T.C. Memo. 1996-25

UNITED STATES TAX COURT

ESTATE OF CYRIL I. MAGNIN, DECEASED,

DONALD ISAAC MAGNIN, EXECUTOR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24883-92. Filed January 24, 1996.

Donald L. Feurzeig, Derek T. Knudsen, and John M.

Youngquist, for petitioner.

Susan J. Adler and Rebecca T. Hill, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: Respondent determined a deficiency of

$1,921,528 in petitioner's Federal estate tax. By amended

answer, respondent has asserted an increase in the deficiency in

petitioner's Federal estate tax in the amount of $157,685. 
 

1Unless otherwise indicated, all section references are to

the Internal Revenue Code as of the date of decedent's death, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

 

2Petitioner also contends that it is entitled to claim

additional deductions under sec. 2053 and an increase in the

State death tax credit under sec. 2011. These issues shall be

resolved in accordance with the Court's opinion herein under Rule

155.

After concessions, the issues for decision are: (1) Whether

decedent's 1971 transfers in trust with retained life estates are

includable in decedent's gross estate, or whether they are

excluded from the estate because they were bona fide sales for

adequate and full consideration under section 2036(a);1 and (2)

whether the fair market value of certain real property owned by

decedent and subject to a lease is $170,000, as determined by

petitioner's appraiser, or is $228,000, as determined by

respondent in the notice of deficiency.2 For convenience, the

facts with respect to the second issue will be set forth with our

opinion on that issue. 

FINDINGS OF FACT

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

The stipulation of facts, the first, second, and third

supplemental stipulations of facts, and the attached exhibits are

incorporated herein by this reference.

Petitioner is the Estate of Cyril I. Magnin (Cyril). Cyril

was born in San Francisco, California, on July 6, 1899, and died

testate on June 8, 1988, in San Francisco. Donald Isaac Magnin,
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decedent's oldest son, is the executor of his estate. Donald

Magnin filed a timely Federal estate tax return on behalf of

petitioner wherein he elected the alternate valuation date,

December 8, 1988. Donald Magnin resided in San Francisco,

California, at the time he filed the estate tax return. 

Background

Cyril's father, Joseph Magnin (Joseph), was born in London,

England, on December 27, 1868. Joseph was the third child of

Isaac and Mary Ann Cohen Magnin (Mary Ann), who emigrated from

England to San Francisco in 1875. In 1877, Mary Ann established

I. Magnin, a fine clothing store for women. 

Joseph started working for I. Magnin when he was a teenager. 

In 1898, he married Charlotte Davis (Charlotte), the head

milliner at I. Magnin. This caused family tensions between

Joseph and his mother. Mary Ann ran I. Magnin with an iron hand

and had a strict rule against family members' fraternizing with

employees. Cyril was born the next year on July 6, 1899. During

the years 1893 to 1913, Joseph was being passed over by Mary Ann

for responsible management positions with I. Magnin in favor of

his younger brothers. 

Joseph left I. Magnin in 1913 and invested in a store, which

was organized as a corporation by the name of "Newman, Magnin &

Co." (Newman-Magnin). Similar to I. Magnin, Newman-Magnin

specialized in the sale of women's clothing. In 1918, Joseph
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bought out the other owners, and in 1919, changed the name of the

corporation to "Joseph Magnin Co., Inc." (JM). JM has been in

continuous existence as a California corporation from 1919

through at least 1988. Starting a rival women's clothing store

using the Magnin name caused a rift between Joseph and the rest

of his family, which lasted for many years.

Joseph led JM to compete directly in I. Magnin's retail

market for the same customers and the same suppliers. Because I.

Magnin had all its finest suppliers tied up in exclusive

contracts, JM had a difficult time finding suppliers. In the

early years of JM, the store thrived on the strength of

Charlotte's millinery business, which had followed her from I.

Magnin to JM. Until the late 1930's, JM was known in the trade

as the second-rate I. Magnin. 

Cyril began working for JM as a child, and at the time of

World War I, he was involved in management. In 1925, Cyril

married Anna Smithline (Anna), and they remained married until

Anna's death on July 12, 1948. Cyril and Anna had three

children: Donald Isaac Magnin (Donald), born November 17, 1926;

Ellen Lois Magnin (Ellen), born April 19, 1928; and Jerry Allen

Magnin (Jerry), born July 30, 1938. Cyril's children also began

working for JM at early ages. 

Anna was a skilled designer and buyer of women's apparel

when she and Cyril married, and she became an important designer

and chief buyer of JM's women's apparel. Although everyone at JM
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worked as a team, Anna and Cyril's mother, Charlotte, were the

key persons in setting the merchandising pace of the store, and

Cyril was more or less the key idea man. 

JM did not do well financially during the Great Depression. 

Joseph started a factoring business, Donner Factors, which

advanced money to companies against their accounts receivable. 

Donner Factors was a successful company and, for a long time,

made more money than JM. 

