Estate of Rosen v. Comm'r

T.C. Memo. 2006-115

UNITED STATES TAX COURT

ESTATE OF LILLIE ROSEN, DECEASED,
ILENE FIELD AND HERBERT SILVER, CO-PERSONAL REPRESENTATIVES,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

ESTATE OF LILLIE ROSEN, DECEASED, DONOR,
ILENE FIELD AND HERBERT SILVER, CO-PERSONAL REPRESENTATIVES,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 7575-04, 7576-04. Filed June 1, 2006.

Marvin A. Kirsner, Daniel D. Mielnicki, G. Michelle

Ferreira, and Jerome M. Hesch, for petitioners.

John T. Lortie, Kenneth A. Hochman, and Jennifer Duval

(specially recognized), for respondent.
 -2-

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: In docket No. 7575-04, the Estate of Lillie

Rosen, Deceased, Ilene Field and Herbert Silver, Co-Personal

Representatives, petitioned the Court to redetermine respondent’s

determination of a $1,107,085 deficiency in the Federal estate

tax of the Estate of Lillie Rosen (decedent’s estate). In docket

No. 7576-04, the Estate of Lillie Rosen, Deceased, Donor, Ilene

Field and Herbert Silver, Co-Personal Representatives, petitioned

the Court to redetermine respondent’s determination of a $25,826

deficiency in the 2000 Federal gift tax of Lillie Rosen

(decedent). The cases resulting from these petitions were

consolidated for purposes of trial, briefing, and opinion.

Following concessions by the parties and a trial of the

remaining issues, we decide whether decedent retained the

possession or enjoyment of, or the right to the income from,

property transferred to the Lillie Rosen Family Limited

Partnership (LRFLP) with the result that the property is

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

hold she did. Given this holding, we need not and do not

consider respondent’s other arguments in support of respondent’s

1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code. Rule
references are to the Tax Court Rules of Practice and Procedure.
 -3-

determination that the property is includable in decedent’s gross

estate.

FINDINGS OF FACT

1. Preface

Some facts were stipulated, and the stipulated facts are

incorporated herein by this reference. Herbert Silver

(decedent’s son) and Ilene Field (decedent’s daughter)

(collectively, decedent’s children) are co-personal

representatives of decedent’s estate. When the petitions were

filed in these cases, decedent’s son resided in Coconut Creek,

Florida, and decedent’s daughter resided in Wilmette, Illinois.

2. Decedent and Her Family

Decedent was born on November 17, 1907, and she died on

July 14, 2000, at the age of 92. Decedent’s children are her

only children. Decedent’s son is married to Greta Silver

(decedent’s daughter-in-law), and their children are Benita

Silver Levin, Alan Silver, and Daniel Silver. Decedent’s

daughter is married to Gerson Field (decedent’s son-in-law), and

their children are Andra Kossy and Debra Levens. As of

December 5, 2005, decedent’s son was 74 years old, decedent’s

daughter was 70 years old, and they each had been married for 50

years.
 -4-

3. Practice of Law by Decedent’s Son-in-Law and Decedent’s
Formal Gift-Giving Program

Decedent’s son-in-law has practiced as an attorney for more

than 50 years, and he has regularly attended seminars on estate

planning and the Federal estate tax. Throughout his practice, he

has advised decedent on various legal matters including

establishing a formal plan to make gifts to her descendants and

their spouses (collectively, descendants). Decedent’s wealth

consisted primarily of stocks, bonds, and cash. Decedent’s

son-in-law most likely recommended the formal plan of gift giving

as a form of estate planning.

In 1979, decedent began the formal gift-giving plan under

which she (in her own capacity or apparently after 1994 through

her daughter as decedent’s attorney-in-fact) generally gave her

descendants gifts in each of the ensuing years until her death.

Before 1995, decedent and her daughter usually met once a year in

Chicago to select any particular stock or bond that would be

given to each donee descendant. Decedent’s son-in-law kept

records detailing these gifts. In 1995 and 1996, decedent

(through her daughter as decedent’s attorney-in-fact) gave cash

to her then 16 descendants as follows:2

2
We note that Jacob Silver and Benjamin Silver each
received $5,000 a year in 1995 and 1996, while all of the other
listed individuals who were not decedent’s children each received
$10,000 a year. We are unable to find the reason the two named
individuals were treated differently.
 -5-
Date of Gift Donee Relationship to Decedent Gift

12/31/95 Decedent’s son Son $15,000
12/31/95 Decedent’s daughter Daughter 25,000
12/31/95 Decedent’s son-in-law Son-in-law 10,000
12/31/95 Decedent’s daughter-in-law Daughter-in-law 10,000
12/31/95 Alan Silver Grandson 10,000
12/31/95 Daniel Silver Grandson 10,000
12/31/95 Andra Kossy Granddaughter 10,000
12/31/95 Debra Levens Granddaughter 10,000
12/31/95 Benita Silver Levin Granddaughter 10,000
12/31/95 David Kossy Grandson-in-law 10,000
12/31/95 Gary Levens Grandson-in-law 10,000
12/31/95 Marcus Levin Great-grandson 10,000
12/31/95 Benjamin Silver Great-grandson 5,000
12/31/95 Jacob Silver Great-grandson 5,000
12/31/95 Rachael Kossy Great-granddaughter 10,000
12/31/95 Nicole Levens Great-granddaughter 10,000
1/1/96 Decedent’s son Son 15,000
1
1/1/96 Decedent’s daughter Daughter -0-
1/1/96 Decedent’s son-in-law Son-in-law 10,000
1/1/96 Decedent’s daughter-in-law Daughter-in-law 10,000
1/1/96 Alan Silver Grandson 10,000
1/1/96 Daniel Silver Grandson 10,000
1/1/96 Andra Kossy Granddaughter 10,000
1/1/96 Debra Levens Granddaughter 10,000
1/1/96 Benita Silver Levin Granddaughter 10,000
1/1/96 David Kossy Grandson-in-law 10,000
1/1/96 Gary Levens Grandson-in-law 10,000
1/1/96 Marcus Levin Great-grandson 10,000
1/1/96 Benjamin Silver Great-grandson 5,000
1/1/96 Jacob Silver Great-grandson 5,000
1/1/96 Rachael Kossy Great-granddaughter 10,000
1/1/96 Nicole Levens Great-granddaughter 10,000
1
On Jan. 1, 1996, in lieu of a cash gift, decedent gave her daughter a
$25,010 “other gift”, the specifics of which we are unable to find.

4. Decedent’s Trust

On June 18, 1974, decedent formed a revocable trust known as

the Lillie Sachar Rosen Investment Trust, a.k.a. Lillie

Investment Trust (Lillie Investment Trust). Decedent was the

trustee and settlor of the Lillie Investment Trust, and

decedent’s children were named in the underlying document (trust

document) as successor cotrustees. The trust document stated

that decedent would “transfer certain cash and securities to the

trustee” and that the “trustee agrees that she will hold the cash
 -6-

and securities and all other property, real and personal,

acquired by her as trustee hereunder, including any property

acquired under the provisions of settlor’s will, upon the trusts

hereinafter set forth.” The trust document required that all of

the trust’s income be distributed to (or on behalf of) decedent

at least once every 3 months, and it allowed decedent, as

trustee, to distribute to herself some or all of the trust’s

principal. The trust document stated that all principal and

undistributed income at the time of decedent’s death would be

distributed in the following order: (1) To pay certain expenses

and claims related to decedent (to the extent that decedent did

not have assets outside of the Lillie Investment Trust to pay

those amounts); (2) $40,000 to a trust benefiting decedent’s

mother, if living; (3) $5,000 to each of decedent’s living

grandchildren; (4) $1,500 to certain charitable organizations;

and (5) one-half of any remaining amount in the Lillie Investment

Trust to each of decedent’s children (or, if deceased, to the

benefit of his or her spouse and children). The trust document

set forth an extensive list of the duties and powers of the

trustee.

The terms of the Lillie Investment Trust were amended three

times. First, on January 1, 1981, the terms of the Lillie

Investment Trust were amended to state that decedent had changed

her residence and domicile from Illinois to Florida effective as
 -7-

of that date. Second, on January 1, 1982, the terms of the

Lillie Investment Trust were amended to state that the trustee

could buy, sell, or trade securities on margin. Third, on

August 23, 1989, the terms of the Lillie Investment Trust were

amended upon the advice of decedent’s estate planning attorney,

Stuart Feldman (Feldman), to restate the terms of the Lillie

Investment Trust by revoking all of the then-existing provisions

and replacing them with new ones. In relevant part, the new

provisions changed the order and amounts of distributions to be

made upon decedent’s death and stated specifically that

decedent’s children would serve as successor cotrustees in the

event decedent was unable to manage her affairs. The new

provisions also stated:

I [decedent] shall be considered to be unable to manage
my affairs if I am under a legal disability or by
reason of illness or mental or physical disability am
unable to give prompt and intelligent consideration to
financial matters, and the determination as to my
inability at any time shall be made by my son, HERBERT
J. SILVER, and daughter, ILENE FIELD, and the trustee
may rely upon written notice of that determination.

The provisions of the Lillie Investment Trust, both before and

after each amendment, allowed decedent (or any successor trustee)

to control and manage her assets and to make gifts to her

descendants as desired. Also on August 23, 1989, Feldman

prepared a will for decedent that listed her children as the

co-personal representatives of her estate.
 -8-

5. Decedent’s Powers of Attorney

On May 26, 1993, decedent signed an Illinois power of

attorney, naming her daughter as her attorney-in-fact with

respect to the handling of decedent’s property.3 This document

was effective May 26, 1993, and set forth a list of powers that

decedent’s daughter had in her capacity as decedent’s attorney-

in-fact with respect to the handling of decedent’s property.

Although the document contained a section in which decedent could

have added to these enumerated powers (e.g., by giving decedent’s

daughter the “power to make gifts”), decedent stated in that

section that there were “No additions”. Decedent signed a second

Illinois power of attorney on May 26, 1993, naming her daughter

as her attorney-in-fact for health care decisions. That document

also was effective May 26, 1993.

On April 26, 1994, decedent signed two more Illinois powers

of attorney that named her daughter as decedent’s attorney-in-

fact for health care and property decisions. The April 26, 1994,

power of attorney for health care decisions became effective

April 26, 1994. The April 26, 1994, power of attorney for

property decisions became effective upon decedent’s “incapacity”,

defined in that document as a “(a) court determination of my

[decedent’s] disability because of my inability to manage my

3
Feldman prepared this document but did not deal directly
with decedent in doing so.
 -9-

estate or financial matters, or (b) certification in writing to

my agent by a physician familiar with my physical and mental

condition that I am unable to transact ordinary business”.

Feldman prepared these April 26, 1994, powers of attorney because

he had concluded that the earlier power of attorney for property

decisions did not allow decedent’s daughter to give away any of

decedent’s property. The April 26, 1994, power of attorney for

property decisions stated specifically in the section referenced

above that allowed additions to the enumerated powers that

decedent’s daughter, as decedent’s attorney-in-fact with respect

to decedent’s property, could make gifts of decedent’s property.

When Feldman prepared the powers of attorney in 1993 and 1994, he

did not ascertain whether decedent was competent to effect those

documents.

