United States Court of Appeals

For the First Circuit

No. 04-1886

ESTATE OF IDA ABRAHAM, Deceased; 

DONNA M. CAWLEY and DIANA A. SLATER, Administratrixes,

Petitioners, Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent, Appellee.

APPEAL FROM A DECISION

OF THE UNITED STATES TAX COURT

Before

 Torruella, Lynch, and Howard, Circuit Judges.

Brendan J. Shea for appellants.

Michael J. Haungs, Tax Division, Department of Justice, with

whom Eileen J. O'Connor, Assistant Attorney General, and Jonathan

S. Cohen, Tax Division, Department of Justice, were on brief, for

appellee.

May 25, 2005
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LYNCH, Circuit Judge. This is an appeal from a Tax Court

determination unfavorable to the estate of Ida Abraham (the

Estate), brought by her two daughters as administratrixes.

Applying 26 U.S.C. § 2036(a), the Tax Court concluded that the

Estate had underreported the taxes due because the decedent had an

interest in certain property purportedly transferred to her

children by gift and purchase, that the purchase of the decedent's

interests by the children were not bona fide sales for adequate and

full consideration, and that the decedent retained rights in the

income from the total property. Estate of Abraham v. Comm'r, 87

T.C.M. (CCH) 975, 979-82 (2004). As a result, the court rejected

the Estate's challenge to the IRS determination of a tax

deficiency, which, after a decrease for state tax credits not

relevant here, came to $939,195.00. 

We affirm the Tax Court. We consider both the

specificity required in a notice of deficiency and the various

requirements of 26 U.S.C. § 2036(a).

Ida Abraham suffered from Alzheimer's disease and had to

be placed under guardianship. In 1995, a Massachusetts probate

court entered a stipulated decree requiring the establishment of an

estate plan for Mrs. Abraham. That action was taken in order to

ensure that Mrs. Abraham's financial needs would be met and to

prevent her estate from being drained by the contentious litigation

among her children. Mrs. Abraham died on June 9, 1997.
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As part of the estate plan, three pieces of commercial

property, which were owned by Mrs. Abraham and which generated

steady rental income, were transferred to three family limited

partnerships (FLPs). Mrs. Abraham and her children were partners

in those FLPs. Between 1995, when the FLPs were set up, and 1997,

when Mrs. Abraham died, she, through her guardian ad litem,

transferred percentage interests of her share in the partnerships

to her children and their families. Upon her death, the Estate

included in her estate tax return only the percentage interests in

the FLPs still held by her at her death and valued these interests

by applying minority and lack of marketability discounts. As

explained, the IRS assessed a deficiency based on 26 U.S.C. § 2036,

and the Tax Court rejected the Estate's challenge.

I.

Establishment of the Estate Plan

Ida Abraham and her husband, Nicholas Abraham, had four

children: Nicholas A. Abraham, Richard Abraham, Donna Cawley, and

Diana Slater. Nicholas, Sr., died on June 5, 1991, and litigation

amongst the children over his estate followed.

Among the assets Mrs. Abraham received from her husband

were three pieces of commercial real estate located in Tyngsboro

and Walpole, Massachusetts, and in Smithfield, Rhode Island. The

Walpole property was leased to a lumber yard, and the other

properties were skating rinks leased to third parties. The leases
1"The triple net lease is a lease in which the tenant is

responsible for taxes, insurance, utilities, and maintenance."

United States v. Stoddard, 875 F.2d 1233, 1235 (6th Cir. 1989). In

essence, the three properties generated a steady stream of rental

income with minimal effort by the owners.

2The oldest son, Nicholas A. Abraham, was not on the petition.

Apparently, he "opted out" of the litigation "early on" and decided

to forgo any interest in his mother's estate. In the rest of this

discussion, the term "children" is assumed to refer to the three

remaining siblings: Richard, Donna, and Diana.

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on all of these properties were long-term, triple net leases to

third parties unrelated to the Abraham family.1

At some point during this period, Mrs. Abraham developed

Alzheimer's disease. A Massachusetts probate court placed her

under guardianship on March 10, 1993. The probate court appointed

her daughter, Donna, as a permanent guardian of Mrs. Abraham's

estate and property. Litigation and discord among the children,

mainly between Richard and the two sisters, continued. The feud

was apparently over what amount was needed for Mrs. Abraham's

protection. The litigation was also draining Mrs. Abraham's

assets. In order to end this, on August 1, 1995, Mrs. Abraham's

children,2 their respective counsel, and Mrs. Abraham's legal

guardians signed a stipulated court decree to establish an estate

plan for Mrs. Abraham pursuant to an agreement. The decree set

forth the expectation for the estate plan and for the

responsibilities of the parties. There was a separate estate plan.

The Tax Court later considered evidence about the decree on the

issue of the understanding of the parties.
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The decree provided for the placing of the three pieces

of income-producing commercial real estate in FLPs and then

apportioning out percentage interests in the FLPs to the children

in order to reduce the Estate's tax liability upon Mrs. Abraham's

death. But the family also understood that the FLPs were a means

to protect Mrs. Abraham financially. As Donna testified at trial:

[T]he partnerships assured . . . that [Mrs.