Joseph, the president of JM, was very conservative. He and

Cyril had differing philosophies as to JM's approach to retailing

women's apparel. Joseph insisted on continuing to compete with

I. Magnin for upscale, older customers, whereas Cyril wanted to

tap the market of younger women. Cyril perceived in the late

1930's that the country was beginning to mobilize as a result of

the war and that military personnel were moving West along with

their spouses. The younger women moving West were increasingly

entering the business world, and they had money to spend and no

preconceived ideas of where to buy. These different philosophies

led to arguments between Joseph and Cyril. Finally, in 1937,

Joseph turned the operation of JM over to Cyril, predicting that

he would fail with his "crazy ideas". Joseph remained president

of JM but concentrated his efforts on Donner Factors. 

In January 1940, Jean Blum, Joseph, and Cyril formed a

Nevada corporation by the name of "Specialty Shops, Inc."

(Specialty), for the purpose of operating a branch store under
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the Joseph Magnin name in Reno, Nevada. Mr. Blum, who was a

close friend of Joseph's (and eventually of Cyril's), provided

the funds to open Specialty's first store in Reno, because JM

lacked the capital to do so. Mr. Blum purchased 50 percent of

the stock initially issued and lent money to Joseph and Cyril to

purchase the remainder. Prior to the creation of Specialty and

the opening of its Reno store, JM had opened only one other

branch store in Palo Alto, California, in 1928. 

In July 1948, Anna died unexpectedly. Joseph and Anna had

been very close. She had long been a mediator in the disputes

between Cyril and Joseph. Cyril briefly thought of selling JM to

I. Magnin, which upset Ellen. Ellen left school at age 20, moved

back home, and took over Anna's position as buyer for JM. 

In October 1950, Ellen married Walter S. Newman (Walter). 

Shortly after the wedding, Walter went to work for JM as a

financial troubleshooter and was subsequently put in charge of

store operations (i.e., all store activities except

merchandising). Ellen reduced her day-to-day activities at JM

immediately after the wedding.

Donald and Jerry were also active in operating JM. Donald

began working full time for JM after his graduation from Stanford

in 1949, first as a merchandise bookkeeper and then as a hosiery

buyer. Donald entered the Navy during the Korean War in 1952. 

He returned to JM in about September of 1953. Jerry began

working full time for JM after he left the Air Force in 1961.
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3The articles of incorporation of Newman, Magnin & Co.

(continued...)

In 1949, Cyril began dating Lillian Helwig (Lillian), who

was the manager of one of the JM stores. Joseph strongly

disliked Lillian, as did Cyril's children. They were not pleased

when Cyril married Lillian on June 19, 1952. 

1951 Agreement Between Joseph and Cyril

In 1951, Joseph and Cyril were concerned about the future of

the business. Cyril had begun dating women after Anna's death,

and Joseph wanted to ensure that the business would remain in the

family and that Cyril's shares of stock would not go to one of

these women. Cyril, on the other hand, was concerned about

control of the business upon Joseph's death. Control of the

business was very important to Cyril; he saw control of the

business as a means to enhance his social, political, and

business position in the community. Cyril also feared that if he

had to share control with his children, he might someday be fired

by them. 

On October 31, 1951, Joseph and Cyril executed a written

document, which they labeled an "Agreement", concerning their JM

and Specialty stock (the Agreement or the 1951 Agreement). As of

October 31, 1951, JM had issued and outstanding 255,174 shares of

stock, consisting of 72,717 shares of preferred stock and 182,457

shares of common stock, all of which had voting rights.3 The
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3(...continued)

(subsequently JM) were silent as to the voting rights of the

preferred stock until a 1968 amendment, which expressly provided

that the preferred stock was entitled to voting rights equal to

those of the common stock. However, it appears that prior to the

1968 amendment, the preferred stock was considered to be voting

by the corporation and that the holders of the preferred stock

actually did exercise voting rights. 

shareholdings of Joseph and Cyril in JM were as follows:

Joseph Cyril

Common stock 50,648 75,044

Preferred stock 21,464 11,035

 Total 72,112 86,079

Thus, Joseph held 28.26 percent of the voting power of JM, and

Cyril held 33.73 percent of the voting power; together their

shares represented 61.99 percent of the voting power. 

As of October 31, 1951, Specialty had issued and outstanding

101,000 shares of stock, consisting of 1,000 shares of voting

common stock and 100,000 shares of nonvoting preferred stock. 

The ownership of Specialty stock as of that date is unclear, but

it appears that Mr. Blum owned 500 shares of the common stock and

50,000 shares of the preferred stock, and Cyril and Joseph

together owned the remaining 500 shares of common stock and

50,000 shares of preferred stock. 

On October 31, 1951, Cyril also held certain options to

acquire JM stock. On October 31, 1945, Joseph had granted to

Cyril and Anna (as joint tenants with the right of survivorship)
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4In May 1960, Cyril assigned his rights in the Nichols

options to the testamentary trust established by Joseph's will of

which he was the trustee. On June 3, 1960, Cyril exercised the

options on behalf of the trust. 

an option to purchase 18,158 shares of Joseph's common stock in

JM at $1 per share. The option could be exercised only within 90

days after Joseph's death. Cyril also held various options to

purchase 7,185 shares of JM common and 11,850 shares of JM

preferred stock owned by Edward R. and Mae C. Nichols, which were

granted by four agreements dated between April 4, 1941, and May

6, 1943 (the Nichols options).4 Joseph was a party to the May 6

agreement, which had granted the option to purchase most of the

Nicholses' JM stock (i.e., 7,185 shares of common and 10,000

shares of preferred stock). 