6. Decedent’s Medical History

On or about July 21, 1994, decedent’s daughter brought

decedent to a neurologist in Illinois, reporting that decedent

had been experiencing medical impairment for approximately 4

years. The specialist examined decedent and diagnosed her as

suffering from a clear case of dementia, with impairments in

language, memory, concentration, reasoning, insight, and

judgment. The specialist advised decedent’s regular doctor that

decedent required close supervision 24 hours a day. In February

1994, decedent had retained a caretaker to assist her 24 hours a
 -10-

day. In 1994, decedent also was experiencing noticeable signs of

Alzheimer’s disease.

On or about July 25, 1994, decedent’s children executed a

document stating that they had concluded that “by reason of

illness or mental or physical disability, LILLIE ROSEN is unable

to give prompt and intelligent consideration to financial

matters, and is unable to manage her affairs”. The document

referenced the language in the trust document that allowed

decedent’s children to become successor cotrustees in such a

situation and stated that they were accepting the roles as such.

Decedent and decedent’s daughter jointly owned a condominium

in Miami Beach, Florida. Decedent lived both there and in

Chicago, Illinois, until 1998, when she became too ill to travel

to Florida. At that time, decedent moved permanently to an

apartment that she leased in Illinois so her daughter could

assist her when her 24-hour caretaker was unavailable. Decedent

remained in that apartment until November 1998 when she was

admitted to the hospital on account of a major stroke that left

her paralyzed and suffering from aphasia. Upon her release from

the hospital, she moved to a nursing home, where she lived,

except for periodic stays in the hospital, until July 1, 2000.

For 1 year after the stroke, her health insurance paid her room

and board at the nursing home, but it did not pay for her
 -11-

doctor’s bills or medication. On July 1, 2000, decedent moved to

a hospice, where she remained until she died.

7. Formation of the LRFLP

In 1994, decedent’s son-in-law attended a seminar on family

limited partnerships and concluded from this seminar that

decedent’s assets should be transferred to a family limited

partnership in order to reduce the value of her estate for

Federal estate tax purposes.4 Decedent’s son-in-law contacted

Feldman, who had been the estate planning attorney for decedent’s

daughter and decedent’s son-in-law since approximately 1980, and

discussed with him the idea of transferring decedent’s assets to

a family limited partnership. Feldman informed decedent’s

son-in-law (and later decedent’s daughter) that simply changing

the form in which decedent’s assets were held from a trust to a

limited partnership would generate significant tax savings.

Feldman believed that such tax savings were a major and

significant reason to form a limited partnership into which

decedent’s assets would be transferred.

Feldman ultimately structured and formed the LRFLP. Before

doing so, Feldman discussed the matter several times with

decedent’s son-in-law; neither of decedent’s children

4
For approximately 15 years before this seminar, decedent’s
son-in-law had been attending other seminars sponsored by the
entity that sponsored the referenced 1994 seminar. Those prior
seminars always discussed estate planning or Federal estate tax.
 -12-

participated in these discussions. On the basis of his general

understanding of family limited partnerships in the setting of

the Federal estate and gift taxes and his conversations with

decedent’s son-in-law, Feldman determined who would be the

initial general and limited partners of the LRFLP, the amount

that each initial partner would contribute, and which assets

decedent would and would not contribute to the LRFLP.5 Feldman

took the view that he represented each initial partner in the

formation of the LRFLP but, in reality, he had spoken only to

decedent’s son-in-law until it came time for the documents to be

signed (at which time Feldman also spoke to decedent’s daughter,

whose role in forming the LRFLP was limited to signing the

documents prepared by Feldman as to that formation). Feldman

never met with or spoke to decedent or decedent’s son to discuss

the formation of the LRFLP. Many years earlier, Feldman had met

with decedent to discuss her view on estate planning, a view that

did not include the formation of a limited partnership into which

she would transfer her assets. At the relevant time underlying

the formation of the LRFLP, Feldman did not know whether decedent

was competent, but he did know that her health was not good. As

5
As discussed below, decedent and her children were the
initial partners of the LRFLP. Feldman ascertained the dollar
amount that each of decedent’s children would contribute to the
LRFLP by setting the dollar amount of decedent’s contribution and
then backing into the proportionate dollar amount that would
correspond to each child’s partnership interest.
 -13-

of July 31, 1996, the date that the LRFLP was established,

decedent was suffering from “full-blown Alzheimer’s”, and

decedent’s daughter knew as much. Also as of that date, Feldman

had never spoken to decedent’s daughter or decedent’s son-in-law

about decedent’s health or about her potential for tort or other

personal liability.

On July 31, 1996, decedent’s children signed a partnership

agreement for the LRFLP (LRFLP agreement). Decedent’s daughter

signed the LRFLP agreement in Illinois in the presence of

Feldman, who notarized her signature. She signed once as a

general partner of the LRFLP in her capacity as trustee of the

Ilene Field Trust and a second time as the limited partner of the

LRFLP in her capacity as cotrustee of the Lillie Investment

Trust. Decedent’s son signed the LRFLP agreement in Florida,

outside Feldman’s presence. Decedent’s son signed the LRFLP

agreement individually as a general partner of the LRFLP and a

second time as the limited partner of the LRFLP in his capacity

as cotrustee of the Lillie Investment Trust. When decedent’s son

signed the LRFLP agreement, he had never met or spoken with

Feldman. Upon signing the LRFLP agreement, decedent’s children

(and Feldman) were unaware of the dollar amount of any partner’s

contribution to the capital of the LRFLP. On either October 11

or 14, 1996, Feldman calculated all of those amounts and attached

that calculation to the LRFLP agreement as “Exhibit A”. On the
 -14-

same day, Feldman informed decedent’s daughter of the amount that

each partner was to contribute to the capital of the LRFLP.

Under the LRFLP agreement, each of decedent’s children

(decedent’s daughter acting as trustee of the Ilene Field Trust)

was named a general partner of the LRFLP, with a .5-percent

interest. The Lillie Investment Trust was named the sole limited

partner, with a 99-percent interest. According to the LRFLP

agreement, the LRFLP was to terminate on December 31, 2016, but

it could terminate (1) earlier with the consent of all partners

or (2) later with the consent of all general partners plus the

limited partners holding a majority in interest of the

partnership percentages as of a certain date. The LRFLP

agreement stated that the principal place of business of the

LRFLP was the residence of decedent’s son and that the purpose of

the LRFLP

shall be the business of making, protecting, enhancing,
and otherwise dealing with purchasing, trading,
acquiring, disposing or otherwise investing, on margin
or otherwise, domestically or otherwise, in any type of
security, whether common stock, preferred stock, debt
securities and rights, options and warrants thereto, or
otherwise, and all other activities incidental thereto,
(b) lending, advancing, arranging, or providing
financing to, or entering into joint ventures with,
individuals, partnerships, corporations, or other
Persons, and all other activities incidental thereto,
and (c) any other purpose allowed by applicable law;
provided, however, that nothing in this Agreement shall
allow the Partnership to make any investments, or do
any other things, which shall not be permitted by the
Act [defined in the LRFLP agreement as “the Revised
Uniform Limited Partnership Act of the State of Florida
 -15-

as amended from time to time (or any other
corresponding provisions of succeeding law)6].

The LRFLP agreement stated as to each partner’s initial

contribution that

Simultaneously with the execution hereof, each of the
partners shall contribute property to the capital of
the Partnership, the value of which is set forth
opposite such Partner’s name in Exhibit A attached
hereto (the “Initial Contribution”). The Partners, in
exchange for their Initial Contributions to the capital
of the Partnership, shall receive the Partnership
Percentage set forth opposite their names in Exhibit
A.[7]

The LRFLP agreement stated that “decisions concerning the

management and control of the business affairs of the Partnership

and the investment of the property of the Partnership shall be

made solely by the General Partners” and that the general

partners of the LRFLP generally have the “sole discretion” to

make and time the distribution of funds from the LRFLP. The

LRFLP agreement required that

At all times during the continuance of the Partnership,
proper and true books of account on the cash receipts
and disbursements basis shall be kept in accordance
with generally accepted accounting principles wherein
shall be entered particulars of all monies, goods, or

6
This part of the LRFLP agreement did not contain a section
(a).
7
As stated above, exhibit A was not attached to the LRFLP
agreement when it was signed by decedent’s children. Exhibit A
stated that decedent’s son and the Ilene Field Trust would each
contribute $12,145.36 to the LRFLP in exchange for a .5-percent
general partnership interest and that the Lillie Investment Trust
would contribute $2,404,781.55 in exchange for a 99-percent
limited partnership interest.
 -16-

effects belonging to or owing to or by the Partnership,
or paid, received, sold, or purchased in the course of
the Partnership’s business, and all of such other
transactions, matters, and things relating to the said
business of the Partnership as are usually entered in
books of account kept by persons engaged in a business
of like kind and character. Such books of account
shall be kept at the principal office of the
Partnership, and each Partner and the accountants,
attorneys, and other designated agents of each Partner
shall at all reasonable times have free access to and
the right to inspect the same.

The LRFLP agreement stated that a partner in the LRFLP needed the

prior written consent of the general partners to transfer his or

her interest in the LRFLP unless the transfer was to (or in trust

for) one of decedent’s descendants, or to a charitable

organization. None of the partners negotiated any of the

relevant terms of the LRFLP agreement; those terms were set by

Feldman without consulting any of the partners.

On August 5, 1996, a certificate of limited partnership for

the LRFLP was filed with the State of Florida.

On October 11, 1996, decedent’s daughter, acting as

attorney-in-fact for decedent and as co-trustee of the Lillie

Investment Trust, caused $2,404,781 in cash and marketable

securities to be transferred from the Lillie Investment Trust to

the LRFLP as consideration for the Lillie Investment Trust’s

99-percent limited partnership interest. Those funds had been

held at Merrill, Lynch, Pierce, Fenner & Smith, Inc. (Merrill

Lynch), in the Lillie Investment Trust’s account No. 695-18X99

(Merrill Lynch trust account). On September 12, 1996, decedent’s
 -17-

children, acting as cotrustees of the Lillie Investment Trust,

had written Merrill Lynch to instruct it to transfer the funds

from the Merrill Lynch trust account to a new account that the

letter directed Merrill Lynch to open in the name of the LRFLP.

On October 1, 1996, Merrill Lynch opened account No. 69F-07047

(Merrill Lynch LRFLP account) in the name of the LRFLP.

Following the transfer of the assets from the Merrill Lynch trust

account to the Merrill Lynch LRFLP account, the Merrill Lynch

trust account was closed. After the transfer, there was no

material change in the manner in which the transferred assets

were managed.

Also on October 11, 1996, before the general partners of the

LRFLP had contributed any funds to the LRFLP, decedent’s

daughter, acting as decedent’s attorney-in-fact, gave each of

decedent’s children a 16.4672-percent limited partnership

interest in the LRFLP. On October 24 and 30, 1996, decedent’s

children contributed $12,145 apiece, a total of $24,290, to the

capital of the LRFLP as consideration for their initial

.5-percent general partnership interests.8 The $24,290

8
Decedent (through her daughter as decedent’s
attorney-in-fact) gave her son a $10,000 cash gift approximately
2 months later. As mentioned earlier, decedent (through her
daughter as decedent’s attorney-in-fact) also gave the other cash
gifts on Dec. 31, 1995, and Jan. 1, 1996, to her children and
their respective spouses.
 -18-

represented (with rounding) 1 percent of the total assets of the

LRFLP at that time.

