T.C. Memo. 2008-278

UNITED STATES TAX COURT

ESTATE OF THELMA G. HURFORD, DECEASED, DONOR, G. MICHAEL HURFORD,

INDEPENDENT EXECUTOR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

ESTATE OF THELMA G. HURFORD, DECEASED, G. MICHAEL HURFORD,

INDEPENDENT EXECUTOR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 23954-04, 23964-04. Filed December 11, 2008.

William A. Roberts and Kyle Coleman, for petitioners.

Nancy B. Herbert, Richard J. Hassebrock, and Gary R. Shuler,

for respondent.
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 CONTENTS

FINDINGS OF FACT .......................................... 3

A. The Hurford Family ............................... 3

B. Gary’s Death...................... ............... 6

C. Thelma’s Diagnosis................................ 11

D. Garza’s Plan...................................... 13

E. Execution of Garza’s Plan - Phase I............... 16

1. Transfers to HI-1............................ 19

2. Transfers to HI-2............................ 25

3. Transfers to HI-3............................ 27

F. Execution of Garza’s Plan - Phase II............. 28

1. Value of the FLP Property.................... 28

a. HI-1’s Value............................ 29

b. HI-2’s Value............................ 30

c. HI-3’s Value............................ 31

d. Discounts............................... 31

2. Creation of the Private Annuity.............. 33

3. How the Hurford Private Annuity Worked....... 34

G. Thelma Hurford’s Death and Tax Returns........... 36

H. Estate and Gift Tax Returns’ Audit............... 43

OPINION ................................................... 45

I. What is Includable in Thelma’s Estate?................ 45

A. Positions of the Parties......................... 47

B. The Private Annuity and the FLPs................. 48

1. Was the Private Annuity Effective to Remove 

 Assets from Thelma’s Estate?................. 52

a. Was the Transfer of Thelma’s Interest in 

 the FLPs for the Private Annuity Bona Fide

 and for Adequate and Full Consideration?. 52

b. Did Thelma Retain a Prohibited Interest

 in the Property She Transferred to Her 

 Children through the Private Annuity?... 58

2. Were the FLPs Valid?........................ 61

a. Was the Creation of the FLPs Bona Fide and

 for Adequate and Full Consideration?..... 61

b. Did Thelma Retain the Possession or 

 Enjoyment of, or the Right to the Income

 From, the Property She Transferred to the

 FLPs in Violation of Section 2036 (a)(1)?. 72

C. The Family and Marital Trusts.................... 75

D. Gifts Thelma Made in February 2000............... 78

II. Attorney’s Fees.................... .................. 78
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III. Negligence............................................. 80

MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: It is a truth universally acknowledged, that

a recently widowed woman in possession of a good fortune must be

in want of an estate planner. 

Thelma Hurford had devoted her life to family and friends,

leaving the management of the finances to her husband Gary. When

he died suddenly, she had to learn what they owned and decide

what to do with it. While she struggled with this burden, she

was herself stricken with cancer and so had to arrange the

accelerated planning of her own estate. Two attorneys vied for

her attention and she chose Joe B. Garza.

She lost her life to the cancer. We must now decide how

much of her estate will be lost to taxes.

FINDINGS OF FACT

A. The Hurford Family

Gary T. Hurford was born in West Texas in unpromising

circumstances and went at a young age to work on oil rigs. There

he met a petroleum engineer whose clean clothes and new car

suggested to young Gary that education might lead to a better

life. He soon gave up roughnecking and enrolled at the

University of Texas. He discovered there that he had an aptitude

for engineering, and after graduation he was hired by the Hunt
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Oil Company. He rose steadily and after 25 years became the

company’s first president not named Hunt. He prospered and grew

rich. 

Thelma also came from a modest background, the daughter of

immigrants. She was an elementary school teacher when she met

Gary and they soon wed. In due course, she became a mother and

devoted herself to working inside the home. 

Much of this work lay in rearing three children; all of whom

are now married with children of their own. The oldest is Gary

Michael Hurford, known as Michael. Michael grew up in Texas,

went to the University of Texas at Austin, and then to medical

school in San Antonio. He became a psychiatrist and practices in

Kentucky, where he also was a resident when the petition was

filed. 

David T. Hurford is the middle child. David graduated from

Southwest Texas State University, but has struggled with

difficult personal problems, some of them severe, for much of his

life. His parents and his siblings acknowledged this and have

tried to protect him, particularly in his finances. While his

parents were alive, David stayed close by and worked for many

years on one of his dad’s ranches--raising and selling cattle,

fixing fences, and cutting and baling hay. 

The youngest Hurford is Michelle Hurford McCandless. 

Michelle also graduated from the University of Texas at Austin,
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and she worked in advertising until October of 1997, when Gary

hired her to help with the family’s bookkeeping--especially the

preparation of the payroll for the employees whom Gary hired to

work on the farms and ranches that he had bought over the years. 

Michelle also kept the books for all her parents’ investments and

bank accounts. 

Michelle, out of duty and habit, took notes on nearly every

meeting she attended and every phone call she listened to that

involved Gary’s and Thelma’s estates. She would also

meticulously list the questions that she planned to ask during

those meetings and calls. It appears that she learned these

habits from her mother, who also kept in her own planner detailed

notes of seemingly every meeting she had. Michelle saved all

these notes and turned them over to the Commissioner during

discovery. We view Michelle’s action as a strong indicator of

her honesty and have used these notes extensively to reconstruct

what happened after Gary died.

But we use them with some caution. They show a general lack

of understanding--even some confusion--about the tax and estateplanning concepts at issue in this case. This is entirely

understandable, since neither Michelle nor her mother had an

education in law or accounting. But the confusion of Michelle

and her siblings about these concepts, though it may have been

rooted in their inherent difficulty, was surely compounded by the
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1 Texas is a community-property state, and these numbers

reflect their total wealth, not just Gary’s interest.

barrage of professional advice they both sought and had directed

against them.

B. Gary’s Death

On April 8, 1999, Gary died. He and Thelma had amassed a

considerable fortune as listed on Gary’s estate tax return:1

Real estate $2,020,800

Stocks and bonds 2,096,314

Mortgages, notes, and cash 934,413

Life insurance 2,300,000

Miscellaneous property 1,342,880

Hunt oil phantom stock 5,552,377

 Total 14,246,784

The real estate included farms and ranches, as well as two

houses: their primary home in Arlington, Texas; and a second

home in Tyler that was closer to their agricultural property. 

This agricultural property amounted to about 2000 acres divided

into 11 or 15 parcels--those records only sometimes combine those

parcels that were contiguous. 

The stocks and bonds and other liquid investments were

strewn among many different accounts at several banks. A large

chunk was in options to buy stock in Nabors Corporation Services,

Inc., which Gary had earned by serving on the Nabors board of

directors. Another large chunk (by far the largest piece of the
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miscellaneous property listed above) was $1.26 million in Gary’s

Hunt Oil retirement plan, which Thelma rolled over to an IRA in

her name after his death. 

But the single biggest asset in Gary and Thelma’s estate 

was no ordinary security or retirement plan, but something called 

Hunt Oil phantom stock. This phantom stock is not actually

stock, but instead a form of deferred compensation that Hunt Oil

gave to employees--letting them share in the company’s growth

without the Hunt family’s having to dilute their own equity. 

Each “share” of phantom stock was valued at approximately the

price of a share of Hunt Oil common stock, as fixed by Hunt Oil

each year on December 31. The dollar amount reported on Gary’s

estate tax return was its value on December 31, 1998. 

Gary received more from Hunt Oil than just compensation in

these varied forms. Among the perks important to this case were

tax-preparation and estate-planning services. While Gary was

working, Hunt Oil paid KPMG to prepare his tax returns; and Gary

retained Santo “Sandy” Bisignano, formerly a partner in the

respected Texas law firm of Johnson & Gibbs, to plan his and

Thelma’s estates. The troubles that later entangled the Hurfords

had their roots in the wills that Bisignano had drafted for them

in 1993. These wills were mirror images of each other and took a

conservative approach to estate planning. This was Gary’s

choice--Bisignano had suggested slightly more aggressive
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2 An ILIT may remove life insurance proceeds from a

decedent’s estate by transferring ownership of the policy to a

trust. Bittker, et al., Federal Estate and Gift Taxation 371

(9th ed. 2005). 

 A GRAT is a tax-saving device in which a grantor transfers

assets into trust and retains an annuity payable for a specified

term. If the grantor survives the term and the assets enjoy a

higher rate of return than specified in tables prescribed by the

IRS, the “extra” appreciation passes to the trust’s beneficiaries

without incurring gift or estate tax. Id. at 80-81. 

 A FLP allows members of a family to transfer partnership

interests to one another at a discount (usually claimed for lack

of marketability and lack of control), which may reduce the tax

that they might otherwise owe on the transaction. Id. at 136-37,

600-02.

3 This is the amount that could pass estate-tax free (thus 

the description “bypass trust”) to nonspouse beneficiaries in

1999. Thelma’s access to its assets was limited, but any money

remaining in the trust would not be taxed at her death.

techniques such as irrevocable life insurance trusts (ILITs),

grantor-retained annuity trusts (GRATs), and family limited

partnerships (FLPs).2 Gary instead chose to divide most of his

estate into two trusts--a bypass trust and a qualified terminable

interest property (QTIP) trust. According to the Hurfords’

wills, the property of whichever spouse died first would go into

the two trusts, with the exception of the Arlington home and any

personal effects, which would pass directly to the surviving

spouse.

The first trust set up in Gary’s will was a bypass trust,

called the “Family Trust.” It was funded with $650,000, the

estate-tax-credit equivalent amount.3 The Family Trust’s
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immediate purpose was to provide for the education, health,

maintenance, or support of Thelma, their children, and Gary’s

mother. But its ultimate purpose was to shield from taxation at

Thelma’s death the original corpus of $650,000 (or whatever was

left after distributions). 

The rest of Gary’s estate went into a second trust called

the “Marital Trust.” Income from the Marital Trust was to be

paid to Thelma. And the principal was also available to her for

her education, health, maintenance, and support. 

Gary’s will appointed Thelma executor of his estate and

trustee of both the Family and Marital Trusts. Managing Gary’s

estate as well as her half of the marital property was a

challenge for Thelma because Gary had long tended their finances

alone. Thelma’s children were similarly unfamiliar with how to

manage such a large estate, so they banded together and sought

the advice of several professionals. Advice from Bisignano and

KPMG was no longer free, because Hunt Oil stopped paying their

bills after Gary died. But Bisignano and KPMG at first remained

members of the Hurfords’ team, and it was at Bisignano’s

suggestion that they hired Chase Bank of Texas, N.A., to provide

investment advice. 

Bisignano outlined for Thelma a plan to settle Gary’s

estate. The first step was probating Gary’s will, which

Bisignano quickly began by April 15, 1999. He then moved on to
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4 Property passing from a deceased husband to his surviving

wife generally is deductible from his gross estate. Sec.

2056(a). But this deduction does not include property--for

example, a life estate with remainder to children--in which the

surviving spouse has an interest that could fail due to the lapse

of time or some other contingency. Sec. 2056(b)(1). Section

2056(b)(7)(A) creates an exception to this exception for

qualified terminable interest property, treating it deductible at

the first spouse’s death, but includable in the surviving

spouse’s estate. (The section references in this note and

throughout the opinion are to the Internal Revenue Code. Any

Rule references are to the Tax Court’s Rules of Practice and

Procedure.)

5 Federal gift and estate-tax law allows a credit which a

person can use either to reduce the tax on gifts made while the

donor is alive (under sections 2505(a) and 2503(b)(2)) or against

the estate tax imposed at death (under section 2010(c)). Thelma

used the credit amount available during 2000, which was $25,000

higher than the credit available to her husband in 1999, when his

(continued...)

identifying and valuing the assets. This ended up taking a

while, but Bisignano credibly testified that his progress was

protracted by design, lest an inaccurate valuation of those

assets undermine his effort to accurately calculate--before he

prepared the tax return for Gary’s estate--whether a QTIP

election was more valuable to Thelma than a credit for prior

transfers.4

As spring turned to summer in 1999, Thelma sought

Bisignano’s advice on her own estate plan. Bisignano again took

a conservative and thoughtful approach, recommending that she

first make $225,000 gifts to Michael, David, and Michelle. The

total of $675,000 in gifts equaled the gift-tax exemption

amount.5 She decided to make these gifts in February 2000. He
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5(...continued)

death led to the creation of the $650,000 Family Trust.

6 Michael got his $225,000 in cash. David got $133,134 in

cash and $91,866 in farm equipment, cattle, and leases. And

Michelle got $177,386 in cash and the cancellation of a loan in

the amount of $47,164. Thelma also made eight $10,000 cash gifts

in 2000 to her sisters, children, and daughters- and son-in-law. 

also recommended that she create a family limited partnership

(FLP) into which she could transfer the farm and ranch

properties, unifying the land management within a single entity,

perhaps with the plausible purpose of reducing the risk of

liability from what were then actual operating businesses. 

Bisignano later recommended a second FLP to hold Thelma’s own

financial assets. In August, Thelma also rolled Gary’s

retirement assets into an IRA in her own name.

