the balance of the estate tax due with
respect to Mr. Stone’s estate.
 - 90 -

tax and interest totaling $655,594 were paid with respect to Mr.

Stone’s estate. Of that total amount of State estate tax and

interest paid in 1999, ES4LP paid $98,545, CRSLP paid $268,474,

RSMLP paid $151,871, and MSFLP paid $136,704. The funds used to

pay Federal and State estate taxes and interest in 1999 with

respect to Mr. Stone’s estate consisted of non pro rata distribu-

tions to or on behalf of his estate.

The partnership return that ES4LP filed for 1999 reflected

that ES4LP made distributions during that year to its partners

totaling $529,254, as follows: $469,882 to Mr. Stone’s estate,57

$47,749 to Ms. Stone’s estate, $11,602 to Eugene Earle Stone, IV,

and $21 to Anne M. Stone.

ES4LP’s balance sheet for 1999 included a schedule entitled

“Eugene E. Stone IV Limited Partnership, General Ledger, As of

December 31, 1999" (ES4LP’s 1999 general ledger). ES4LP’s 1999

general ledger reflected a check dated March 4, 1999, payable to

Eugene E. Stone, III, in the amount of $469,881.72.58 Another

schedule (capital accounts schedule) included as part of ES4LP’s

57
The $469,882 distribution to Mr. Stone’s estate shown in
ES4LP’s 1999 partnership return equals the total amount of
Federal and State estate taxes and interest with respect to Mr.
Stone’s estate that E&Y’s Estate tax allocation schedule re-
flected as payable by ES4LP in 1999.
58
The $469,881.72 check reflected in ES4LP’s 1999 general
ledger and rounded to $469,882 equals the total amount of Federal
and State estate taxes and interest with respect to Mr. Stone’s
estate that E&Y’s estate allocation schedule reflected as payable
by ES4LP in 1999. See supra note 57.
 - 91 -

balance sheet for 1999 showed, inter alia, the capital accounts

of the partners of ES4LP. The capital accounts schedule re-

flected cash distributions during 1998 and 1999 from ES4LP to

Mr. Stone’s estate of $629,67159 and $469,882, respectively. That

schedule also reflected negative adjustments to the respective

capital accounts of the remaining partners of ES4LP in such

amounts that all of the partners of ES4LP were shown to have

received pro rata partnership distributions during 1998 and 1999.

The capital accounts schedule reclassified such negative adjust-

ments as loans made to ES4LP from all of its partners, except Mr.

Stone’s estate.

The partnership return that CRSLP filed for 1999 reflected

that CRSLP did not make distributions during that year to any of

its partners. Schedule L, Balance Sheets per Books, of the

partnership return that CRSLP filed for 1999 reflected a yearend

asset of $1,369,116 identified as “Other investments”. A state-

ment attached to that return explained that such “Other invest-

ments” was an amount of $1,369,116 “Due From C. Rivers Stone”.

CRSLP’s trial balance worksheets for 1999 reflected the

following entries:

59
As a result of bookkeeping entries, the $639,288 non pro
rata distribution during 1998 from ES4LP to Mr. Stone’s estate
that was reflected in ES4LP’s 1998 partnership return was re-
flected in the capital accounts schedule as a distribution to
that estate of $629,671.
 - 92 -

Current
Prior Year Year Adjusted
Description Balance Balance Adjustments Balance
1
C.R. Stone- $100,000 $100,000 $1,269,115.91 $1,369,115.9
Estate Taxes 1

1
The $1,269,115.91 expenditure reflected in CRSLP’s 1999
Montebello expense schedule with respect to Mr. Stone’s estate
equals the amounts of Federal and State estate taxes and interest
with respect to Mr. Stone’s estate that E&Y’s Estate tax alloca-
tion schedule reflected as payable by CRSLP in 1999.

A schedule entitled “C. Rivers Stone LLP ‘99, Montebello

Actual Expenses (1/20/00)” (CRSLP’s 1999 Montebello expense

schedule) reflected in pertinent part the following entries:

Vendor C/F March 1999 1999 Totals Grand Totals
Estate Taxes $100,000 $1,269,115.91 $1,269,115.91 $1,369,115.91
1
First Trust-Est. 0 534,980.73 534,980.73
Tax Loan
2
South Trust- 0 14,837.39 14,837.39
Estate Tax Loan

1
The 1999 Montebello expense schedule reflected various
entries on the line entitled “First Trust-Est. Tax Loan” for each
of the months February through December 1999. Those entries,
when totaled, equaled the “1999 Totals” reflected on that line.
2
The 1999 Montebello expense schedule reflected various
entries on the line entitled “South Trust-Estate Tax Loan” for
each of the months April through July 1999. Those entries, when
totaled, equaled the “1999 Totals” reflected on that line.