8. Operation of the LRFLP

The LRFLP conducted no business activity and had no business

purpose for its existence. On its 1996 through 2000 Forms 1065,

U.S. Partnership Return of Income, the LRFLP reported no trade or

business income and claimed total deductions (and ordinary

losses) of $2,526, $2,546, $2,546, $10,504, and $13,771,

respectively. The specific items and amounts claimed as expenses

were:

1996 1997 1998 1999 2000

Florida taxes $1,889 -0- -0- $3,890 $3,332
Amortization 637 $2,546 $2,546 2,546 -0-
Professional fees1 -0- -0- -0- 4,068 10,439
2,526 2,546 2,546 10,504 13,771
1
The “professionals” to whom these fees were paid appear
to be Feldman and the accountant who prepared these Forms
1065. The record does not reflect who paid the accountant
to prepare the 1996, 1997, and 1998 Forms 1065.

The LRFLP also reported on its Forms 1065 the following income

from other than a trade or business:

1996 1997 1998 1999 2000

Portfolio interest $295 $2,062 $4,613 $5,335 19,198
Dividend income 5,274 34,257 39,793 43,348 74,499
Capital gain (loss) 968 2,505 7,220 (27,912) 20,078
Tax-exempt interest 18,437 103,249 85,641 75,887 70,931
Other tax-exempt income -0- 219 -0- -0- -0-

In preparing the Forms 1065, the LRFLP’s accountant relied

primarily upon Forms 1099 issued by the banks and brokerage
 -19-

houses and canceled checks that decedent’s daughter gave him.

The accountant obtained all other information by talking to

decedent’s daughter and to decedent’s son-in-law. The accountant

forwarded the completed returns to decedent’s daughter, who

signed them on behalf of the LRFLP. No books were maintained as

to any activity of the LRFLP, and the primary records that were

kept by or for the LRFLP were the Merrill Lynch account records,

the checkbook (and related canceled checks), and the bank and

brokerage statements for the accounts bearing the name of the

LRFLP.9 No formal or documented meetings were held between the

general partners of the LRFLP.

The following table is a summary of the assets held in the

Merrill Lynch LRFLP account on five dates:

11/29/96 12/31/97 12/31/98 12/31/99 06/30/00

Equities $392,234 $670,234 1,056,556 1,096,826 1,185,247
Mutual funds 13,514 47,156 75,886 78,604 118,014
Securities 92,877 124,785 519,546 477,077 39,724
Municipal bonds 1,673,052 1,489,675 1,317,579 1,184,717 1,146,119
Corporate bonds -0- -0- 100,299 126,245 187,370
CD’s, notes 20,049 -0- -0- 9,852 10,197
Cash -0- 626 3,384 69,676 510,335
Total 2,191,726 2,331,850 3,073,250 3,042,997 3,197,006

Although the amounts invested in equity versus debt changed

somewhat from year to year, the investment strategy of the

general partners of the LRFLP followed that of decedent when she

had managed her investments. In addition to this account,

decedent’s daughter also maintained at First National Bank of

9
Decedent’s children each received copies of the referenced
statements.
 -20-

Chicago, a.k.a. Bank One (FNBC) checking account No.

1115000772130 (FNBC LRFLP checking account) in the name of the

LRFLP.10

On the date of decedent’s death, the assets of the LRFLP

totaled $3,288,192 and consisted of the following:

Money market funds $553,039
Stocks 1,169,676
Mutual funds 90,514
Defined asset fund 41,344
Certificate of deposit 10,219
Corporate bonds 102,165
Government bonds 9,256
Government bonds 78,162
Municipal bonds-GO insured 21,557
Municipal bonds-GO uninsured 91,717
Municipal bonds-revenue 1,010,706
Other bonds 19,050
Preferred stocks 78,064
Other corporate bonds 9,706
Other money market account 3,017
Total 3,288,192

9. Payment of Decedent’s Living Expenses and Satisfaction of Her
Gift-Giving Obligations Following the Transfer of Her Assets
to the LRFLP

After the transfer of some of her assets to the LRFLP,

decedent retained the followed assets:

Asset Amount

50-percent interest in the condominium
in Miami Beach, Florida $50,000
American National Bank savings account
No. 32256515 917
FNBC joint checking account 17,731
FNBC money market account No. 10552915 6,647
FNBC certificate of deposit 27,313

10
Decedent’s daughter and decedent also had joint checking
account No. 2952106 at FNBC (FNBC joint checking account).
 -21-

Annuity (approximate value) 1,600/yr.
Social Security benefits (approximate value) 1,459/mo.
Jewelry, furniture, and other personal
property (approximate value) 11,000

Following the transfer of decedent’s assets to the LRFLP,

her retained assets were insufficient to pay her living expenses

and the cost of her formal gift-giving program. When the LRFLP

was formed, 8 of her then 17 descendants depended on an annual

cash gift from decedent of at least $10,000, and those 8

individuals did not want to receive a portion of decedent’s

limited partnership interest in lieu of cash. Decedent’s

daughter knew that she would have to withdraw money from the

LRFLP to give (on behalf of decedent) $80,000 to those family

members in 1997. Decedent’s daughter also knew that she would

have to withdraw more money to pay some of decedent’s living

expenses. Decedent’s daughter called Feldman in December 1996

and told him that she had to withdraw $80,000 from the LRFLP in

that month to make gifts in January 1997 and that she would have

to withdraw more funds in later years to pay decedent’s living

expenses for those later years. Feldman told decedent’s daughter

to consider any withdrawal from the LRFLP to be a loan to

decedent from the LRFLP. Decedent’s daughter did not discuss

with decedent’s son the making of any such loans by the LRFLP,

and decedent’s son was never involved in treating any amounts

withdrawn from the LRFLP as loans to decedent. Decedent’s
 -22-

children, as the general partners of the LRFLP, never discussed

how decedent would pay these amounts back.

From 1996 through 2000, after decedent’s Social Security

benefits had been spent paying some of her living expenses,

decedent’s daughter withdrew funds from the LRFLP to pay

decedent’s remaining living expenses and to satisfy decedent’s

obligations under her gift-giving plan. Those withdrawals came

from the Merrill Lynch LRFLP account and the FNBC LRFLP checking

account as follows:11

1996: $80,000 was taken from the Merrill Lynch
LRFLP account to make the previously discussed $10,000
gifts in 1997.

1997: $20,000 from the Merrill Lynch LRFLP
account was used to pay decedent’s living expenses.

1998: $20,000 from the FNBC LRFLP checking
account was used to make $10,000 gifts to Andra Kossy
and David Kossy; $14,000 from the FNBC LRFLP account
was used to pay decedent’s living expenses; $31,000
from the Merrill Lynch LRFLP account was used to pay
decedent’s living expenses.

1999: $55,000 from the Merrill Lynch LRFLP
account was used to make gifts (some in 1999, some in
2000) of $15,000 to Benita Silver Levin, $20,000 to
Andra Kossy, and $20,000 to David Kossy; $15,100 from
the Merrill Lynch LRFLP account was used to pay
decedent’s living expenses.

11
In addition to the withdrawals listed below, on Dec. 23,
1998, decedent’s daughter transferred $516,000 from the Merrill
Lynch LRFLP account to the FNBC LRFLP checking account and then
transferred that money back to the former account on Jan. 4,
1999. Decedent’s daughter made this transfer and retransfer to
avoid paying the Florida intangible tax.
 -23-

2000: $23,744 from the Merrill Lynch LRFLP
account was used to pay decedent’s living expenses.

With one exception, decedent’s daughter considered all of

these withdrawals to be loans from the LRFLP to decedent.12 As

relevant herein, none of the other partners of the LRFLP ever

received from the LRFLP a loan, a distribution, or a payment of a

personal obligation.

10. Demand Notes

Two demand notes were prepared in connection with the use of

the funds of the LRFLP to benefit decedent. The first note

(note 1) was dated December 30, 1996, and was in the stated

amount of $80,000. This amount reflected the withdrawal used to

finance the previously discussed gifts in 1997.

Under the terms of note 1, decedent (through her daughter as

decedent’s attorney-in-fact) agreed to pay the LRFLP $80,000 plus

interest at the “blended annual rate for the year as published

annually by the Commissioner”. Note 1 contained no maturity date

but was payable on demand. Note 1 stated that the LRFLP could

transfer additional funds for the benefit of decedent and that

the terms of any additional transfer would be the same as those

expressed in note 1. Neither Feldman nor the LRFLP kept

12
The single exception concerned a $16,000 withdrawal in
November 1998. For some unexplained reason, decedent’s daughter
considered only $5,745 of this amount to be a loan. Thus, while
we add the withdrawals to equal $258,844, petitioners assert that
the lent funds total $248,589 ($258,844 - ($16,000 - $5,745) =
$248,589).
 -24-

contemporaneous records of the amounts of the LRFLP’s funds that

were expended for decedent’s benefit.

After decedent died, decedent’s children signed a second

note (note 2). In note 2, decedent’s children (as cotrustees of

the Lillie Investment Trust) agreed to assume decedent’s

purported liability under note 1 in the amount of $292,077

(purportedly representing $258,589 in principal13 plus $33,488 in

interest accrued to decedent’s death) and to pay that amount to

the LRFLP with interest at the “blended annual rate for the year

as published annually by the Commissioner”. Note 2 was dated

July 14, 2000 (the date of decedent’s death), but was not

prepared until after that date. Note 2 contained no maturity

date but was payable on demand. Note 2 stated that the LRFLP

could transfer additional funds for the benefit of the Lillie

Investment Trust and that the terms of any additional transfer

would be the same as those expressed in note 2.

None of the funds reflected in either note 1 or note 2 were

transferred for the benefit of decedent with any expectation of

repayment from decedent or with any intent to enforce the terms

of either note against decedent. Neither general partner of the

LRFLP ever demanded from decedent any repayment of either note,

and the general partners were not concerned about receiving

13
Petitioners assert that note 2 incorrectly reflects that
$258,589 of principal was owing, rather than the $248,589
discussed supra n.12.
 -25-

before decedent’s death the repayment of any of the funds

reflected in either note. Nor was there any stated security or

collateral for any repayment of the funds reflected in either

note.

During her life, decedent never repaid any of the principal

or interest reflected in note 1 or note 2. Nor did decedent have

the ability to repay those amounts unless she sold (or the LRFLP

redeemed) her interest in the LRFLP for a price greater than

those amounts. As discussed below, decedent’s limited

partnership interest in the LRFLP was redeemed after she died,

and her estate paid all of the amounts shown as due in the notes

(inclusive of principal and interest) through a reduction of the

proceeds that the estate received in the redemption.