Abraham] would be constantly protected. She

would never want for anything. There would

always be money there. And if there wasn't

money in her partnership fund, it had to come

out of my partnership shares or my brother's,

but the protection was there for her as a

guarantee that she would live status quo.

The decree provided that attorney David Goldman would be

named as a limited guardian ad litem with respect to Mrs. Abraham's

interests in the FLPs and would:

have the right to meet with the guardians of

the person and the estate of Ida Abraham in

order to ascertain her needs to determine any

and all shortfall as between the funds

generated by Ida Abraham's segregated property

and the income required [for] her from each of

the separate limited partnerships.

For each FLP, Mrs. Abraham would be made a general and

limited partner, while the three children, Richard, Donna, and

Diana, would also receive limited partnership interests in their

respective FLPs. The decree provided that each child, as a limited

partner, would: 

receive income from said family limited

partnership . . . either as the management fee

and/or gifts from Ida Abraham after deducting
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from the gross income of the partnership all

fees, taxes, partnership administration

expenses, reserve for expenses and monies

needed in the discretion of the limited

Guardian ad litem for Ida Abraham's support.

(emphasis added). Under the decree, although the later FLP

agreements are silent on the point, support for Mrs. Abraham came

from the income of the overall partnerships. The three

partnerships under the decree "share equally . . . the support of

Ida Abraham insofar as the funds generated by Ida Abraham's

properties maintained by her do not provide sufficient funds for

her adequate health, safety, welfare and comfort as determined by

the limited Guardian ad litem . . . ."

There were two mechanisms by which the children would

increase their ownership share in the FLPs, thus ostensibly

reducing Mrs. Abraham's estate: by gift or by purchase. The decree

provided that annual gifts consisting of limited partnership

interests in the three FLPs would be made "in amounts not to exceed

the then available annual gift tax exclusion for federal gift tax

purposes" to the three children and their families. The three

children would also have the right to purchase from Mrs. Abraham

additional limited partnership interests in their respective FLPs,

with the proceeds from the sales "held in a revocable trust for the

benefit of Ida Abraham during her lifetime and . . . utilized for

her needs (only if her other assets are insufficient to do so) and
3Some of the properties were deeded to real estate trusts with

the respective FLPs made 100% beneficiaries. For our purposes,

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then held for such child and his or her family upon the death of

Ida Abraham." 

Finally, the decree provided that:

Ida Abraham's living arrangements shall remain

in accordance with the present arrangement and

every effort will be made to maintain her in

"status quo." Her segregated assets shall be

maintained at a level established by the

limited Guardian ad litem in his sole

discretion.

The decree thus gave the guardian ad litem power not to make gifts

from Mrs. Abraham's share if that would contravene maintaining the

status quo as to Mrs. Abraham's living conditions.

Creation of the FLPs and the Transfers of the Underlying Real

Estate

The estate plan that was established essentially followed

the plan agreed to by the parties in the decree, though there were

some differences in the details. We omit discussion of details not

pertinent to the appeal here. 

In October 1995, three separate FLPs, one for each of the

three children embroiled in the litigation, were created: (1) The

RMA Smithfield/Walpole Family Limited Partnership for Richard (RMA

FLP), (2) The DAS Tyngsboro Family Limited Partnership for Diana

(DAS FLP), and (3) The DAC Tyngsboro Family Limited Partnership for

Donna (DAC FLP). The commercial real estate properties were placed

in the FLPs.3 Instead of having Mrs. Abraham as the general
these details are not relevant and the parties stipulated that the

properties were "placed in" the FLPs.

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partner, each FLP had, as its respective general partner, a

separate management company formed for this purpose. Each

management company, as corporate general partner, had only a 1%

interest in the respective FLPs, but each also had "the exclusive

right to manage the business of the Partnership," including the

authorization "to dispose of all or substantially all of the assets

of the Partnership without the consent of the Limited Partners."

Attorney Goldman was the sole corporate officer of the general

partner management companies for the DAC and DAS FLPs. Because

Richard refused to indemnify Goldman, Harold Rubin, Richard's

accountant, was put in charge of the general partner management

company of the RMA FLP. Rubin was also named Mrs. Abraham's

guardian ad litem with respect to Richard's interests in the

partnership, but had to defer to Goldman as Mrs. Abraham's guardian

ad litem, and Rubin had "no control whatsoever over [Mrs.

Abraham]."

The partnership agreements did not specifically mention

any obligation for Mrs. Abraham's support as specified in the

decree. The agreements provided that if cash were available for

distribution to the partners, the cash should first be used to

discharge "debts and obligations of the Partnership and management

fees," then to "fund reserves for working capital, improvements or
4According to a letter dated November 9, 1995, from William

Kirchick, an estate planning lawyer chosen to create Mrs. Abraham's

estate plan, Donna and Diana were deemed to have made a $9,091

capital contribution to the respective FLPs. This amount was

apparently computed by treating $900,000, the FLP's interest in the

underlying Tygnsboro property, as 99% of the final value of the

FLP.

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replacements or contingencies, to the extent deemed reasonable by

the General Partner," and finally "to the Partners in proportion to

their respective Percentage Interests."