Thelma, however, had little desire to run the farms and

ranches herself, so Bisignano began drafting leases for those 

properties, starting with a parcel in Navarro County, and then

moving on to all the properties in Dallas and Ellis counties. 

And though Thelma continued to employ her son David to work on a

ranch in Anderson County until the end of January 2000, even her

direct involvement in that business ended when David received his

$225,000 gift, which included a one-year lease for 754 acres.6 

C. Thelma’s Diagnosis 

At the beginning of 2000, Thelma began feeling back pain,

which became so severe that on January 23 she went to an
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emergency room. The diagnosis was cancer, and Thelma decided to

have surgery in February 2000. 

Her surgeon classified her disease as being already at stage

three because it had already spread beyond its initial site to

the surface of her liver. Surgery could not cure the disease,

but it did succeed in reducing the cancer’s size, and Thelma

began chemotherapy immediately. 

Near the end of January 2000, Bisignano had begun to move

forward with Thelma’s estate plan. He started drafting documents

to create two FLPs, one for the farm and ranch properties and

another for Thelma’s cash and investment assets. But by early

February, while Bisignano was still working on the FLPs, Michael

was already looking for a new attorney. Thelma had become

dissatisfied with Bisignano, because (according to Michael) he

did not relate well to the family and would often speak over

their heads. Thelma was also concerned that he was not

completing Gary’s estate tax return or her own estate plan

quickly enough and worried that he was too expensive. Michael

volunteered to take the lead in trying to find a replacement for

Bisignano, but living in Louisville made this mission difficult

and he turned to his brother-in-law, an orthopedic surgeon living

near Houston, for advice. 

This brother-in-law recommended Joe Garza. Michael and

Michelle spoke with him, asking Garza to critique Bisignano’s
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proposed estate plan and make suggestions on what he would do

differently. Their infatuation with Garza was understandable. 

We observed Bisignano to be reserved and fastidious, and proud of

the high quality of his work, but with a manner that on first

appearance is perhaps not the most inviting. Garza, in contrast,

is a model of the amiable and pleasing man; and his debut in the

notes of Thelma’s meetings with him show that she thought him one

of the most agreeable men (or, at least, lawyers) that she had

ever met. Garza swiftly persuaded Thelma that his estate plan

was better for her than Bisignano’s and she hired him on February

22, 2000. Thelma dismissed Bisignano the very next day. 

D. Garza’s Plan

According to Garza, a “brilliant estate-planning strategy”

is one “that saves estate tax.” His plan was to separate

Thelma’s, the Marital Trust’s, and the Family Trust’s assets into

three groups: (1) cash, stocks, and bonds; (2) the Hunt Oil

phantom stock; and (3) the farm and ranch properties. Then he

created three FLPs, one to receive each group of assets, giving

an interest in each to Thelma, Gary’s estate, Michael, David, and

Michelle. Finally, Garza directed Thelma to sell her and Gary’s

estate’s interests in each FLP to Michael, David, and Michelle

through a private annuity agreement. 

To understand Garza’s plan, we need to step back and explain

a bit about FLPs and private annuities. A FLP uses two entities: 
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a limited partnership and either a limited liability company

(LLC) or a trust. The LLC or trust serves as the general partner

of the limited partnership and thereby assumes any extraordinary

liabilities associated with the property owned by the

partnership. The limited partners of the partnership are

typically family members who contribute something of value,

either in goods or in services, to the partnership in exchange

for their ownership share. Once the partnership interests are

created, they are quickly rearranged by gift or will.

The first obstacle that an aggressive planner meets is the

Code’s insistence that property transferred either by will or by

gift must be taxed at its fair market value. See secs. 2031,

2032, 2512 and 25.2512-1, Gift Tax Regs. A planner using a FLP

has to make sure that it is not the assets in the partnership

that are being transferred among family members, but only

interests in the partnership itself. This is important because

due to factors such as lack of marketability and control, a

partner’s interest in the partnership often has a lower fair

market value than the same partner’s pro rata share of the

assets’ own fair market value. See Holman v. Commissioner, 130

T.C. 12, 14, 19 (2008); Senda v. Commissioner, T.C. Memo. 2004-

160 (imposing a gift tax on the value of stock contributed to a

partnership rather than the transferred partnership interests

where partnership formalities were not respected), affd. 433 F.3d
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7 Courts, including the circuit court to which this case may

be appealable, have nevertheless recognized that such a reduction

in immediately realizable fair market value might be sensible for

a rational actor willing to pay for the benefits of management

expertise, preservation of assets, and avoidance of personal

liability. Estate of Kimbell, 371 F.3d at 257, 266. And such

calculations may also be seen in earlier forms of intergenerational wealth transfer. See Völsunga Saga: the Story of the

Volsungs and Niblungs 5-8, 11-12, 36-39, 50-51, 59, 64-67 (H.

Halliday Sparling ed., Eirikr Magnusson & William Morris trans.,

Walter Scott Publg. Co., Ltd. 1888) (bequeathing shards of sword

to heir who reforges them into new sword after waiting period,

noting “Fain would we keep all our wealth till that day of

days”). 

1044 (8th Cir. 2006). This would seem unusual--normal people

typically don’t try to reduce the value of their hard-earned

wealth.7 

Like FLPs, private annuities are another common estateplanning tool. A private annuity is a transfer of property from

one person to another in exchange for a promise to make periodic

payments. These payments can last for the rest of the

transferor’s life, and the IRS allows drafters of private

annuities to calculate the transferor’s life expectancy using

government-published actuarial tables. In theory, the value of

the periodic-payment stream equals the value of the transferred

property, so the private annuity removes the transferred property

from the transferor’s estate and gives the transferee any

appreciation in the transferred property’s value. The usually

unspoken usefulness of this device is greatest when those

arranging it know more about the particulars of their situation
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8 The regulations define terminal illness to be an

“incurable illness or other deteriorating physical condition”

with at least a fifty-percent chance of death within a year. See

sec. 1.7520-3(b)(3), Income Tax Regs. In such cases, the parties

to a private annuity must use the transferor’s actual life

expectancy to calculate payments. Sec. 1.7520-3(b)(4), Example, 

Income Tax Regs.

than is reflected in the actuarial tables or--to be blunt--when 

children think their parent won’t survive for very long. 

Anticipating this, the Secretary has long had regulations

restricting use of the actuarial tables in cases of terminal

illness.8

E. Execution of Garza’s Plan - Phase I

Garza got to work setting up the FLPs immediately after he

was hired. He first organized three limited partnerships and

three LLCs. He named the LLCs Hurford Management No. 1, LLC (HM1); Hurford Management No. 2, LLC (HM-2); and Hurford Management

No. 3, LLC (HM-3). For each LLC he filed a certificate of

organization and articles of organization with the secretary of

state of Texas on February 24, 2000. He then prepared stock

certificates, regulations, employment agreements, and minutes of

the organizational meetings. Each of the Hurfords received a

one-fourth interest in each LLC. The Hurfords held an

organizational meeting for each of the LLCs and elected Thelma

president, Michelle secretary and treasurer, and Michael and

David vice presidents. According to the employment agreements,

each of the Hurfords was to receive compensation for serving as
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an officer, but these agreements were never signed or used. And

no one signed the stock certificates, regulations, or

organizational minutes either. 

To form the limited partnerships, Garza filed certificates

of limited partnership with the Texas secretary of state on

February 24, 2000. He named these limited partnerships Hurford

Investments No. 1, LTD. (HI-1); Hurford Investments No. 2, LTD.

(HI-2); and Hurford Investments No. 3, LTD (HI-3). On each

certificate, Garza named as general partner the LLC whose name

corresponded to the name of the partnership, e.g., HM-1 and HI-1. 

Garza completed organizing the FLPs on March 20, 2000, by having

the Hurfords sign agreements of limited partnership. These

agreements show an unsteady drafting ability to even an untrained

eye--a table of contents pointing to incorrect page numbers, a

grant of a limited-partnership interest to the “Gary T. Hurford

Trust” when no such trust existed at the time, and signature

pages showing HM-1 as the general partner of all three

partnerships. 

We find, however, that Garza at least intended to use the

same organizational structure for each of the FLPs, as shown by

the following diagram where x = 1, 2, or 3:
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An unusual feature of Garza’s plan was that he created the

limited partnership interests before the partnerships were 
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funded. He testified that he did this to avoid gift taxes when

Michael, David, and Michelle received their 1-percent interests. 

Garza reasoned that by creating the partnership interests first,

each partner would start with a zero balance in his capital

account and each capital account would remain at zero until that

partner made a contribution. So when Thelma and Gary’s estate

funded the partnership, their capital accounts were to have

increased by the amount each contributed. Conversely, Michael,

David, and Michelle did not contribute anything to the

partnerships, so they held a 1-percent interest in each

partnership but had capital account balances of zero. 

1. Transfers to HI-1

The Hurfords created HI-1 to receive stock and cash assets

from Thelma, the Marital Trust, and the Family Trust. To move

these assets into HI-1, Thelma signed an undated letter drafted

by Garza. Garza based this letter on a form that he used to fund

the FLPs, but he didn’t customize it beyond the names of the

accounts and the people and entities involved. In the letter,

Thelma asked Chase to “transfer my above-referenced account with

you into the name of the Limited Partnership.” The accounts that

she listed were the Thelma G. Hurford Investment Management

Agency (THIMA), the Marital Trust, and Family Trust accounts. 

Thelma also requested that Chase give herself, Michael, David,

and Michelle “signatory and withdrawal authority” on the HI-1
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9 Tables 1 through 7, infra, shows the tax cost of the

stocks and bonds, not their fair market value on the transfer

date. The parties did not remedy this peculiarity of Chase's

recordkeeping with summaries of the market price of those

securities on dates relevant to the case--for example, their

value on the date Thelma signed the private annuity, or the dates

when payments under the annuity were made to her using those

securities.

account. At the end of March 2000, Thelma acting in her capacity

as president of HM-1, signed an agreement with Chase to open the

accounts necessary to complete the transfers. 

Chase then opened three accounts for HI-1, using the same

names as the old accounts except that each was preceded by HI-1,

e.g., HI-1 THIMA. Over the next three months, assets flowed into

the H-1 THIMA account:9

Table 1: Transfers from THIMA to HI-1 THIMA

Date Amount Originating Acct Destination Acct

4/12/00 $3,447,466 stocks THIMA HI-1 THIMA

4/13/00 $ 471,949 cash THIMA HI-1 THIMA

5/01/00 $ (274,417)cash HI-1 THIMA THIMA (“to close

out”)

6/27/00 $ 273,275 stocks THIMA HI-1 THIMA

7/31/00 $ 88,683 cash

from house sale

THIMA HI-1 THIMA

7/31/00 $ 1,561 cash THIMA HI-1 THIMA

10/2/00 $ 351 cash THIMA HI-1 THIMA

1/31/01 $ 1 cash THIMA (“final

distribution”)

HI-1 THIMA

Total $3,720,741 stocks

$ 288,127 cash

THIMA HI-1 THIMA

Thelma also set to work transferring the trusts’ assets to

the new HI-1 accounts:
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Table 2: Transfers from the Marital Trust to HI-1 MT

Date Amount Originating Acct Destination Acct

4/12/00 $ 447,179 stocks MT HI-1 MT

4/13/00 $ 72,276 cash MT HI-1 MT

5/01/00 $ (1,198)cash HI-1 MT MT (“to close

out”)

6/27/00 $ 90 cash MT HI-1 MT

9/08/00 $ 1 cash MT HI-1 MT

Total $ 447,179 stocks

$ 71,169 cash 

MT HI-1 MT

Table 3: Transfers from the Family Trust to HI-1 FT

Date Amount Originating Acct Destination Acct

4/12/00 $ 570,050 stocks FT HI-1 FT

4/13/00 $ 99,877 cash FT HI-1 FT

5/01/00 $ (6,098)cash HI-1 FT FT (“to close

out”)

6/27/00 $ 124 cash FT HI-1 FT

10/2/00 $ 1 cash FT HI-1 FT

Total $ 570,050 stocks

$ 93,904 cash

FT HI-1 FT

In late November or early December 2000, Thelma told Chase

to transfer over $1 million from the Gary Hurford estate account

to HI-1. Thelma’s letter, however, did not specify into which

HI-1 account Chase should transfer the funds. Chase acknowledged

Thelma’s request in a December 8, 2000, fax that asked her to

sign an investment management agreement to complete the transfer. 
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After she signed the agreement, Chase transferred the assets into

a new account named “Thelma G. Hurford, Executrix of The Estate

of Gary T. Hurford, Deceased #1.” In February 2001, Chase

emptied this new estate account into the THIMA HI-1 account. 

Thelma requested a liquidation of her IRA on December 28, 2000,

and asked that Chase transfer the funds from her IRA to HI-1. 