11. Gifts of the LRFLP Interests

Between October 11, 1996, and January 7, 2000, decedent’s

daughter (as decedent’s attorney-in-fact) gave decedent’s

descendants a total of 64.0012 percent of the limited partnership

interest in the LRFLP. The specifics of these gifts were as

follows:14

14
As of Oct. 11, 1996, the number of decedent’s descendants
had increased to 19 on account of the births of Zachary Silver
and Julia Anne Levens and the apparent marriage of Daniel and
Dana Silver. In each of the years from 1997 through 2000,
decedent’s daughter (as decedent’s attorney-in-fact) gave cash or
a limited partnership interest in the LRFLP to 18 of the 19
descendants. Dana Silver received a gift ($10,000 cash) only in
1997. The record does not indicate whether Dana Silver remained
(continued...)
 -26-
Date Donee Relationship LRFLP Interest

10/11/96 Decedent’s son Son 16.4672%
10/11/96 Decedent’s daughter Daughter 16.4672
10/11/96 Zachary Silver Great-grandson .5881
10/11/96 Julia Anne Levens Great-granddaughter .5881
1/8/97 Decedent’s daughter Daughter .5748
1/8/97 Decedent’s son-in-law Son-in-law .5748
1/8/97 Debra Levens Granddaughter .5748
1/8/97 Benita Silver Levin Granddaughter .5748
1/8/97 Marcus Levin Great-grandson .5748
1/8/97 Zachary Silver Great-grandson .5748
1/8/97 Rachael Kossy Great-granddaughter .5748
1/8/97 Julia Anne Levens Great-granddaughter .5748
1/8/97 Nicole Levens Great-granddaughter .5748
1/7/98 Decedent’s son Son 1.1269
1/7/98 Decedent’s daughter Daughter 1.1269
1/7/98 Decedent’s son-in-law Son-in-law .5009
1/7/98 Decedent’s daughter-in-law Daughter-in-law .5009
1/7/98 Alan Silver Grandson .5009
1/7/98 Daniel Silver Grandson .5009
1/7/98 Debra Levens Granddaughter .5009
1/7/98 Benita Silver Levin Granddaughter .5009
1/7/98 Marcus Levin Great-grandson .5009
1/7/98 Benjamin Silver Great-grandson .5009
1/7/98 Jacob Silver Great-grandson .5009
1/7/98 Zachary Silver Great-grandson .5009
1/7/98 Rachael Kossy Great-granddaughter .5009
1/7/98 Julia Anne Levens Great-granddaughter .5009
1/7/98 Nicole Levens Great-granddaughter .5009
1/7/98 Gary Levens Grandson-in-law .5009
1/5/99 Decedent’s son Son .9727
1/5/99 Decedent’s daughter Daughter .9727
1/5/99 Decedent’s son-in-law Son-in-law .4323
1/5/99 Decedent’s daughter-in-law Daughter-in-law .4323
1/5/99 Alan Silver Grandson .4323
1/5/99 Daniel Silver Grandson .4323
1/5/99 Debra Levens Granddaughter .4323
1/5/99 Marcus Levin Great-grandson .4323
1/5/99 Benjamin Silver Great-grandson .4323
1/5/99 Jacob Silver Great-grandson .4323
1/5/99 Zachary Silver Great-grandson .4323
1/5/99 Rachael Kossy Great-granddaughter .4323
1/5/99 Julia Anne Levens Great-granddaughter .4323
1/5/99 Nicole Levens Great-granddaughter .4323
1/5/99 Gary Levens Grandson-in-law .4323
1/7/00 Decedent’s son Son .9857
1/7/00 Decedent’s daughter Daughter .9857
1/7/00 Decedent’s son-in-law Son-in-law .4381
1/7/00 Decedent’s daughter-in-law Daughter-in-law .4381
1/7/00 Alan Silver Grandson .4381
1/7/00 Daniel Silver Grandson .4381
1/7/00 Debra Levens Granddaughter .4381
1/7/00 Benita Silver Levin Granddaughter .2190

14
(...continued)
a descendant of decedent after 1997.
 -27-
1/7/00 Gary Levens Grandson-in-law .4381
1/7/00 Marcus Levin Great-grandson .4381
1/7/00 Benjamin Silver Great-grandson .4381
1/7/00 Jacob Silver Great-grandson .4381
1/7/00 Zachary Silver Great-grandson .4381
1/7/00 Rachael Kossy Great-granddaughter .4381
1/7/00 Julia Anne Levens Great-granddaughter .4381
1/7/00 Nicole Levens Great-granddaughter .4381

12. Post-Death Events

When decedent died, the Lillie Investment Trust held a

34.9988-percent limited partnership interest in the LRFLP. The

following is a summary of the percentage ownership of the LRFLP

held by decedent and her descendants at that time:

Interest Holder Percentage

General partners:

Ilene Field Trust .5%
Decedent’s son .5

Limited partners:

Lillie Investment Trust 34.9988
Decedent’s son 19.5525
Ilene Field Trust 20.1273
Gerson B. Field Trust 1.9461
Decedent’s daughter-in-law 1.3713
Andra Kossy as custodian for Rachael Kossy 1.9461
Debra Levens 1.9461
Debra Levens as custodian for Julia Anne Levens 2.5342
Debra Levens as custodian for Nicole Levens 1.9461
Benita Silver Levin 1.2947
Benita Silver Levin as custodian for Marcus Levin 1.9461
Daniel Silver 1.3713
Alan Silver 1.3713
Daniel Silver as custodian for Benjamin Silver 1.3713
Daniel Silver as custodian for Jacob Silver 1.3713
Daniel Silver as custodian for Zachary Silver 2.5342
Gary Levens 1.3713
Total 100.0000
 -28-

After decedent died, the LRFLP redeemed the Lillie

Investment Trust’s limited partnership interest. Before the

redemption but after decedent’s death, $97,412 was paid from the

Merrill Lynch LRFLPA account to the benefit of decedent for the

period immediately preceding her death, or her estate. Of that

amount, $5,712 was used to pay decedent’s living expenses; $7,700

was used to pay decedent’s funeral expenses; and $14,000 was used

to pay decedent’s (or her estate’s) legal fees. The remaining

$70,000 was used to make $10,000 bequests to decedent’s son, Alan

Silver, Daniel Silver, Benita Silver Levin, Debbie Levens, Andra

Field, and a charitable organization. No note was prepared to

reflect any of these payments. On February 21, 2001, $2,230 from

the FNBC joint checking account was used to pay the Florida

intangible tax.

On February 1, 2001, the LRFLP and the Lillie Investment

Trust entered into the agreement for the redemption of the Lillie

Investment Trust’s limited partnership interest. In the

agreement, the LRFLP agreed to redeem the Lillie Investment

Trust’s limited partnership interest for $743,263. On March 7,

2001, the LRFLP paid decedent’s estate $341,977 of the redemption

price and retained the $401,286 balance in payment of the
 -29-

“loans”.15 The balance paid to the Lillie Investment Trust was

computed as follows:

Redemption amount $743,263

Loans before death $258,589
Loans after death 97,412
Interest accrued to date of death 33,488
Interest accrued after date of death 11,797 401,286
Net proceeds to decedent’s estate 341,977

At or about the same time, decedent’s daughter, as cotrustee

of the Lillie Investment Trust, opened Merrill Lynch account No.

695-33K24 (Merrill Lynch postdeath trust account) in the name of

the Lillie Investment Trust. The account was funded on March 7,

2001, with the just-referenced $341,977. In 2001 and 2002, funds

were paid to the benefit of decedent (or her estate) from the

Merrill Lynch postdeath trust account. As to these funds,

$4,032.14 was paid to appraise the LRFLP; $12,832.32 was paid for

attorney’s fees; $6,704 was paid for the Florida death tax;

$152,227.81 was paid for the Federal estate tax; $25 was paid for

postage; $1,175.81 was paid for decedent’s funeral; $2,400 was

paid for an accounting fee related to the Florida intangible tax;

$1,956.80 was paid for the Florida intangible tax; and $7,651 was

paid for the Lillie Investment Trust’s 2001 Form 1041, U.S.

Income Tax Return for Estates and Trusts. In addition, on

November 7, 2005, decedent’s daughter wrote a check in the amount

15
We use the term “loan” in quotation marks for simplicity
and do not intend to suggest that the underlying amounts were in
fact loans for Federal tax purposes.
 -30-

of $1,133,000 with respect to the tax deficiencies at issue. The

money that was used to fund that check was distributed from the

LRFLP.

13. Pretrial Order of August 5, 2004

On August 5, 2004, the Court issued the following pretrial

order in docket No. 7575-04:

For cause, it is

ORDERED that each of the parties shall file no
later than September 7, 2004, a memorandum [issues
memorandum] setting forth–

(1)(a) The issues of fact (including any
issues subsidiary to ultimate issues), and
(b) the issues of law (including any issues
subsidiary to ultimate issues) to be resolved
by the Court. Such issues should be set
forth in sufficient detail to enable the
Court to decide the case in its entirety by
addressing each of the issues listed.

(2) A clear, complete, and concise
exposition of each party’s position and the
theory underlying that position with respect
to each of the issues that are set forth
pursuant to (1) above. In this regard, each
party shall include a statement in narrative
form of what each party expects to prove.

* * * * * * *

It is further

ORDERED that the statement of issues set forth
pursuant to (1) above shall control the admissibility
of evidence at trial * * *. It is further

ORDERED that neither party will be allowed to
advance a position or theory underlying that position
with respect to * * * one or more of the issues set
forth pursuant to (1) above that is different from the
positions or theories set forth pursuant to (2) above.
 -31-

Respondent filed his issues memorandum on December 6, 2004.

Eight days later, petitioner in docket No. 7575-04 filed an

issues memorandum that stated:

The reason that the decedent and her children formed
the Lillie Rosen Family Limited Partnership was to have
a family business of making, protecting, enhancing, and
investing in the partnership’s assets. This included
trading, acquiring, disposing or investing in
securities on behalf of the partnership’s partners.

OPINION16

1. Preface

Respondent determined that the assets of decedent

transferred to the LRFLP are includable in her gross estate under

section 2036(a)(1). According to respondent, those assets were

transferred in other than a bona fide sale for full and adequate

consideration, and decedent retained until her death the

possession or enjoyment of, or the right to the income from, the

16
During the trial of these cases, petitioners elicited
testimony from witnesses who included decedent’s children,
decedent’s son-in-law, and Feldman. Each named witness has a
pecuniary interest in the outcome of these cases. Our perception
of Feldman and decedent’s son-in-law while viewing them
testifying at trial, coupled with our review of the record, leads
us to discount much of their testimony as unreliable. Our
perception of decedent’s children while viewing them testifying
at trial, coupled with our review of the record, leads us to
discount the portion of their testimony that is inconsistent with
objective evidence in the record. We do not rely on the
discounted testimony to support petitioners’ positions herein.
See Frierdich v. Commissioner, 925 F.2d 180, 185 (7th Cir. 1991),
affg. T.C. Memo. 1989-103 as amended by T.C. Memo. 1989-393;
Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 84
(2000), affd. 299 F.3d 221 (3d Cir. 2002); cf. United States v.
Thompson, 422 F.3d 1285 (11th Cir. 2005).
 -32-

assets. Petitioners argue that section 2036(a)(1) does not apply

because the assets were transferred in a bona fide sale for full

and adequate consideration. Alternatively, petitioners argue,

section 2036(a)(1) does not apply because decedent did not retain

the possession or enjoyment of, or the right to income from, the

transferred assets. As a second alternative, petitioners argue,

section 2036(a)(1) does not apply to all of the transferred

assets because decedent gave away a 48.5502-percent limited

partnership interest in the LRFLP more than 3 years before she

died.17 Petitioners assert that only those assets that decedent

actually owned at her death are included in her gross estate.