The partnership return that RSMLP filed for 1999 reflected

that RSMLP made distributions during that year to Mr. Stone’s

estate of $1,041,87160 and did not make distributions during that

year to any of its other partners.

60
The $1,041,871 distribution to Mr. Stone’s estate shown in
RSMLP’s 1999 partnership return exceeds the total amount of
Federal and State estate taxes and interest with respect to Mr.
Stone’s estate (i.e., $723,468.34) that E&Y’s Estate tax alloca-
tion schedule reflected as payable by RSMLP in 1999.
 - 93 -

The partnership return that MSFLP filed for 1999 reflected

that MSFLP made distributions during that year to Mr. Stone’s

estate totaling $805,69361 and did not make distributions during

that year to any of its other partners.

A 1999 profit and loss statement for MSFLP (MSFLP’s 1999

profit and loss statement) reflected an expense of $805,692.6762

for “Tax: Fed”.

On October 16, 1998, Ms. Stone died at the age of 86.

Pursuant to Mr. Stone’s will, upon the death of Ms. Stone, any

assets remaining in the AWS Trust were to be distributed equally

to the children.

On the date of Ms. Stone’s death, the AWS Trust held a

69.973 percent limited partnership interest in ES3LP,63 the assets

61
The $805,693 distribution to Mr. Stone’s estate shown in
MSFLP’s 1999 partnership return exceeds the total amount of
Federal and State estate taxes and interest with respect to Mr.
Stone’s estate (i.e., $650,899) that E&Y’s Estate tax allocation
schedule reflected as payable by MSFLP in 1999.
62
The $805,692.67 expense reflected in MSFLP’s 1999 profit
and loss statement and rounded to $805,693 exceeds the total
amount of Federal and State estate taxes and interest with
respect to Mr. Stone’s estate (i.e., $650,899) that E&Y’s Estate
tax allocation schedule reflected as payable by MSFLP in 1999.
See supra note 61.
63
On June 5, 1997, the date of Mr. Stone’s death, Mr. Stone
held a 1.001 percent general partnership interest and a 68.972
percent limited partnership interest in ES3LP. Both of those
interests were transferred to the AWS Trust pursuant to Mr.
Stone’s will. The parties stipulated that on Oct. 16, 1998, the
date of Ms. Stone’s death, the AWS Trust held a 69.973 percent
limited partnership interest in ES3LP. We presume that after Mr.
(continued...)
 - 94 -

on that date in Mr. Stone’s retirement account, and the right on

that date to Mr. Stone’s deferred compensation from Stone Manu-

facturing. The respective identities and values of the assets

owned by ES3LP on the date of Mr. Stone’s death on June 5, 1997,

were not the same as the respective identities and values of the

assets owned by that partnership on the date of Ms. Stone’s death

on October 16, 1998. Moreover, the respective identities and

values of the assets in Mr. Stone’s retirement account on the

date of Mr. Stone’s death on June 5, 1997, were not the same as

the respective identities and values of the assets in that re-

tirement account on the date of Ms. Stone’s death on October 16,

1998. In addition, the present value on the date of Ms. Stone’s

death of Mr. Stone’s right to deferred compensation from Stone

Manufacturing was less than the present value of his right to

such compensation on the date of his death.

On July 20, 1999, the IRS received $875,000 (July 20, 1999

payment) in payment of the anticipated estate tax with respect to

Ms. Stone’s estate.

On January 20, 2000, Ms. Stone’s estate filed an estate tax

return (Ms. Stone’s estate tax return). Pursuant to section

2044, Ms. Stone’s estate tax return reported as part of the value

63
(...continued)
Stone’s death Mr. Stone’s general partnership interest in ES3LP
was converted pursuant to the partnership agreement of ES3LP into
a limited partnership interest.
 - 95 -

of her gross estate the date-of-death values claimed for all the

assets held by the AWS Trust as of October 16, 1998, the date of

Ms. Stone’s death (i.e., the claimed fair market value on that

date of the 69.973 limited partnership interest in ES3LP, the

claimed fair market value on that date of all the assets in Mr.

Stone’s retirement account on that date, and the claimed present

value on that date of the deferred compensation from Stone Manu-

facturing that remained to be paid as of that date).

