T.C. Memo. 2005-102

UNITED STATES TAX COURT

ESTATE OF EDNA KORBY, DECEASED, AUSTIN KORBY, JR., TRUSTEE OF THE

AUSTIN AND EDNA KORBY LIVING TRUST, AND ESTATE OF EDNA KORBY,

DECEASED, TRANSFEROR, AUSTIN KORBY, JR., TRUSTEE OF THE AUSTIN

AND EDNA KORBY LIVING TRUST, TRANSFEREE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18451-02. Filed May 10, 2005.

David W. Johnson and James A. Beitz, for petitioners.

Helen H. Keuning, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: Respondent determined a deficiency of

$1,104,635 in the Federal estate tax of the Estate of Edna Korby 
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1Respondent also determined a deficiency with respect to the

estate of Edna Korby’s husband, Austin Korby, who died 5 months

after Edna. The issues concerning Austin’s estate are addressed

in a separate Memorandum Findings of Fact and Opinion of this

Court. 

2Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the date of the

decedent’s death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

(the estate)1 and an addition to tax under section 6651(a)(1)2 of

$276,159. After concessions, the issues for decision are: 

(1) Whether the values of the assets Austin and Edna Korby

(Austin and Edna or the Korbys) transferred to the Korby

Properties, A Limited Partnership (KPLP), are includable in the

gross estate under sections 2036 and 2038. We hold that 38.26

percent of KPLP’s value is includable under section 2036(a)(1); 

(2) whether the value of an annuity purchased in 1995 is

includable in the gross estate. We hold that it is; and

(3) whether the estate is liable for an addition to tax

under section 6651(a)(1) for failure to timely file a return. We

hold that it is. 

FINDINGS OF FACT

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

The stipulation of facts, supplemental stipulation of facts,

second supplemental stipulation of facts, and attached exhibits

are incorporated herein by this reference. At the time the

petition was filed, the mailing address for the estate was in
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Fergus Falls, Minnesota, and Austin Dennis Korby, Jr. (Dennis),

Austin and Edna’s son and the trustee of the Austin and Edna

Korby Living Trust (the living trust), resided in Fergus Falls,

Minnesota. Edna died in Minnesota.

I. Background

Austin and Edna were married in 1948. They had four sons:

Dennis, Gary Alan Korby, Donald Wayne Korby, and Steven Glen

Korby. In 1993, Austin was 79 years old and Edna was 69 years

old. In February 1993, Edna was diagnosed with severe

Alzheimer’s dementia. She resided in Pelican Lake Health Care

Center, a nursing home, from mid-February 1993 until she died on

July 3, 1998, from progressive dementia. Before 1993, Austin

suffered a stroke and was diagnosed with Type II diabetes,

hypertension, and cardiac arrhythmias. During 1993, Austin was

diagnosed with atrial fibrillation with slow ventricular

response. In August 1996, Austin was hospitalized for pneumonia

and an episode of congestive heart failure. As a result, he

entered a nursing home for several weeks. Austin’s health

deteriorated after this episode. In the fall of 1998, Austin was

hospitalized again for pneumonia and was later transferred to a

nursing home, where he lived until his death. On December 2,

1998, Austin died of coronary artery disease, diabetes, and

pneumonia. 
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II. The Austin & Edna Korby Living Trust

In 1993, Austin and Dennis met with an attorney specializing

in estate planning. On June 2, 1993, with the assistance of the

estate attorney, Austin and Edna formed the living trust as

cotrustmakers. Austin and Dennis were the only trustees of the

living trust from its inception until Austin’s death on December

2, 1998. Edna was never a trustee of the living trust. The

living trust gave Austin and Edna the authority to control and

direct payments from the living trust, add or remove living trust

property, and amend or revoke the living trust.

Between 1993 and spring 1995, the following assets of the

Korbys were transferred to the living trust: (1) A money market

account; (2) a house in Fergus Falls, Minnesota; (3) a vacant lot

in Fergus Falls, Minnesota; (4) a checking account; (5) a savings

account; (6) household furnishings and items; (7) a 1-percent

general partnership interest in Crane Properties, A Limited

Partnership (Crane Properties); (8) a 2-percent general

partnership interest in KPLP; and (9) the Korbys’ monthly Social

Security checks. During 1993, the living trust also opened a

checking account. 