The preamble to the 1951 Agreement set forth the following

premises: 

WHEREAS the parties hereto are the owners of the

majority of the issued and outstanding stock of JOSEPH

MAGNIN COMPANY, INC., a California Corporation, and

SPECIALTY SHOPS, INC., a Nevada Corporation,

hereinafter called "said corporations"; and

WHEREAS the parties hereto have over many years

last past mutually controlled the operation and

management of said corporations in the best interests

of said corporations and the stockholders thereof; and

WHEREAS Cyril Magnin desires that upon the death

of Joseph Magnin, the control of said corporations

shall be vested in Cyril Magnin for the term of his

life; and

WHEREAS Joseph Magnin is willing under and subject

to the terms and conditions hereinafter set forth, to
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provide in his Last Will and Testament that all of his

stock, both common and preferred, of said corporations

shall be bequeathed to Cyril Magnin, as trustee for the

benefit of Cyril Magnin, Ellen Magnin Newman, Donald

Magnin and Jerry Magnin, and that Cyril Magnin, as said

trustee, shall have the sole right to vote said stock

for the term of his life as provided in said Last Will

and Testament[.]

Consistent with these premises, the terms of the Agreement

provided that Joseph agreed to bequeath his JM and Specialty

stock to Cyril as sole trustee for Cyril's life as already

provided in his will, which provision he agreed not to revoke. 

Cyril agreed to will in trust all his JM and Specialty stock "now

owned or hereafter acquired" to a bank trustee for the benefit of

his three children. 

The Agreement also provided that the terms and conditions on

the part of Cyril were to be secured by a deposit in pledge with

Bank of California, N.A. (the Bank), as pledgeholder of the stock

belonging to Cyril; that as long as Cyril performed the terms and

conditions of the Agreement, the voting rights would vest in him,

but in the event of default, the voting rights would vest in the

pledgeholder. Cyril agreed not to transfer, assign, or encumber

any of his stock in the corporations, except that he could give

stock to his children. The Agreement provided that at no time

should the issued and outstanding stock of the corporations

belonging to persons other than Joseph, Cyril, or his three

children exceed 49 percent, except in the event of a sale of the

entire capital stock of the corporations. Moreover, any other
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stock, securities, cash, or other property received by Cyril upon

the sale or exchange of his stock in either corporation, or in

the event of a merger, consolidation, spinoff, splitoff, or

splitup, would be subject to the terms and conditions of the

Agreement.

The Agreement further provided that in the event of the sale

of all or any part of the stock of the corporations, or in the

event of a dissolution of either corporation, Cyril would create

a trust of the proceeds received, under the terms of which the

income of said trust would belong to Cyril for his life, and the

principal would be distributed upon his death to his three

children. The terms of the Agreement were subject to

modification by the unanimous consent of Cyril on the one hand

and of Donald, Ellen, and Jerry (after he has reached his

majority) on the other hand. 

By letter dated October 31, 1951, and signed by Joseph,

Cyril, Donald, and Ellen, the Bank was instructed to hold certain

stock certificates "solely for safekeeping" in accordance with

the Agreement between Joseph and Cyril. By the terms of the

letter, the Bank was given no responsibility with respect to the

performance of the Agreement, but the stock certificates were

subject to redelivery to Cyril upon authorization executed by

Cyril and Joseph, or by Cyril, Donald, and Ellen (after Joseph's

death and if Donald were available). A schedule attached to the

letter identified the certificates and the number of JM shares
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5There is some discrepancy between the number of shares

delivered to the Bank and the number of shares owned by Joseph

and Cyril as of Oct. 31, 1951. The schedule indicates that

51,648 shares of JM common stock were delivered by Joseph, but

Joseph owned only 50,648 shares of JM common stock as of Oct. 31,

1951. Similarly, the schedule reflects that 11,135 shares of JM

preferred stock were delivered to the Bank by Cyril, but Cyril

owned only 11,035 shares of JM preferred stock as of Oct. 31,

1951. 

 

6The share certificates that were delivered to Mr.

Schmulowitz in 1945 were not delivered to the Bank pursuant to

the Agreement between Joseph and Cyril in 1951. 

delivered.5 There is no evidence that Joseph and Cyril delivered

any Specialty stock to the Bank. 

On May 15, 1952, Joseph and Cyril entered into a

supplementary agreement. The supplementary agreement referred to

the option that Joseph had granted to Cyril and Anna on October

31, 1945, to purchase 18,158 shares of Joseph's common stock in

JM at $1 per share. Pursuant to the terms of the option, the

certificates representing the 18,158 shares had been deposited

with Joseph's attorney, Nat Schmulowitz.6 The supplementary

agreement between Joseph and Cyril provided that the 1945 option

would remain in effect, except that if Cyril exercised the

option, the shares delivered to Cyril upon such exercise were to

be pledged to the Bank and subject to the terms of the 1951

Agreement. In the event that Cyril did not exercise the option,

then Mr. Schmulowitz would deliver the shares in his possession

to the Bank to be held subject to the 1951 Agreement. 