Ms. Stone’s estate tax return also reported as part of the

value of her gross estate the claimed value as of the date of Ms.

Stone’s death of her limited partnership interest in each of the

Five Partnerships.64 Ms. Stone’s estate tax return showed net

64
E&Y was retained to provide opinions on the fair market
value on the date of Ms. Stone’s death of her limited partnership
interest in each of ES4LP, CRSLP, RSMLP, and MSFLP. E&Y based
those opinions on, inter alia, the assumptions that, as of the
date of Ms. Stone’s death, ES4LP, CRSLP, RSMLP, and MSFLP had the
following respective liabilities for “an estate tax payable” with
respect to Mr. Stone’s estate:

Erroneous Assumptions Relied on by
Partnership E&Y Regarding Estate Tax Liability
ES4LP $469,882
CRSLP 1,269,116
RSMLP 723,468
MSFLP 650,899

The parties agree that neither the Federal estate tax nor the
State estate tax with respect to Mr. Stone’s estate was a liabil-
ity of ES4LP, CRSLP, RSMLP, or MSFLP and that, as of Oct. 16,
1998, ES4LP, CRSLP, RSMLP, and MSFLP had the following total
liabilities:

(continued...)
 - 96 -

estate tax of $861,972, a prior payment of $875,000, and an

overpayment of $13,028.

Respondent commenced examinations of Mr. Stone’s estate tax

return and Ms. Stone’s estate tax return after July 22, 1998.

Mr. Stone’s estate and Ms. Stone’s estate cooperated with reason-

able requests by respondent for witnesses, information, docu-

ments, meetings, and interviews.

On September 7, 2001, respondent issued a notice of defi-

ciency (notice) to Mr. Stone’s estate. In that notice, respon-

dent determined, inter alia, to increase by $8,491,090 the value

attributable to Mr. Stone’s respective partnership interests in

ES3LP, ES4LP, CRSLP, RSMLP, and MSFLP reported in SCHEDULE F,

Other Miscellaneous Property Not Reportable Under Any Other

Schedule (Schedule F), of Mr. Stone’s estate tax return. In

support of that determination, respondent relied on seven alter-

native grounds, including the substance over form doctrine, the

economic substance doctrine, section 2036(a)(1) which was respon-

64
(...continued)
Total
Partnership Liabilities
ES4LP $0
CRSLP 2,428,389
RSMLP 0
MSFLP 0
 - 97 -

dent’s third alternative ground, and respondent’s gift theory.65

With respect to respondent’s alternative ground under section

2036(a)(1), respondent determined in the notice that

the decedent retained until the time of his death the
possession or enjoyment * * * [of], or right to the
income from, the assets he contributed to the * * *
[Five Partnerships] within the meaning of Internal
Revenue Code Section 2036. * * *

On November 13, 2001, respondent issued a notice to Ms.

Stone’s estate. In that notice, respondent determined to in-

crease (1) by $688,385 the value attributable to Ms. Stone’s

respective partnership interests in ES3LP, ES4LP, CRSLP, RSMLP,

and MSFLP and (2) by $959,463 the value attributable to the

partnership interest in ES3LP held by the AWS Trust, which were

reported in Schedule F of Ms. Stone’s estate tax return. In

support of those determinations, respondent relied on six alter-

native grounds, including the substance over form doctrine, the

economic substance doctrine, and section 2036(a)(1) which was

respondent’s third alternative ground. With respect to respon-

65
With respect to respondent’s alternative gift theory,
respondent determined in the notice that

if it is determined that the value of the decedent’s
[Mr. Stone’s] interests is other than that as deter-
mined above, then, for purposes of determining the
amount of adjusted taxable gifts, it is determined that
the decedent made indirect gifts in 1997 of proportion-
ate amounts of the property the decedent transferred to
* * * [ES3LP, ES4LP, CRSLP, MSFLP, and RSMLP] within
the meaning of Internal Revenue Code Sections 2501 and
2511.
 - 98 -

dent’s alternative ground under section 2036(a)(1), respondent

determined in the notice that

the decedent retained until the time of her death the
possession or enjoyment of, or right to the income
from, the assets he [sic] contributed to the * * *
[Five Partnerships] within the meaning of Internal
Revenue Code Section 2036. * * *

OPINION

Respondent has abandoned all of the various alternative

determinations in the respective notices issued to Mr. Stone’s

estate and Ms. Stone’s estate (collectively, the estates) except

section 2036(a)(1).66 According to respondent,

The only issue remaining for decision is whether sec-
tion 2036(a)(1) applies to include the value of the
assets Decedents [Mr. Stone and Ms. Stone] transferred
to the Stone LPs [ES3LP, ES4LP, CRSLP, RSMLP, and
MSFLP], rather than of interests in the partnerships,
in their gross estates.