III. KPLP

On March 26, 1994, KPLP was formed under the Minnesota

Limited Partnership Act with the help of the estate attorney who

had been involved in the formation of the living trust. Austin,
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Edna, and each of their sons signed the KPLP limited partnership

agreement (the KPLP agreement) as limited partners on March 26,

1994. The living trust was the sole general partner of KPLP from

its formation until 1999. Austin and Dennis signed the KPLP

agreement as cotrustees of the living trust. The KPLP agreement

provided for management fees to be paid to the general partner

“to be measured by the time required to manage and administer the

partnership, by the value of property under the general

partner(s) administration, and by the responsibilities the

general partner(s) assume in discharging of the duties of

office.” The general partner was to decide the amounts of the

management fees. The KPLP agreement also required KPLP to

reimburse the general partner for “all reasonable and necessary

business expenses incurred in managing and administering the

partnership.” 

KPLP was not funded and did not commence business until

spring 1995; therefore, KPLP did not file a tax return for 1994. 

In 1995, the living trust transferred the money market account

with a balance of $37,841 to KPLP. In exchange, the living trust

received a 2-percent general partnership interest. Also in 1995,

the Korbys transferred the following assets to KPLP: (1) Stocks

valued at $1,330,442; (2) State and municipal bonds valued at

$449,378; and (3) U.S. savings bonds worth $71,043 (the
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3In 1994, the Korbys reported income from these assets of

$75,429.

transferred assets).3 In exchange, Austin and Edna received a

98-percent limited partnership interest. Austin and Edna then

gave 24.5-percent limited partnership interests to irrevocable

trusts created for each of their four sons. Approximately 90

percent of the transferred assets had been held by Austin and

Edna in joint tenancy. The remaining 10 percent had been held by

Austin individually or in joint tenancy with his sons. As a

result, Austin contributed 58.46 percent of KPLP’s assets, Edna

contributed 38.26 percent of KPLP’s assets, Austin and Edna’s

sons contributed 1.28 percent of KPLP’s assets, and the living

trust contributed 2 percent of KPLP’s assets. After the

transfers to the living trust and KPLP, Austin and Edna did not

have any bank accounts open in their own names.

For 1995, Austin and Edna filed identical Forms 709, U.S.

Gift Tax Return, reporting gifts of 24.5 percent of KPLP’s

limited partnership interests and 24.75 percent of Crane

Properties’ limited partnership interests to each of their sons’

irrevocable trusts. The gift tax returns reported the gifts as

split gifts; they were given half from each of Austin and Edna. 

The gift tax returns also applied a 43.61-percent discount to the

value of the transferred KPLP interests because the interests

were minority interests and lacked management control. The KPLP
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interests were valued at $521,870 and the Crane Properties

interests were valued at $78,160, for a total gift of $600,030.

After 1995, KPLP maintained five investment accounts at

various investment companies and a checking account. Dividends

and interest earned on the investment accounts were deposited

into the checking account. KPLP’s checking account was also used

to pay KPLP’s expenses. Austin and Dennis were the only

signatories on the checking account. In August 1995, Austin

purchased an annuity from LifeUSA Insurance Co. for $140,000. 

Austin named himself as the annuitant and KPLP as the owner on

the annuity application. The annuity entitled Austin to payments

after the annuity date, September 5, 2005, for a 10-year period

as long as he was living. If Austin died during the 10-year

period, the payments would continue to his sons as irrevocable

beneficiaries. Austin’s sons were also entitled to a death

benefit if Austin died before the annuity date. 

As stated above, the Korbys transferred their house to the

living trust in 1995, and Austin lived in the house until 1998. 

From 1995 through 1998, KPLP and the living trust paid many of

the Korbys’ household expenses. The living trust made payments

to Edna’s nursing home, various drug stores, other miscellaneous

stores, and the Internal Revenue Service (IRS). The living trust

also made occasional cash payments to Austin. To pay all these

expenses, the living trust received cash payments from KPLP and
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the Korbys’ Social Security payments. KPLP paid the utility and

heating bills, property taxes, and insurance for the Korbys’

residence and paid for subscriptions to newspapers and

periodicals. For each year, KPLP deducted as a business expense

40 percent of the home expenses. The deductions were taken

because in an IRS audit for an earlier year, it was determined

that Austin used 40 percent of his home in his bridge-building

business and was entitled to deduct the cost of that portion. 

KPLP also deducted the cost of Austin’s subscriptions to

newspapers and periodicals in each year.