Chase completed most of that transaction on December 28 and 29,

2000. These various transfers can be understood better in

tabular form:

Table 4: Transfers from GTH Estate Acct to GTH Estate Acct #1

Date Amount Originating Acct Destination Acct

12/29/00 $1,077,934 stocks GTH Estate GTH Estate #1

1/03/01 $ 4,364 cash GTH Estate GTH Estate #1

Total $1,077,934 stocks

$ 4,364 cash

GTH Estate GTH Estate #1

Table 5: Transfers from TGH’s IRA to HI-1 THIMA

Date Amount Originating Acct Destination Acct

12/28/00 $ 56,063 cash TGH’s IRA HI-1 THIMA

12/29/00 $1,092,954 stocks TGH’s IRA HI-1 THIMA

3/15/01 $ 453 cash TGH’s IRA HI-1 THIMA

Total $1,092,954 stocks

$ 56,516 cash

TGH’s IRA HI-1 THIMA

Then in February 2001, Chase moved most of the assets in the

HI-1 MT, HI-1 FT, and Thelma G. Hurford, Executrix of The Estate

of Gary T. Hurford, Deceased #1 accounts into the HI-1 THIMA

account. On the form Chase prepared to complete the transfer it
- 23 -

listed Thelma as the “Primary Client” and/or “Beneficiary” for

the HI-1 MT account. 

These last transfers are summarized in this table:

Table 6: Transfers from HI-1 MT, HI-1 FT, 

and GTH Estate Acct #1 to HI-1 THIMA

Date Amount Originating Acct Destination

Acct

2/07/01 $ 4,574 cash HI-1 MT HI-1 THIMA

2/26/01 $ 126,534 bonds HI-1 MT HI-1 THIMA

2/27/01 $ 1,178 cash HI-1 MT HI-1 THIMA

3/02/01 $ 5 cash HI-1 MT HI-1 THIMA

3/15/01 $ 428,763 stocks HI-1 MT HI-1 THIMA

Total

from 

HI-1 MT

$ 428,763 stocks

$ 126,534 bonds

$ 5,757 cash

HI-1 MT HI-1 THIMA

2/07/01 $ 10,873 cash HI-1 FT HI-1 THIMA

2/26/01 $ 151,636 bonds HI-1 FT HI-1 THIMA

2/27/01 $ 1,164 cash HI-1 FT HI-1 THIMA

3/02/01 $ 9 cash HI-1 FT HI-1 THIMA

3/15/01 $ 565,594 stocks HI-1 FT HI-1 THIMA

Total

from 

HI-1 FT

$ 565,594 stocks

$ 151,636 bonds

$ 12,046 cash

HI-1 FT HI-1 THIMA

2/26/01 $1,077,934 stocks GTH Estate Acct #1 HI-1 THIMA

3/02/01 $ 20 cash GTH Estate Acct #1 HI-1 THIMA

3/15/01 $ 225 cash GTH Estate Acct #1 HI-1 THIMA

4/06/01 $ 63 cash GTH Estate Acct #1 HI-1 THIMA

4/09/01 $ 28 cash GTH Estate Acct #1 HI-1 THIMA

Total

from GTH

Estate

Acct #1

$1,077,934 stocks

$ 336 cash

GTH Estate Acct #1 HI-1 THIMA
- 24 -

THIMA

The entire series of transfers is summed up in this diagram:

HI-1 Transfers

HI-1 THIMA

TGH’s

IRA

Family

Trust

Marital

Trust

GTH’s

Estate

Acct

TGH Annuity

Acct

HI-1 Family

Trust

HI-1

Marital

Trust

GTH Estate

Acct No. 1
- 25 -

The Hurfords acknowledge that there were problems with the

Chase HI-1 accounts. The biggest was that throughout the year

before she died, Thelma remained the sole signatory on many of

these accounts, and kept pouring money and assets into them even

after they had supposedly been used to pay for the private

annuity. The Hurford children claim that they tried on numerous

occasions to have Thelma’s name removed from the HI-1 accounts,

but were always unsuccessful. Another serious problem was that

not all the transfers were deposits. On April 14, 2000, just

days after she started moving money into the HI-1 accounts,

Thelma had Chase transfer $65,000 from “my Limited Partnership #1

(TH) account to the personal Chase [checking account].” Then a

few days later, she had Chase transfer $25,000 from “my Limited

Partnership #1 Account” to “my Bank of America checking account.” 

Michelle credibly explained that Thelma signed these transfers

because Chase was confused about who had authority under these

accounts, and that Thelma needed the money to make an estimated

tax payment. There is no evidence that any of this backwash of

money benefited the HI-1 partnership itself in any way. 

2. Transfers to HI-2

The Hurfords created HI-2 to receive the Hunt Oil phantom

stock. Garza prepared another of his form letters to notify Hunt

Oil that Thelma wanted the phantom stock moved to HI-2. Richard

Massman, Hunt’s transfer agent for the stock as well as its vice
- 26 -

president and general counsel, received the letter on March 24,

2000, and quickly sent Thelma a list of documents that he needed

before he would okay the transfer:

1. Letters testamentary identifying Thelma as

executrix;

2. An excerpt from Gary’s will identifying her

as the beneficiary;

3. Documentation showing that the phantom stock 

was transferred from Gary’s estate to Thelma;

and 

4. An assignment from Thelma to HI-2. 

Garza faxed Massman the letters testamentary in May, but then let

things slide--neither the Hurfords nor Garza communicated with

Massman again until that fall. On October 20, 2000, Michael

called Massman to discuss the transfer of the phantom stock, and

Massman became concerned about Thelma’s multiple roles as

beneficiary, executrix, and trustee. To allay these concerns, he

asked Thelma for a letter stating that Thelma was approving the

transfer under all three roles. As Massman himself credibly put

it, “we kind of operate on the bomb-throwing grandchild

principle”--meaning that he wanted to protect Hunt Oil from any

competing claims to the phantom stock. 

This prompted Garza to send Massman an indemnity letter on

November 18, 2000, but this letter was as sloppy as the other

paperwork he’d prepared, including a space on a signature line

for “Daniel” instead of David. Massman is a meticulous man, and
- 27 -

he wanted the letter corrected. But it took Garza almost two

months to fix his mistakes. The second letter satisfied Massman,

though, and on January 15, 2001, Massman responded with his own

letter stating that Hunt Oil recognized HI-2 as the owner of the

phantom stock. Even though Hunt did not receive all the

necessary documents until January 2001, it reported in its

internal records that the transfer occurred on March 22, 2000,

the day Thelma sent the first letter requesting the transfer. 

3. Transfers to HI-3

The Hurfords created HI-3 to receive the real property

(except for the houses in Arlington and Tyler) held by Thelma,

the Marital Trust, and the Family Trust. To complete this chore,

Garza prepared twenty deeds for Thelma to sign. Why twenty? 

We’re not sure. We could not figure out by examining the deeds

how eleven parcels (or fifteen, if a couple contiguous properties

were divided) had multiplied into twenty. There was also another

patent problem with the deeds. Garza had drafted each deed so

that it conveyed the property to “Hurford No. 3, Ltd.” not

“Hurford Investments No. 3, LTD.” Garza filed the deeds with the

counties on March 23, 2000. But even twenty deeds were not

enough: Garza failed to prepare a deed for a parcel that was in

both Ellis and Dallas Counties. Garza waited until April 10,

2002, and then mistakenly deeded this parcel to “Hurford No. 3,

Ltd.” too. 
- 28 -

Thelma Hurford herself maintained the insurance policy on

the farm and ranch properties now lying (maybe) in HI-3. The

Commissioner suggests that Thelma was paying for that insurance,

but the record is not clear. We do find that she had a friendly

relationship with the insurance agent and spoke with him about

renewing the policy in July 2000. We also find that Thelma’s and

Michelle’s names remained on the Bank of America Farm Account

until December 2000, when the account’s name was finally changed

to “Hurford #3 DBA Hurford Farms.” 

F. Execution of Garza’s Plan - Phase II

Michael and Michelle took the next step in Garza’s estate

plan and entered into a private annuity with Thelma on April 5,

2000, a bit more than two weeks after the FLPs had been formed,

but a week before even the first transfers of property from

Thelma and the Trusts to the FLPs. Through this agreement,

Thelma purported to sell Michael and Michelle a 96.25-percent 

interest in HI-1, HI-2, and HI-3 for a “fixed annual income for

the rest of her life.” David did not sign the private annuity

and the extent of his obligations under the agreement is a

problem we discuss below. See infra, p. 53.

1. Value of the FLP Property

One key to creating a private annuity capable of

withstanding audit is valuing the assets being sold so that the

amount of the annuity is accurate. The values Garza used in his
- 29 -

10 During the course of litigation, the estate hired an

appraiser to determine the fair market value of the FLP interests

(continued...)

calculations appear in two nearly identical unsigned letters that

he wrote on April 4, 2000. The first two sections of both

letters are the same. In those sections, Garza listed the total

values for the assets in each FLP. He then calculated the value

of Thelma’s interest in each partnership by multiplying the total

value of the FLP by 96.25 percent. The third section is where

the letters diverge. In that section, Garza calculated the

discounted value of Thelma’s interest in each FLP by multiplying

the value of that interest by a discount factor, and then summing

them to get a “Grand Total Figure.” In one of the letters,

however, he used lower discount factors and included Thelma’s IRA

in the “Grand Total Figure.” The “Grand Total Figure” on this

letter was not correct due to an arithmetic error. 

a. HI-1’s Value

In his April 4 letters, Garza separated HI-1’s assets into

two classes. He reported that the stocks and bonds were worth

$2,115,740 and that the mortgage notes and cash were valued at

$1,134,593. We don’t know where Garza got these numbers--while

they are close to those on Gary’s estate tax return, they differ

by about $200,000. They are also significantly lower than the

minimum of more than $5.5 million that the Hurfords agree was

transferred into HI-1.10 And they in no way take into account
- 30 -

10(...continued)

after applying discounts. The appraiser’s letter listed the

value of assets contributed from Thelma and the “Gary T. Hurford

Trust” to the partnerships. The appraiser determined the stated

value of HI-1’s cash, stocks, bonds and mortgage notes was

$5,524,641 as of March 20, 2000.

the changes in the composition of Gary’s and Thelma’s assets in

the year after he died. Assets in several accounts were moved to

Chase, where normal trading further reduced the similarity of the

Hurfords’ portfolio transferred to the FLPs and their portfolio

at the date of Gary’s death. 

 b. HI-2’s Value

In his April 4 letters, Garza valued the phantom stock at

$5,552,377. That is the same value that he reported on Gary’s

estate tax return. It comes from a letter that Massman had sent

Bisignano in May 1999 that included an estimated value for the

phantom stock as of December 31, 1998. Garza testified that he

used this value because it was the “most current information that

we had” and “it didn't appear to me that the value was increasing

very much.” But we know that the December 1998 value was already

out-of-date because Hunt Oil recalculated phantom-stock values at

the end of each calendar year. And we specifically find that the

value of the phantom stock was increasing. In February 2000,

Massman met with a Chase employee to discuss the phantom-stock

plan and during that meeting he estimated that the phantom stock

was already worth $6.4 million, which we now find was its value
- 31 -

when the FLPs were formed--as even the estate’s expert witness

conceded. 

c. HI-3’s Value

In his April 4 letters, Garza listed the value of HI-3 as

$2,020,800. This was again based on the same valuation used to

report real estate values on Gary’s estate tax return. But using

the number from the return was wrong. Those real-estate values

came from an appraisal that Bisignano had prepared and reflect

the properties’ values on April 12, 1999, the day Gary died, and

Garza made no effort to consider any change in their values in

the year that had passed. The $2,020,800 reported on Gary’s

estate tax return also included the Arlington and Tyler houses,

and the Ellis/Dallas county property, none of which was actually

transferred to HI-3. This necessarily caused a misstatement of

the value of the property that Garza was trying to move out of

Thelma’s own estate.

d. Discounts

The method that Garza used to pick the discount factors to

apply to the FLP interests was similarly haphazard. We know from

Michelle’s notes that Garza bragged that he had “experience

obtaining 50 percent discounts in settlements on estates with

IRS, and also [he] had coached a lawyer in Mississippi in a

valuation battle with IRS, and he got a 50 percent discount.” 
- 32 -

But Garza chose not to go for these maximum discounts with the

Hurfords. Instead, he contacted several valuation appraisers. 

Garza sent a letter to one of these appraisers on March 8,

2000, asking him to call and tell him his “general approach,

estimate of discount, and proposed fees.” After their

discussion, Garza noted in Thelma’s file that the appraisals

would cost $6,500 and that “[h]is discount for the marketable

securities would be 32-36 [percent,] for Phantom stock, 36-44

[percent,] and for the real estate[,] 36-48 [percent].” In any

event, the appraisals were never done. Garza chose instead to

use his own discount percentages, but even the precise

percentages that he chose are unclear from the record. They

fell, more likely than not, within the range bounded by the two

versions of his April 4 letter: 

Partnership Discount Taken for Lack of

Marketability and Lack of

Control

Hurford Investments No. 1, Ltd 25-32 percent 

Hurford Investments No. 2, Ltd 25-36 percent 

Hurford Investments No. 3, Ltd 30-42 percent 

We find with more confidence that Garza’s calculations for the

value of the annuity are not transparent.

To clean up some of the problems, the estate offered two

expert witnesses–-Mr. Preti and Mr. Henderson. One testified

that the discount factors were within acceptable limits. The
- 33 -

other testified that, while Garza undervalued the FLPs, the

$80,000 monthly payments exceed what the annuity payment would

have been had the FLPs been correctly valued. 