However, as discussed below, on brief respondent also relies on

section 2044 at the time of Ms. Stone’s death, and section

2036(a)(1) at the time of Mr. Stone’s death, in support of re-

spondent’s position that “the pro rata net asset value of the

66
With respect to the alternative economic substance doc-
trine that respondent advanced in the respective notices issued
to Mr. Stone’s estate and Ms. Stone’s estate, respondent stipu-
lated as follows:

Respondent does not contest the validity under
state law of * * * ES3LP * * * ES4LP * * * CRSLP * * *
RSMLP * * * and * * * MSFLP * * *.

Respondent does not contest the economic substance
of ES3LP, ES4LP, CRSLP, RSMLP, and MSFLP.
 - 99 -

69.973% interest in ES3LP held by the AWS Trust at her [Ms.

Stone’s] death is * * * included in Mrs. Stone’s gross estate.”

In addition to the foregoing substantive disputes regarding

sections 2036(a)(1) and 2044, the parties disagree over whether

the burden of proof has shifted to respondent under section

7491(a). The parties’ disagreements under section 7491(a) relate

to the application in the instant cases of the term “credible

evidence” in section 7491(a)(1) and the factual issue or issues

with respect to which Mr. Stone’s estate and Ms. Stone’s estate

must introduce credible evidence in order for the burden of proof

regarding any such issue or issues to shift to respondent. We

need not and shall not address those disagreements under section

7491(a)(1). That is because resolution of the issues presented

under sections 2036(a)(1) and 2044 does not depend on who has the

burden of proof.

Section 2036(a)(1)

In order to resolve the parties’ dispute under section

2036(a)(1),67 we must consider the following three factual issues

67
Sec. 2036(a)(1) provides:

SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.

(a) General Rule.--The value of the gross estate
shall include the value of all property to the extent
of any interest therein of which the decedent has at
any time made a transfer (except in case of a bona fide
sale for an adequate and full consideration in money or
money’s worth), by trust or otherwise, under which he
(continued...)
 - 100 -

presented in each of the instant cases:

(1) Was there a transfer of property by the dece-

dent?

(2) If there was a transfer of property by the

decedent, was such a transfer other than a bona fide

sale for an adequate and full consideration in money or

money’s worth?

(3) If there was a transfer of property by the

decedent that was other than a bona fide sale for an

adequate and full consideration in money or money’s

worth, did the decedent retain possession or enjoyment

of, or the right to income from, the property trans-

ferred?

Transfer of Property by the Decedent

Mr. Stone’s estate concedes that Mr. Stone made a transfer

of property to each of the Five Partnerships in exchange for the

general and limited partnership interests in each such partner-

ship that he owned on the date of his death. Ms. Stone’s estate

concedes that Ms. Stone made a transfer of property to each of

the Five Partnerships in exchange for the limited partnership

67
(...continued)
has retained for his life or for any period not ascer-
tainable without reference to his death or for any
period which does not in fact end before his death--

(1) the possession or enjoyment of, or the
right to the income from, the property * * *
 - 101 -

interest in each such partnership that she owned on the date of

her death. In light of the foregoing concessions by Mr. Stone’s

estate and by Ms. Stone’s estate, we hold that Mr. Stone and Ms.

Stone each made a transfer of property under section 2036(a). We

shall address below whether such respective transfers were other

than bona fide sales for adequate and full consideration in money

or money’s worth under that section.

Ms. Stone’s estate disputes, and does not concede, that Ms.

Stone made a transfer of property to ES3LP in exchange for the

69.973 percent partnership interest in that partnership that the

AWS Trust held on the date of her death. Respondent agrees with

Ms. Stone’s estate.68 In light of respondent’s concession, we

hold that Ms. Stone did not make a transfer of property under

section 2036(a) with respect to the 69.973 percent partnership

interest in ES3LP that the AWS Trust held on the date of her

death.69

68
According to respondent, “it is irrelevant that Mrs. Stone
made no § 2036(a) transfer with respect to that [69.973 percent]
interest [in ES3LP].” That is because, as indicated above,
respondent relies on sec. 2044 at the time of Ms. Stone’s death,
and sec. 2036(a)(1) at the time of Mr. Stone’s death, to support
respondent’s position that 69.973 percent of the assets of ES3LP
on the date of Ms. Stone’s death is includible in her gross
estate.
69
We shall address below respondent’s argument under sec.
2044.
 - 102 -