The Korbys received Social Security income of $18,014 in

1995, $18,468 in 1996, $19,016 in 1997, and $16,751 in 1998. On

its Federal income tax returns and its books and records, KPLP

reported its interest and dividend income, value, and payments to

the living trust as follows: 

 Payments to

 Year KPLP Income Living Trust KPLP Value 

 1995 $77,898 $30,387 $1,869,901

 1996 72,434 19,334 2,185,581

 1997 74,239 32,324 2,699,138 

 1998 77,343 38,750 12,625,821 

 

 1Value of KPLP assets on the date of Austin’s death.

KPLP reported distributions and guaranteed payments during 1995,

1996, 1997, and 1998 as follows:
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 Guaranteed Distributions Distributions

 Year Pymts to GP to GP to LPs 

 1995 None $30,387 None

 1996 $19,334 None None

 1997 32,324 None None

 1998 38,750 None $12,061

KPLP did not report any guaranteed payments to limited partners

in any year. KPLP paid $18,104.76 in 1996 and $4,400 in 1997 for

income taxes owed by its limited partners. In 1998, KPLP paid

$12,061 for income taxes owed by its limited partners and

reported the tax payments as distributions to its limited

partners.

For 1995, 1996, 1997, and 1998, the living trust used income

from Austin and Edna’s Social Security payments and the

guaranteed payments from KPLP to pay approximately $2,500 per

month to Pelican Lake Health Care Center for Edna’s care. Austin

and Edna reported medical expenses of $37,684, $38,586, and

$40,216 on their 1995, 1996, and 1997 Federal income tax returns,

respectively.

In June 1998, KPLP redeemed the U.S. savings bonds that

Austin and Edna had contributed in 1995. The U.S. Treasury

issued KPLP two checks for $43,638 each. One check was endorsed

to the National Western Life Insurance Co. to purchase an

annuity. On the annuity application, Dennis was named as the

annuitant, and the four Korby sons were named as the four equal

owners and beneficiaries. The other check was deposited into the
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living trust’s checking account. KPLP did not report this amount

on its 1998 return as a distribution or a guaranteed payment to

the living trust. From these funds, the living trust issued a

$10,000 check to each of the Korby sons and retained the

remaining $3,638. KPLP reported the interest earned on the U.S.

savings bonds as income on its 1998 Federal income tax return.

Austin and Edna’s joint Federal income tax return for 1998

was filed by Dennis as personal representative for each estate.

The 1998 return was the first return on which it was reported

that Austin and Edna were liable for self-employment tax on the

payments from KPLP. The living trust remained KPLP’s general

partner after Austin and Edna died. The living trust held the

same property from the spring of 1995 until Austin’s death, and

the living trust’s property was worth $116,097 on the date of

Edna’s death. Pursuant to the terms of the living trust

agreement, Austin and Edna’s funeral expenses and Austin’s estate

taxes were paid by the living trust. On September 1, 1999, KPLP

issued a check to the living trust for $19,500. On the same day,

the living trust paid estate taxes of $20,068 owed by Austin’s

estate. 

The living trust agreement provided that upon the death of

the first of Austin or Edna to die, the living trust would split

into a marital deduction trust and a family trust. All of the

living trust property, less the amount necessary to use the
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unified credit amount in effect for the year of death, was to be

transferred to the marital deduction trust. The remaining assets

were to be transferred to the family trust. 

IV. The Estate Tax Return

The estate mailed Form 706, U.S. Estate (and GenerationSkipping Transfer) Tax Return, on September 1, 1999, and it was

received by the IRS on September 5, 1999. The estate tax return

listed as jointly owned property the residence, the vacant lot,

and a checking account, including half their total value as part

of the gross estate. It listed as miscellaneous property half

the Korbys’ general partnership interests in Crane Properties and

KPLP, and personal property. The total gross estate value was

listed as $73,398. The estate claimed a deduction for funeral

expenses and claimed the marital deduction in an amount

approximately equal to the value of the jointly owned property in

the gross estate. The estate also reported adjusted taxable

gifts of $600,030 for the 1995 gifts of KPLP and Crane Properties

interests, gross estate tax of $202,050 subject to the unified

credit against estate tax, and zero tax due. 