On November 16, 1952, Joseph and Cyril entered into a second
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7It appears that this provision of the second supplemental

agreement was drafted in error. Although Cyril promised to vote

his shares so that his children would constitute two of the five

directors, JM had seven and Specialty had three authorized

directors as of November 1952. 

supplementary agreement. This second supplementary agreement set

forth the parties' understanding that nothing in the 1951

Agreement prohibited Cyril from selling all his stock of, or from

dissolving, JM or Specialty in the event that either corporation

received a fair purchase offer. In such event, Cyril agreed to

create a trust of the stock proceeds under the terms of which the

income would belong to Cyril for his life, and the principal

would be distributed to his children upon his death. Cyril also

agreed under this second supplementary agreement to vote his

shares (as an individual and as trustee for Joseph's testamentary

trust) so that his children would constitute two of the five

members of the board of directors of each corporation.7

Performance of October 31, 1951, Agreement

Joseph died on April 29, 1953. Cyril was the executor of

Joseph's estate. Joseph's Last Will and Testament bequeathed all

his stock in JM and Specialty to Cyril in trust and provided that

Cyril was to divide the stock into four separate trusts. Onehalf of the stock was to be placed in the Cyril Magnin Trust for

the benefit of Cyril. One-sixth of the stock was to be placed in

each of the three remaining trusts, one trust for the benefit of
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each of Joseph's three grandchildren. As the trustee of the four

trusts, Cyril had the power to vote the stock. These provisions

were as promised by Joseph to Cyril under the October 31, 1951,

agreement. Additionally, Cyril received a life interest in the

income from the Cyril Magnin Trust. 

Joseph's estate tax return included the value of JM and

Specialty stock as follows: 

 Stock Per-Share Value

 18,158 shares JM subject to option 

 at $1 per share $1.00

 33,490 shares JM, common 1.50

 21,464 shares JM, preferred .90

 112-1/2 shares Specialty, common 150.00

 25,000 shares Specialty, preferred .90

The IRS estate tax examiner proposed certain adjustments to

Joseph's taxable estate, including an increase in the per-share

value of JM common and preferred stock to $2.25 and $1,

respectively. The estate agreed to these changes. 

On February 4, 1955, Cyril executed a Last Will and

Testament in which he bequeathed all JM and Specialty stock in

trust for the benefit of each of his three children. The will

expressly acknowledged that such provision was in performance of

the October 31, 1951, agreement between Cyril and Joseph. 

Subsequently, on November 30, 1965, Cyril executed a new will

superseding his 1955 will, which also provided for the creation

of a trust of JM and Specialty stock for the benefit of his
- 15 -

 

8We note that the actual language in both Cyril's 1955 and

1965 wills referred to an Oct. 5, 1951, agreement. However,

respondent conceded, and we agree, that Cyril meant to refer to

the Oct. 31, 1951, agreement. 

children in performance of his October 31, 1951,8 agreement with

Joseph.

On May 25, 1971, Cyril created three trusts, one for each of

his three children. He transferred, inter alia, the proceeds of

the JM stock that had been sold in a 1969 buyout of all JM stock

by Amfac, Inc. Under the terms of each trust, Cyril retained an

income interest for his life, and upon Cyril's death, the trust

was to terminate, and the principal and undistributed income were

to be distributed to the beneficiary. 

For the calendar quarter ending June 30, 1971, Cyril filed a

gift tax return. In an attachment entitled "Statement Describing

Incomplete Gifts", Cyril reported the creation of the three

trusts, stating that they were created "pursuant to pre-existing

agreements between * * * [himself] and his father" and explaining

that the transfers were not completed gifts. The IRS accepted

the gift tax return as filed. 

Facts Related to Value of JM and Specialty

JM originally operated one location in downtown San

Francisco. In 1928, a second store was opened in Palo Alto,

California, and three other stores were opened between 1943 and

1950--one in San Mateo and two in Sacramento, California. JM did
- 16 -

not begin to expand considerably until the mid-1950's, eventually

operating 32 stores by the end of 1969.

In January 1940, Cyril, Joseph, and Mr. Blum formed

Specialty for the purpose of operating a branch store in Reno,

Nevada. At that time, JM lacked the capital to open a new store. 

Specialty opened a second store in Oakland, California, in 1948,

and a third store in Lake Tahoe, Nevada, in 1950. All

Specialty's stores were operated under the JM name and by JM

management, and they had merchandise and customers similar

to JM's.

 Whenever possible, JM and Specialty elected to lease rather

than own their store locations. The companies did not have a

great deal of available capital, and leasing store locations

permitted them to expand. 

Relevant financial data from the financial statements of JM

for the fiscal years ending January 31, 1949 through 1952, are as

follows: 

 Fiscal Year Ending January 31 

 (In Thousands)

 1949 1950 1951 1952

Assets $1,778 $1,886 $1,983 $2,161

Earned surplus 645 749 757 782 

Sales 4,994 4,856 5,239 5,591

Net income 117 58 41 38

Similarly, relevant data from the financial statements of

Specialty for the fiscal years ending January 31, 1949 through
- 17 -

 

9The executor, however, may elect to value a decedent's

property as of an alternate valuation date; i.e., 6 months after

death. Sec. 2032.