Transfer Other Than a Bona Fide Sale for an
Adequate and Full Consideration in Money or Money’s Worth

Section 2036(a) excepts from its application any transfer of

property otherwise subject to that section which is “a bona fide

sale for an adequate and full consideration in money or money’s

worth”. The foregoing exception is limited to a transfer of

property where the transferor “has received benefit in full

consideration in a genuine arm’s length transaction”. Estate of

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

It is respondent’s position that the respective transfers of

property by Mr. Stone and Ms. Stone to each of the Five Partner-

ships were not bona fide sales for adequate and full consider-

ation in money or money’s worth under section 2036(a). In sup-

port of that position, respondent relies principally on Estate of

Harper v. Commissioner, T.C. Memo. 2002-121.70 According to

respondent, there is no evidence

in the record indicating that Decedents intended to
conduct a joint enterprise for the mutual profit of
their children and themselves * * *.

Further, a transfer is a sale for adequate and
full consideration only if that received in exchange is
“an adequate and full equivalent reducible to a money
value.” Treas. Reg. § 20.2036-1(a) (cross-referencing
Treas. Reg. § 20.2043-1(a)). The average 43-percent
valuation discounts claimed on Decedents’ estate tax
returns, and the stipulated discounts to be applied in

70
Respondent also relies on Estate of Reichardt v. Commis-
sioner, 114 T.C. 144 (2000), and Estate of Thompson v. Commis-
sioner, T.C. Memo. 2002-246, which are factually similar to
Estate of Harper v. Commissioner, T.C. Memo. 2002-121.
 - 103 -

valuing Decedents’ limited partner interests in the
event the Court concludes that section 2036(a)(1) is
not applicable, show that Petitioners admittedly do not
consider interests in the Stone LPs to be the “full
equivalent reducible to a money value” of the propor-
tionate amount of the underlying assets Decedents con-
tributed to the partnerships. * * * As in Estate of
Harper, Decedents’ transfers to the Stone LPs were
simply a mere recycling of value and form of ownership.
* * *

It is the estates’ position that the respective transfers of

property by Mr. Stone and Ms. Stone to each of the Five Partner-

ships were bona fide sales for adequate and full consideration in

money or money’s worth under section 2036(a). In support of that

position, the estates argue:

Because Mr. and Mrs. Stone received pro rata partner-
ship interests in return for the contributions made to
the Partnerships * * *, and because the contributions
were properly credited to each partner’s capital ac-
count * * *, there was no donative transfer made in
connection with the creation of the Partnerships. * * *
Because no donative transfer occurred when the Partner-
ships were formed § 2036(a) does not apply. * * *

* * * * * * *

In Harper, the Court’s finding of no bona fide
sale for adequate and full consideration was based upon
the conclusion that the creation of the partnerships
was not “motivated primarily by legitimate business
concerns,” and constituted only “unilateral” value
recycling. * * * In [Estate of] Thompson [v. Commis-
sioner, T.C. Memo. 2002-46], the Court’s finding was
based on its conclusion that “the transactions were not
motivated by the type of legitimate business concerns
that furnished ‘adequate consideration’ as described in
Estate of Harrison v. Commissioner [T.C. Memo. 1987-8]
and Estate of Michelson v. Commissioner [T.C. Memo.
1978-371].” * * * In these [instant] cases, however,
the creation of the [Five] Partnerships was motivated
by substantial business purposes and their creation and
funding resulted from substantial arm’s-length negotia-
 - 104 -

tions. * * * The creation of the [Five] Partnerships
did not constitute “value recycling,” and Mr. and Mrs.
Stone received full and adequate consideration for
their transfers to the partnerships. [Fn. ref. omit-
ted.]

On the record before us, we agree with the estates’ position

and reject respondent’s position. The instant cases are distin-

guishable from Estate of Harper v. Commissioner, supra, and other

cases factually similar to Estate of Harper71 on which respondent

relies, and respondent’s reliance on such cases is misplaced.