On August 29, 2002, respondent issued a notice of deficiency

addressed to the estate and the living trust. On the same day,

respondent issued a notice of deficiency to the living trust as

transferee of the estate’s liabilities (the notices). In the

notices, respondent determined that the full values of the assets
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4The estate does not challenge respondent’s inclusion of the

living trust property under secs. 2036 and 2038 or his adjustment

to the adjusted taxable gifts. We therefore accept these

adjustments. 

held by KPLP were includable in the gross estate under sections

2036 and 2038. Respondent also determined that the value of the

property held by the living trust was includable in the gross

estate under sections 2036 and 2038, rather than as jointly owned

property. Respondent reduced the estate’s adjusted taxable gifts

from $600,030 to $121,798, reflecting in part respondent’s

exclusion of the 1995 gifts of KPLP interests.4 The deficiency

in estate tax totaled $1,104,635. Respondent next determined

that the estate was liable for an addition to tax under section

6651(a)(1) of $276,159 because the estate tax return was not

filed timely. 

OPINION

Respondent argues that the value of the property transferred

by Austin and Edna to KPLP is includable in Austin’s and Edna’s

gross estates under sections 2036(a)(1) and (2) and/or

2038(a)(1). The estate argues that sections 2036 and 2038 do not

apply to the assets the Korbys transferred to KPLP because Austin

and Edna retained no right to income from, corpus of, or power of

appointment over them, KPLP received the assets in a bona fide

sale for adequate and full consideration in money or money’s

worth, and Austin and Edna did not retain ownership or control
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over the assets alone or in conjunction with anyone else or the

power alone or in conjunction with anyone else to alter, amend,

revoke, or terminate the enjoyment by any person of the assets. 

See secs. 2036(a)(1) and (2), 2038(a). 

Respondent’s determination in the notice of deficiency is

entitled to a presumption of correctness. See Rule 142(a). The

parties do not address section 7491(a). The estate does not

argue that the burden of proof has shifted to respondent under

section 7491(a), and it has failed to establish that it has

complied with the requirements of section 7491(a)(2). Therefore,

we conclude that the estate’s burden of proof does not shift to

respondent. 

The Internal Revenue Code imposes a Federal estate tax on

the transfer of the taxable estate of a decedent who is a citizen

or resident of the United States. Sec. 2001. The value of the

gross estate includes the value of all property to the extent of

the decedent’s interest therein on the date of death. Sec. 2033.

I. Section 2036

The purpose of section 2036 is to include in a deceased

taxpayer’s gross estate the value of inter vivos transfers that

were testamentary in nature. United States v. Estate of Grace,
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5SEC. 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 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.

6Sec. 2036(b) provides that the retention of the right to

vote shares of a controlled corporation that were transferred by

a decedent is the retention of the enjoyment of the transferred

property. 

395 U.S. 316 (1969). Section 2036(a)5 generally provides that if

a decedent makes an inter vivos transfer of property, other than

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

money’s worth, and retains certain enumerated rights or interests

in the property which are not relinquished until death, the full

value of the transferred property will be included in the

decedent’s gross estate. Section 2036(a) is applicable when

three conditions are met: (1) The decedent made an inter vivos

transfer of property; (2) the decedent retained an interest or

right enumerated in section 2036(a)(1) or (2) or (b)6 in the

transferred property which he did not relinquish before his
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7Because we find an implied agreement, we need not decide

whether an express agreement existed that gave Austin and Edna

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

transferred assets. 

death; and (3) the decedent’s transfer was not a bona fide sale

for adequate and full consideration in money or money’s worth. 

The parties do not dispute that Austin and Edna made an inter

vivos transfer of property when they contributed the assets to

KPLP. Therefore, we conclude that this requirement is met.

A. Retention of Rights in Transferred Property

Section 2036 requires the inclusion of the value of

transferred property with respect to which a decedent retained,

by express or implied agreement, possession, enjoyment, or the

right to income. Respondent argues that Austin and Edna

retained, by express and implied agreement, until they died, the

enjoyment of the assets they transferred to KPLP. The estate

argues that Austin and Edna retained no rights with respect to

the transferred property and that no agreement, express or

implied, existed.