1952, are as follows: 

 Fiscal Year Ending January 31 

 (In Thousands)

 1949 1950 1951 1952

Assets $452 $405 $385 $432

Earned surplus 120 103 127 148 

Sales 742 644 593 677

Net income 35 6 24 21

OPINION

The Internal Revenue Code imposes a Federal estate tax on

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

or resident of the United States. Secs. 2001 and 2002. The

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

the extent of the decedent's interest therein on the date of

death.9 Sec. 2033.

Section 2036(a) provides that a decedent's gross estate also

includes the value of all property interests transferred by a

decedent during his life in which the decedent has retained for

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

property. However, section 2036(a) does not apply when the

property interest of the decedent was transferred pursuant to a

"bona fide sale for an adequate and full consideration in money
- 18 -

 

10Sec. 2036(a) provides:

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 * * *

(1) the possession or enjoyment of, or the

right to the income from, the property * * *

or money's worth". Sec. 2036(a).10

The parties do not dispute that the 1971 transfer in trust

of the proceeds of Cyril's shares in JM was one in which he

retained a life interest within the meaning of section 2036(a). 

Instead, petitioner contends that the transfer of the remainder

interest to Cyril's children was made pursuant to the terms of

the 1951 Agreement in exchange for Cyril's receipt of lifetime

voting control of JM and a 50-percent lifetime income interest in

Joseph's shares. Thus, petitioner argues that in 1951 Cyril

received adequate and full consideration in money or money's

worth when he obligated himself to transfer the remainder

interest in his JM shares pursuant to the 1951 Agreement.

We must determine whether the agreement entered into between

Cyril and Joseph in 1951 constituted a bona fide sale supported

by adequate and full consideration in money or money's worth. As

a preliminary matter, however, we must determine which party

bears the burden of proof on this issue.

Generally, the burden of proof is on the taxpayer. Rule
- 19 -

142(a); Welch v. Helvering, 290 U.S. 111 (1933). The

Commissioner bears the burden of proof, however, with respect to

"any new matter, increases in deficiency, and affirmative

defenses, pleaded in the answer". Rule 142(a). An assertion in

an amended answer is treated as a new matter when it either

alters the original deficiency or requires the presentation of

different evidence. Wayne Bolt & Nut Co. v. Commissioner, 93

T.C. 500, 507 (1989); Achiro v. Commissioner, 77 T.C. 881, 890

(1981). The assertion of a new theory that merely clarifies or

develops the original determination is not a new matter in

respect of which the Commissioner bears the burden of proof. 

Wayne Bolt & Nut Co. v. Commissioner, supra; Achiro v.

Commissioner, supra; Estate of Jayne v. Commissioner, 61 T.C.

744, 748-749 (1974).

In her notice of deficiency, respondent determined a

deficiency in petitioner's estate tax of $1,921,528. The

deficiency was based in large part on respondent's determination

that the value of the three trusts created in 1971, in which

decedent retained a life interest, was includable in the gross

estate. In the notice, respondent determined that the value

includable in the gross estate was $3,789,849, which was

calculated by taking the value of the three trusts at the

appropriate valuation date ($3,833,727), less the value of

consideration received by decedent in connection with the 1951

Agreement ($43,878). As more fully discussed below, section 2043
- 20 -

reduces the amount that is includable under section 2036 by the

value of any consideration received by the decedent.

On November 22, 1993, respondent filed a Motion for Leave to

File an Amended Answer, which this Court granted. In her amended

answer, respondent asserted a deficiency in petitioner's estate

tax of $2,079,213 based in part on respondent's revised

determination that decedent received no consideration for the

transfer and that the entire value of the three trusts was

includable in the gross estate.

Respondent's assertion in the amended answer that there was

no consideration clearly increased the original deficiency. 

Accordingly, we find that the issues of whether there was any

consideration and whether the consideration was less than $43,878

are new matters, in respect of which the burden of proof falls on

respondent. However, the burden of proof with respect to the

other issues remains on petitioner. Rule 142(a).

The requirement that there must be "adequate and full

consideration" in order to trigger the exception in section 2036

is to prevent the depletion of the decedent's estate. Estate of

Frothingham v. Commissioner, 60 T.C. 211, 215-216 (1973); see

also Commissioner v. Wemyss, 324 U.S. 303, 307 (1945);

Commissioner v. Bristol, 121 F.2d 129, 134 (1st Cir. 1941), revg.

42 B.T.A. 263 (1940). The type of consideration contemplated by

this exception is not the same as common law contractual

consideration. Commissioner v. Wemyss, supra at 306; Estate of
- 21 -

Gregory v. Commissioner, 39 T.C. 1012, 1016 (1963). Rather, the

exception contemplates

the kind of consideration which in an arm's length

business transaction provides the transferor of

property with the full value thereof, in exchange; and

that if the consideration is not paid in money,

property, or services, but is represented by some

benefit, then the benefit must be of the equivalent

money value in order to constitute the required

"adequate and full consideration." * * * [Estate of

Goetchius v. Commissioner, 17 T.C. 495, 503 (1951).]