2. Creation of the Private Annuity

With the FLP values and discounts set, Garza calculated the

amount of the annuity two different ways. He first consulted a

mortality table and published interest rates included in a BNA

tax portfolio and made the calculation by hand. Using this

method, he computed an annuity payment slightly below $70,000 a

month. Then he used a computer program to redo the calculation

and decided that the annuity should instead be pegged at about

$80,000 a month. Garza advised the Hurfords that they should use

the higher number because it was “more conservative.”

The private annuity that Garza prepared also had another

peculiarity: It completely omitted any mention of David Hurford,

listing only Michael and Michelle as purchasers of Thelma’s

interests in HI-1, HI-2, and HI-3 and obligors of the duty to

make the monthly payments to her. All who testified on this

point were credible, and therefore we find that Thelma wanted to

transfer one-third of her partnership interests to David. But

she also wanted to protect both him and the assets, so she

thought it best not to give him signature authority. Garza

testified that he knew what Thelma intended, but he could not

explain how the agreement he drafted reflected in any way
- 34 -

Thelma’s intent to give each of her children an equal share. 

Michael and Michelle claimed to believe that the private annuity

transferred one-third of Thelma’s partnership interests to David,

and that David would be obligated to make the payments. On this

point, we do not find them credible. Instead we find that they

privately agreed to accomplish their mother’s desire to give

David a third of the estate, but keep him away from

decisionmaking authority by keeping his name off the private

annuity--just promising themselves that they would distribute to

him a third of the estate when the time came (i.e., when Thelma

died).

On April 5, 2000, Thelma and Michelle signed the documents. 

Michael was in Kentucky so the agreement was mailed to him. He 

signed them and mailed them back. Neither David Hurford nor

Chase reviewed the agreement before it was signed. 

3. How the Hurford Private Annuity Worked

To receive the annuity payments, Thelma opened an account

named “Thelma Hurford Annuity Account” (THAA) at Chase. Michael

asked that Chase pay Thelma by transferring assets from the HI-1

THIMA account into the THAA account. Thelma received her first

annuity payment in May 2000, but she did not want all of that

payment transferred into her THAA account. She herself asked

that Chase transfer $40,000 of cash into her account at Boston

Safe Deposit & Trust and $40,000 in stocks to the THAA. She
- 35 -

11 The Commissioner argues that the annuity payments didn’t

consistently total $80,000 each month. It appears that he is

using the tax-cost numbers reflected on the Chase account

statements, instead of fair market values. For example, the

Commissioner argues that in May 2000, payments totaled only

$70,561. We find, however, that the fair market value of stocks

transferred was $39,397 and cash was $39,990, totaling $79,387. 

In June, the Commissioner claims Thelma received only $39,956.

But the fair market value of additions to the account was over

$78,000, and in July it was approximately $78,000. We therefore

find that there was not a significant variation in Thelma’s

monthly annuity payments. 

12 The problem of distinguishing cost and value numbers

which we’ve already noted, supra, note 9, is made more difficult

here, because the tax cost reported in HI-1 THIMA statements

doesn’t match the tax cost reported in the annuity statements. 

In this table, we list the annuity-statement value first, and the

HI-1 THIMA-values in parentheses.

asked that Chase make all other payments by transferring

securities from the HI-1 account into her THAA account.11

Table 7: Transfers from HI-1 THIMA to 

TGH’s Annuity Account (opened 5/17/00)12

Payment Date Amount

1 5/15/00 $ 39,991 cash (deposited to Nations Fund)

1 5/19/00 $ 30,570 stocks

2 6/06/00 $ 36,420 stocks

2 6/08/00 $ 536 cash

3 7/03/00 $ 3 cash

3 7/03/00 $ 100,411 stocks (or $105,636)

4 8/01/00 $ 98 cash

4 8/01/00 $ 90,384 stocks (or $91,512)

5 9/01/00 $ 144 cash

5 9/01/00 $ 87,586 stocks (or $91,892)

6 10/4/00 $ 214 cash
- 36 -

6 10/6/00 $ 68,783 stocks

7 11/1/00 $ 77 cash

7 11/1/00 $ 158,237 stocks

8 12/1/01 $ 59 cash

8 12/1/00 $ 75,290 stocks

9 1/02/01 $ 75 cash

9 1/02/01 $ 53,567 stocks

10 2/01/01 $ 47 cash

10 2/01/01 $ 81,529 stocks

TOTAL $ 658,520

G. Thelma Hurford’s Death and Tax Returns

Thelma’s friends who testified were completely credible in

their description of how bravely Thelma struggled with her cancer

and how positive her attitude remained throughout the multiple

surgeries and rounds of chemotherapy she endured. But her cancer

never went into remission and, while she was in the hospital

after her last surgery, she died on February 19, 2001. 

After Gary died, Thelma had endured more than disease. She

was also responsible in some way for numerous tax returns as

either an individual, executrix, trustee, partner, or member of

an LLC. KPMG had at first continued to prepare her tax returns,

but with Hunt Oil no longer paying the bill, she went to Garza

and asked him in July 2000 to refer her to a new firm. He

recommended two, and she hired one of them--Turner & Stone. 

Before the switch, KPMG had prepared four returns:
- 37 -

• 1999 Income Tax Return, Form 1041, Gary T. Hurford

Family Trust 

• 1999 Income Tax Return, Form 1041, Estate of Gary T.

Hurford

• 1999 Income Tax Return, Form 1041, Gary T. Hurford

Marital Trust 

• 1999 Income Tax Return, Form 1040, Gary and Thelma

Hurford 

Turner & Stone prepared the following returns:

• 2000 Income Tax Return, Form 1041, Gary T. Hurford

Family Trust 

• 2000 Income Tax Return, Form 1041, Gary T. Hurford

Marital Trust 

• 2000-2002 Partnership Tax Returns, Forms 1065, Hurford

Management No 1, LLC 

• 2000-2002 Partnership Tax Returns, Forms 1065, Hurford

Management No 2, LLC 

• 2000-2002 Partnership Tax Return, Forms 1065, Hurford

Management No 3, LLC 

• 2000-2002 Partnership Tax Returns, Forms 1065, Hurford

Investments No 1, LTD 

• 2000-2002 Partnership Tax Returns, Forms 1065, Hurford

Investments No 2, LTD 

• 2000-2002 Partnership Tax Returns, Forms 1065, Hurford

Investments No 3, LTD 

• 2000 Income Tax Return, Form 1041, Estate of Gary T.

Hurford 

• 2000 Gift Tax Return, Form 709, Thelma Hurford 

• 2000 Income Tax Return, Form 1040, Thelma Hurford 

• 2001 Income Tax Return, Form 1041, Estate of Gary T.

Hurford 
- 38 -

Garza prepared two returns:

• Estate Tax Return for Gary T. Hurford, Form 706, signed

by Thelma as Executrix on 7/11/00 

• Estate Tax Return for Thelma G. Hurford, Form 706,

signed by Michael as Executor on 7/9/01 

The first return relevant to this case is the estate tax

return for Gary’s estate. Garza himself prepared the Form 706

and Thelma signed it on July 11, 2000. We note especially a

$6,543,236 deduction claimed on the return’s “Schedule M--

Bequests, etc., to Surviving Spouse.” Gary’s estate took the

deduction because it was electing to treat this sum as QTIP

property. The problem is that we have no idea which property is

included in that number. On the schedule M it is only described

as “QTIP”. At trial, when asked about the number, Garza replied

that he didn’t remember how he computed it.

Also on July 11, 2000, Thelma signed 1999 returns for

herself and the Marital Trust. (Her 1999 return was actually a

joint return, and she also signed it in her capacity as executrix

of Gary’s estate.) Both these returns were prepared by KPMG. 

Then Turner & Stone entered the scene. That firm prepared

tax returns for each of the FLPs. These returns were signed by

Michelle and filed on July 8, 2001. The K-1s from each of the

returns show that, during 2000, Michael’s, David’s, and

Michelle’s interest in each partnership went from 1 percent to 33

percent, while Thelma’s and Gary’s estate’s interest dwindled
- 39 -

from 48 to 0 percent. The K-1s also show that Michael, David,

and Michelle each made the following capital contributions to the

FLPs in 2000: 

HI-1 Capital

Contribution

HI-2 Capital

Contribution

HI-3 Capital

Contribution

$1,968,957 $2,088,593 $556,822

These numbers appear to be complete fictions--we specifically

find no evidence of money coming into or services provided for

any of the FLPs or LLCs from the three Hurford children, much

less the millions of dollars that Turner & Stone reported. The

LLCs (1-percent owner of each FLP) reported these capital

contributions to the FLPs:

HI-1 Capital

Contribution

HI-2 Capital

Contribution

HI-3 Capital

Contribution

$59,665 $63,291 $16,872

On Thelma’s and the estate of Gary Hurford’s K-1s the space for

“capital contributed during year” was left blank. 

The schedule D for HI-2 shows a $6,411,000 capital gain on

the “phantom stock interest--Hunt Oil” and a sale date of

December 30, 2000, even though the Hurfords claim that the

transfer was not a taxable event. At trial, Michelle explained

that the gain was reported in 2000 because Chase had concerns

about the phantom stock’s ownership. The concern was reasonable-

-Hunt Oil had not sent certificates to the Hurfords showing that

ownership had passed to HI-2. Garza and Chase got together to
- 40 -

discuss the issue and decided that, if the Hurfords did not have

the certificates when it was time to file HI-2’s return, they

would take the conservative approach and report that the phantom

stock had been distributed. 

Turner & Stone also prepared the final tax returns for the

Family and Marital Trusts on June 29, 2001, and they were signed

by Michael as successor trustee to his mother. There is no other

evidence that the trusts were terminated. Michelle believed that

Thelma terminated the trusts in early March 2000 by transferring

all their property to the FLPs. This cannot possibly be true,

since the bank records showed that Thelma didn’t succeed in even

beginning to move money into the HI-1 accounts until a week after

those same accounts had supposedly been used to buy the private

annuity. See supra p. 21, Tbls. 2 & 3. 

The tax returns for the LLCs--HM-1, HM-2, and HM-3--were

prepared by Turner & Stone and signed by Michelle on July 3,

2001. The K-1s from each of those returns show Michael’s,

David’s, and Michelle’s ownership in each LLC was 33.333334

percent at the end of 2000. Their K-1s also showed that each of

them made capital contributions to the LLCs in 2000:

HM-1 Capital

Contribution

HM-2 Capital

Contribution

HM-3 Capital

Contribution

$19,888 $21,097 $5,624
- 41 -

None of the LLCs’ returns included a K-1 for Thelma. And none of

these capital contributions was actually made.

The estate tax return for Thelma’s estate was signed by

Garza as preparer and by Michael as executor on July 9, 2001,

though it was not filed until September 26, 2001. On the return,

Garza answered “No” to the following four questions: 

• Did the decedent, at the time of death, own any

interest in a partnership * * * or [a] closely

held corporation?

• Did the decedent make any transfers described in

section 2035, 2036, 2037, or 2038?

• Were there in existence at the time of the

decedent’s death: Any trusts created by the

decedent under which the decedent possessed any

power, beneficial interest, or trusteeship?

• Was the decedent ever the beneficiary of a trust

for which a deduction was claimed by the estate of

a pre-deceased spouse under section 2056(b)(7) and

which is not reported on this return?

Whether Garza correctly answered the first two of these

questions is, as we shall see, a central issue in this case. 

Whether he answered the third question correctly is also in

dispute: Though Thelma’s estate claims that transferring

property out of the Marital and Family Trusts terminated them,

the Commissioner argues that property was left in the trusts by

Garza’s faulty execution of his plan. 

Garza’s answer of “no” to the final question is just

egregiously false. He himself had prepared Gary’s estate tax

return and should have known that section 2056(b)(7) refers to a
- 42 -

13 Gary’s will directed the residuary of his estate to the

Marital Trust, which allowed for a QTIP election.

QTIP trust like the one for which he claimed a deduction on that

return.13

The assets reported on Thelma’s estate tax return were:

Arlington residence $165,000

Thelma Hurford annuity account 348,296

Mortgages, notes, and cash 282,660

Life insurance 5,000

Miscellaneous property 45,710

 Total 846,666

The estate reported that Thelma made no taxable gifts other than

gifts includable in her gross estate. Thelma’s estate took a

$45,000 deduction for attorney’s fees. 

Michael, who was now executor for both his parents’ estates,

signed and filed a 2000 Form 1041 prepared by Turner and Stone

for Gary’s estate on July 12, 2001. On this return, he reported

half the proceeds (the other half being Thelma’s community

property) from the exercise of the options for Nabors stock and

its subsequent sale as well as the sale of the house in Tyler. 

He also reported $194,921 in the “other income” section as the

estate’s portion of the private annuity. This is odd because,

even though Gary’s estate owned 48 percent of each FLP, it was

not a party to the private annuity nor was it meant to be. 
- 43 -

Michael also filed Thelma’s 2000 gift tax return using Form

709 on August 12, 2001. This return was also prepared by Turner

& Stone, and they reported that Thelma made $775,000 in gifts,

$675,000 of which were taxable. These included the $225,000

gifts she had made to each of her children, the $10,000 gifts to

her children and other relatives, and two $10,000 trusts she

created for her grandchildren. They also reported that she owed

no tax on these gifts because she was using her unified credit. 