We agree with respondent that an implied agreement existed

between Austin, on his own behalf and on behalf of Edna, and the

four Korby sons that after the assets were transferred to KPLP,

income from the assets would continue to be available to Austin

and Edna for as long as they needed income.7 In 1995, when

Austin and Edna transferred $1,888,704 worth of assets to KPLP,
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Edna was living in a nursing home and suffering from severe

dementia. Edna’s nursing home costs were approximately $2,500

per month. Austin had experienced a stroke and had been

diagnosed with various ongoing ailments. It is reasonable to

believe that Austin and Edna expected to incur significant

medical expenses in the future. Austin and Edna reported medical

expenses of over $37,000, approximately double their Social

Security income, in each of the 4 years before they died. It was

clear that the Korbys’ Social Security income would not cover

their basic expenses in the future. Despite their expected

increased expenses, however, Austin and Edna retained in their

names or the name of their living trust only their house, a

vacant lot, bank accounts with a total balance of $7,428, a 1-

percent interest in Crane Properties, a 2-percent interest in

KPLP, and the right to receive Social Security income. KPLP paid

the Korbys’ home expenses after their assets were transferred to

it. In order to pay the Korbys’ other basic living expenses,

KPLP also distributed significant percentages of its income to

the living trust, ranging from 26.7 percent of its income in 1996

to 50.1 percent of its income in 1998, which paid their remaining

expenses. These payments from KPLP to the living trust totaled

at least 52.6 percent of the Korbys’ income in each of the 4

years before they died.
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The estate argues that the cash payments that KPLP made to

the living trust and the payments of the Korbys’ home expenses

were management fees paid for Austin’s services as a money

manager for the KPLP assets. The estate further claims that

Austin and Edna were financially able to transfer their incomeproducing assets to KPLP because they expected the living trust

to receive management fees that would provide enough income to

them. We do not believe that the payments to the living trust

were management fees. The purported fees amounted to $19,334 to

$38,750 in each of the 4 years before the Korbys died. The

amounts were used by the living trust to pay Edna’s nursing home

costs of over $30,000 per year and the Korbys’ taxes, medical

expenses, and other various expenses. The amounts were used

entirely by Austin and Edna and not by Dennis, who was cotrustee

of the general partner and was entitled to half of any management

fees. While the living trust received management fees totaling

over $120,000 during the years at issue, the limited partners

(who owned 98 percent of KPLP) received only one distribution

totaling $12,061, for taxes in 1998. 

Further, no management contract was executed, and the fees

were paid at varying times and amounts, as Austin requested them. 

The purported fees were not based on any regular or prescribed

method of payment or computation. Dennis testified that he

caused KPLP to make payments to the living trust whenever Austin
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requested them because he was raised not to say no to his father. 

He stated that he and his father discussed the amounts of the

management fees in 1995, and they wrote down the amounts on

“pieces of paper” at the kitchen table. These notes regarding

the purported fees were not produced by the estate at trial. 

The estate submitted an expert report by Paul R. Kenworthy,

C.F.P., in which he opined that money managers generally receive

fees of 1 to 1.5 percent of the asset values in the portfolios

they manage. Mr. Kenworthy testified that fees are generally not

determined by the income of the portfolio because income amounts

vary with different types of investments.

We accept Mr. Kenworthy’s testimony that money managers

generally earn 1- to 1.5-percent management fees. However, the

record shows that although KPLP held approximately 60

investments, Austin made only 6 sales or purchases between 1995

and 1998. Dennis testified that few trades were made because his

parents had low bases in the investments, and KPLP would

recognize significant income if they were sold. Given the plan

to hold the investments in order to avoid tax, the degree of

anticipated management of those assets would have been minimal. 

The only other management activity the estate claims Austin

undertook was reading newspapers and periodicals daily. The

living trust continued to receive the purported management fee

income and use it to pay the Korbys’ expenses even after Dennis
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took over most of Austin’s duties managing KPLP’s assets in

February 1997, as reported in the minutes of the partnership. 

During their lives, Austin and Edna never reported selfemployment income from their purported management income; only

after their deaths was the income treated as self-employment

income, on an income tax return filed by Dennis. While we

believe that Austin was skilled at managing his portfolio, the

amount of work and time he committed to managing KPLP’s assets

did not rise to the level that an independent money manager might

have committed, and KPLP’s assets, under Austin’s own plan to

avoid recognition of gain, required little management. While the

passive nature of transferred assets is generally not

determinative in a section 2036 analysis of their transfer to a

family limited partnership, we believe the lack of activity by

Austin with respect to the KPLP assets is relevant to the issue

of whether the payments the living trust received from KPLP were

management fees. 