Unlike the transfers involved in Estate of Harper and those other

cases, we have found on the record in the instant cases that the

respective transfers of assets by Mr. Stone and Ms. Stone to each

of the Five Partnerships, as well as the respective transfers of

assets by the other partners to each such partnership,72 were bona

71
See supra note 70.
72
All the partners of each of the Five Partnerships trans-
ferred to each such partnership respective assets such partners
owned. We reject respondent’s contention that, because certain
of the assets that the children respectively transferred to one
or more of the Five Partnerships were assets that they received
as gifts from Mr. Stone, the children did not make transfers to
one or more of such partnerships that should be recognized for
purposes of determining the applicability of sec. 2036(a)(1) to
such transfers. Mr. Stone gave certain property to each of the
children, which they then transferred to one or more of the Five
Partnerships in return for partnership interests. Mr. Stone
reported the gifts that he made to the children in his 1997 gift
tax return. The children owned the assets that he gave them when
they respectively transferred such assets to one or more of such
partnerships. In this connection, we note that respondent
abandoned the alternative substance over form doctrine advanced
in the respective notices issued to Mr. Stone’s estate and Ms.
Stone’s estate.
 - 105 -

fide, arm’s-length transfers.

On the record before us, we reject respondent’s contention

that, because Mr. Stone and Ms. Stone did not actively partici-

pate in the negotiations by the children, the respective trans-

fers of assets by Mr. Stone and Ms. Stone to each of the Five

Partnerships were not bona fide, arm’s-length transfers. Each

member of the Stone family was represented by his or her own

independent counsel and had input into the decision-making as to

how each of the Five Partnerships was to be structured and oper-

ated and what property was to be transferred to each such part-

nership. The Stone family understood that Mr. Stone and Ms.

Stone would not be bound by any agreements that the children were

able to reach as a result of the children’s negotiations and that

Mr. Stone and Ms. Stone would make the ultimate decision as to

which, if any, of their respective assets to transfer to each of

the Five Partnerships. In this connection, although Mr. Stone

and Ms. Stone agreed to form the Five Partnerships, they did not

intend to, and did not, transfer all their respective assets to

such partnerships. Instead, they retained sufficient assets to

enable them to maintain their respective accustomed standards of

living. Mr. Stone and Ms. Stone did not accept the children’s

recommendations resulting from the children’s negotiations re-

garding the structure, funding, and operation of the Five Part-

nerships without thought, comment, or question. For example, it
 - 106 -

was Mr. Merline, Mr. Stone’s attorney, who drafted proposed

partnership agreements for the Five Partnerships. Mr. Merline

discussed with Mr. Stone the children’s and their respective

attorneys’ suggested changes to those proposed agreements. Only

after Mr. Stone agreed to certain of those suggested changes did

Mr. Merline revise the proposed partnerships agreements to re-

flect the changes to which Mr. Stone agreed.

The record also establishes that the respective transfers at

issue did not constitute gifts by Mr. Stone and Ms. Stone, re-

spectively, to the other partners of each of the Five Partner-

ships.73 In addition, the record shows that those transfers were

motivated primarily by investment and business concerns relating

to the management of certain of the respective assets of Mr.

Stone and Ms. Stone during their lives74 and thereafter and the

resolution of the litigation among the children.

73
Respondent properly does not contend that the respective
transfers of assets by Mr. Stone and Ms. Stone to each of the
Five Partnerships were gifts by them to the other partners of
each such partnership. See Estate of Jones v. Commissioner, 116
T.C. 121, 127-128 (2001); Estate of Michelson v. Commission, T.C.
Memo. 1978-371. In this connection, respondent asserted in the
notice issued to Mr. Stone’s estate an alternative gift theory
which respondent has since abandoned. Respondent did not assert
any alternative gift theory in the notice issued to Ms. Stone’s
estate.
74
At least as early as the last six months of 1995, Mr.
Stone and Ms. Stone were in control of their respective assets.
However, they no longer were interested or actively involved in
managing those assets and wanted their children to become ac-
tively involved in the management of those assets.
 - 107 -

Unlike the decedent in Estate of Harper and other cases

factually similar to that case, the record in the instant cases

establishes that Mr. Stone and Ms. Stone did substantially more

than “change the form in which he [and she] held his [and her]

beneficial interest in the contributed property.” Estate of

Harper v. Commissioner, T.C. Memo. 2002-121. The record in the

instant cases shows that the Five Partnerships had economic

substance and operated as joint enterprises for profit through

which the children actively participated in the management and

development of the respective assets of such partnerships during

their parents’ lives (and thereafter). When the partners of

ES3LP formed and funded that partnership, they contemplated and

intended that ES3LP operate as a joint enterprise for profit for

the management of its assets and that the children contribute

their services in providing such management. After ES3LP was

funded in April 1997, the children actively managed the assets of

that partnership, as Mr. Stone and Ms. Stone intended. When the

partners of ES4LP formed and funded that partnership, they con-

templated and intended that ES4LP operate as a joint enterprise

for profit for the management of its assets and that Eugene Earle

Stone, IV, contribute his services in providing such management.