The October 1995 transfers of the underlying real estate

to the FLPs are referred to by the parties as "the first set of

transfers." The parties stipulate that at the time of the transfer

of the Tyngsboro property to the DAC/DAS FLPs, the property's value

was $1,800,000, with the undivided one-half interest in each FLP

valued at $900,000. Mrs. Abraham initially held a 98% limited

partnership interest in each of the DAC and DAS FLPs. Donna and

Diana each held a 1% limited partnership interest in the respective

FLPs. It does not appear from the record that Donna or Diana paid

for their 1% interests, but in the end that is immaterial.4

In order to establish the value of the percentage

interests in the partnerships (as of the time the FLPs were set

up), the children submitted to the Tax Court the valuation set out

in a November 9, 1995 letter from attorney William Kirchick, an

estate planning lawyer chosen to draft Mrs. Abraham's estate plan.

In that letter, Kirchick explained that each 1% interest in the

DAC/DAS FLPs was valued at $9,091, but that he had applied a 15%
5We do not delve into the details about the transfer of the

Smith/Walpole properties to the RMA FLP because they are not as

relevant to the subject of this appeal due to the fact that Richard

did not purchase any FLP interests. In broad terms, the events

were similar to the events surrounding the DAC/DAS FLPs.

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discount for minority interest and a 25% discount for lack of

marketability to arrive at the market value of $5,795 for each 1%

interest. At trial, attorney Kirchick was not qualified as an

expert and did not testify, and there was no explanation in the

letter for how he arrived at these discount percentages. At the

end of the letter, attorney Kirchick added the following

disclaimer:

You should know that no representation is made

that these discounts will hold up or that you

will be entitled to the full amount of the

annual exclusions claimed for the gifts made.

Each partnership and the assets thereof must

be judged on their own merits, and it is not

possible to ascertain with any degree of

certainty what will pass muster with the

Internal Revenue Service.

That warning proved to be prophetic.5

At trial, the Commissioner objected to the introduction

of this valuation letter into evidence. The Tax Court admitted the

letter for the limited purpose of showing that the children relied

on the given valuation. But the court did not consider it as

evidence that the discounts were appropriate.
6Applying the valuation the parties relied on in Kirchick's

letter ($5,795 per 1% interest), it appears that Diana was credited

with having paid $161,000 ($5,795 x 27.783 = $161,002.48) while

Donna was credited with having paid $151,000 ($5,795 x 26.057 =

$151,000.31). Apparently this discrepancy was deliberately

introduced in order to ensure that the two families would end up

with roughly equal ownership in the FLPs after gift interests were

added.

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"Purchase" of Partnership Interests by the Children

The transfers of interests in the FLPs subsequent to

their formation are referred to by the parties as "the second set

of transfers."

In October of 1995, Diana and Donna each wrote a $160,000

check to Mrs. Abraham, and in exchange, Mrs. Abraham, through her

guardian ad litem, transferred a 27.783% limited partnership

interest in the DAS FLP to Diana, and a 26.057% limited partnership

interest in the DAC FLP to Donna.6

Attorney Goldman only created one checking account for

each FLP, and in the same general account he deposited the income

from the monthly rent generated by the underlying real estate and

the money paid to Mrs. Abraham to purchase limited partnership

interests. No effort was made to segregate income paid to Mrs.

Abraham for the transfer of her shares from the income from her

ownership interest. This was not in compliance with the court

decree, which specified that the funds paid to Mrs. Abraham to

purchase her limited partnership interests would be held in a

revocable trust for her benefit. 
7These percentages were computed (based on the discounted

value for each 1% interest set out in Kirchick's letter) to come

within the annual federal gift tax exclusion. See 26 U.S.C.

2503(b).

8Mrs. Abraham initially held a 99% limited partnership

interest in the RMA FLP. On December 26, 1995, through her

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On March 25, 1996, Donna wrote out a $30,000 check made

payable to the DAC FLP, but not to Mrs. Abraham, drawn on an

account in both Donna and Diana's names. In exchange, Donna

received a 5.178% limited partnership interest in the DAC FLP from

Goldman (who held the shares for Mrs. Abraham). On the same day,

Donna also wrote out a $40,000 check made payable to the DAS FLP

drawn on the same checking account that she and Diana shared. In

exchange, Diana received a 6.904% limited partnership interest in

the DAS FLP from Goldman. 

In March 1997, Donna and Diana each purchased an

additional 8.63% interest in their respective FLPs by paying

$50,000 to the FLPs.

Gifts to the Children

Also, between 1995 and 1997, Goldman, as Mrs. Abraham's

guardian ad litem, made total gifts of 22.438% interests in the DAS

FLP to Diana and her family. During the same time, Goldman made

total gifts of 25.89% interests in the DAC FLP to Donna and her

family.7 Between 1995 and 1997, Goldman made gifts from Mrs.

Abraham's share of 23.439% interests in the RMA FLP to Richard and

his family.8
guardian ad litem, Mrs. Abraham transferred a 30% limited

partnership interest in the RMA FLP to Richard in exchange for his

settling of the claims against her estate. This 30% interest in

the RMA FLP is not at issue in this appeal. See infra note 10.

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Operation of the FLPs

Each month between the creation of the FLPs and Mrs.