We note that transactions among family members are subject to

particular scrutiny to determine whether they represent a true

arm's-length bargain or merely a cooperative attempt to make a

testamentary disposition. Estate of Huntington v. Commissioner,

16 F.3d 462, 466-467 (1st Cir. 1994), affg. 100 T.C. 313 (1993);

Bank of New York v. United States, 526 F.2d 1012, 1016-1017 (3d

Cir. 1975); Estate of Morse v. Commissioner, 69 T.C. 408, 418

(1977), affd. 625 F.2d 133 (6th Cir. 1980). This is not to say,

however, that transactions between family members can never be

for consideration in money or money's worth. Estate of

Huntington v. Commissioner, supra; Leopold v. United States, 510

F.2d 617, 623 (9th Cir. 1975); Estate of Morse v. Commissioner,

supra at 419. "Even a family agreement, although achieved

without apparent bitterness, has been regarded as bargained for

when members of the family had interests contrary to those of

other members of the family." Bank of New York v. United States,

supra at 1017 (fn. ref. omitted).
- 22 -

In the present case, although Cyril and Joseph were father

and son, the circumstances surrounding the 1951 Agreement

indicate that the parties had divergent interests. Cyril and

Joseph were concerned with the future of the family business. 

Cyril wanted to gain control of JM following Joseph's death. 

Cyril feared that if he had to share control with his children,

he might be fired by them. In exchange for obtaining lifetime

control, Cyril agreed to will his own stock in trust for the

benefit of his children. Under the terms of the 1951 Agreement,

Cyril not only relinquished his freedom to transfer his stock to

whomever he wished but also tied up the proceeds of the stock in

the event he sold it. Joseph, on the other hand, wanted to

ensure that Cyril's stock would not end up in the hands of one of

the women Cyril was dating. In exchange for Cyril's promise not

to give his stock to anyone but his children, Joseph promised not

to revoke the provision in his will bequeathing his stock to

Cyril as sole trustee with voting rights (and thus control) for

Cyril's life. Because a will is an ambulatory instrument that

has no effect until the death of the testator, without the 1951

Agreement, Joseph could have revoked or revised his will any time

prior to his death. Dodd v. United States, 345 F.2d 715, 719 (3d

Cir. 1965); Wasserman v. Commissioner, 24 T.C. 1141, 1144 (1955).

Cyril and Joseph put their promises in writing, and the

Agreement represented a give-and-take on each side. Both

parties, in fact, performed as promised under the Agreement. 
- 23 -

 

11In its brief, petitioner assigns a value of $83,600 to

Cyril's entire stock interest ($42,000 of which is allocated to

Cyril's remainder interest) and assigns a value of only $58,146

to the interest in Joseph's stock received by Cyril. 

Petitioner's values are based on the opinion of its expert

witness, using a valuation date of Oct. 31, 1951. Respondent's

expert assigned a value of $244,000 to Cyril's stock as of that

date.

Based on this record, we find that there was an element of

bargained-for consideration present.

The fact that there was some bargained-for consideration

does not mean that there was adequate and full consideration

within the meaning of section 2036(a). In order to constitute

adequate and full consideration, the value of what the decedent

received must be measured against the total value of property

that the decedent transferred. United States v. Past, 347 F.2d

7, 12 (9th Cir. 1965); Estate of D'Ambrosio v. Commissioner, 105

T.C. 252 (1995).

Petitioner does not contest that the value of the stock

Cyril agreed to transfer pursuant to the 1951 Agreement exceeded

the value of the interest in Joseph's stock that Cyril

received.11 Rather, petitioner contends that because the value

of what Cyril received exceeded the value of the remainder

interest that Cyril transferred to his children, he received

adequate and full consideration. 

We recently addressed this issue in Estate of D'Ambrosio v.

Commissioner, supra. In that case, we held that when a decedent

receives consideration for making a transfer of property to a
- 24 -

trust in which the decedent retains only a life interest, the

adequacy of the consideration must be determined by comparing the

value of the consideration received with the total value of the

property the decedent transferred to the trust rather than with

just the remainder interest. Id. at 259-260. Indeed,

petitioner's argument is no different from contending that the

value of the retained life estate should be regarded as part of

the consideration received for the transfer, an argument this

Court has specifically rejected. Estate of Glen v. Commissioner,

45 T.C. 323, 343 (1966).

The same issue was presented in United States v. Past,

supra, where the decedent and her husband transferred their

community property to a trust in which the decedent received an

income interest for life. The transfer was pursuant to a divorce

settlement. Citing this Court's opinion in Estate of Gregory v.

Commissioner, supra, the Court of Appeals for the Ninth Circuit

rejected the argument that the decedent's transfer to the trust

was excepted from section 2036(a) as a bona fide sale for

adequate and full consideration. The court held that the

consideration received by the decedent had to be measured against

the total value of the property that she contributed to the

trust, rather than the value of the remainder interest in the

property that she contributed. Given that the decedent

transferred $243,989 in property to the trust in return for a

life estate worth approximately $143,346, the Court of Appeals
- 25 -

for the Ninth Circuit held that the decedent did not receive

adequate and full consideration under section 2036(a). United

States v. Past, supra at 12-14.

Whether the consideration received by Cyril under the 1951

Agreement was "adequate and full" within the meaning of section

2036(a) must be determined by comparing the value of what Cyril

received on October 31, 1951, with the October 31, 1951, value of

the stock that Cyril owned and agreed to transfer to his children

at his death; i.e., the value that otherwise would have been

included in his gross estate by virtue of the retained life

estate. Id. at 12; United States v. Allen, 293 F.2d 916, 918

(10th Cir. 1961); Estate of D'Ambrosio v. Commissioner, supra at

260; Estate of Gregory v. Commissioner, 39 T.C. at 1016; Gradow

v. United States, 11 Cl. Ct. 808 (1987), affd. 897 F.2d 516 (Fed.