After the funding of ES4LP in April 1997, Eugene Earle Stone, IV,

began actively managing the assets of ES4LP, as Mr. Stone and Ms.

Stone intended. When the partners of CRSLP formed and funded
 - 108 -

that partnership, they contemplated and intended that CRSLP

operate as a joint enterprise for profit for the management of

its assets and that C. Rivers Stone contribute his services in

providing such management. After the funding of CRSLP in April

1997, C. Rivers Stone began actively managing the assets of that

partnership, as Mr. Stone and Ms. Stone intended. When the

partners of RSMLP formed and funded that partnership, they con-

templated and intended that RSMLP operate as a joint enterprise

for profit for the management of its assets and that Ms. Morris

contribute her services in providing such management. After the

funding of RSMLP in April 1997, Ms. Morris began actively manag-

ing the assets of that partnership, as Mr. Stone and Ms. Stone

intended. When the partners of MSFLP formed and funded that

partnership, they contemplated and intended that MSFLP operate as

a joint enterprise for profit for the management of its assets

and that Ms. Fraser contribute her services in providing such

management. After the funding of MSFLP in April 1997, Ms. Fraser

began actively managing the assets of that partnership, as Mr.

Stone and Ms. Stone intended.

On the record in the instant cases, we find that, unlike the

transfers involved in Estate of Harper and other cases factually

similar to that case, the respective transfers at issue by Mr.

Stone and Ms. Stone did not constitute “circuitous ‘recycling’ of
 - 109 -

value”.75

On the record before us, we further find that the respective

transfers of assets by Mr. Stone and Ms. Stone to each of the

Five Partnerships were for adequate and full consideration in

money or money’s worth. We have found that such transfers were

not, and respondent does not claim that they were, gifts by Mr.

Stone and Ms. Stone, respectively, to the other partners of each

such partnership. We have also found, and respondent agrees

and/or does not dispute, that after all the partners of each of

the Five Partnerships transferred to each such partnership cer-

tain of their respective assets and after certain gifts were made

by Mr. Stone in April 1997 to correct the unintended consequences

of certain inadvertent valuation errors:76 (1) All partners of

75
Although not cited by the parties in the instant cases
because they filed their respective briefs prior to the issuance
of Estate of Strangi v. Commissioner, T.C. Memo. 2003-145,
Strangi insofar as it relates to sec. 2036(a)(1) is similar to
Estate of Harper v. Commissioner, T.C. Memo. 2002-121, and is
distinguishable from the instant cases. On the facts presented,
Strangi found, as Estate of Harper did on the facts presented
there, that “there has been merely a ‘recycling’ of value through
partnership or corporate solution.” Estate of Strangi v. Commis-
sioner, supra. In so concluding, Strangi found that the arrange-
ment involved in that case “patently fails to qualify as the sort
of functioning business enterprise that could potentially inject
intangibles that would lift the situation beyond mere recycling.”
Id.
76
Respondent properly does not contend that Mr. Stone’s
gifts to correct the unintended consequences of certain inadver-
tent valuation errors are factors to be considered in determining
whether the transfers at issue were bona fide sales for adequate
and full consideration in money or money’s worth under sec.
(continued...)
 - 110 -

each of the Five Partnerships held respective partnership inter-

ests in each such partnership that were proportionate to the fair

market value of the assets that such partners respectively trans-

ferred to each such partnership; (2) the respective assets that

the partners of each such partnership transferred to each such

partnership were properly credited to the respective capital

accounts of such partners; and (3) upon the termination or disso-

lution of each of the Five Partnerships, the partners of each

such partnership were entitled to distributions from each such

partnership in amounts equal to their respective capital ac-

counts. Under the circumstances presented in the instant cases,

we find that Mr. Stone and Ms. Stone, as well as the other part-

ners of each of the Five Partnerships, received in exchange for

their respective transfers of assets to each such partnership

respective partnership interests in each such partnership that

were adequate and full equivalents reducible to a money value.

See secs. 20.2036-1(a), 20.2043-1(a), Estate Tax Regs.; see also

Estate of Goetchius, 17 T.C. at 503.