2. Overview of Section 2036(a)(1)

Congress has imposed a Federal estate tax on the transfer of

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

of the United States. See sec. 2001. Decedent’s taxable estate

equals her gross estate less applicable deductions. See sec.

2051. Decedent’s gross estate includes the fair market value of

all property to the extent provided in sections 2031 through

2046. See sec. 2031. For purposes of this computation, the

17
Petitioners argue that decedent gave away a 48.5502-
percent limited partnership interest in the LRFLP more than 3
years before her death. Petitioners explain that decedent died
on July 14, 2000, and that the 48.5502-percent interest
corresponds to the total of the limited partnership interests
that were the subject of decedent’s gifts in 1996, 1997, and
1998. To state the obvious, decedent’s gifts in 1998 were not
more than 3 years before her death in 2000.
 -33-

parties dispute whether section 2036(a)(1) applies to the

transferred assets. In relevant part, section 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
has retained for his life or for any period not
ascertainable without reference to his death or for any
period which does not in fact end before his death–-

(1) the possession or enjoyment of, or
the right to income from, the property * * *

Congress enacted section 2036 intending to bring within a

decedent’s gross estate “transfers that are essentially

testamentary–-i.e., transfers which leave the transferor a

significant interest in or control over the property transferred

during his lifetime.” United States v. Estate of Grace, 395 U.S.

316, 320 (1969); see also Estate of Strangi v. Commissioner,

417 F.3d 468, 476 (5th Cir. 2005) (citing Estate of Lumpkin v.

Commissioner, 474 F.2d 1092, 1097 (5th Cir. 1973), vacating

56 T.C. 815 (1971)), affg. T.C. Memo. 2003-145. Under section

2036(a)(1), decedent’s gross estate will include the fair market

value of the transferred assets to the extent that decedent

retained possession or enjoyment of the assets for her life or

for any other period that does not end before her death. Section

2036(a) “describes a broad scheme of inclusion in the gross
 -34-

estate, not limited by the form of the transaction, but concerned

with all inter vivos transfers where outright disposition of the

property is delayed until the transferor’s death.” Guynn v.

United States, 437 F.2d 1148, 1150 (4th Cir. 1971).

In order not to have retained an interest described in

section 2036(a)(1), decedent must have “absolutely,

unequivocally, irrevocably, and without possible reservations,”

parted with all of her title, possession, and enjoyment of the

transferred assets. Commissioner v. Estate of Church, 335 U.S.

632, 645 (1949). Decedent will have retained an interest in the

transferred assets to the extent that the assets were transferred

with an understanding or agreement, express or implied, that the

possession or enjoyment of, or the right to the income from, the

assets would be for decedent’s pecuniary benefit. See Guynn v.

United States, supra at 1150; Estate of Rapelje v. Commissioner,

73 T.C. 82, 86 (1979); sec. 20.2036-1(a) and (b)(2), Estate Tax

Regs.; see also United States v. Byrum, 408 U.S. 125, 145, 150

(1972) (in the context of section 2036(a)(1), the word

“enjoyment” denotes the receipt of a “substantial present

economic benefit” as opposed to “a speculative and contingent

benefit which may or may not be realized”). Such is so even if

the retained interest is not legally enforceable. See Estate of

Abraham v. Commissioner, 408 F.3d 26, 39 (1st Cir. 2005), affg.

T.C. Memo. 2004-39; Estate of Maxwell v. Commissioner, 3 F.3d
 -35-

591, 593 (2d Cir. 1993), affg. 98 T.C. 594 (1992); Estate of

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

Whether there was an understanding or agreement for decedent

to retain possession or enjoyment of the transferred assets is

determined from all of the facts and circumstances surrounding

both the transfer itself and the assets’ subsequent use. See

Estate of Abraham v. Commissioner, supra at 39. We carefully

scrutinize the facts and circumstances of this case because it

involves an intrafamily transaction. See Slappey Drive Indus.

Park v. United States, 561 F.2d 572, 584 n.21 (5th Cir. 1977);

Anderson v. Commissioner, 164 F.2d 870, 873 (7th Cir. 1947),

affg. 5 T.C. 443 (1945); Estate of Maxwell v. Commissioner,

98 T.C. at 602. While intrafamily transactions are not barred by

section 2036(a)(1), we test whether the resulting terms and

conditions of the transfer of decedent’s assets to the LRFLP were

the same as if unrelated parties had engaged in the same

transaction. See Estate of Bongard v. Commissioner, 124 T.C. 95,

123 (2005). Petitioners have the burden of proof as their

counsel acknowledged at trial.

3. Bona Fide Sale for Adequate and Full Consideration

Under a plain reading of section 2036(a), decedent’s gross

estate does not include the value of property transferred in “a

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

money’s worth”. Petitioners argue primarily that the transfer of
 -36-

decedent’s assets to the LRFLP was such a sale. We disagree. In

the context of section 2036(a), a finding of “a bona fide sale

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

requires that “the transfer must have been made in good faith,

and the price must have been an adequate and full equivalent

reducible to a money value.” Sec. 20.2043-1(a), Estate Tax Regs.

As this Court has recently stated, a transfer of assets to a

family limited partnership may meet this requirement if the

record establishes that: (1) The family limited partnership was

formed for a legitimate and significant nontax reason and

(2) each transferor received a partnership interest proportionate

to the fair market value of the property transferred. See Estate

of Bongard v. Commissioner, supra at 118; cf. Estate of Strangi

v. Commissioner, supra at 479 (“the proper inquiry is whether the

transfer in question was objectively likely to serve a

substantial non-tax purpose”); Estate of Thompson v.

Commissioner, 382 F.3d 367, 379-380 (3d Cir. 2004) (discussing

the lack of “legitimate business operations” in concluding that a

transfer to a family entity was not a bona fide sale), affg. T.C.

Memo. 2002-246. After analyzing the record at hand in the light

of the first prong of this test, we conclude that this test has

not been met. Given this conclusion, we do not consider the

second prong.
 -37-

Petitioners assert as to the first prong that the LRFLP

was formed for four legitimate and significant nontax
purposes, beyond estate tax savings: (1) to protect
the decedent’s assets during her lifetime, and,
ultimately, to provide limited liability protection to
the donees of the limited partnership interests; (2) to
create giftable assets that preserve value and cannot
be easily liquidated in the short-term, (3) to
facilitate Decedent’s annual gifting program to her
family; and (4) to provide for the common management of
the LRFLP’s assets during the decedent’s lifetime and
after her death.

The credible evidence at hand does not support this assertion to

the extent that it relates to forming the LRFLP for a reason

other than the avoidance of Federal estate (and gift) tax.18 As

an initial matter, petitioner’s issues memorandum lists only the

following reason for forming the LRFLP: “[T]o have a family

business of making, protecting, enhancing, and investing in the

partnership’s assets. This included trading, acquiring,

disposing or investing in securities on behalf of the

partnership’s partners.” In order to qualify as a “legitimate

and significant nontax reason” within the meaning of Estate of

Bongard v. Commissioner, supra at 118, we must find that the

reason was an important one that actually motivated the formation

of that partnership from a business point of view. See id. The

18
Petitioners concede on brief that the LRFLP was formed to
reduce the value of decedent’s gross estate for Federal estate
tax purposes and to avoid paying Federal estate tax on the amount
of the reduction.
 -38-

reason must be an actual motivation, not a theoretical

justification, for a limited partnership’s formation. See id.

On the basis of the credible evidence in the record, we

conclude that the transfer of decedent’s assets was not “a bona

fide sale” within the meaning of section 2036(a)(1). See Estate

of Thompson v. Commissioner, supra at 383 (transfer to a family

limited partnership is not a bona fide sale if it does not

“provide the transferor some potential for benefit other than the

potential estate tax advantages that might result from holding

assets in the partnership form”). We find that the overwhelming

reason for forming the LRFLP was to avoid Federal estate and gift

taxes and that neither decedent nor her children had any

legitimate and significant nontax reason for that formation.

Decedent and her children were not even involved in the structure

of the LRFLP. Decedent’s son-in-law knew that decedent was

wealthy and in the waning years of her life, and he approached

Feldman to structure and form the LRFLP to lower the Federal

estate and gift tax that would be assessed on her wealth and the

passing thereof. The LRFLP was structured and formed to hold

decedent’s assets and to allow the assets to pass to decedent’s

descendants with minimal tax. Any other reason that may have

been discussed by decedent’s son-in-law and Feldman at or after

the time of formation was simply a theoretical justification that

could be, and was, advanced in the event of a challenge to their
 -39-

estate planning scheme. The estate planning nature of the LRFLP

is further revealed when we view the specific manner in which the

LRFLP was formed. Feldman established the terms of the LRFLP

without talking to any of the partners, and he set each partner’s

contribution to capital by first valuing decedent’s assets and

her contribution to capital and then calculating all of the

remaining numbers on the basis of his initial calculation.19 As

he testified:

I knew how much Lillie Rosen was putting in. That
represented 99 percent, so I used, you know, an
algebraic formula to determine what additional 1
percent would consist of. So basically I took the
value of her—-of Lillie Rosen’s contribution and
divided it by 99 percent, and came up with a total
value of the partnership to equal 100 percent. Then I
subtracted Lillie Rosen’s contribution to come up with
the 1 percent interest, and then I divided that in two.
They each put in half of 1 percent.

Notwithstanding the incredible subjective expressions of

contrary intent espoused at trial by individuals connected with

the LRFLP, the objective facts in the record support our

conclusion that the transfer of decedent’s assets to the LRFLP

was not a bona fide sale. First, the LRFLP was not engaged in a

valid, functioning business operation, and the LRFLP served no

legitimate or significant nontax purpose; it operated simply as a

19
While Feldman testified that he consulted with decedent’s
son and other “family members” before forming the LRFLP, we find
that he spoke only to decedent’s son-in-law. Indeed, decedent’s
son testified that he did not remember ever meeting Feldman and
that the only time that he may have spoken to Feldman was after
decedent’s funeral.
 -40-

vehicle for changing the form in which decedent held her

beneficial interest in the transferred assets. See Estate of

Harper v. Commissioner, T.C. Memo. 2002-121; see also Estate of

Bongard v. Commissioner, 124 T.C. at 128-129. Although the LRFLP

did have some minimal economic activity consisting of its receipt

of dividend and interest income, its apparent sale of a small

portion of its portfolio, and its reinvestment of the proceeds of

matured bonds, this passive activity was not significant enough

to characterize the LRFLP as a legitimate business operation, see

Estate of Thompson v. Commissioner, 382 F.3d at 379, or, as

suggested by petitioners, a true joint venture. Nor did the

LRFLP maintain the books of account required by the LRFLP

agreement (books that would have been commonplace in a true

business venture), comply with all of the other terms of the

LRFLP agreement (e.g., no capital contributions were made by any

of the partners simultaneously with the signing of the LRFLP

agreement), hold formal or documented meetings between the

general partners, or operate the way that a bona fide partnership

would have operated (e.g., while the LRFLP agreement was signed

on July 31, 1996, and a certificate of limited partnership was

filed 5 days later, the amount of each partner’s contribution to

the capital of the LRFLP was not set until October 11, 1996, at

the earliest). See Estate of Bigelow v. Commissioner, T.C. Memo.