Abraham's death, Donna, as guardian of Mrs. Abraham's person, would

send letters to Goldman setting out the monthly "shortfall" in

payment for Mrs. Abraham's expenses and demanding that the three

FLPs make up the shortfalls. The shortfall represents the extent

to which Mrs. Abraham's personal income from sources such as Social

Security and an annuity could not cover her expenses. Goldman

occasionally sought documentation of certain expenses, but

ultimately always found Donna's accounting in order. Goldman would

then divide the shortfall amount in three, and cause checks to be

written to Donna from the accounts of the three FLPs to pay the

shortfall.

Each month, Goldman also paid out to Donna, Diana, and

Richard their percentage ownership share (which also included the

shares gifted to their families) of the income from the FLPs. 

According to some early accounting records of the FLPs, the net

income of the partnerships was computed by deducting from the gross

income of the partnerships expenses such as administration fees and

insurance. At least in these early accounting records, the

payments from the partnerships to make up the shortfall in Mrs.
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Abraham's expenses were not treated formally on the books as

partnership expenses. There were no FLP accounting records from

later in the record.

Donna testified at trial that it was her understanding

that all of the partnership income from the FLPs would be available

to pay Mrs. Abraham's expenses regardless of the children's

ownership interests, and that Goldman was obliged to use the

overall partnership funds to make up the shortfall. Goldman

testified at trial that he acted as a fiduciary for Mrs. Abraham,

and understood his "first responsibility, as set out in the

documents, and as [he] discussed with everyone, [to be] to . . .

use funds necessary to maintain [Mrs. Abraham] as is." Goldman

testified that he saw his duties and authority as guardian ad litem

to originate in the court decree, and specifically in the sections

of the decree which provided that partnership funds had to be

reserved for Mrs. Abraham's needs and that Mrs. Abraham's living

arrangements were to be maintained in "status quo." Although he

acknowledged that he had various other fiduciary duties in so far

as he also managed the general partner management companies for the

FLPs, his view was that "the reason [he] was appointed was to work

on [Mrs. Abraham's] behalf, period."

Goldman also testified that he never paid either Donna or

Diana more than their share of the partnership funds, and that

during the whole time he acted as her guardian ad litem, he paid
9Lipof valued the Smith and Walpole properties together at

$830,000 and the Tyngsboro property at $2,200,000 at the time of

Mrs. Abraham's death. Treating the value of the underlying

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Mrs. Abraham's monthly shortfalls out of the share of FLP income

attributable to Mrs. Abraham. He admitted, though, that if Mrs.

Abraham's needs had increased beyond the income generated by the

share attributable to her, he would have put Mrs. Abraham "in the

top priority" and used "any money that was at [his] disposal to use

to account for her." He also explained that if one of the FLPs

lost its source of income, he would have used his discretionary

power to make up the shortfall from funds in the other FLPs.

Although he did testify at one point that he did not think he could

outright refuse to pay to Diana and Donna the income attributable

to the FLP interests they had purchased, he immediately amended his

testimony to explain that it was his and the family's understanding

that all FLP funds could be used to fulfill Mrs. Abraham's needs

and had he used the funds in this way, he "would have been doing .

. . what the family would have wanted."

Events Following Mrs. Abraham's Death

On June 9, 1997, Mrs. Abraham died. Based on the

calculations in a letter from Michael Lipof, a real estate

consultant, the Estate reported in its Estate (and GenerationSkipping Transfer) Tax Return that the fair market value of Mrs.

Abraham's 45% interest in the RMA FLP was $242,750 and the value of

her 33.3% interest in the DAC/DAS FLPs was a combined $476,666.9
property as the value of the FLP holding the property, Lipof then

computed the market value of Mrs. Abraham's percentage interests in

the respective FLPs. Lipof applied a 30-40% discount to the value

of the partnership interests for lack of marketability. 

10The Notice of Deficiency only sought to include 70% of the

value of the assets of the RMA FLP in the gross estate, crediting

the Estate for Richard's settlement of his claims against the

Estate for a 30% stake in the FLP. Although the Commissioner's

position is that this determination was erroneous and 100% of the

value of the assets in the RMA FLP should have been included, the

Commissioner did not seek to increase the deficiency amount in the

Tax Court and does not do so before this court. See Estate of

Abraham v. Comm'r, 87 T.C.M. (CCH) 975, 982 n.29 (2004).

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During the three months after Mrs. Abraham's death,

attorney Goldman disbursed $120,869.42 to Diana from the DAS FLP

and $93,078.62 to Donna from the DAC FLP. These amounts were not

reported on the Estate's tax return. The Commissioner does not

seek to include these amounts in the gross estate.

II.

The Internal Revenue Service audited the Estate's tax

return and determined a deficiency of $1,125,210 plus interest.

The Notice of Deficiency was issued on February 28, 2001. In the

Notice, for each FLP, the value of each FLP as reported by the

Estate was set aside, and the underlying value of the commercial

real estate held by the FLP was included as part of the gross

estate.10 The Notice gave the following explanation for each FLP:

It is determined that the decedent/guardian

transferred [name of FLP] for less than

adequate and full consideration in money or

money's worth and that the decedent, through

the guardian, retained an interest in the

asset. Therefore, pursuant to I.R.C., section
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2036, the fair market value of the asset is

includable in the decedent's gross estate.

Accordingly, the taxable estate is increased

by [fair market value of the underlying real

estate].