The preparer answered “no” to the question “[h]ave you (the

donor) previously filed a Form 709 for any other year?” 

The final return was Thelma’s last individual income tax

return, which Michael filed on August 12, 2001, after Turner &

Stone prepared it. They reported that the IRS owed Thelma a

$238,948 refund, though the refund had not been included as an

asset on Thelma’s estate tax return. Most of this reported

income came from her one-half interest in the proceeds from the

sale of the Nabors stock and her accumulated income from the

private annuity.

H. Estate and Gift Tax Returns’ Audit

On November 18, 2004, Thelma’s estate received two notices

of deficiency--one for her 2000 estate tax return and the other

for her 2000 gift tax return. The notices set out large

deficiencies and penalties:
- 44 -

Estate Tax Return Gift Tax Return

Deficiency $9,805,082 $8,314,283

Penalties 1,956,066 1,662,857

The notice of deficiency prompted by the gift tax return

characterized the $14,981,722 Thelma transferred under the guise

of the private annuity as gifts to Michael and Michelle because

the annuity’s real fair market value was $0. 

The notice of deficiency sent to the estate had a longer

list of adjustments: 

• The properties in Ellis and Dallas counties 

should have been included in Thelma’s estate.

• The value of the THAA at Thelma’s death was

$426,206 and not $348,296.

• Thelma’s estate should have included her one-half

interest in a Bank of America account and all of a

Deutsche Bank account.

• The private annuity was a sham and all the

property that she transferred to Michael and

Michelle should have been included in her estate.

• The transfers to HI-1, HI-2, and HI-3 should be

included in Thelma’s estate under section 2035. 

• The estate failed to substantiate a $45,000

deduction for attorney fees.

• The $675,000 in gifts that Thelma made in 2000

are includable in her estate.

The penalties asserted in both notices were for negligence or

disregard of the rules and regulations. 

Thelma’s estate has conceded an increase in the estate’s

value of $3,381,999 because Garza failed to report the money
- 45 -

Thelma received when she liquidated her IRA, her individual tax

refund, and the proceeds from the sale of the Nabors stock. The

estate also concedes that the true value of Thelma’s THAA account

was $426,206. The main issue that we are left to decide is what

else should have been included--specifically, whether Thelma’s

transfers to the FLPs and the subsequent private-annuity

transaction were valid under sections 2035, 2036 and 2038. Also

at issue:

• What is the effect of the QTIP election made on

Gary’s estate tax return;

• Should the $675,000 in gifts that Thelma made in

2000 be excluded from her estate tax return?;

• May the estate deduct $45,000 in attorney’s fees?;

• Is Thelma’s estate liable for section 6662

penalties?

OPINION

I. What is Includable In Thelma’s Estate?

The Code imposes a tax on a decedent’s taxable estate, which

it defines as the value of the gross estate minus any allowed

deductions. Secs. 2001(a), 2051. The gross estate is the value

of the property in which a decedent had an interest at the time

of her death. Sec. 2033. Sections 2034 through 2045 tell us

what property to include in that estate. In this case, the

Commissioner argues that sections 2035, 2036 and 2038 bring back

into Thelma’s estate the property that Garza tried to transfer

out of it via the FLPs and private annuity.
- 46 -

Section 2036(a)(1) includes in a decedent’s gross estate

property that she transferred to another but in which she keeps a

right to possession or enjoyment or income until death. The

paradigm is a gift or low-ball sale from A to B of property in

which A retains a life estate. And the target is lifetime

transfers that are essentially testamentary in nature. United

States v. Estate of Grace, 395 U.S. 316, 320 (1969); Estate of

Bongard v. Commissioner, 124 T.C. 95, 112 (2005). 

Section 2036(a)(2) includes in the estate property in which

a decedent keeps until death a right to designate a person who

gets possession or enjoyment of, or the income from, the

transferred property. It covers many of the same situations also

governed by section 2038(a)(1), Estate of Wall v. Commissioner,

101 T.C. 300, 313 (1993), which includes in an estate any

property that a decedent transfers while keeping a right to

revoke or change the transfer. Both sections 2036 and 2038

contain the same parenthetical exception for bona fide sales for

an adequate and full consideration. Secs. 2036(a), 2038(a)(1).

The Commissioner also relies on section 2035(a), which

requires us to reach back and include property in Thelma’s estate

if section 2036 or 2038 would have included it in her estate but

for her terminating her retained interest within three years of

death.
- 47 -

Depending on how these sections affect what’s included in

Thelma’s gross estate, we may also have to decide what property

should be included because of the QTIP election made on Gary’s

estate tax return and a potential miscalculation in the estatetax computation arising from the gifts Thelma made during the

last several months of her life. 

A. Positions of the Parties

Apart from some comparatively minor concessions, the estate

claims that Thelma’s estate and gift tax returns were correct. 

It acknowledges Garza’s sloppiness but argues that Thelma’s

estate plan should be respected despite all the missteps. 

On the major questions, it argues that sections 2035, 2036, and

2038 don’t apply because Thelma transferred her property into the

FLPs and then into the private annuity through bona fide sales

for adequate and full consideration. It also contends that none

of these sections apply because Thelma did not retain possession

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

property after it was transferred. 

The Commissioner attacks the entire estate plan as nothing

more than a transparently thin substitute for a will. He argues

first that the property transferred to the FLPs is includable in

Thelma’s estate because Thelma kept control over the assets after

the transfer, and because there was an implied agreement among

the Hurfords for Thelma to do so. He also argues that Thelma’s
- 48 -

transfer of her property (and the property of the Trusts) in

exchange for an interest in the FLPs was neither bona fide nor

done for adequate and full consideration. The same is true for

the exchange, only two weeks later, of her interest in those FLPs

for the private annuity: The Commissioner argues that there is

grossly insufficient evidence that the exchange of Thelma’s

interests in the FLPs for the private annuity was a bona fide

sale for adequate and full consideration, and also argues that

Thelma continued to control these assets well after the

transaction was complete.

He next contends that Garza mangled Gary’s estate plan by

terminating the Family Trust, leading to the inclusion of that

Trust’s assets in Thelma’s own taxable estate. 

Finally, the Commissioner argues that section 2044 requires

Thelma’s estate to include the value of the property identified

on Gary’s estate tax return as a QTIP deduction. This is a

fallback position--if all his other arguments fail, he is

contending that at least the approximately $6.5 million deduction

that Gary’s estate took on its return for QTIP property must be

matched by an inclusion of $6.5 million on Thelma’s estate tax

return.

B. The Private Annuity and the FLPs

We begin with the language of the Code. Section 2036(a)

states:
- 49 -

SEC. 2036(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.

(The italicized portions are the key phrases for this case.)

In Estate of Bongard, we said section 2036 pulls

transferred property back into a decedent’s estate if: (1) The

decedent made an inter vivos transfer of property (no one doubts

Thelma did this); (2) the decedent’s transfer was not a bona fide

sale for adequate and full consideration; and (3) the decedent

kept an interest or right in the transferred property of the kind

listed in section 2036(a) which she did not give up before she

died. Estate of Bongard, 124 T.C. at 112. 

In other words, section 2036(a) has two exceptions to a

general rule that includes in her estate all inter vivos

transfers of her property. The first exception excludes assets

in a transfer if it is a bona fide sale for adequate and full

consideration. Hunting for the bona fides of a transfer is a
- 50 -

14 Kimbell phrases the test somewhat differently, holding

that a sale is bona fide if the transferor “actually parted with

her interest in the assets transferred and the [transferee]

actually parted with the partnership interest in exchange;” and a

sale is for adequate and full consideration if issued “the

exchange of assets * * * does not deplete the estate.” Kimbell,

371 F.3d at 265. If read in isolation, this might look like an

instruction pointing us to judge bona fides purely in terms of

legal effectiveness. But the Kimbell court also carefully noted

that “a transaction motivated solely by tax planning with no

business or corporate purpose is nothing more than a contrivance

without substance that is rightly ignored.” Id. at 264. We

don’t think, therefore, that Kimbell and Estate of Bongard stake

out different tests; but if they do, the series of deals in this

case fails both. 

question of motive--did Thelma have a legitimate and significant

nontax reason, established by the record, for transferring her

property? Deciding whether a transfer was for adequate and full

consideration is a question of value--did what Thelma give up

roughly equal the value of what she received? Estate of Bongard,

124 T.C. at 118.14

The second exception--applicable even if the transfer is an

outright gift--takes the transferred property out of the estate 

if the decedent did not retain either the

(1) possession, enjoyment or rights to the 

transferred property, or (2) the right to 

designate the persons who would possess or 

enjoy the transferred property.

Kimbell v. United States, 371 F.3d 257, 261 (5th Cir. 2004). 

Section 2038 says: 

SEC. 2038(a). In General.--The value of the gross

estate shall include the value of all property--

(1) Transfers after June 22, 1936.--To 

the extent of any interest therein of which 
- 51 -

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, where 

the enjoyment thereof was subject at the date

of his death to any change through the 

exercise of a power (in whatever capacity 

exercisable) by the decedent alone or by the 

decedent in conjunction with any other person

(without regard to when or from what source 

the decedent acquired such power), to alter, 

amend, revoke, or terminate, or where any 

such power is relinquished during the 3-year 

period ending on the date of the decedent's 

death.

In Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74,

we framed section 2038 as pulling transferred property back into

a decedent’s estate if: (1) the decedent made an inter vivos

transfer of property; (2) the decedent’s transfer was not a bona

fide sale for adequate and full consideration; and (3) the

decedent kept an interest or right in the transferred property of

the kind listed in section 2038(a) which she did not give up

before she died or which she relinquished within the three-year

period ending on the date of her death.

There are two sets of transfers that we need to consider--

transfers by Thelma of her own and the Trusts’ property in

exchange for interests in the FLPs, and her exchange of the FLPs

for the private annuity. We address the validity of each

transaction separately because they have independent estate-
- 52 -

15 The estate argues that an unpublished Fifth Circuit case,

Estate of McLendon v. Commissioner, 77 F.3d 477, (5th Cir. 1995),

revg. T.C. Memo. 1993-459, stands for the proposition that the

bona fides of a private-annuity transaction are irrelevant to its

validity. Estate of McLendon stands for no such thing--the

opinion even quotes the section imposing the requirement of bona

fides--but it decides the case on other grounds. 

tax consequences. The FLPs, if valid, may well entitle the

estate to value interests in them at a discount to the property

they hold. The private annuity, if valid, would then remove

a very large part of the FLPs’ value from the estate

altogether. 

We start at the end, looking first to see if the exchange of

Thelma’s interest in the FLPs for the private annuity was bona

fide and supported by fair and adequate consideration.15 Then we

look at what interest she retained in the assets exchanged for

the private annuity throughout the last year of her life. And we

do the same analysis for the transfers by Thelma (and the Trusts)

in exchange for interests in the FLPs.

1. Was the Private Annuity Effective to Remove

Assets from Thelma’s Estate?

a. Was the Transfer of Thelma’s Interest in the 

FLPs for the Private Annuity Bona Fide and 

for Adequate and Full Consideration?

Kimbell teaches that a court has to consider separately the

bona fides of a transfer and whether it was supported by adequate

and full consideration. Kimbell, 371 F.3d at 262. We begin by

finding that the private annuity agreement was not bona fide, but
- 53 -

16 If the problem with the private annuity was merely one

of inadequate consideration, we would include only the excess of

what was transferred over what Thelma received in her estate.

Sec. 2043. But because we are finding that the FLPs were in

effect not transferred, and Thelma retained an interest in them

until death, we include the entire value of the property

transferred for the private annuity in her estate. 

was instead “a disguised gift or a sham transaction.” Id. at 263

(citing Wheeler v. United States, 116 F.3d 749, 767 (5th Cir.

1997)). There are two key pieces of evidence. 

The agreement that Garza drafted transferred Thelma’s

interest only to Michael and Michelle. Thelma intended to limit

David’s control over the property she was giving to her children,

but we specifically find that she did not intend to disinherit

him. A more artful attorney might have written a private annuity

that made David’s rights and obligations clear without giving him

the ability to deplete the FLPs’ assets. Garza assumed, however,

that Michael and Michelle would ignore what he had drafted and

they had signed, and instead carry out (as they ultimately did)

Thelma’s true intentions. That rendered the private annuity a

sham--nothing more than a substitute for a will leaving Thelma’s

estate in equal shares to her children. See, e.g., Estate of

Rector v. Commissioner, T.C. Memo. 2007-367 (similar reasoning in

a failed FLP case).16 

The second key piece of evidence is in what she transferred. 

In April 2000, she transferred all of her interest in each FLP to

two of her children, including all the marketable securities and
- 54 -

cash in HI-1. Then in May she received her first payment--

$40,000 of the cash and $40,000 of the securities that she’d just

transferred to Michael and Michelle. In every subsequent month,

she received back another $80,000 of cash and securities that she

had transferred. Thelma’s children did not use their own assets,

let alone the income from the assets in the FLPs, to make these

payments. They couldn’t have. Even collectively they could not

afford to pay Thelma $80,000 a month. What Thelma’s children did

instead was to hold the assets in the exact same form that they

were in before the private annuity and then slowly transfer bits

and pieces of them back to her, planning to divide what was left

over (including a share for David), after she died. Again, this

makes the private annuity look much more like a testamentary

substitute than a bona fide sale. 