Cir. 1990). Such measurement is consistent with the purpose

behind the "adequate and full consideration" exception--to

prevent the depletion of the decedent's estate. Commissioner v.

Wemyss, 324 U.S. at 307; Commissioner v. Bristol, 121 F.2d at

134; Estate of Frothingham v. Commissioner, 60 T.C. at 215-216. 

Accordingly, we hold that the consideration received by Cyril

under the 1951 Agreement was not "adequate and full" within the

meaning of section 2036(a), and, therefore, the value of the

trusts that Cyril created in 1971 must be included in his gross
- 26 -

 

12Even if we were to hold that sec. 2036(a) requires receipt

of adequate and full consideration for only the remainder

interest, we would find that petitioner has not met its burden of

proving that the value of the interest in Joseph's stock that

Cyril received equaled the value of the remainder interest

transferred. We conclude, infra, that the value of the interest

received by Cyril is $43,878. The value of the remainder

interest transferred by Cyril is $42,000 according to petitioner

and $122,997.64 under respondent's calculations. These values

were determined after the parties made certain posttrial

adjustments to their expert reports. Although we need not

determine the precise value of the remainder interest transferred

by Cyril, we conclude that it was more than $43,878. This

conclusion is based on the evidence, including the expert

witnesses' opinions and the values placed on JM and Specialty

stock in gift and estate tax returns filed by Cyril and Joseph

between 1948 and 1953.

estate.12

Where a transfer of property fails to meet the requirements

of this exception to section 2036(a) because it was for

insufficient consideration, section 2043(a) provides some relief

from potential double taxation. Estate of Frothingham v.

Commissioner, supra at 216. Section 2043(a) provides in

pertinent part:

(a) In General.--If any one of the transfers * * *

described in sections 2035 to 2038, inclusive, and

section 2041 is made * * * for a consideration in money

or money's worth, but is not a bona fide sale for an

adequate and full consideration in money or money's

worth, there shall be included in the gross estate only

the excess of the fair market value at the time of

death of the property otherwise to be included on

account of such transaction, over the value of the

consideration received therefor by the decedent.

Thus, under section 2043(a), the consideration received is to be

valued at the time of receipt by the decedent (i.e., at the time
- 27 -

of the 1951 Agreement between Cyril and Joseph) and then credited

against the date-of-death value (or, as in this case, the value

as of the alternate valuation date) of the property subject to

section 2036(a). The net amount is to be included in the gross

estate. United States v. Righter, 400 F.2d 344, 348 (8th Cir.

1968); United States v. Past, 347 F.2d at 14; Estate of Vardell

v. Commissioner, 307 F.2d 688, 693 (5th Cir. 1962), revg. 35 T.C.

50 (1960); Estate of Davis v. Commissioner, 51 T.C. 269, 280-281

(1968), revd. and remanded 440 F.2d 896 (3d Cir. 1971); Estate of

Gregory v. Commissioner, 39 T.C. at 1021.

Petitioner argues that in valuing the consideration received

by Cyril, this Court should apply a proportional rule and reduce

the includable value of the trusts by the proportion of the value

of the corpus at death that is attributable to the consideration

received by Cyril under the 1951 Agreement. However, it is well

settled that the consideration received is to be valued at the

time of the transfer (i.e., at the time of the 1951 Agreement)

and then credited against the date-of-death value of the property

subject to section 2036(a). United States v. Righter, supra at

348; United States v. Past, supra at 14; Estate of Vardell v.

Commissioner, supra at 693; Estate of Davis v. Commissioner,

supra at 280-281; Estate of Gregory v. Commissioner, supra at

1021.

The parties do not dispute that Cyril received a life income

interest in 50 percent of Joseph's JM and Specialty stock, as
- 28 -

 

13The difference between the values assigned by each party

to the consideration received, $27,394, is not significant when

one considers the value of the trusts includable in the gross

estate, which is equal to $3,833,727.

well as the voting rights (as trustee) with respect to all of

Joseph's stock. The parties do, however, dispute the value of

the interests that Cyril received. In her notice of deficiency,

respondent permitted an offset for the value of consideration

received by Cyril in the amount of $43,878. However, as

previously mentioned, respondent amended her answer to disallow

any such offset. On brief, respondent argues that in the event

that this Court finds that there was consideration, the amount of

the offset pursuant to section 2043(a) is limited to $30,752,

based on the report and testimony of her expert appraiser,

Stephen A. Stewart. Petitioner contends that the value of what

Cyril received on October 31, 1951, is $58,146, based on the

report and testimony of its expert appraiser, Bryan H.

Browning.13 

Both experts determined the overall value of JM and

Specialty using a combination of a discounted future cash-flow

analysis and a market comparable analysis. The experts differ in

their application of premiums or discounts in arriving at the

value of the consideration received by Cyril. Mr. Browning,

petitioner's expert, applied a control premium of 40 percent to

the proportional equity value of JM, because after execution of

the 1951 Agreement, Cyril would hold 62 percent of the total
- 29 -

 

14Mr. Stewart applied the minority discount only under the

discounted future cash-flow approach, because, in his opinion,

the market comparison approach already produces a per-share value

for a minority interest.