The provision of the code pursuant to which the

Commissioner determined a deficiency provided, in relevant part:

(a) General rule.--The value of the gross

estate shall include the value of all property

to the extent of any interest therein of which

the decedent has at any time made a transfer

(except in case of a bona fide sale for an

adequate and full consideration in money or

money's worth), by trust or otherwise, under

which he has retained for his life or for any

period not ascertainable without reference to

his death or for any period which does not in

fact end before his death--

(1) the possession or enjoyment of, or the

right to the income from, the property, or

(2) the right, either alone or in conjunction

with any person, to designate the persons who

shall possess or enjoy the property or the

income therefrom.

26 U.S.C. § 2036(a).

The Estate petitioned the Tax Court for a redetermination

of the deficiency. Trial in the Tax Court was held on October 16,

2002. The Tax Court issued a memorandum decision on February 18,

2004. See Estate of Abraham v. Comm'r, 87 T.C.M. (CCH) 975 (2004).

The Tax Court first determined that the burden of proof

was on the Estate, rejecting the Estate's argument that the Notice

of Deficiency failed to give adequate description of the factual

and legal bases for the deficiency determination. Id. at 979.
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The Tax Court found that it was the understanding of the

children and the legal representatives that Mrs. Abraham "was

entitled to any and all funds generated from the partnerships for

her support first. Only after this could any excess be distributed

in proportion of the partners['] supposed ownership interests.

Here, it is clear that at the time of the transfers, decedent

explicitly retained the right to the income that the FLPs generated

to the extent necessary to meet her needs." Id. at 981 (emphasis

in original).

The Tax Court further found that the initial sales by

Mrs. Abraham of FLP interests to Donna and Diana for $160,000 each

did not constitute "bona fide sale[s] for adequate consideration"

within the meaning of 26 U.S.C. § 2036(a) because the Estate did

not produce sufficient evidence to demonstrate the fair market

value for the partnership interests on the dates of the transfers.

Id. at 982. In addition, in the case of the subsequent purchases,

the money was paid to the FLPs, not to Mrs. Abraham, and thus, the

court found, could not qualify as bona fide sales. Id.

Accordingly, the Tax Court upheld the deficiency determination.

The final determination of the deficiency, after credits for state

estate, inheritance, legacy or succession taxes, was $939,195.00.

The Estate timely appealed to this court.
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III.

The Burden of Proof

The Estate first argues that the Tax Court erred by

placing the burden of proof on the Estate instead of on the

Commissioner. We review the allocation of the burden of proof, a

question of law, de novo. See Trull v. Volkswagen of Am., Inc.,

187 F.3d 88, 93 (1st Cir. 1999). 

Generally, the taxpayer bears the burden to refute by a

preponderance of the evidence the Commissioner's determination of

deficiency, which is presumed to be correct. See Welch v.

Helvering, 290 U.S. 111, 115 (1933); Delaney v. Comm'r, 99 F.3d 20,

23 (1st Cir. 1996); T.C.R. 142(a)(1). But where the Notice of

Deficiency fails to adequately "describe the basis on which the

Commissioner relies to support a deficiency determination" and the

Commissioner seeks to establish the deficiency on a basis not

described in the Notice, the burden shifts to the Commissioner on

that new basis. Shea v. Comm'r of Internal Revenue, 112 T.C. 183,

197 (1999); see T.C.R. 142(a)(1). "A new theory that is presented

to sustain a deficiency is treated as a new matter when it either

alters the original deficiency or requires the presentation of

different evidence." Wayne Bolt & Nut Co. v. Comm'r, 93 T.C. 500,

507 (1989). But if the theory "merely clarifies or develops the

original determination[, it] is not a new matter in respect of

which [the Commissioner] bears the burden of proof." Id.
11The Estate makes no argument that burden shifting is

appropriate under 26 U.S.C. § 7491.

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The Estate's main argument is that the Notice was

"latently ambiguous, overly broad and confusing" and failed to

specify all the elements of the Commissioner's argument that under

§ 2036, the FLP interests were 100% taxable to the estate. The

Estate argues that the Notice should have described "why the

consideration was inadequate" and "the amount of consideration the

Government would consider adequate," as well as "which of the

alternative possession, enjoyment or right to income theories it is

relying on alleging a taxable event has occurred pursuant to

§ 2036(a)." The Estate also argues that the Notice failed to

explain how the Commissioner valued the FLP interests at the fair

market values of the underlying real estate. Therefore, the Estate

argues, the burden of proof on all of these "new matters" should

have been placed on the Commissioner.11

Acceptance of the Estate's arguments would amount to a

requirement that the Notice of Deficiency be as detailed as trial

briefs. There is no such requirement. The standard of specificity

for notices of deficiency is much lower. "In fact, if a deficiency

notice is broadly worded and the Commissioner later advances a

theory not inconsistent with that language, the theory does not

constitute new matter, and the burden of proof remains with the

taxpayer." Abatti v. Comm'r, 644 F.2d 1385, 1390 (9th Cir. 1981);
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see also Shea, 112 T.C. at 191. The Commissioner did not seek to

change the amount of the deficiency or advance a theory

inconsistent with the language of the Notice. 