To be bona fide, a transaction need not be between

strangers. Estate of Bongard, 124 T.C. at 123. But there must

be some objective proof that the transaction wouldn’t materially

differ if the parties involved were negotiating at arms’ length. 

Id. Any such finding would be insupportable here.

Thelma’s transfer of her interest in Gary’s estate to the

children as part of the private annuity looks even less like a

bona fide sale. According to Garza, Thelma transferred her

interest in Gary’s estate to the FLPs by first transferring the

Marital and Family Trusts to herself, disregarding their
- 55 -

17 Using the Family and Marital Trust assets in this way may

have independent estate-tax consequences, and we address these

issues later. 

formalities. He described the transaction at trial: “Well,

she's transferring, in the capacity of trustee, to herself in the

capacity of recipient. It would be like me doing a document to

transfer money from one pocket to another pocket.” Garza went on

to clarify that she completed this transaction simultaneously

with the transfer to her children without putting anything in

writing. 

We’re skeptical. The account statements reveal that the

Marital and Family Trust assets, along with assets in an account

in the name of Gary’s estate, were all transferred into the HI-1

partnership. These accounts remained separately titled during

the private-annuity transaction and then until Thelma’s death,

even though Garza testified that Thelma distributed the Family

and Marital Trust assets to herself and sold them to her

children. (That’s the estate’s explanation for how Thelma

obtained a 96.25-percent interest in the FLPs prior to the

private-annuity transaction.17)

We next turn to whether Thelma received adequate and full

consideration when she transferred her assets for the private

annuity. The key is whether what Thelma received is roughly

equivalent to what she gave up. “‘[U]nless a transfer that

depletes the transferor’s estate is joined with a transfer that
- 56 -

augments the estate by a commensurate (monetary) amount, there is

no “adequate and full consideration”’.” Kimbell, 371 F.3d at 262

(quoting Wheeler v. United States, 116 F.3d at 762). It is on

this point that the private annuity is most vulnerable.

We have already found that Garza conjured the partnership

discounts out of the air. But even if those discounts were

correct, Garza undervalued each FLP interest sold in the private

annuity. On April 1, 2000, the balances of the accounts that

eventually were transferred to HI-1 were:

Account* 4/1/00 Balance

THIMA $4,263,636 

MT $ 547,192

FT $ 713,813 

Total $5,524,641

*Note that these are not even HI-1 accounts. Chase did not begin

transferring the assets out of these accounts into HI-1 accounts

until after the private annuity was completed. Given the many

problems with these transactions, we are going to call this one

administrative delay and move on.

Garza, in his April 4 letter, valued HI-1’s assets at $3,250,334

--the value from Gary’s estate tax return. 

Garza put the same lack of effort into valuing HI-2. A

Chase employee got a revised estimate of the value of the Hunt

Oil phantom stock by giving Massman a call in February 2000. At

that time Massman valued the phantom stock at $6.4 million, which
- 57 -

18 For a definition of fair market value for purposes of the

estate and gift transfer taxes, see sec. 20.2031-1(b), Estate Tax

Regs., sec. 25.2512-1, Gift Tax Regs. 

is almost $1 million more than the $5.5 million value Garza took

from Gary’s estate tax return. 

There is no record evidence of a boom or a bust in the Texas

farm-and-ranch property market from April 1999 to April 2000, but

we are certain that a careful attorney would have had the

properties in HI-3 reappraised before including them in the

private annuity.18 To meet section 2036(a)’s requirement that the

transfer was “for adequate and full consideration in money or

money’s worth,” Garza should have determined the fair market

value of the properties at the time of transfer so that the value

of the annuity received would be roughly equal to that of the

property sold. Wheeler, 116 F.3d at 759 (“adequate and full

consideration under the exception to section 2036(a) requires

only that the sale not deplete the gross estate”). Recall that

Garza just took the values off Gary’s estate tax return--values

which included properties not even held by HI-3.

We therefore hold on the basis of these findings that the

transfer of Thelma’s FLP interests for the private annuity must

be ignored, and the value of the FLPs must be added to her estate 

unless she retained neither possession, nor enjoyment of, nor the

right to income from the transferred property, nor the right to

designate the persons who would possess or enjoy that property.
- 58 -

b. Did Thelma Retain a Prohibited Interest in 

the Property She Transferred to Her 

Children through the Private Annuity?

Because we find Thelma didn’t receive adequate consideration

in a bona fide sale for the transfer of her property for the

annuity, her estate needs to show under section 2036(a)(1) that

she did not keep possession or “enjoyment” of that property after

the private annuity agreement. “[A] transferor retains the

enjoyment of property if there is an express or implied agreement

at the time of the transfer that the transferor will retain the

present economic benefits of the property, even if the retained

right is not legally enforceable.” Estate of Reichardt v.

Commissioner, 114 T.C. 144, 151 (2000); see sec. 20.2036-1(a),

Estate Tax Regs. For example, “the existence of formal legal

structures which prevent de jure retention of benefits of the

transferred property does not preclude an implicit retention of

such benefits.” Estate of Bongard, 124 T.C. at 129 (citing

Estate of Thompson v. Commissioner, 382 F.3d 367, 375 (3d Cir.

2004). Estate of McNichol v. Commissioner, 265 F.2d 667, 671 (3d

Cir. 1959), affg. 29 T.C. 1179 (1958)).

Now it is true that Thelma’s relationship to the assets

changed after the private annuity. She didn’t need to regularly

dip into the FLPs once she began receiving $80,000 a month under

the annuity. But as previously discussed, her children paid her

with the very assets she supposedly sold to them. Her monthly
- 59 -

payments came directly from HI-1 THIMA, which was an FLP account,

meaning that she retained a present economic benefit from her

assets after she “sold” them. Admitting that Michael and

Michelle couldn’t afford to pay $80,000 per month to their

mother, Garza testified that the plan all along was for the

children to “pay the payments from the assets in the private

annuity that they purchased.” See supra pp. 35, Tbl. 7. She

also continued to make deposits into the various FLP accounts,

shifted assets between accounts, and otherwise treated them as if

they were her own rather than actually transferred to Michael and

Michelle. See, e.g., supra p. 20, Tbl. 1. After the private

annuity agreement, Thelma never resigned as president of the LLCs

and remained a party to the farm leases. She also had ongoing

signature authority over assets in HI-1’s Chase accounts, which

she exercised after the annuity agreement. At trial, Michelle

testified that her mother withdrew money from HI-1 to pay her

income taxes after she sold the partnership interests to her

children.

Q All right. Do you recall on or around April 14 of

2000 that your mother needed $65,000?

 A Yes.

 Q Okay. And she needed that to pay taxes. Correct?

 A To pay estimated taxes, yes.

 Q Okay. And this money, this $65,000--she took 

this money out of a family limited partnership 

account. Correct?
- 60 -

 A This money was taken out of the family limited 

partnership shortly after the time we did the 

private annuity transaction, because my mother's 

private annuity payments were not to kick in until

the first week of May. She needed the money to 

pay the taxes, and so this is what happened. The 

biggest concern was getting the taxes paid.

 Q So there was a transfer taken out of a family 

limited partnership account to cover that then?

 A Yes. 

Thelma also made it clear to Michael and Michelle, even

after the private annuity was signed, that they were to make sure

that David got one-third of the property in the FLPs. Garza

testified that there was “no design to not include David;

[Thelma] just didn’t want him to have managerial signature

rights.” And Michelle said at trial that although the private

annuity didn’t include David on paper, he was equally included

with his two siblings. The Hurfords therefore treated David as a

coowner in the FLPs after the annuity was in place. Michelle

plainly stated, “[David] was a part of the private annuity

agreement. He’s a one-third owner.” Michael and Michelle

followed their mother’s directions for the disposition of her

property, even after she supposedly gave up any interest in it. 

Under section 2036(a)(2), we find this to be an exercise by

Thelma of a “right, either alone or in conjunction with any other

person, to designate the persons who shall possess or enjoy the

property.” We also find that it is the exercise of a power by
- 61 -

19 Because we’re including in Thelma’s estate the assets

that went to pay for the private annuity, we hold against the

Commissioner on his alternate assertion of a gift tax and

associated negligence penalty in docket number 23954-04.

Thelma altering or amending the transfer of the property going to

pay for the private annuity of the sort described in section

2038(a)(1). The consequence is, again, to pull the FLPs back

into her gross estate. 

We therefore find that, under sections 2036 and 2038, Thelma

retained an impermissible interest in the assets she had tried to

transfer to her children through the private annuity. All the

assets “sold” to Michael and Michelle in the private annuity

transaction must be included in Thelma’s estate.19 And that means

we need to address the validity of the FLPs themselves and

whether or not the estate may take discounts resulting from that

form of ownership.

2. Were the FLPs Valid?

a. Was the Creation of the FLPs Bona Fide and 

for Adequate and Full Consideration?

As with the exchange of FLPs for the private annuity,

Thelma’s exchange of property for interests in the FLPs must be

bona fide and for adequate and full consideration if it is to be

effective at removing property from her taxable estate. Compared

to private annuities, however, caselaw on the subject of FLPs is

a rich source of analogous fact patterns and helps us figure out
- 62 -

where on the spectrum of legitimate tax planning Thelma’s estate lies.

Let’s start with the FLPs’ bona fides. We focus on Thelma’s

motivation for moving her property into the FLPs. One motive is

obvious. Neither the Hurfords nor Garza are shy about admitting

that they created the FLPs for the valuation discounts. At

trial, Garza said he and the family “discussed discounts * * *

more than a dozen times.” But they are equally insistent that

the FLPs had other purposes. Garza listed ten reasons on each of

the FLPs’ partnership agreements (numbering as in the original):

1. provide resolution of any disputes which may

arise among the Partners in order to preserve

Partnership harmony and avoid the expense and 

problems of litigation;

2. maintain and centralize control of Partnership

Assets;

3. consolidate fractional interests in Partnership

Assets to achieve cost savings and to allow those 

Assets to be managed in an orderly manner;

4. increase Partnership wealth;

5. continue the ownership of Partnership Assets and 

restrict the right of non-Partners to acquire 

interests in Partnership assets;

6. provide protection to Partnership Assets from

claims of future creditors against Partnership 

members;

8. prevent the transfer of a Partnership member’s

interest in the Partnership as a result of a 

failed marriage;

9. provide flexibility in business planning not 

available through trusts, corporations, or other 

business entities;
- 63 -

10. facilitate the administration and reduce the cost 

associated with the disability or probate of the 

estate of Partnership members; and

11. promote the Partnership’s knowledge of and 

communication about the management, 

responsibilities, and benefits of Partnership 

Assets.

We do not just look at a list of reasons, though. Thelma’s

nontax reason has to be a significant factor motivating creation

of the partnerships and not merely a theoretical justification,

and we’ve observed before that taxpayers often disguise taxavoidance motives with a rote recitation of nontax purposes. See

Estate of Bongard, 124 T.C. at 118. As the Third Circuit said in

Estate of Thompson, 382 F.3d at 383 (quoting Gregory v.

Helvering, 293 U.S. 465, 469 (1935)) “Even when all the ‘i’s are

dotted and t’s are crossed,’ a transaction motivated solely by

tax planning and with ‘no business or corporate purpose * * * is

nothing more than a contrivance.’” As we have seen, Garza did

not make a rigorous effort to correctly form the FLPs. He left

many of the i’s undotted and t’s uncrossed. But we won’t

disregard Thelma’s transfers to the FLPs because of his

sloppiness. Instead we’ll examine the evidence to see whether

any of these nontax reasons was a significant factor in founding

the FLPs. Estate of Bongard, 124 T.C. at 118; Estate of Harper

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

Of the ten listed nontax purposes, the Hurfords rely mainly

on asset protection and asset management. They claim that the
- 64 -

assets needed protection from the liabilities associated with the

farm and ranch properties and from creditors. As for asset

management, they claim that the FLPs would consolidate the

management of the cash and securities held by Thelma, the Marital

Trust, and the Family Trust. 

We have found in other cases that similar claims about asset

protection, without supporting evidence, were insufficient proof

of a significant nontax purpose. See Estate of Bongard, 124 T.C.

at 128 (FLP’s credit-protection function already served by

existing trusts); Estate of Korby v. Commissioner, T.C. Memo.

2005-102, (failure to show FLP would protect assets from

creditors) affd. 471 F.3d 848 (8th Cir. 2006); Estate of Korby v.

Commissioner, T.C. Memo. 2005-103, (FLP no greater protection

than previous form of ownership) affd. 471 F.3d 848 (8th Cir.

2006); Estate of Rosen v. Commissioner, T.C. Memo. 2006-115 . 