 

15While expert opinions can assist the Court in evaluating a

claim, we are not bound by the opinion of any expert witness and

may reach a decision based on our own analysis of all the

evidence in the record. Helvering v. National Grocery Co., 304

U.S. 282, 295 (1938); Silverman v. Commissioner, 538 F.2d 927,

933 (2d Cir. 1976), affg. T.C. Memo. 1974-285; Estate of Newhouse

v. Commissioner, 94 T.C. 193, 217 (1990).

voting rights of JM. No similar premium was applied to the

Specialty stock. Mr. Stewart, on the other hand, applied a 35-

percent discount for lack of marketability and a 20-percent

minority discount,14 because the interest that Joseph transferred

to Cyril amounted to less than 50 percent of the stock in each

company.15 

The term "value" means fair market value, which is "the

price at which the property would change hands between a willing

buyer and a willing seller, neither being under any compulsion to

buy or to sell and both having reasonable knowledge of relevant

facts." Sec. 20.2031-1(b), Estate Tax Regs. The standard is

objective, using a purely hypothetical willing buyer and seller. 

Propstra v. United States, 680 F.2d 1248, 1251-1252 (9th Cir.

1982); Estate of Newhouse v. Commissioner, 94 T.C. 193, 218

(1990); Estate of Mueller v. Commissioner, T.C. Memo. 1992-284. 

However, "the hypothetical sale should not be constructed in a

vacuum isolated from the actual facts that affect the value of
- 30 -

the stock". Estate of Andrews v. Commissioner, 79 T.C. 938, 956

(1982).

Petitioner must prove that respondent's determination of

value set forth in her notice of deficiency is incorrect. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Estate of

Gilford v. Commissioner, 88 T.C. 38, 51 (1987). Respondent bears

the burden of proving the increases in the deficiency asserted in

her amended answer. Rule 142(a); Estate of Bowers v.

Commissioner, 94 T.C. 582, 595 (1990). Valuation is a question

of fact, and the trier of fact must weigh all relevant evidence

to draw the appropriate inferences. Hamm v. Commissioner, 325

F.2d 934, 938 (8th Cir. 1963), affg. T.C. Memo. 1961-347; Estate

of Newhouse v. Commissioner, supra at 217. 

After considering the reports and testimony of both experts

and all the other evidence in the record, we think that neither

party has shown that the value of the interest received by Cyril

should be greater or less than the $43,878 determined by

respondent in her notice of deficiency. Accordingly, we hold

that petitioner is entitled to reduce the includable value of the

trusts by $43,878 pursuant to section 2043(a). 

The final issue for decision concerns the fair market value

of a retail shoe store located in Louisville, Kentucky, as of

December 8, 1988, the alternate valuation date. Petitioner

valued the property at $150,980 on its estate tax return. In the

notice of deficiency, respondent valued the property at
- 31 -

 

16Respondent's valuation in the notice of deficiency of

$228,000 was based upon the income stream provided for in the

lease capitalized at a rate of 10 percent. 

$228,000.16 At trial and on brief, petitioner argued that the

value of the property was $170,000. The fair market value of

property is a question of fact. The value determination in the

notice of deficiency is presumed correct, and petitioner bears

the burden of proving otherwise. Rule 142(a); Welch v.

Helvering, supra. 

The subject property, a retail shoe store, is located in an

older, inner-city neighborhood, west of the downtown area of

Louisville. The area is depressed, and property values have

steadily declined in the area since the 1960's. The site is

zoned for commercial use. The property was purchased by Cyril

for $207,721, and the deed was recorded in July 1983. The

property was subject to a lease, which commenced on April 26,

1983, and was for an initial term of 20 years. At the end of the

initial lease period, the tenant had the right to extend the term

for two additional consecutive periods of 5 years each. The

terms of the lease provided for minimum annual payments of

$22,514, plus 5 percent of the gross sales less the minimum rent. 

The tenant was responsible for all expenses directly related to

the property, including taxes, insurance, and interior and

exterior maintenance. 

Petitioner introduced a report and testimony of its expert
- 32 -

appraiser, J. Michael Jones. Mr. Jones valued the property as of

June 8, 1988. Although petitioner elected to use the alternate

valuation date of December 8, 1988, Mr. Jones testified that he

did not think his appraisal would have changed had it been made

as of 6 months later. Mr. Jones used the cost approach, the

sales comparison approach, and the income capitalization approach

to value the property, giving the most weight to the latter

method. Pursuant to the income capitalization approach, Mr.

Jones began with the income stream provided for in the lease and

subtracted out a relatively small allowance for vacancy and

collection loss (due to the long-term lease), as well as an

amount for management expenses. Mr. Jones determined a

capitalization rate of 12.2 percent using the mortgage-equity

technique, and he applied this rate to the operating income

stream.

We find petitioner's expert to be a credible witness. He

utilized acceptable appraisal methods, and his underlying

assumptions were reasonable. We, therefore, find that petitioner

has met its burden of proving that the value of the property was

$170,000.

Decision will be entered

under Rule 155.