The Estate relies for its burden shifting argument on

cases with very different facts and which are easily

distinguishable. See, e.g., Estate of Thompson v. Comm'r, 84

T.C.M. (CCH) 374, 385 (2002) (Commissioner had the burden on the

applicability of § 2036 because the notice of deficiency discussed

disallowance of minority and lack of marketability discounts but

did not mention § 2036.); Shea, 112 T.C. at 192 (Commissioner had

the burden on the applicability of 26 U.S.C. § 66(b) and California

community property law because neither was explicitly or implicitly

referenced in the notice of deficiency.). Here, the Notice

specifically named § 2036 as the legal basis for the deficiency and

explained the factual basis for the determination as being Mrs.

Abraham's retention of an interest in all the income from the FLPs

through her guardian despite transfers of FLP interests to her

children without adequate consideration. 

As to the valuation question, while the Notice itself

does not explain, step-by-step, why the Commissioner wanted to

include in the gross estate the total value of the underlying real

estate, it is clear that the Estate was never confused about the

Commissioner's theory. The Estate's tax return included

attachments in which the Estate computed the value of the FLP
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interests nominally held by Mrs. Abraham at the time of her death.

The Estate's own computations began with, and then applied

discounts to, the fair market value of the underlying real estate.

This was logical since the only property held by the FLPs was the

real estate and rental income generated by the real estate. The

Notice of Deficiency cited § 2036 and included in Mrs. Abraham's

gross estate the fair market value of the underlying real estate as

reported by the Estate. 

Read in context, the clear implication of the Notice of

Deficiency was that 1) the Commissioner sought to include 100% of

the FLPs in the gross estate, and 2) the Commissioner valued the

FLPs at the value of the underlying real estate, as the Estate

itself did in its computations. That the Estate shared this

understanding of the Commissioner's theory is shown by the Estate's

petition to the Tax Court for a redetermination, in which it argued

that the Commissioner was wrong to have determined that the entire

value of each FLP was includable in the gross estate and also wrong

to have valued the FLPs at the value of the underlying real estate.

Cf. Olsen v. Helvering, 88 F.2d 650, 651 (2d Cir. 1937) (looking at

whether taxpayers were misled to determine adequacy of notice of

deficiency).

The Commissioner's valuation is in fact based on the

Estate's own appraisal. In such circumstances, "[t]he valuation in

the notice of deficiency is entitled to a presumption of
12The Tax Court decision focused on the applicability of § 2036

to the transfers of FLP interests to Mrs. Abraham's children. On

appeal, the Commissioner contends that we should focus our analysis

on the applicability of § 2036 to the initial transfers of the real

estate to the FLPs and affirm the Tax Court on this different

basis. We decline the Commissioner's invitation.

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correctness." Estate of Magnin v. Comm'r, 184 F.3d 1074, 1081 (9th

Cir. 1999). To the extent that any discounts may be appropriate

due to the fact that the assets are in the form of FLPs, the burden

was on the Estate to show the appropriateness of such discounts.

That burden was critical to the question of whether the transfers

of FLP interests were for adequate consideration in money or

money's worth, an aspect of the § 2036 analysis also set out in the

Notice of Deficiency. The Notice of Deficiency was adequate to

provide notice to the Estate, and the Commissioner did not argue

any "new matter" over which burden shifting to the Commissioner

would have been appropriate.12

IV.

Application of Section 2036 to the FLP Interests Transferred By

Mrs. Abraham During Her Lifetime

On the merits, the Estate argues that the Tax Court erred

in determining that under § 2036, 100% of the FLPs were includable

in Mrs. Abraham's gross estate. The Estate argues that the Tax

Court erred because 1) Donna and Diana's purchases of percentage

interests in the FLPs were bona fide sales for adequate

consideration, and 2) Mrs. Abraham did not retain a "right" to, or
13The Estate and the Commissioner disagree over whether we

should analyze the "retained interest" branch or the "bona fide

sale" branch first. It makes no difference in which order the

analysis is done. The two branches are not completely overlapping.

The gratuitous gifts of FLP percentage interests were not "sales,"

bona fide or other wise, and would only escape inclusion under

§ 2036 if Mrs. Abraham retained no interest in those transferred

FLP interests.

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"enjoy," the income from the percentage interests transferred as

the result of an agreement between the parties.

We begin with the structure of § 2036. Section 2036 is

designed to capture in the 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). A transfer would be covered by

§ 2036 if the transferor "retained for his life . . . the

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

property." 26 U.S.C. § 2036. But if such a transfer were "a bona

fide sale for an adequate and full consideration in money or

money's worth," § 2036 would not apply.13 Id.

Bona Fide Sale

The Estate argues that except for the outright gifts of

FLP interests, Donna and Diana paid adequate and full consideration

and purchased their other percentage interests in the FLPs in bona

fide sales so that it was error to include those non-gifted

interests in Mrs. Abraham's gross estate.
14In addition to the fact that the letters were inadmissible

hearsay, they contained inadequate explanation for the valuation

computation. There was no explanation for why Donna and Diana were

deemed to have made 1% capital contributions; there was no

explanation for how the minority and lack of marketability

discounts were computed; and the letters contained extensive

disclaimers as to the reliability of the valuation.