And we find that placing the assets in FLPs provided no greater

protection than they had while held by the Family or Marital

Trusts, or in Thelma’s own name. Nor have the Hurfords convinced

us that giving each child a small ownership interest reduced the

risk of a creditor’s reaching the assets. And we cannot find in

this case any advantage in consolidated management that Thelma or

the two trusts gained from the transfer, particularly because the

partners’ relationship to the assets didn’t change after

formation. Estate of Reichardt v. Commissioner, 114 T.C. at 152. 
- 65 -

While we have found that consolidated asset management can be a

significant nontax purpose, Estate of Schutt v. Commissioner,

T.C. Memo. 2005-126, we have also denied that such a purpose is

significant where a FLP is “just a vehicle for changing the form

of the investment in the assets, a mere asset container.” Estate

of Erickson v. Commissioner, T.C. Memo. 2007-107. We find that

asset management and asset protection were not significant nontax purposes in this case. 

What was the purpose of the FLPs then? We’ve already

mentioned the Hurfords’ desire to discount the value of Thelma’s

property. But that finding’s not enough by itself; we have

developed in our caselaw a longer list of factors that, if

present, will incline us to find that the transfer of property to

a FLP was not motivated by a legitimate and significant nontax

reason. These factors include: 

• The taxpayer’s financial dependence on

distributions from the partnership, Estate of

Thompson v. Commissioner, T.C. Memo. 2002-246;

Estate of Harper v. Commissioner, T.C. Memo.

2002-121; 

• whether the taxpayer commingled her own funds

with partnership funds, Estate of Reichardt, 

114 T.C. at 152 

• the taxpayer’s delay or failure to transfer 

the property to the partnership, Estate of

Hillgren v. Commissioner, T.C. Memo. 2004-46; 

Estate of Rosen v. Commissioner, T.C. Memo.

2006-115; 

• the taxpayer’s old age or poor health when 

the FLP was formed, Estate of Rosen, T.C. Memo.
- 66 -

2006-115; Estate of Korby v. Commissioner, 

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

Commissioner, T.C. Memo. 2005-102, affd. 

471 F.3d 848 (8th Cir. 2006); and 

• whether the FLP functioned as a business

enterprise or otherwise engaged in any

meaningful economic activity, Estate of 

Bongard, 124 T.C. at 126. 

Adherence to partnership formalities is a theme underlying

many of these factors. See Estate of Harper, T.C. Memo. 2002-

121. And the Hurfords’ disregard for partnership formalities

began early. Thelma asked Chase just a few weeks after creating

the FLPs to distribute $65,000 from HI-1 so she could make an

estimated income tax payment, because she had transferred nearly

all of her liquid assets to HI-1--strong evidence that she was

financially dependent on distributions from the partnership. The

HI-1 partnership made another mistake when it reported on

Thelma’s K-1 that she received no disbursements in 2000, which is

evidence that everyone was still treating HI-1's assets as

Thelma’s own. 

Thelma also commingled her own funds with the partnerships’

until shortly before she died on February 19, 2001--and long

after the Hurfords supposedly traded the FLPs for the private

annuity. Chase transferred the proceeds from the sale of the

Tyler house into the HI-1 THIMA account. Thelma herself

transferred the proceeds from her IRA to the HI-1 THIMA account
- 67 -

in December 2000. See supra p. 22, Tbl 5. But neither the Tyler

house nor the IRA were meant to be partnership property.

The Hurfords also disregarded partnership formalities by

significantly delaying the transfer of the assets from Thelma and

the trusts to the FLPs. Many of HI-1’s assets remained in

Thelma’s and the trusts’ accounts for several months after the

FLPs were formed. HI-2 had similar problems. Hunt Oil did not

even acknowledge that HI-2 owned the phantom stock until January

2001. While the estate argues that the official transfer date

was March 22, 2000, it has not explained why it took so long to

complete the paperwork. The transfer of the Dallas/Ellis County

property to HI-3 was put off for two years, and we’ve already

recounted how disordered the other deeds were. 

The other underlying theme in our caselaw is that a FLP

needs to be a functioning business or at least have some

meaningful economic activity. Estate of Bongard, 124 T.C. at

126. It’s easy enough to show this if a working business is

contributed to a FLP. See Kimbell, 371 F.3d at 267 (working

interest in oil and gas properties). We’ve also found that a FLP

may have meaningful economic activity where the partnership

furthers family investment goals or where the partners work

together to jointly manage family investments. Estate of

Mirowski, T.C. Memo. 2008-74; Estate of Schutt v. Commissioner,

T.C. Memo. 2005-126. But where none of the partners was involved
- 68 -

in conducting the partnerships’ business, it’s unlikely that the

transfer has a legitimate and significant nontax reason. See

Estate of Thompson, 382 F.3d at 379.

Look at the FLPs in this case. HI-1 just held marketable

securities and cash. The Hurfords did not have even a minimal

involvement in deciding which securities HI-1 should own, or even

whether it should buy or sell. Cf. (Estate of Schutt, T.C. Memo.

2005-126, where we said that while the mere holding of securities

in an untraded portfolio is a negative factor, the record in that

case reflected a significant nontax reason for creating the

FLPs). All investment decisions were left to Chase, and the same

people at Chase made the decisions before and after the assets

were moved to HI-1. HI-2 required even less of the Hurfords than

HI-1. The only choice they could make concerning the Hunt Oil

phantom stock was to hold it or to cash out. The HI-3

partnership did hold real estate, but again, the partnership was

not actively managing any of the farms or ranches. The three

leases of those properties were all in place when HI-3 was formed

and the Hurfords did nothing more than collect rent. There is no

evidence that the partners met to discuss family business or

investment strategy, or even discuss the partnerships’ profits or

losses. This would have been difficult given the partnerships’

mayfly-like life span: they were hatched and dispatched to the

private-annuity transaction in a few weeks’ time, and afterward
- 69 -

served primarily as a holding pen to fund Thelma’s monthly

annuity payments. See supra p. 35, Tbl. 7.

This leaves only the Hurfords’ drive for a discount as a

reason for creating the FLPs. And we do find that their purpose

was nothing more than allowing the Hurfords to claim a discount

when Thelma transferred her interest in them to her children for

the private annuity; there was no nontax business or economic

reason for them to exist. Michelle’s notes from one of the

initial meetings with Garza confirm this. She wrote, “have kids

own 1 percent of everything to maximize discount advantage.” We

thus find that Thelma’s transfers to the FLPs were not bona fide

sales. 

Even if the transfers were bona fide, we would find that

they were not for adequate and full consideration. The general

test for deciding whether transfers to a partnership are made for

adequate and full consideration is to measure the value received

in the form of a partnership interest to see if it is

approximately equal to the property given up. Estate of Bongard,

124 T.C. at 118; Kimbell, 371 F.3d at 262. But Kimbell also

teaches more specifically that we should focus on three things:

(1) whether the interests credited to each of

the partners was proportionate to the fair

market value of the assets each partner

contributed to the partnership,

(2) whether the assets contributed by each

partner to the partnership were properly
- 70 -

20 Recall that the “Gary T. Hurford Trust” was given a 48-

percent interest in the partnerships, but that no such trust

actually existed. Instead, the Family and Marital Trusts created

under Gary’s will, together with an account holding other assets

from Gary’s estate, were all contributed to the HI-1 partnership,

and eventually consolidated in the HI-1 THIMA account long after

the private annuity transaction was completed. See supra pp. 20-

23.

credited to the respective capital accounts

of the partners, and 

(3) whether on termination or dissolution of

the partnership the partners were entitled to

distributions from the partnership in amounts

equal to their respective capital accounts.

Id. at 266. 

We phrase our own test a bit differently: We look to see if

“All partners in each partnership received interests proportionate to the fair market value of the assets they each transferred,

and partnership legal formalities were respected.” Estate of

Bongard, 124 T.C. at 117. 

It is obvious that the value of Thelma’s interest in each

FLP was worth less than the assets she contributed. For all

three FLPs, Thelma’s and Gary’s estates20 each received a 48-

percent interest and the three children and the LLC each received

a 1-percent interest gratis. But for HI-2 and HI-3, Thelma and

Gary’s estate contributed 50 percent of the assets. What Thelma

contributed to HI-1 was even more disproportionately large

compared to the interest she received. Thelma transferred almost

$4 million of assets to HI-1 in April 2000. The Family and
- 71 -

Marital Trusts contributed a little under $1.2 million combined. 

Even assuming the Gary T. Hurford Trust existed as a valid

partner, these numbers show that each partner’s interest in each

of the FLPs did not reflect his or her or its contribution. 

It is equally obvious that there was no pooling of assets in

the interest of creating true joint ownership or starting a new

enterprise--Thelma and Gary’s estate contributed everything. 

There was no contribution from any of the Hurford children either

in money, property, or services, nor were their partnership

interests reported as gifts to them. And we’ve already found

that the crediting of the partners’ capital accounts was entirely

fictional. See supra p. 39. Thelma’s unilateral contribution

supports an inference that only a desire for tax savings

motivated the FLPs’ formation. See Estate of Harper, T.C. Memo.

2002-121; cf. Estate of Harrison, T.C. Memo. 1987-8 (where other

partners made significant contributions at formation, the

partnership served as a vehicle for a genuine pooling of

interests).

For a FLP to work, the minority interest holders must at a

minimum receive their interests either by gift or by contributing

their own assets or services. Section 1.704-1(e)(1)(iii), Income

Tax Regs., provides that 

A donee or purchaser of a capital interest in

a partnership is not recognized as a partner

* * * unless such interest is acquired in a

bona fide transaction, not a mere sham for
- 72 -

tax avoidance or evasion purposes, and the

donee or purchaser is the real owner of such

interest. * * * 

This didn’t happen here--the Hurford children neither contributed

their own property nor did Thelma report gifts to them of

partnership interests. We have found no legal authority for

Garza’s position that partners can have a partnership interest

with nothing more than a shuffle of paper. We therefore cannot

recognize the Hurford children as true partners of the FLPs.

We find that the only purpose the FLPs served in Garza’s

scheme was to allow the Hurfords to take a discount when Thelma

transferred her assets for the private annuity a short time after

the partnerships were formed. Therefore, we find that Thelma’s

transfers to the FLPs were not bona fide sales for adequate and

full consideration.

b. Did Thelma Retain the Possession or Enjoyment

of, or the Right to the Income From, the 

Property She Transferred to the FLPs in 

Violation of Section 2036(a)(1)?

One question remains: Must we discount the value of those

assets now included in Thelma’s estate for lack of control and

lack of marketability because they consist of interests in FLPs? 

The answer depends on whether we would’ve looked past the FLP to

include the underlying assets in those FLPs in Thelma’s estate

absent the private annuity transaction. We return to the same

analysis under section 2036(a)(1) to find the answer. 
- 73 -

The key is whether there was an express or implied agreement

at the time of the transfer to the FLPs that Thelma would keep

the present economic benefits of the property, even if the

retained right were not legally enforceable. Estate of

Reichardt, 114 T.C. at 151 (citing references omitted). We have

found implied agreements when: 

C The decedent used FLP assets to pay his

personal expenses, e.g., Estate of Rosen,

T.C. Memo. 2006-115; 

C the decedent transferred nearly all of his 

assets to the FLP, e.g., Estate of Reichardt, 

114 T.C. 144 (2000); and 

C the decedent’s relationship to the assets 

remained the same before and after the transfer,

e.g., Estate of Reichardt, 114 T.C. 144 (2000);

Estate of Rosen, T.C. Memo. 2006-115. 

Garza’s plan plunges this case right into these precedents. 

The key proof of an implied agreement that Thelma would continue

to be able to enjoy her property after she gave nearly all of it

to the FLPs lies in evidence of what happened after the FLPs were

formed--they were shuttled right into the private annuity just

weeks after they were created and before they were fully funded

with Thelma’s assets. And Thelma received her very own assets

back from her children as payments under the private-annuity

agreement. Yet even though Thelma supposedly held an interest in

the FLPs for only a few weeks, we’ve already recounted how she

impermissibly took distributions for her living expenses directly

from the FLP accounts. And like many of the other cases where we
- 74 -

have found a retained interest, she needed that money because she

had transferred nearly everything she owned into the FLPs. Her

relationship to her assets didn’t change after she transferred

them to the FLP accounts--and remained the same even after the

private annuity sale. 

We therefore find that, after transferring the assets into

the FLPs, Thelma retained an interest in them in violation of

section 2036(a)(1). Well, almost. Because she transferred the

FLP interests to her children through the private annuity--albeit

in a transfer we have found problematic under section 2036(a)(1)

itself--it is possible that she severed her ties to the FLP

interests and didn’t hold the impermissible retained interest at

death. This is where section 2035(a) comes into play. Section

2035(a) says: 

SEC. 2035(a). Inclusion of Certain Property in

Gross Estate.--If--

(1) the decedent made a transfer (by

trust or otherwise) of an interest in any

property, or relinquished a power with

respect to any property, during the 3-year

period ending on the date of the decedent's

death, and

(2) the value of such property (or an

interest therein) would have been included in

the decedent's gross estate under section

2036, 2037, 2038, or 2042 if such transferred

interest or relinquished power had been

retained by the decedent on the date of his

death, the value of the gross estate shall

include the value of any property (or
- 75 -

21 The Commissioner also argues that section 2036(a)(2) or

section 2038(a)(1) requires inclusion in the estate of the assets

transferred into the FLPs. We need not address this argument,

because we’ve found section 2036(a)(1), in conjunction with

section 2035(a), suffices.

interest therein) which would have been so included.