Respondent nonetheless argues that, because Mr. Stone and

Ms. Stone received respective partnership interests in each of

the Five Partnerships the value of which, taking into account

appropriate discounts, was less than the value of the respective

76
(...continued)
2036(a).
 - 111 -

assets that they transferred to each such partnership, they did

not receive adequate and full consideration for the assets trans-

ferred. Respondent’s argument in effect reads out of section

2036(a) the exception for “a bona fide sale for an adequate and

full consideration in money or money’s worth” in any case where

there is a bona fide, arm’s-length transfer of property to a

business entity (e.g., a partnership or a corporation) for which

the transferor receives an interest in such entity (e.g., a

partnership interest or stock) that is proportionate to the fair

market value of the property transferred to such entity and the

determination of the value of such an interest takes into account

appropriate discounts. We reject such an argument by respondent

that reads out of section 2036(a) the exception that Congress

expressly prescribed when it enacted that statute.

Respondent’s argument about the discounted values of the

partnership interests at issue also ignores the fact that each of

the Five Partnerships was created, funded, and operated as a

joint enterprise for profit for the management of its assets in

which there was a genuine pooling of property and services. We

have found that, when the partners of each of the Five Partner-

ships formed and funded each such partnership, they contemplated

and intended that each such partnership operate as a joint enter-

prise for profit for the management of its assets and that the

children contribute services in providing such management in the
 - 112 -

case of ES3LP and that Eugene Earle Stone, IV, C. Rivers Stone,

Ms. Morris, and Ms. Fraser contribute services in providing such

management in the case of ES4LP, CRSLP, RSMLP, and MSFLP, respec-

tively. As Mr. Stone and Ms. Stone intended, after the funding

of ES3LP, the children actively participated in the management of

the assets of that partnership, and after the funding of ES4LP,

CRSLP, RSMLP, and MSFLP, Eugene Earle Stone, IV, C. Rivers Stone,

Ms. Morris, and Ms. Fraser, respectively, actively participated

in the management of the assets of such partnerships.

Based upon our examination of the entire record before us,

we find that the respective transfers of assets by Mr. Stone and

Ms. Stone to each of the Five Partnerships were bona fide sales

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

under section 2036(a).77

Possession or Enjoyment of, or
Right to Income from, the Transferred Property

We have found that the respective transfers of assets by Mr.

77
Although not altogether clear, respondent appears to take
the position that, where a decedent has made a bona fide transfer
of property for which the decedent has received an adequate and
full consideration in money or money’s worth and with respect to
which the transferor has retained possession or enjoyment of, or
the right to income from, such property, the exception in sec.
2036(a) for “a bona fide sale for an adequate and full consider-
ation in money or money’s worth” may never apply to such a
transfer. We reject any such position. That position, like
respondent’s position about the discounted values of the partner-
ship interests at issue, in effect reads out of sec. 2036(a) the
exception that Congress expressly prescribed when it enacted that
statute.
 - 113 -

Stone and Ms. Stone to each of the Five Partnerships were bona

fide sales for adequate and full consideration in money or

money’s worth under section 2036(a). Consequently, we need not

and shall not address the third factual issue presented under

section 2036(a)(1).

Ultimate Holdings

Based upon our examination of the entire record before us,

we hold that none of the assets owned by any of the Five Partner-

ships (1) on the date of Mr. Stone’s death is includible under

section 2036(a)(1) in his gross estate and (2) on the date of Ms.

Stone’s death is includible under section 2036(a)(1) in her gross

estate.

Section 2044

Respondent argues that, because section 2036(a)(1) requires

the inclusion in Mr. Stone’s gross estate of 69.973 percent of

the assets of ES3LP on the date of his death, section 2044 re-

quires the inclusion in Ms. Stone’s gross estate of 69.973 per-

cent of the assets of ES3LP on the date of her death.78 We have

rejected respondent’s position that section 2036(a)(1) requires

the inclusion in Mr. Stone’s gross estate of 69.973 percent of

78
Respondent did not raise sec. 2044 in the notice issued to
Ms. Stone’s estate or in the answer. We conclude that respon-
dent’s reliance on sec. 2044 raises a new issue that respondent
advances for the first time on brief. However, the estates do
not object to, and we find no prejudice to the estates as a
result of, respondent’s raising that issue for the first time on
brief.
 - 114 -

the assets of ES3LP on the date of his death. Consequently, we

need not and shall not address the argument that respondent

advances under section 2044. On the record before us, we hold

that none of the assets owned by ES3LP on the date of Ms. Stone’s

death is includible under section 2044 in her gross estate.

We have considered all of the respective contentions and

arguments of the estates and of respondent that are not discussed

herein, and we find them to be without merit, irrelevant, and/or

moot.

To reflect the foregoing and the concessions of the parties,

Decisions will be entered

under Rule 155.