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The biggest hurdle in the way of the Estate (and the

reason why it lost in the Tax Court) is that it did not meet its

burden to prove that Donna and Diana paid adequate consideration

for their FLP interests. The Estate produced no admissible

evidence concerning the adequacy of the discounted value of the FLP

percentage interests because the valuation letters from Kirchick,

on which the Estate relies, were excluded from evidence for those

purposes.14 The Estate does not challenge that evidentiary ruling

by the Tax Court here.

Attempting an end run, the Estate now argues that the Tax

Court erred as a matter of law because the Tax Court used the wrong

test for what constituted adequate consideration. The Estate

argues that whether full and adequate consideration was paid should

be measured by the value of the remainder interest of the FLP

percentages at the time of the transfers and not the fee simple

value of the FLP percentages at the time of the transfers. The

Estate argues that Donna paid $251,000 for 43.317% of the DAC FLP,

while the remainder value of that portion of the DAC FLP, computed

according to the actuarial tables in IRS regulations, was only

$227,410. Similarly, the Estate argues, Diana also overpaid for
-26-

her interests in the DAS FLP, as measured by the actuarial value of

the remainder interest. The Commissioner, unsurprisingly, disputes

the accuracy of these computations.

But this dispute is beside the point. The Estate relies

on a series of cases in which the decedent sold the remainder

interest in property for its actuarial value while retaining a life

estate in the property, and the courts held in those cases that

"adequate and full consideration" for § 2036 purposes should be

measured by what the decedents actually sold -- the remainder

interests -- and not the fee value of the property as a whole.

See, e.g., Estate of Magnin, 184 F.3d at 1078; Wheeler v. United

States, 116 F.3d 749, 767 (5th Cir. 1997); Estate of D'Ambrosio v.

Comm'r, 101 F.3d 309, 311, 317-18 (3d Cir. 1996). But those cases

are inapplicable to the facts here, where no evidence in the record

suggests that the parties ever contemplated the transfers as sales

by Mrs. Abraham of remainder interests in the FLPs. 

In fact, the evidence in the record is all to the

contrary. The Estate's argument here is directly in conflict with

its position at trial, where it vigorously attempted to show that

Donna and Diana purchased present fee interests in the FLPs. The

documents memorializing the transfers of FLP interests from Mrs.

Abraham to her daughters do not speak of remainder interests, and

the parties computed the amount of money paid by Donna and Diana

for the FLP interests in reliance on (unsubstantiated) minority and
-27-

lack of marketability discounts, not on the actuarial value of the

remainder interests in the FLPs. The Estate in its appellate brief

argues that "[t]he transferee will not possess or enjoy the

property until the death of the transferor," which is plainly

untenable in view of the fact that Donna and Diana received monthly

payments from the FLPs during Mrs. Abraham's lifetime. 

The interests that were transferred are best described as

present interests in the FLPs subject to Mrs. Abraham's interest in

diverting all FLP income for her needs, a power to be determined

and exercised at the discretion of her guardian ad litem. When all

the evidence in the record suggests that the transfers were not

treated by anybody as sales of remainder interests in the FLPs, it

is impossible for the transfers to qualify as "bona fide sales [of

remainder interests] for adequate and full consideration."

It should be noted that the Commissioner did give the

Estate credit for the $160,000 payments under 26 U.S.C. § 2043,

offsetting these payments from the full value of the underlying

asset. See Estate of Abraham, 87 T.C.M. (CCH) at 982.

Right and Enjoyment

The Estate next argues that the Tax Court erred in

holding that Mrs. Abraham "retained the right to the income that

the FLPs generated to the extent necessary to meet her needs."

Estate of Abraham, 87 T.C.M. (CCH) at 981. The Estate makes two

intertwined arguments: 1) Mrs. Abraham did not retain a legally
-28-

enforceable "right" within the meaning of § 2036, and 2) there was

no agreement that Mrs. Abraham would retain a first-access interest

in all the income from the FLPs to the extent necessary for her

support.

In order for § 2036 to apply, it is not necessary that

the decedent-transferor retain a legally enforceable interest in

the property. See Estate of Maxwell v. Comm'r, 3 F.3d 591, 593-94

(2d Cir. 1993); Guynn v. United States, 437 F.2d 1148, 1150 (4th

Cir. 1971). "An interest retained pursuant to an understanding or

arrangement comes within § 2036." Guynn, 437 F.2d at 1150. "The

existence or nonexistence of such an understanding is determined

from all of the facts and circumstances surrounding both the

transfer itself and the subsequent use of the property." Estate of

Harper v. Comm'r, 83 T.C.M. (CCH) 1641, 1648 (2002). The finding

by the Tax Court that such an understanding existed is reviewed for

clear error. See Estate of Maxwell, 3 F.3d at 594. As with other

issues, the Estate "bears the burden (which is especially onerous

for transactions involving family members) of proving that an

implied agreement or understanding between [Mrs. Abraham] and [her]

children did not exist." Estate of Reichardt v. Comm'r, 114 T.C.

144, 151-52 (2000).

We may dispose of the first part of the Estate's argument

quickly. The Tax Court did not find that Mrs. Abraham retained a

legally enforceable "right" to all the income from the FLPs.
-29-

Therefore the arguments that the Tax Court decision is in conflict

with vested property interests of the children is irrelevant.