2005-65.
 -41-

Second, the partners of the LRFLP did not negotiate or set

any of the terms of the LRFLP, and decedent’s daughter (as

decedent’s attorney-in-fact, cotrustee of the Lillie Investment

Trust, and general partner of the LRFLP) stood on all sides of

the transaction. See Estate of Strangi v. Commissioner, 417 F.3d

468 (5th Cir. 2005); Estate of Hillgren v. Commissioner, T.C.

Memo. 2004-46; Estate of Harper v. Commissioner, supra. Feldman

singlehandedly set up everything connected with the LRFLP without

first discussing the matter with any of the partners. See Estate

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

Commissioner, T.C. Memo. 2005-103; Estate of Korby v.

Commissioner, T.C. Memo. 2005-102. He decided who should be the

general and limited partners and how much each partner would

contribute to the LRFLP. He represented each initial partner in

the formation of the LRFLP, and he chose the limited partnership

form solely so that decedent or her estate could claim discounts

on the proportionate values of the assets that were reflected in

the partnership interests that were either the subject of gifts

or included in decedent’s gross estate. As decedent’s daughter

conceded at trial: Feldman “drew up the partnership agreement,

and he was the one who told us what to do and how to do it.”

Third, while the LRFLP agreement was signed on July 31,

1996, decedent did not make her initial contribution until

October 11, 1996, and decedent’s children did not make their
 -42-

initial contributions until October 24 and 30, 1996.20 The

reported contributions of assets by decedent’s children also were

de minimis in relation to the assets contributed by decedent; in

fact, given the cash gifts that decedent made to each of her

children surrounding their contributions to the capital of the

LRFLP, decedent arguably funded the LRFLP all by herself, see

Estate of Reichardt v. Commissioner, 114 T.C. at 155 (finding the

lack of a bona fide sale for adequate and full consideration

where, among other things, the decedent’s children transferred

nothing to the decedent or to the partnership). We also note

that decedent’s daughter, acting as decedent’s attorney-in-fact,

gave both herself and her brother a 16.4672-percent limited

partnership interest in the LRFLP before they had even made their

initial contributions.

Fourth, decedent, acting through her daughter (her

attorney-in-fact and co-trustee of the Lillie Investment Trust)

transferred substantially all of decedent’s assets, including all

of her investment assets, to the LRFLP. The management of the

transferred assets was the same both before and after the

transfer, and no meaningful change occurred in decedent’s

20
Petitioners assert that decedent’s funds were not
transferred upon the signing of the LRFLP agreement because it
took time to open the Merrill Lynch LRFLP account and to transfer
the funds into that account from the Merrill Lynch trust account.
We are unpersuaded. Decedent’s children waited more than 6 weeks
after the signing of the LRFLP agreement even to ask Merrill
Lynch to open the new account and to make the transfer.
 -43-

relationship to her assets after the transfer. See Estate of

Schutt v. Commissioner, T.C. Memo. 2005-126; Estate of Korby v.

Commissioner, T.C. Memo. 2005-103; Estate of Korby v.

Commissioner, T.C. Memo. 2005-102; Estate of Schauerhamer v.

Commissioner, T.C. Memo. 1997-242. We also note that during the

first 4 years of the LRFLP’s existence, i.e., the last 4 years of

decedent’s life, decedent’s daughter (as decedent’s attorney-in-

fact) gave away almost 65 percent of decedent’s limited

partnership interest.

Fifth, after the transfer of the assets to the LRFLP,

decedent was unable to meet her financial obligations without

using funds of the LRFLP. In fact, all of the funds that were

withdrawn from the LRFLP were used for decedent’s benefit.

Before decedent died, that benefit included the payment of her

personal living expenses and the carrying out of her intent to

make significant annual gifts to each of her descendants. After

decedent died, that benefit included the satisfaction of the

bequests set forth in the Lillie Investment Trust, the payment of

costs related to administering her estate, and the satisfaction

of her Federal estate tax liability. The use of the LRFLP’s

funds to satisfy those obligations of decedent is inconsistent

with a finding of a bona fide sale. See Estate of Thompson v.

Commissioner, 382 F.3d 367 (3d Cir. 2004); Estate of Korby v.

Commissioner, T.C. Memo. 2005-103; Estate of Korby v.
 -44-

Commissioner, T.C. Memo. 2005-102; Estate of Harper v.

Commissioner, T.C. Memo. 2002-121.

Sixth, the assets that were contributed to the LRFLP

consisted solely of marketable securities and cash. For the most

part, the assets of the LRFLP appear not to have been traded by

the LRFLP, which, in part, explains the minimal capital gain

income and loss reported by the LRFLP. As the Court of Appeals

for the Third Circuit has suggested, the mere holding of an

untraded portfolio of marketable securities weighs against the

finding of a nontax benefit for a transfer of that portfolio to a

family entity. See Estate of Thompson v. Commissioner, supra at

380. This Court also has agreed with that principle in cases

where, as here, the securities were contributed almost

exclusively by one person. See Estate of Strangi v.

Commissioner, T.C. Memo. 2003-145; Estate of Harper v.

Commissioner, supra.

Seventh, we note decedent’s age and health when the LRFLP

was formed. In 1994, 2 years before the LRFLP agreement was

signed, decedent was suffering from dementia and Alzheimer’s

disease. As of the beginning of 1994, she also had retained a

caretaker to assist her 24 hours a day. The fact that decedent

was 88 years old and in failing health strongly supports our

finding that the transfer of the assets was purely for the

purpose of avoiding Federal estate and gift taxes. Accord Estate
 -45-

of Korby v. Commissioner, T.C. Memo. 2005-103; Estate of Korby v.

Commissioner, T.C. Memo. 2005-102. Such is especially so where,

as here, decedent’s daughter (as decedent’s attorney-in-fact)

transferred substantially all of decedent’s assets to the LRFLP

and did not retain sufficient assets to support decedent for the

rest of her life. See Estate of Thompson v. Commissioner, supra

at 376-377.

Nor does the credible evidence in the record support the

purposes that petitioners allege motivated the formation of the

LRFLP. First, as to petitioners’ claim that the LRFLP was formed

to create centralized management, decedent had centralized

management through the Lillie Investment Trust. The Lillie

Investment Trust held almost all of decedent’s assets and allowed

her (or a successor trustee) to manage and control her assets in

full.21 In fact, even Feldman admitted that decedent had

centralized management through the Lillie Investment Trust.

While Feldman also stated that the LRFLP allowed decedent to make

gifts of a limited partnership interest without selling any

assets, we do not find that decedent, before the transfer, had to

sell any of her assets to make the gifts that she then made;

e.g., she annually selected the stocks and bonds that were the

21
For example, decedent’s daughter, as a successor
co-trustee, displayed her control over decedent’s assets when she
transferred the assets from the Merrill Lynch trust account to
the Merrill Lynch LRFLP account.
 -46-

subject of each prior gift. Feldman also testified that placing

the assets in the LRFLP allowed the general partners to invest

with fewer fiduciary restrictions than through the Lillie

Investment Trust. Upon further questioning, however, Feldman

conceded that the general partners’ investments through the LRFLP

were not in fact more liberal than had been made through the

Lillie Investment Trust and that the trust document could easily

have been rewritten to give the cotrustees powers similar to

those set forth in the LRFLP agreement.

Second, as to petitioners’ claim that the LRFLP was formed

to limit decedent’s liability, i.e., to protect her assets from

her creditors, petitioners have not persuaded us that the LRFLP

was likely to provide more meaningful creditor protection than

the Lillie Investment Trust would have provided. As we

understand petitioners’ factual position as to this claim, the

LRFLP was formed so that someone could not sue decedent and

foreclose on her assets for payment of a judgment against her.

From a factual point of view, however, the record is devoid of

persuasive evidence that the LRFLP was formed with any such

intent. Nor do we find that Feldman informed either of

decedent’s children, before they signed the LRFLP agreement, that

the LRFLP was meant to limit the liability of decedent or any

other limited partner. Indeed, Feldman testified that before the

LRFLP was formed, he never discussed with decedent’s daughter or
 -47-

decedent’s son-in-law the subject of whether decedent risked

incurring personal liability on account of her actions. Feldman

also conceded during his testimony that decedent did not drive a

car or face any other specific type of liability, except, he

stated, possibly from her caretaker. While Feldman stated that

decedent, like any other individual, always faced the risk that

she could be sued on account of her actions, we are unpersuaded

by this statement of mere general applicability that limiting

decedent’s personal liability was an actual purpose for forming

the LRFLP. Instead, we hear that statement as nothing more than

a theoretical justification for the formation of a limited

partnership. Such is especially so given that, like decedent,

the general partners of the LRFLP are elderly individuals who

face similar risks of liability. Whereas a limited partnership’s

assets are typically not protected from the liability of its

general partners, it seems that the formation of the LRFLP with

two individual general partners effectively increased the

possibility that a creditor could foreclose on decedent’s

transferred assets.22 Although decedent’s daughter testified that

22
Feldman also did not know or investigate whether decedent
was already protected against personal liability or whether, in
the case of the caretaker, the employment relationship between
decedent and her caretaker precluded the latter from suing the
former on account of actions that arose in the course of that
relationship. Feldman acknowledged that decedent had a “renter’s
insurance” policy but stated that he did not know the specific
terms of that policy.
 -48-

decedent had the potential to commit a tort, we do not find that

she had this concern when the LRFLP was formed. Nor do we find

that tort liability was a motivation for forming the LRFLP or

that decedent’s daughter had discussed this issue with her

husband or her brother.

We also disagree with petitioners’ reasoning from a legal

point of view. Petitioners assert that decedent’s creditors

could not satisfy judgments against her by foreclosing on her

interest in the LRFLP but could only attach distributions that

the LRFLP actually made to her. By contrast, petitioners assert,

decedent’s creditors could satisfy judgments against her by

foreclosing on the assets of the Lillie Investment Trust.

Petitioners conclude from these assertions that the LRFLP offered

more creditor protection than offered by the Lillie Investment

Trust. We are unpersuaded. Whereas creditors can set aside

fraudulent transfers in both Florida and Illinois, see Fla. Stat.

Ann. sec. 726.108 (West 2000); 740 Ill. Comp. Stat. Ann.

160/5(a)(1) (West 2002), we are unpersuaded on the facts at hand

that decedent’s creditors would not have been able to foreclose

on substantially all of decedent’s assets transferred to the

LRFLP. See United States v. Engh, 330 F.3d 954 (7th Cir. 2003);

Friedman v. Heart Inst. of Port St. Lucie, Inc., 863 So. 2d 189

(Fla. 2003). Nor are we persuaded that the transfer would

withstand scrutiny in a bankruptcy court. See, e.g., Movitz v.
 -49-

Fiesta Invs., LLC (In re Ehmann), 319 Bankr. 200 (Bankr. D. Ariz.

