internal_revenue_service number release date index number ------------------------------------------------------------ ---------------------- -------------------------------------- -------------------------- ---------------------------------- department of the treasury washington dc person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 - plr-147520-04 date date ---------------------------------------------------------------------------- -------------------------------------------------------------- ---------------------------------------------------------- ------------------ --------------------- ---------------------- trust -------------------------------------------- trust a_trust b a ---------------------------------------------- b ---------------------------------------------- c d e state court d1 d2 ------------------ ------------------ -------------- -------------------------- ------------------------------- ----------------------------------- plr-147520-04 dear -------------- correspondence submitted on behalf of trust requesting rulings concerning the proposed division of trust into two separate trusts trust a and trust b facts this letter responds to a letter dated date and subsequent a and b who are husband and wife are the grantors donors and unitrust beneficiaries of trust trust was created pursuant to a_trust agreement dated d1 the trustees of trust are a b c d and e trust operates as a charitable_remainder_unitrust crut under sec_664 of the internal_revenue_code article i of the trust agreement provides that trust is intended to provide the donors during their joint lifetimes with an annual income_interest equal to ten percent of the net fair_market_value of the trust assets for such taxable_year as determined on the first business_day of january of each year this amount is to be paid in equal quarterly installments in equal shares at the end of each calendar_quarter to the donors for the remainder of their lifetimes the payments will be paid from trust’s income unless such income in a given year is insufficient in which case the payments will be made from principal any income in excess of the annual payment is to be added to the trust’s principal upon the death of a donor the trustees will thereafter pay and distribute the unitrust_amount to the surviving donor in each taxable_year of the trust article ii provides that upon the death of the surviving donor all remaining assets of trust shall be paid and distributed to any one or more charitable organizations selected by the trustees each of which is at the time of such payment and distribution an organization described in sec_170 sec_170 sec_501 sec_2055 and sec_2522 in such amounts and proportions as the trustees shall determine in the sole discretion of the trustees notwithstanding this provision the donors or the surviving donor reserve the power exercisable by written instrument to select such charitable_organization or organizations which shall be the recipients of any distribution under article ii in such amounts and in such proportions as the donors or surviving donor shall determine provided that such organizations must be described in the above code sections article vii provides that no estate inheritance or other death taxes with respect to trust shall be allocated to or recoverable from trust and the donors agree not to make any inconsistent directions in their wills article iv provides that trust is irrevocable article viii provides that trust is subject_to state law plr-147520-04 for a variety of reasons a and b have proposed a division of trust into two separate cruts trust a and trust b one for each donor trust’s assets will be divided equally and on a pro_rata basis betweens trust a and trust b_trust a and trust b will be identical to trust in all terms other than a will be the only non-charitable beneficiary of trust a and b will be the only non-charitable beneficiary of trust b each spouse retains a survivorship interest in the other’s unitrust’s annual payout the surviving_spouse cannot appoint or change the charitable_remainder beneficiaries of the other spouse’s new trust this designation will have been determined by the deceased donor or in the absence of such donor designation by the trustees for his or her new trust trust trust a and trust b will have the same trustees except that a and e will not be trustees of trust b and b and d will not be trustees of trust a and trust a and trust b will incorporate certain additional mandated administrative provisions contained in the income_tax regulations issued after creation of trust that must be included so that trust a and trust b will qualify as charitable_remainder trusts on d2 court of state tentatively approved the division of trust into trust a and trust b as described above the final dissolution of trust and its division into trust a and trust b is contingent upon receiving a favorable ruling letter from the service law and analysis ruling exempt from federal_income_tax sec_664 provides generally that a charitable_remainder_unitrust shall be sec_664 provides that a charitable_remainder_unitrust is a_trust a from which a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in ' c and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in ' d a and other than qualified gratuitous transfers described in ' d c may be paid to or for_the_use_of any person other than an organization described in ' c c following the termination of the payments described in ' d a the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in ' c or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in ' g all or part of such securities are to be transferred to an employee_stock_ownership_plan as defined in ' e in a qualified gratuitous plr-147520-04 transfer as defined by ' g and d with respect to each contribution of property to the trust the value determined under ' of such remainder_interest in such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust ruling sec_2 sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the entire amount of gain_or_loss must be recognized except as otherwise provided sec_1_1001-1 provides that except as otherwise provided in subtitle a of the code the gain_or_loss realized from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties exchanged are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite sec_1041 provides that no gain_or_loss will be recognized on a transfer of property from an individual to or in trust for the benefit of a spouse or former spouse if the transfer is incident to the divorce under sec_1041 for purposes of subtitle a the transferee is treated as having acquired the property by gift from the transferor with a carryover_basis from the transferor in the present case prior to the division of trust the two spouses together received annual income from trust equal to a percent unitrust_amount following the division trust will be partitioned and divided into two equal trusts one for a and one for b each new trust will have percent of the assets of trust a and b will each receive income equal to a percent unitrust_amount determined from only the percent of the assets deposited into his or her respective new trust consequently a in essence is transferring one-half of a’s former interest in trust to b and b is transferring one-half of b’s former interest in trust to a even if this change in their