What the Tax Court did find was that "[t]he documentary

evidence, including the stipulated decree of the probate court, and

the understanding of decedent's children and legal representatives

demonstrate that decedent was entitled to any and all funds

generated from the partnership for her support first." Estate of

Abraham, 87 T.C.M. (CCH) at 981 (emphasis in original). This

finding is not clearly erroneous.

Evidence adduced at trial shows that the motivation for

the formation of the FLPs was to protect Mrs. Abraham's financial

needs so as to maintain her in status quo and to prevent her estate

from being drained by litigation. The FLPs were formed, according

to Donna, so that "[t]here would always be money there" for Mrs.

Abraham. The probate court decree memorializing the understanding

of the parties at the time of the creation of the FLPs explicitly

made "monies needed in the discretion of the limited Guardian ad

litem . . . for Ida Abraham's support" into an obligation of the

FLPs which must be met before any partnership income could be

disbursed to the partners. 

The Estate chooses to focus on the FLP agreements, which

do not include Mrs. Abraham's support as obligations of the FLPs,

and argues that the discretion of Goldman, Mrs. Abraham's guardian

ad litem and the person in control of the general partner
-30-

management companies for the FLPs, is limited by his fiduciary

duties to the other limited partners. But these arguments, at

most, show that Mrs. Abraham's first-priority claim on all the

income from the FLPs may not be legally enforceable. They do not

show that there was no such understanding among the parties. 

In fact, the weight of the evidence was just the

opposite. The evidence showed that all parties understood that

Goldman, as Mrs. Abraham's guardian ad litem, had the discretion

and the approval of the family to use all FLP income, if necessary,

for Mrs. Abraham's support. Donna testified that if Mrs. Abraham's

needs exceeded her share of the partnership income, "it had to come

out of my partnership shares or my brother's, but the protection

was there for her as a guarantee that she would live status quo."

Goldman testified that he had exclusive control over the FLP

accounts; he understood his authority and duties to come primarily

from the court decree and also understood that he was appointed

primarily to work on Mrs. Abraham's behalf. The evidence is that

Goldman failed to segregate what was supposed to be Mrs. Abraham's

personal funds from the funds in her revocable trust and commingled

all monies in the bank accounts for the FLPs. Such commingling in

disregard of the partnership form is indicative of Mrs. Abraham's

retained interest over all the FLP income. See Estate of Harper,

83 T.C.M. (CCH) at 1649. Goldman also testified that it was his

and the family's understanding that should it be necessary, all FLP
15To be sure, there was also some contradictory evidence. For

example, at one point Goldman explained that he did not think he

could deny the other limited partners (Donna and Diana's families)

their monthly income from the FLPs (although he then amended his

testimony). It also appears from a few accounting statements done

by Donna early on that the expenses for Mrs. Abraham's support were

not formally treated as an obligation of the FLPs (but these

statements were subsequently corrected for overpayments to Donna

and Diana, and there are no detailed accounting statements for the

partnerships in the record after the first few months). In any

case the decree only called for sufficient funds for Mrs. Abraham's

support to be reserved in the FLPs, which does not require the

guardian ad litem to treat Mrs. Abraham's support as a partnership

expense. The Tax Court, as fact finder, resolved these potential

contradictions in favor of the overwhelming evidence that there was

such an understanding among the parties, and that finding is not

clearly erroneous.

-31-

income could be used to pay Mrs. Abraham's expenses, to the

exclusion of paying out the shares to any of the other limited

partners because that would be "what the family would have

wanted."15

Neither is it dispositive that, according to the Estate,

the FLPs' payments for Mrs. Abraham's maintenance never exceeded

what Mrs. Abraham was legally entitled to by virtue of her

ownership of FLP percentage interests. That Mrs. Abraham's

guardian ad litem did not have the occasion to, or did not choose

to, exercise what was conceded to be an available option -- the

diversion of all FLP income for Mrs. Abraham's maintenance --

cannot be taken to make the Tax Court's finding that this option

existed clearly erroneous.
16"The value of the gross estate shall include the value of all

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

the time of his death." 26 U.S.C. § 2033.

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V.

The Estate makes a final argument that the Tax Court

erred by including 100% of the FLPs in Mrs. Abraham's gross estate

under § 2036 because § 2036 only covered the FLP interests that

Mrs. Abraham transferred to her children, but not the interests she

held at her death. Interests retained by the decedent at her death

are of course includable in the gross estate under 26 U.S.C.

§ 2033,16 the basic estate tax provision, but the Estate argues that

the Tax Court did not address the applicability of § 2033 and thus

should be reversed at least with respect to those interests.

Further, the Estate maintains that the Notice of Deficiency was

confusing because it was not clear whether the deficiency was

assessed under § 2036 or § 2033.

This argument is frivolous. The Commissioner invoked

§ 2036 in order to recapture in the gross estate the FLP interests

Mrs. Abraham had allegedly "transferred." Section 2033 was never

an issue at trial nor was it mentioned in the Notice of Deficiency

because the Estate never disputed that the FLP interests explicitly

held by Mrs. Abraham at her death were includable in her gross

estate. Throughout the litigation, it was assumed by all parties

that the dispute was only over the interests Mrs. Abraham

transferred to her children during her lifetime. In fact, the
-33-

interests held by Mrs. Abraham at the time of her death were

reported in the Estate's initial tax return.

VI.

The Tax Court's decision is affirmed.