2005).

Third, as to petitioners’ claim that the LRFLP was formed to

facilitate decedent’s gift giving and to preserve the value of

her gifts, even if gift giving were an actual reason for the

LRFLP’s formation, it is not a significant nontax purpose that

could characterize the transfer of decedent’s assets to the LRFLP

as a bona fide sale.23 See Estate of Thompson v. Commissioner,

382 F.3d 369, 373-374, 379; Estate of Bigelow v. Commissioner,

T.C. Memo. 2005-65; cf. Estate of Bongard v. Commissioner,

124 T.C. at 126-127. While petitioners also assert on brief that

the LRFLP was formed to avoid the burdens and costs associated

with giving individual assets to each of the donees, we are

unpersuaded by this assertion. Petitioners did not include this

assertion in their issues memorandum as a reason for forming the

LRFLP, and it appears to be nothing more than an after-the-fact

23
We note for completeness that we disagree with
petitioners’ claim that gift giving was an actual reason for the
formation of the LRFLP. In fact, it appears to us that the
making of gifts was made harder after that formation. Before the
LRFLP was formed, decedent received monthly brokerage statements
that listed the value of the stocks and bonds held at the
brokerage firm. Afterwards, any gift of a limited partnership
interest had to be appraised for Federal tax purposes, a process
that most likely is more time consuming and expensive than
valuing the stocks and bonds directly. Such is especially so
given that the appraisal of the limited partnership interests
would almost always include discounts for lack of control and
lack of marketability and that the valuation of discounts is a
subject on which taxpayers and the Commissioner may reasonably
disagree.
 -50-

espousal made solely to defend their claim to the legitimacy of

the transfer.

4. Retention of Possession or Enjoyment of Transferred Property

Petitioners next argue that decedent did not retain the

possession or enjoyment of, or the right to income from, the

transferred assets after her assets were transferred to the

LRFLP. We disagree. We find that decedent transferred her

assets to the LRFLP and retained the lifetime possession and

enjoyment of those assets pursuant to express or implied

understandings and agreements. In other words, we find that the

terms and conditions of the transfer of decedent’s assets to the

LRFLP were not the same as they would have been had unrelated

parties been involved in the same transfer. In fact, we find it

hard to conceive of unrelated parties’ engaging in such a

transaction.

Decedent’s daughter was decedent’s attorney-in-fact, and

decedent’s children were cotrustees of the Lillie Investment

Trust and general partners of the LRFLP. The LRFLP was funded

with liquid assets, and decedent’s children, as the Lillie

Investment Trust’s cotrustees, had a fiduciary duty to decedent,

in effect standing in her shoes. Given the additional fact that

the LRFLP agreement allowed decedent’s children, as general

partners, to make distributions to decedent when and in the

amount they pleased, we conclude that decedent had the same
 -51-

enjoyment of her assets that she had had before the assets were

transferred to the LRFLP. We find it understood that decedent

would receive distributions when and as she needed them. “The

existence of an implied agreement is a question of fact that can

be inferred from the circumstances surrounding a transfer of

property and the subsequent use of the transferred property.”

Estate of Bongard v. Commissioner, supra at 129. We find such an

implied understanding or agreement when we view the conduct of

the parties to the LRFLP agreement, as well as that agreement

itself. See Estate of Reichardt v. Commissioner, 114 T.C. at

151; Estate of Rapelje v. Commissioner, 73 T.C. at 86.

First, the LRFLP was not a business operated for profit; it

was a testamentary device whose goal was to reduce the estate tax

value of decedent’s assets. Before the transfer of decedent’s

assets to the LRFLP, decedent directly paid her expenses and

fulfilled her plan of gift giving. After the transfer, the LRFLP

used the assets received from decedent to pay indirectly the same

types of expenses and conduct the same gift giving.

Second, decedent’s relationship to her assets did not change

following their transfer to the LRFLP and was not treated

differently by either decedent’s daughter (as decedent’s

attorney-in-fact) or the general partners of the LRFLP. Decedent

transferred substantially all of her assets to the LRFLP, leaving

her few liquid assets on which to live. Where an individual
 -52-

conveys all or nearly all of his or her assets to a trust or

partnership, the likelihood of an implied agreement allowing the

individual to keep using the assets is the greatest. See Estate

of Reichardt v. Commissioner, supra at 153; Estate of Hillgren v.

Commissioner, T.C. Memo. 2004-46; cf. Estate of Strangi v.

Commissioner, 417 F.3d at 477-478. The presence of an implied

agreement in such a situation is further revealed where, as here,

funds of the LRFLP were used to pay decedent’s living expenses,

to make gifts to her descendants, and, after her death, to pay

the bequests under the Lillie Investment Trust and the expenses

of her estate, including, 5 years after her death, her estate

taxes. Cf. Estate of Strangi v. Commissioner, 417 F.3d at 477.

No funds of the LRFLP were ever distributed to any of the other

partners of the LRFLP.

Third, decedent’s assets were transferred to the LRFLP on

the advice of counsel in order to minimize the tax on the passage

of her estate to her descendants. Petitioners assert that the

LRFLP was an entity separate from decedent. As stated above,

however, the lifetime enjoyment and possession of transferred

property may be retained by implied agreement. Decedent

transferred her assets to the LRFLP when she was 88 years old and

in poor health, and the only other partners of the LRFLP were

decedent’s children. Decedent’s children did not prevent
 -53-

decedent from continuing to enjoy her transferred assets. See

Estate of Disbrow v. Commissioner, T.C. Memo. 2006-34.

Petitioners assert that the distributions from the LRFLP to

decedent were actually loans that did not constitute enjoyment of

the underlying funds. We disagree. Petitioners bear the burden

of proving this assertion. See Rule 142(a)(1); Frierdich v.

Commissioner, 925 F.2d 180, 182 (7th Cir. 1991), affg. T.C. Memo.

1989-103 as amended by T.C. Memo. 1989-393; Roth Steel Tube Co.

v. Commissioner, 800 F.2d 625, 630 (6th Cir. 1986), affg. T.C.

Memo. 1985-58. As we understand their factual claim supporting

this assertion, neither decedent nor decedent’s children foresaw

that decedent would incur the amounts of health expenses that she

did after her assets were transferred to the LRFLP. We consider

this claim incredible. When the LRFLP was formed, decedent was

nearing 90 years old and suffering from dementia and Alzheimer’s

disease. The fact that an elderly individual in such a condition

could be expected to incur major health expenses in later years

cannot seriously be denied. Nor can it seriously be denied that

decedent enjoyed the capital of the LRFLP for the duration of her

lifetime and that decedent’s children, as the general partners of

the LRFLP, never intended to seek repayment of the “loans” during

decedent’s lifetime.

Moreover, we disagree with petitioners from a legal point of

view. Debt for Federal tax purposes connotes an existing,
 -54-

unconditional, and legally enforceable obligation to repay, see

Frierdich v. Commissioner, supra at 185; Hubert Enters., Inc. &

Subs. v. Commissioner, 125 T.C. 72, 91 (2005), and transfers

between related parties are examined with special scrutiny, see

Tulia Feedlot, Inc. v. United States, 513 F.2d 800, 805 (5th Cir.

1975); Haber v. Commissioner, 52 T.C. 255, 266 (1969), affd.

422 F.2d 198 (5th Cir. 1970). A transfer’s economic substance

prevails over its form, see Byerlite Corp. v. Williams, 286 F.2d

285, 291 (6th Cir. 1960), and a finding of economic substance

turns on whether the transfer would have followed the same form

had it been between the transferee and an independent lender, see

Scriptomatic, Inc. v. United States, 555 F.2d 364 (3d Cir. 1977).

The subjective intent of the parties to a transfer that the

transfer create debt does not override an objectively indicated

intent to the contrary. See Stinnett’s Pontiac Serv., Inc. v.

Commissioner, 730 F.2d 634, 639 (11th Cir. 1984), affg. T.C.

Memo. 1982-314; cf. Busch v. Commissioner, 728 F.2d 945, 948 (7th

Cir. 1984), affg. T.C. Memo. 1983-98.

Whether the withdrawal of funds from an entity by one of its

owners creates a true debtor-creditor relationship is a factual

question to be decided on the basis of all relevant facts and

circumstances. See Haag v. Commissioner, 88 T.C. 604, 615

(1987), affd. without published opinion 855 F.2d 855 (8th Cir.

1988); see also Haber v. Commissioner, supra at 266. For
 -55-

disbursements to be bona fide loans, we must find that when the

funds were disbursed there was an unconditional obligation and

intent on the part of the transferee to repay the money and an

unconditional intent on the part of the transferor to secure

repayment. See Busch v. Commissioner, supra at 948; Haag v.

Commissioner, supra at 615-616; see also Haber v. Commissioner,

supra at 266. Direct evidence of a taxpayer’s state of mind is

generally unavailable, so courts have focused on certain

objective factors to distinguish bona fide loans from, among

other things, disguised distributions. Although objective

factors are most often employed by courts to distinguish debt

from equity in the setting of closely held corporations, see

Hubert Enters., Inc. & Subs. v. Commissioner, supra at 91-92, we

consider them to be most helpful here, accord Gray v.

Commissioner, T.C. Memo. 1997-67 (factors used to determine

whether a corporation’s transfer to a shareholder is a loan

rather than a dividend); Miller v. Commissioner, T.C. Memo.

1996-3 (factors used to determine whether a transfer was made

with a real expectation of repayment and an intention to enforce

a debt), affd. without published opinion 113 F.3d 1241 (9th Cir.

1997). The relevant factors used to distinguish debt from equity

include: (1) The name given to an instrument underlying the

transfer of funds; (2) the presence or absence of a fixed

maturity date and a schedule of payments; (3) the presence or
 -56-

absence of a fixed interest rate and actual interest payments;

(4) the source of repayment; (5) the adequacy or inadequacy of

capitalization; (6) the identity of interest between creditors

and equity holders; (7) the security for repayment; (8) the

transferee’s ability to obtain financing from outside lending

institutions; (9) the extent to which repayment was subordinated

to the claims of outside creditors; (10) the extent to which

transferred funds were used to acquire capital assets; and

(11) the presence or absence of a sinking fund to provide

repayment. See Hubert Enters., Inc. & Subs. v. Commissioner,

supra at 92; Recklitis v. Commissioner, 91 T.C. 874, 901-902

(1988); cf. Stinnett’s Pontiac Serv., Inc. v. Commissioner, supra

at 638. No one factor is controlling, and courts must consider

the particular circumstances of each case. See Busch v.

Commissioner, supra at 951; Recklitis v. Commissioner, supra at

905. Each case turns on its own factors. See Slappey Drive Ind.

Park v. United States, 561 F.2d at 581; see also Busch v.

Commissioner, supra at 951.