All these facts, taken together, show that Austin and Edna

had an implied agreement with their sons that Austin and Edna

were entitled to the income from the assets they transferred to

KPLP. KPLP was formed as a testamentary vehicle designed to

transfer Austin’s and Edna’s assets to their sons during their

lives at a significant discount, while retaining for Austin and

Edna the economic enjoyment of those assets. 
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B. The Bona Fide Sale Exception

Having concluded that Austin and Edna retained the enjoyment

of and right to income from the assets they transferred to KPLP,

we must now determine whether section 2036 is nonetheless

inapplicable as a result of the bona fide sale exception. We

recently held in Estate of Bongard v. Commissioner, 124 T.C. , 

___ (2005) (slip. op. at 39), that in the context of family

limited partnerships, the bona fide sale exception is met where

the record establishes the existence of a legitimate and

significant nontax reason for the transfer, and the transferors

received partnership interests proportionate to the value of the

property transferred. See, e.g., Estate of Thompson v.

Commissioner, 382 F.3d 367 (3d Cir. 2004), affg. T.C. Memo. 2002-

246; Kimbell v. United States, 371 F.3d 257, 258 (5th Cir. 2004).

The objective evidence must indicate that the nontax reason was a

significant factor that motivated the partnership’s creation. 

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

of Harrison v. Commissioner, T.C. Memo. 1987-8. A significant

purpose must be an actual motivation, not a theoretical

justification. 

The facts and circumstances of each case must be examined in

order to determine whether the bona fide sale exception has been

met. Certain factors indicate that a bona fide sale has not

occurred. Factors that support a finding that a sale was not
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bona fide are: (1) The taxpayer’s standing on both sides of the

transaction, Estate of Hillgren v. Commissioner, T.C. Memo. 2004-

46; (2) the taxpayer’s financial dependence on distributions from

the partnership, Estate of Thompson v. Commissioner, supra;

Estate of Harper v. Commissioner, supra; (3) the partners’

commingling of partnership funds with their own, Estate of

Thompson v. Commissioner, supra, and (4) the taxpayer’s failure

to actually transfer the property to the partnership, Estate of

Hillgren v. Commissioner, supra. 

Austin formed KPLP with the help of his estate lawyer but

without the involvement of his sons, who were each to be 24.5-

percent owners through trusts and who each signed the KPLP

agreement. Austin alone decided which of his and Edna’s assets

would be contributed to KPLP, the terms of the KPLP agreement,

that the living trust would receive management fees as general

partner, and whether the limited partners would receive any

distributions. In his testimony, Dennis was unfamiliar with the

terms of the KPLP agreement. He thought its terms were followed

at all times but was unsure how the management fees were to be

determined. Gary Korby, one of Dennis’s brothers, testified that

he was not aware that his father received management fees from

KPLP, that he was not represented in the formation of KPLP, and

that he did not know how he acquired his interest in KPLP,

whether by gift or otherwise. He also testified that although he
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signed the KPLP agreement in 1994, the first time his father

explained the partnership to him and gave him a chance to ask

questions about it was at a partnership meeting in February 1995. 

Dennis’ other two brothers did not testify at trial, but the

parties stipulated that their testimony would echo Gary’s

testimony. These facts indicate that none of Austin’s and Edna’s

four sons was involved in the formation of the partnership or the

drafting of the KPLP agreement. Austin essentially stood on all

sides of the partnership’s formation and approved the provisions

of the KPLP agreement without negotiation or input from the

limited partners.

The circumstances leading us to conclude above that the

payments from KPLP to the living trust were not management fees

also weigh against a conclusion that the sale of assets to KPLP

was bona fide. The Korbys’ use of KPLP income for basic living

expenses is inconsistent with a finding of a bona fide transfer. 

By drafting the KPLP agreement to allow the living trust to

determine the amounts of its purported fees as general partner

and by making Dennis, with whom Austin had an implied agreement,

his cotrustee, Austin ensured that he and Edna would be provided

with sufficient income from the KPLP assets during their

lifetimes. 