Section 2035(a), together with section 2036(a)(1), thus also

requires the estate to include the value of assets Thelma

transferred to the FLPs, assuming she severed her connection to

the FLPs with the sale of her interests to the private annuity. 

Of course, those assets are already included because of the

problems with the private annuity. We hold, therefore, that the

Hurfords were not entitled to any discounts because of the FLPs

when they calculated the amount of the monthly annuity payments,

and so no discounts apply when determining the amount now

includable in the estate.21

C. The Family and Marital Trusts

We have already described how the Marital and Family Trust

account statements show that Thelma moved those accounts into the

HI-1 partnership and then tried to shuttle them to her children

through the private annuity. At trial, Garza described what

happened to the two trusts as follows: 

Well, the accounts were transferred by the

bank to the limited partnerships, so those

trusts became assets--the assets in the trusts

were transferred to the limited partnerships. 

The limited partnership interests were sold to

the private annuity. See, in effect, you had

a distribution to Thelma, then a conveyance to
- 76 -

22 A general power of appointment is one that is “exercisable in favor of the decedent, [her] estate, [her] creditors, or

the creditors of [her] estate.” Sec. 2041(b)(1). Any control

limited by the ascertainable standard (as was provided by Gary’s

Family Trust), however, “shall not be deemed a general power of

appointment.” Sec. 2041(b)(1)(A).

the partnership, then a sale of the

partnership interest to the kids, using the

private annuity.

Later, when asked whether Thelma had an interest in the Marital

and Family Trusts at death, Garza responded: “Well, the assets

had been blown out to limited partnerships which had been sold,

so I think there were trusts, but I don't think they--I think

they were pretty hollow at that point.”

On this narrow point, we agree with Garza. The Family Trust

was an entirely legitimate part of Gary’s estate plan, intended

to use his unified credit of $650,000. Bisignano had carefully

ensured that the terms of the Family Trust imposed an

ascertainable standard on withdrawals--Thelma was limited to

taking distributions for her “health, education, support, or

maintenance.” Without this limitation, the Code would treat

Thelma as if she had general power of appointment,22 and section

2041(a)(2) would include property subject to that power in

Thelma’s gross estate. But the Hurfords cannot qualify for the

exception merely by stating it in the will and avoiding it in

practice. Thelma exercised a general power by “distributing” all

of the Family Trust to herself and “selling” those assets in the
- 77 -

23 Sec. 2031(a) broadly provides that the gross estate includes “all property, real or personal, tangible or intangible,

wherever situated.”

24 For example, does a transfer of QTIP into a FLP terminate the qualified income interest that the Code requires Thelma

to have from the time she receives the interest until death? 

Sec. 2044; sec. 25.2519-1(f), Gift Tax Regs.

private-annuity agreement, and so they became subject to her full

control and individual ownership.23 Since Thelma used all the

Family Trust’s assets as her own in the private annuity, we

disregard the fact that they at one time could have been

sheltered from any estate tax under the plan designed by

Bisignano.

There are many other problems with the Marital Trust’s 

assets independent of the FLP and private-annuity transactions. 

For example, though Gary’s will passed all of the property in his

estate--except for the Family Trust’s assets, his home, and his

personal effects--into the Marital Trust, only a small portion of

it ended up in the Marital Trust account with Chase or was

otherwise titled in the Trust’s name. And Gary’s estate took a

QTIP election for approximately $6,500,000. Were we to try to

construct an alternate holding for this part of Thelma’s estate,

as the Commissioner urges, we would quickly run into tricky

questions of whether Thelma’s handling of that property was a

conversion and disposition of the QTIP property under sections

2511 and 2519.24 We’ll leave those questions for another case,
- 78 -

and hold instead that all the property that Garza moved from

Thelma and the Trusts into the FLPs and the private annuity is

included without discount in her gross estate under section

2031(a)’s broad language including in an estate “all property,

real or personal, tangible or intangible, wherever situated.” 

D. Gifts Thelma Made in February 2000

Thelma gave away $675,000 in taxable gifts in February 2000

and reported them on her gift tax return for that year (Form

709). The Code requires a taxpayer to include adjusted taxable

gifts made during life in the computation of the tentative estate

tax. Sec. 2001(b)(1). The Code then reduces that amount by the

hypothetical tax on a taxpayer’s post-1976 taxable gifts. Sec.

2001(b)(2). The effect is that the estate uses a higher marginal

rate on the graduated rate schedule when computing the estate

tax. The Commissioner argues that because Thelma’s estate failed

to report post-1976 adjusted taxable gifts on her estate tax

return, the estate miscalculated the estate tax due. We agree

with the Commissioner.

II. Attorney’s Fees

The Commissioner challenges the estate’s deduction of

$45,000 for attorney’s fees it claims it paid Garza to administer

Thelma’s estate. Section 2053(a)(2) allows a deduction for

administration expenses, including attorney’s fees. See sec.
- 79 -

25 Section 7491 shifts the burden of proof to the Commissioner when the taxpayer has produced credible evidence. However, the Hurfords’ lawyers withdrew their section 7491 motion,

so Rule 142 applies. 

20.2053-3(a), Estate Tax Regs. It is the estate’s burden to

substantiate the deduction. See Rule 142.25

The Commissioner agrees with the Hurfords that they paid

Garza over $300,000, so we find it a bit hard to believe that

they cannot show any of these fees were paid to administer

Thelma’s estate. Garza never complained that the Hurfords failed

to pay a bill and we are quite sure that his work on Thelma’s

estate was not done pro bono.

Still, the record is thin. At trial, the Commissioner

cross-examined the Hurfords and Garza, trying to figure out how

much of Garza’s fees were paid by the estate itself. But Garza’s

bills were as sloppy as his other paperwork, and no one was able

to decipher them. The Commissioner asked Michelle how much the

estate’s administration fee was:

Q. Do you know what the total fees, estate-tax fees,

were paid to Garza Staples?

A. Well, $45,000 were paid on behalf of my mother's 

estate.

 Q. Were there fees paid after the estate tax return 

for your father's estate was filed that were paid 

to Garza Staples?

 A. Yes. There was $15,000 paid in the year 2000.

 Q. And is that amount claimed on the 706?
- 80 -

 A. No.

We find Michelle credible and, by a bare preponderance of the

evidence, find that the estate has proved its $45,000 deduction

for attorney’s fees. 

III. Negligence

The estate contests the Commissioner’s assertion of a

negligence penalty under section 6662. Before determining the

estate’s liability, we first have to decide whose negligence

matters--Thelma’s or her executor’s. On this point, both parties

agree that it is Michael’s actions that we need to consider,

because the estate is the taxpayer and Michael acted as the

estate’s fiduciary in his capacity as executor. We agree that

this makes his conduct the focus of our analysis of whether a

negligence penalty under section 6662 is justified. See Estate

of Holland v. Commissioner, T.C. Memo. 1997-302; see also, e.g.,

Bank of the West v. Commissioner, 93 T.C. 462, 472 (1989)

(imposing on estate’s fiduciary a negligence-based penalty for

failure to timely file); Thomas v. Commissioner, T.C. Memo. 2001-

225 (same). 

Since the facts of this case span a long period, we also

need to determine when to scrutinize Michael’s conduct. On this,

the Code and regulations direct us to use the time period

encompassing the preparation of the return at issue, because the

“term ‘negligence’ includes any failure to make a reasonable
- 81 -

attempt to comply with the provisions of the internal revenue

laws or to exercise ordinary and reasonable care in the

preparation of a tax return.” Sec. 1.6662-3(b)(1), Income Tax

Regs. (emphasis added). We will therefore consider the time

during which Garza and Turner & Stone prepared Thelma’s estate’s

tax returns. Both Garza and Turner & Stone represented the

estate during this time and prepared the estate tax return that

Michael signed. We consider Michael’s knowledge and observations

of his attorney’s and accountants’ actions to decide whether the

estate is liable.

The penalty in this case is triggered by a failure to “make

a reasonable attempt to comply” with internal revenue laws or to

“exercise ordinary and reasonable care in the preparation of a

tax return.” Sec. 1.6662-3(b)(1), Income Tax Regs. Negligence

also includes “failure by the taxpayer to keep adequate books and

records or to substantiate items properly.” Id. Negligence is

“strongly indicated” where the taxpayer “fails to make a

reasonable attempt to ascertain the correctness of a deduction,

credit, or exclusion on a return which would seem to a reasonable

and prudent person to be ‘too good to be true’ under the

circumstances.” Id.

If Michael had prepared the estate tax return himself, there

is little doubt that we could find negligence or an intentional
- 82 -

disregard of the tax rules. But Michael himself didn’t prepare

the returns. Instead, he hired Garza and Turner & Stone.

The negligence penalty can be rebutted by a showing of

reasonable cause and good faith. Sec. 6664(c). And Michael

points to his reliance on professional advice for proof. We

begin with the regulation, which somewhat unhelpfully states that

reliance on professional advice is “reasonable cause and good

faith if, under all the circumstances, such reliance was

reasonable and the taxpayer acted in good faith.” Sec. 1.6664-

4(b)(1), Income Tax Regs. The caselaw more helpfully points to

three factors to test whether the taxpayer--and remember that in

this case, that means Michael--properly relied on professional

advice. Neonatology Associates, P.A. v. Commissioner, 115 T.C.

43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002).

• First, was the adviser a competent

professional who had sufficient expertise 

to justify reliance? 

• Second, did the taxpayer provide necessary

and accurate information to the adviser? 

• Third, did the taxpayer actually rely in 

good faith on the adviser’s judgment? Id.

Both Garza and Turner & Stone were professionally licensed

and would have appeared competent to a layman at the time they

prepared the estate tax return. Reliance on even these

professionals appears more rational in light of Bisignano’s prior

recommendations. Although nowhere nearly as aggressive, and
- 83 -

certainly more competently drafted, Bisignano’s advice contained

strategies similar in name and purpose to Garza’s. Garza was

thus not the first to introduce Michael to the concept of family

limited partnerships, and we do not find Michael to have

unreasonably relied on Garza when pursuing tax-reduction

strategies on behalf of his mother’s estate. See Melnik v.

Commissioner, T.C. Memo. 2006-25. We find it more likely than

not that Michael was reasonable in not knowing that Garza’s

particular method of estate planning was so far off the mark that

it would lead him and his family into their present morass of

litigation. We find little indication that Michael knew or

reasonably could have known that Garza’s schemes were not within

the realm of legitimate estate-planning practices or that Garza

or Turner & Stone lacked sufficient competence in estate-tax law. 

Sec. 1.6664-4(c), Income Tax Regs. 

On the second point, we find that Michael provided both

Garza and Turner & Stone with all the relevant financial data

needed to assess the correct level of estate tax. Sec. 1.6664-

4(c)(1)(i), Income Tax Regs. 

It’s the third point--did Michael reasonably and in good

faith rely on Garza and Turner & Stone’s professional advice--

that’s the hardest to address. Sec. 6664(c). The regulations

direct us to consider “all facts and circumstances” to decide

whether Michael’s reliance was reasonable and in good faith. 
- 84 -

Sec. 1.6664-4(c)(1), Income Tax Regs. Michael is a child

psychiatrist of considerable education and experience in his

field, but we find that he is not sophisticated in tax and

business matters. See Malone v. Commissioner, T.C. Memo. 2005-

69; cf. Estate of Holland, T.C. Memo. 1997-302 (imposing a

negligence penalty on executor who was estate-planning and tax

attorney).

Our review of Michelle’s notes of meetings and calls with

her brother, Garza, and the accountants consistently show a

family that wanted to do all it could to reduce or eliminate the

tax bill they faced, but also show constant questioning of their

advisors about what was going on and whether it would work. This

makes us fall back on United States v. Boyle, 469 U.S. 241

(1985), where the Court noted:

Most taxpayers are not competent to discern

error in the substantive advice of an

accountant or attorney. To require the

taxpayer to challenge the attorney, to seek a

“second opinion,” or to try to monitor counsel

on the provisions of the Code himself would

nullify the very purpose of seeking the advice

of a presumed expert in the first place. * * * 

“Ordinary business care and prudence” do not

demand such actions.

Id. at 251; see also Chamberlain v. Commissioner, 66 F.3d 729,

733 (5th Cir. 1995), (quoting Boyle) affg. in part, revg. in

part, T.C. Memo. 1994-228; Stanford v. Commissioner, 152 F.3d

450, 461-62 (5th Cir. 1998), (discussing the need for even an
- 85 -

intelligent person to obtain expert advice) affg. in part and

vacating in part, 108 T.C. 344 (1997). 

We consider it well established that a taxpayer has the

right to minimize his tax liability, and it was reasonable for

Michael to have relied on professionals in the arcane and complex

field of estate-tax law. That his and his family’s choice of

advisers proved so unsuitable has led them to their present

situation--unable to enjoy fully the estate built up by old Mr.

Hurford, and seeking relief at court instead. But we do find

that Michael’s reliance on the professionals he chose, however

unsuitable they turned out to be, was nevertheless under the

circumstances done reasonably and in good faith. We therefore

impose no penalty for negligence or disregard of the Code.

Decisions will be entered 

under Rule 155.