We analyze and weigh the facts of this case in the context

of the relevant factors.

i. Name of Certificate

We look to the name of the certificate evidencing a transfer

to determine whether the parties thereto intended that the

transfer create debt. Although the issuance of a note weighs
 -57-

toward a finding of bona fide debt, see Estate of Mixon v. United

States, 464 F.2d 394, 403 (5th Cir. 1972), the mere existence of

a note is not dispositive. The issuance of a demand note may not

be indicative of genuine debt where the note is unsecured,

without a maturity date, and without meaningful repayments. See

Stinnett’s Pontiac Serv., Inc. v. Commissioner, supra at 638.

We give little weight to the fact that the record contains

note 1 and note 2 (collectively, promissory notes). Each of the

promissory notes was a demand note with no fixed maturity date,

no written repayment schedule, no provision requiring periodic

payments of principal or interest, no stated collateral, and no

repayments by decedent during her lifetime. The LRFLP also never

demanded repayment from decedent or otherwise sought during her

lifetime to enforce either note. The facts that a note is due on

demand and that the obligee never demanded payments support a

strong inference that the obligee never intended to compel the

obligor to repay the notes. See id. at 640. Such is especially

so where, as here, only one of the promissory notes was prepared

during decedent’s lifetime despite the fact that numerous

payments had been made on her behalf. Although the payments to

the benefit of decedent may have periodically been recorded as

“loans”, those postings provide little if any support for a

finding of bona fide debt. See Estate of Thompson v.

Commissioner, 382 F.3d at 377 n.16; Roth Steel Tube Co. v.
 -58-

Commissioner, 800 F.2d at 631; see also Estate of Strangi v.

Commissioner, T.C. Memo. 2003-145 (“accounting entries alone are

of small moment in belying the existence of an agreement for

retained possession and enjoyment”).

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt.

ii. Fixed Maturity Date and Schedule of Repayments

The absence of a fixed maturity date and a fixed obligation

to repay weighs against a finding of bona fide debt. See Roth

Steel Tube Co. v. Commissioner, supra at 631; Stinnett’s Pontiac

Serv., Inc. v. Commissioner, 730 F.2d at 638.

The promissory notes had no fixed maturity date or schedule

for repayment. While petitioners assert that each note was a

demand note for which payment could have been requested at any

time, LRFLP never made any such demand and, more importantly,

decedent never had the ready ability to honor such a demand if

and when one had been made. Moreover, despite the lack of any

repayment, the LRFLP continued to allow decedent to use its funds

without any schedule for repayment. As noted by the Court of

Appeals for the Eleventh Circuit, “an unsecured note due on

demand with no specific maturity date, and no payments is

insufficient to evidence a genuine debt.” Stinnett’s Pontiac

Serv., Inc. v. Commissioner, supra at 638. Such is especially so

where, as here, the choice of whether or when to make demand for
 -59-

repayment was within the discretion of decedent’s children and

was not conditioned upon the occurrence of any stated event. See

id.; see also Busch v. Commissioner, 728 F.2d at 951.

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt.

iii. Interest Rate and Actual Interest Payments

A reasonable lender is concerned about receiving payments of

interest as compensation for, and commensurate with, the risk

assumed in making the loan. See Stinnett’s Pontiac Serv., Inc.

v. Commissioner, supra at 640; cf. Deputy v. du Pont, 308 U.S.

488, 498 (1940) (in the business world, interest is paid on debt

as “compensation for the use or forbearance of money”). The

absence of an adequate rate of interest and actual interest

payments weighs strongly against a finding of bona fide debt.

See Roth Steel Tube Co. v. Commissioner, supra at 631.

Although each of the promissory notes bore interest, the

facts of this case persuade us that the parties thereto did not

intend that decedent during her lifetime actually pay any (let

alone a market rate of) interest for the use of the funds of the

LRFLP. We do not believe that a reasonable lender would have

lent the funds to decedent, an elderly, infirm woman with minimal

assets in her name, at the rate of interest stated in the

promissory notes and with the intent to be repaid only after her

death. A transferor of funds who does not insist on reasonable
 -60-

interest payments for the use of the funds may not be a bona fide

lender. See Stinnett’s Pontiac Serv., Inc. v. Commissioner,

supra at 640. We also note that decedent during her lifetime

never paid any interest (or principal) to the LRFLP for the use

of its funds.

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt.

iv. Source of Repayment

Repayment that depends solely upon the success of the

transferee’s business weighs against a finding of bona fide debt.

Repayment that does not depend on earnings weighs toward a

finding of debt. See Roth Steel Tube Co. v. Commissioner, supra

at 632; Lane v. United States, 742 F.2d 1311, 1314 (11th Cir.

1984). “An expectation of repayment solely from * * * earnings

is not indicative of bona fide debt regardless of its

reasonableness.” Roth Steel Tube Co. v. Commissioner, supra at

631; see also Stinnett’s Pontiac Serv., Inc. v. Commissioner,

supra at 638-639; Segel v. Commissioner, 89 T.C. 816, 830 (1987);

Deja Vu, Inc. v. Commissioner, T.C. Memo. 1996-234.

The funds of the LRFLP were used to benefit decedent with no

expectation of repayment from her during her lifetime. In

addition, as to the possibility of repayment, the funds were

placed at the risk of the business of the LRFLP in that

decedent’s ability to repay them depended primarily (if not
 -61-

solely) on the earnings and assets of the LRFLP. The only way

that decedent could have repaid those amounts would have been for

the LRFLP to distribute formally some of its earnings to her or

to redeem her limited partnership interest at a price greater

than the amount reported as due. While petitioners assert that

the “loans” were ultimately repaid in connection with the

redemption of the Lillie Investment Trust’s limited partnership

interest, such a post mortem transaction serves only to

strengthen our finding that decedent continued to enjoy the

transferred assets up until her death.

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt.

v. Capitalization

Thin or inadequate capitalization to fund a transferee’s

obligations weighs against a finding of bona fide debt. See

Stinnett’s Pontiac Serv., Inc. v. Commissioner, supra at 639.

We consider this factor to be irrelevant in the context of

this case and give it no weight.

vi. Identity of Interest

Transfers made in proportion to ownership interests weigh

against a finding of bona fide debt. A sharply disproportionate

ratio between an ownership interest and the debt owing to the

transferor by the transferee generally weighs toward a finding of
 -62-

debt. See id. at 630; Estate of Mixon v. United States, 464 F.2d

at 409.

The only partner of the LRFLP who used its funds was

decedent.

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt or, at best

for petitioners, is irrelevant.

vii. Presence or Absence of Security

The absence of security for the repayment of transferred

funds weighs strongly against a finding of bona fide debt. See

Roth Steel Tube Co. v. Commissioner, 800 F.2d at 632; Lane v.

United States, supra at 1317.

The promissory notes were unsecured. While petitioners

claim to the contrary, stressing the fact that the amounts of the

“loans” were less than the value of decedent’s limited

partnership interest, the mere fact that the balance of the

transfers was less than the presumed fair market value of

decedent’s interest in the LRFLP does not necessarily make the

transfers secured debt. Such is especially so where, as here,

decedent’s daughter conceded at trial that she loved her mother

and indicated that she would probably have continued to use the

funds of the LRFLP to pay her mother’s living expenses as

necessary.
 -63-

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt.

viii. Inability To Obtain Comparable Financing

The question of whether a transferee could have obtained

comparable financing from an independent source is relevant in

measuring the economic reality of a transfer. See Roth Steel

Tube Co. v. Commissioner, supra at 631; Estate of Mixon v. United

States, supra at 410. Evidence that a transferee could not at

the time of the transfer obtain a comparable loan from an arm’s-

length creditor weighs against a finding of bona fide debt. See

Roth Steel Tube Co. v. Commissioner, supra at 631; Stinnett’s

Pontiac Serv., Inc. v. Commissioner, 730 F.2d at 640; Calumet

Indus., Inc. v. Commissioner, 95 T.C. 257, 287 (1990).

We do not believe that a creditor dealing at arm’s length

would have lent decedent money under the terms that petitioners

allege were entered into between decedent and the LRFLP.

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt.

ix. Subordination

The subordination of purported debt to the claims of other

creditors weighs against a finding of bona fide debt. See Roth

Steel Tube Co. v. Commissioner, supra at 631-632; Stinnett’s

Pontiac Serv., Inc. v. Commissioner, supra at 639.
 -64-

We do not know whether decedent had any creditors. Given

that the “loans” from the LRFLP were unsecured, however, the

right of the LRFLP to repayment would have been subordinate to

the interests of any secured creditors.

This factor is either inapplicable or does not support a

finding that decedent’s use of the funds of the LRFLP created

bona fide debt.

x. Use of Funds

A transfer of funds to meet the transferee’s daily needs

weighs toward a finding of debt. See Roth Steel Tube Co. v.

Commissioner, supra at 632; Stinnett’s Pontiac Serv., Inc. v.

Commissioner, supra at 640.

Decedent’s daughter (as decedent’s attorney-in-fact) used

the funds of the LRFLP to meet decedent’s daily needs. But for

those funds, those needs most likely would have gone unsatisfied.

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt or, at best

for petitioners, is irrelevant.

xi. Presence or Absence of a Sinking Fund

The failure to establish a sinking fund for repayment weighs

against a finding of bona fide debt. See Roth Steel Tube Co. v.

Commissioner, supra at 632; Lane v. United States, 742 F.2d at

1317.
 -65-

Decedent did not establish any fund to repay the promissory

notes.

This factor weighs toward a finding that decedent’s use of

the funds of the LRFLP did not create bona fide debt.

xii. Conclusion

On the basis of our review of the record in light of the

relevant factors,24 we find it extremely improbable that an arm’s-

length lender at the time of each use of the funds of the LRFLP

would have lent unsecured, at a low rate of interest, and for an

unspecified period to an individual in decedent’s financial

condition and with decedent’s weakened health. Security,

adequately stated interest, and repayment arrangements (or

efforts to secure the same) are important proofs of intent, and

such proofs are notably lacking here. Economic realities require

that decedent’s use of the funds of the LRFLP be characterized as

distributions to decedent, and we so hold.

5. Effect of Section 2035(a)

Petitioners next argue that the Court, if we conclude that

the assets are includable in decedent’s gross estate under

section 2036(a)(1), must exclude from those assets the portion

24
In addition to the factors mentioned above, we note that
no contemporaneous records were kept as to the payments other
than the recordings in the checkbook registers. We consider the
lack of more formal documentation to be especially notable given
that decedent’s son-in-law prepared and kept detailed
documentation for all of the gifts before 1995.
 -66-

thereof that relates to the limited partnership interest that

decedent transferred by gift more than 3 years before her death.

We disagree. Petitioners’ argument, as we understand it, is that

this Court in Estate of Bongard v. Commissioner, 124 T.C. at

131-132, concluded that section 2035(a), which pertains to assets

transferred by gift within 3 years of death, limits the reach of

section 2036(a)(1). Petitioners are mistaken. Decedent

continued to possess and enjoy the transferred assets up until

her death. Accordingly, section 2036(a)(1) includes those assets

in her gross estate.

6. Epilog

We hold for respondent. We have considered all arguments by

petitioners for a contrary holding and find those arguments not

discussed herein to be without merit. To reflect the parties’

concessions,

Decisions will be entered

under Rule 155.