The estate argues that the creation of KPLP was bona fide 

because Austin and Edna created KPLP to protect the family from
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commercial and personal injury liability resulting from their

bridge-building business, as well as liability arising from

divorce. The estate points to provisions in the KPLP agreement

that prevented any partner from unilaterally forcing a

distribution of partnership property and restricted transfer of

the limited partnership interests. However, the estate has not

shown that the terms of the KPLP agreement would prevent a

creditor of a partner from obtaining that partner’s KPLP interest

in an involuntary transfer. The limited protection KPLP gave the

family and the other evidence in the record lead us to believe

that credit protection was not a significant reason for forming

KPLP; rather, Austin and Edna formed KPLP in order to make a

testamentary transfer of their assets to their sons at a

discounted value while still having access to the income from

those assets for their lifetime. Instead of retaining assets

sufficient to provide the income they would need as their medical

expenses grew, Austin and Edna used KPLP in an attempt to

insulate all of their income-producing assets from the estate

tax. As a result, we find that the transfer of Austin’s and

Edna’s assets to KPLP was not a bona fide sale for full and

adequate consideration. Therefore, section 2036(a)(1) applies to

the KPLP assets that were contributed by Austin and Edna. Given

this conclusion, we need not address respondent’s argument for

inclusion under sections 2036(a)(2) and 2038. 
- 24 -

8This 38.26-percent portion of KPLP’s value is includable in

Edna’s gross estate in addition to the 2-percent KPLP general

partnership interest held by the living trust, which the estate

does not dispute is included in Edna’s gross estate under sec.

2036(a) as living trust property. In addition, the calculation of

the portion includable in each gross estate takes into account

that the 1.28-percent interest contributed by the Korby sons is

not included in either Austin’s or Edna’s gross estate. 

KPLP’s assets were contributed as follows:

 Edna Austin Korby sons Living trust Total

 38.26 58.46 1.28 2.00 100.00

The parties agree that if section 2036 applies to the assets

contributed to KPLP by Austin and Edna, 38.26 percent of KPLP’s

value should be included in Edna’s gross estate and 58.46 percent

of KPLP’s value should be included in Austin’s gross estate.8 In

calculating the values of the KPLP assets at Edna’s death, the

parties shall take into consideration their stipulation that the

value of Amoco stock at Edna’s death was $43.039 per share, not

$89.13 per share as stated in the notice of deficiency. 

II. The 1995 and 1998 Annuities

The estate argues that respondent incorrectly included the

1995 annuity, valued at $143,000 at Edna’s death, in the KPLP

assets. The estate does not object to respondent’s valuation of

the annuity. The annuity entitled Austin to payments after the

annuity date for a 10-year period as long as he was living. If

Austin died during the 10-year period, the payments would

continue to his beneficiaries. Austin’s sons were named as
- 25 -

irrevocable beneficiaries, which also entitled them to a death

benefit if Austin died before the annuity date. 

The annuity was payable only to Austin if he lived to the

annuity date. Edna was not named as an annuitant, beneficiary,

or owner on the annuity application. Because she did not possess

a right to payments for any period under the annuity, the value

of the annuity is not includable in her gross estate under

section 2039. 

However, the fact that an amount is not includable in a

decedent’s gross estate under section 2039 does not preclude its

inclusion in the gross estate under some other section of the

estate tax laws. See Estate of Kleemeier v. Commissioner, 58

T.C. 241, 252 (1972) (citing section 20.2039-1(a), Estate Tax

Regs.). The 1995 annuity was purchased by KPLP and was included

as one of its assets when Edna died. Its value is therefore

includable in Edna’s gross estate under section 2036 to the same

extent the values of the other KPLP assets are includable. In

calculating KPLP’s total value, the value of the 1995 annuity,

agreed upon by the parties as $143,000 at Edna’s death, should be

included. The portions includable in Edna’s gross estate (the

38.26-percent interest she contributed and the 1-percent general

partnership interest owned by the living trust) shall then be

calculated from the total value. 
- 26 -

9The estate argues nonetheless that respondent conceded the

marital deduction should apply to the KPLP assets in Edna’s

estate. In an e-mail dated approximately 3 months before trial,

respondent’s counsel stated: “we will stipulate to the marital

deduction issue”. The estate essentially claims that respondent

should be bound by his statement by equitable estoppel. We

(continued...)

The estate also argues that the value of the annuity

purchased in 1998 by Austin using the proceeds of KPLP’s U.S.

savings bonds should not be included in Edna’s gross estate. The

estate does not argue that the annuity should not be treated as a

gift or contest the value respondent ascribed to the annuity

($43,638). The estate’s argument is moot; respondent does not

argue that it should be included in the gross estate. The estate

does not dispute respondent’s adjustment of the estate’s adjusted

taxable gifts by the value of the 1998 annuity.

III. Marital Deduction Under Section 2056

Section 2056 provides for a deduction from the gross estate

of a decedent for the value of property that passes from the

decedent to the surviving spouse. The estate conceded that if

respondent agrees that the value of only 38.26 percent of KPLP’s

assets is includable in Edna’s gross estate and 58.46 percent is

includable in Austin’s gross estate, the marital deduction does

not apply to the KPLP assets. The parties have so agreed, and we

accept the estate’s concession that the marital deduction does

not apply to the 38.26-percent portion of KPLP’s value includable

in Edna’s gross estate under section 2036(a)(1).9 Respondent
- 27 -

9(...continued)

disagree. Equitable estoppel precludes a party from denying its

own representations if they induced another to act to his

detriment. See Wilkins v. Commissioner, 120 T.C. 109, 112

(2003). At a minimum, a taxpayer must rely to his detriment on

the Commissioner’s actions in order to bind the Commissioner by

equitable estoppel. See Boulez v. Commissioner, 76 T.C. 209, 215

(1981), affd. 810 F.2d 209 (D.C. Cir. 1987). The estate did not

rely to its detriment on respondent’s counsel’s communication; on

the contrary, because respondent’s counsel’s statement was not

included in the stipulations of fact, the estate presented

evidence at trial and argued its position that the marital

deduction should apply to the KPLP assets. 

10It is not necessary for us to address the effect of the

provision in the living trust splitting it into two new trusts at

the death of the first spouse to die because respondent conceded

that the marital deduction applies to the property held by the

living trust at Edna’s death.

also conceded that the estate is entitled to the marital

deduction under section 2056 for the “property the [living] trust

owned upon Edna Korby’s death.” The living trust held the house,

the vacant lot, the checking account, the general partnership

interest in Crane Properties, and the general partnership

interest in KPLP at Edna’s death. Therefore, the marital

deduction applies with respect to this property. The unified

credit for 1998 will then be applied against the tax imposed by

section 2001 on the taxable estate.10

We note that the estate argues that respondent’s position

with respect to the marital deduction issue should be treated as

a concession of the issue of whether the transfer to KPLP

precludes the application of section 2036 to the transferred

assets. Respondent argues that his statement was not a
- 28 -

concession. The statement to which the estate refers was made by

respondent in his pretrial memorandum filed with the Court. 

Before the parties agreed that the marital deduction is

inapplicable to the KPLP assets included in Edna’s gross estate,

the estate argued that the application of section 2036 would

cause the KPLP assets to pass to Austin at Edna’s death (a

requirement of section 2056) under the terms of the living trust. 

In response, respondent stated:

Under Articles 8 and 9 of the [living] trust the

surviving spouse received a right to trust income

during life and a general power of appointment. 

However, the assets that Edna and Austin used to fund

the KPLP were never part of the [living] trust, nor was

the 98 percent KPLP limited interest the decedents

transferred to their sons. Thus, the surviving spouse

has no right to the income or the corpus of 98 percent

of the property transferred to the KPLP, nor does the

surviving spouse have a power of appointment over that

property. * * * [Emphasis omitted.]

In the context of respondent’s argument that the property held by

KPLP did not pass to Austin at Edna’s death, respondent’s

statement is neither a concession that section 2036 does not

apply to the KPLP assets nor inconsistent with his position that

the value of the KPLP property is includable in Edna’s gross

estate. We find that respondent has not conceded any issues by

reason of the statement in his pretrial memorandum.

IV. Section 6651(a)(1) Addition to Tax

Section 6075(a) requires that all estate tax returns filed

pursuant to section 6018(a) be filed within 9 months after the
- 29 -

date of a decedent’s death or within a longer period as extended

by the Secretary. Edna died on July 3, 1998, and the estate tax

return was filed on September 5, 1999. The estate did not

request an extension to file the return, and none was granted. 

Because the value of Edna’s gross estate exceeds the applicable

exclusion amount under section 2010 in effect for 1998, $625,000,

her estate was required to file a return within 9 months of her

death. Sec. 6018(a)(1). It did not. The estate does not argue

that it had reasonable cause for its failure to file a timely

return or that the addition to tax under section 6651(a)(1) is

not appropriate. Therefore, we find that the estate is liable

for the addition to tax under section 6651(a)(1) on the estate

taxes due.

To reflect the foregoing, and concessions by the parties,

Decision will be entered

 under Rule 155.