respective rights to the full plr-147520-04 amount of the unitrust income from trust and the other changes in rights listed in the facts eg each spouse is giving up his or her right to name the ultimate charitable_beneficiary of the other spouse’s new trust were to constitute a material_change in legal entitlements for purposes of cottage savings and sec_1001 we conclude that sec_1041 applies to the transfer therefore for purposes of the income_tax no gain_or_loss will be recognized by a on the transfer of one-half of a’s unitrust_interest in trust to b and b receives that interest as a gift with a carryover_basis from a under sec_1041 similarly no gain_or_loss will be recognized by b on the transfer of one-half of b’s unitrust_interest in trust to a and a receives that interest as a gift with a carryover_basis from b under to sec_1041 ruling through sec_507 provides that except as provided in sec_507 a private_foundation may terminate its private_foundation_status only under the specific rules set forth in sec_507 sec_507 provides that in the case of the transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_507 imposes an excise_tax on any private_foundation which voluntarily terminates its private_foundation_status under sec_507 sec_1_507-3 provides that unless a private_foundation voluntarily gives notice pursuant to sec_507 a transfer of assets described in sec_507 will not constitute a termination of the tranferor's private_foundation_status under sec_507 sec_1_507-3 provides in pertinent part that as used in sec_507 the term other adjustment organization or reorganization includes any partial_liquidation or any other significant disposition of assets to one or more private_foundations other than transfers for full and adequate_consideration or distributions out of current income sec_1_507-3 provides that the term significant disposition of assets means the transfer of or more of the net assets of the foundation at the beginning of the year which disposition may be made in a single year or in a series of related dispositions over more than one year sec_1_507-3 provides in general that in the event of a transfer of assets described in sec_507 any person who is a substantial_contributor within the meaning of sec_507 with respect the transferor foundation shall be treated as a substantial_contributor with respect to the transferee foundation plr-147520-04 sec_1_507-1 provides that if a private_foundation transfers all or part of its asset to one or more other private_foundations pursuant to a transfer described in sec_507 such transferor foundation will not have terminated its private_foundation_status under sec_507 sec_1_507-3 provides that if a private_foundation transfers all of its net assets to one or more private_foundations which are effectively controlled directly or indirectly by the same person or persons which effectively controlled the transferor private_foundation such a transferee private_foundation shall be treated as if it were the transferor private_foundation for purposes of sec_4940 through and through sec_1_507-3 provides in pertinent part that a transfer of assets pursuant to any liquidations merger redemption recapitalization or other adjustment organization or reorganization to an organization that is described in sec_4947 is a not a taxable_expenditure under sec_4945 sec_4941 imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4945 imposes an excise_tax on a private foundation's making of any taxable_expenditure under sec_4945 sec_53_4945-6 of the foundation and similar excise_taxes regulations provides that expenditures_for unreasonable administrative expenses including compensation consultant fees and other fees for services rendered will ordinarily be taxable_expenditures under sec_4945 unless the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence sec_4946 provides the term disqualified_person with respect to a private_foundation includes a substantial_contributor to the foundation including the creator of a_trust and a foundation_manager including a trustee sec_53_4947-1 provides that a split-interest trust is subject_to the provisions of sec_507 except as provided in sec_53_4947-1 e to the extent applicable to a split-interest trust except as provided in sec_4947 except as provided in sec_4947 and in the same manner as if such trust were a private_foundation sec_53_4947-1 provides in general that under sec_4947 sec_4941 does not apply to any amounts payable under the terms of a split interest trust to plr-147520-04 income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 with respect to the income_interest of any such beneficiary as a split-interest trust trust is treated as if it were a private_foundation thus except as provided in sec_53_4947-1 it is subject_to sec_507 sec_4941 and sec_4945 the proposed transfers of all of trust’s assets to trust a and trust b will constitute a significant dispositions of trust’s assets the proposed transfers will not be for full and adequate_consideration and will not be distributions out of current income thus the proposed transfers will be sec_507 transfers a transfer of assets described in sec_507 does not constitute a termination of the transferor’s private_foundation_status under sec_507 unless the transferor voluntarily gives notice pursuant to sec_507 since trust has not given notice of its intent to terminate it will retain its private_foundation_status and the tax imposed by sec_507 will not apply since trust a and trust b will be treated as if they were trust for purposes of sec_4941 transfers between the trust and trust a and trust b will not be acts of self- dealing assuming no deduction was allowed payments to the unitrust beneficiaries named will not be acts of self-dealing under sec_4941 see sec_53_4947-1 a transfer of assets pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization to an organization that is described in sec_4947 is not a taxable_expenditure under sec_4945 accordingly trust’s proposed transfer of all of its assets to trust a and trust b will not be a taxable_expenditure sec_53_4945-6 provides that expenditures_for unreasonable administrative expenses including compensation consultant fees and other fees for services rendered will ordinarily be taxable_expenditures under sec_4945 unless the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence trust represents that the fees related to the proposed transfer of assets will be reasonable and will be consistent with ordinary business care and prudence thus the payment of the fees will not be a taxable_expenditure conclusions plr-147520-04 based solely on the representations made and the information submitted we have reached the following conclusions the division of trust into trust a and trust b will not cause either trust trust a or trust b to fail to qualify as charitable_remainder trusts under ' the partition of trust into trust a and trust b will not cause gain_or_loss to be recognized by a or b under sec_1001 the proposed transfers of assets will not terminate the trust’s status as a private_foundation or result in the imposition of taxes under sec_507 the proposed transfers of the trust’s assets will not result in self-dealing under sec_4941 the proposed transfers of the trust’s assets will not be a taxable_expenditure under sec_4945 if reasonable in amount payment of the legal and other expenditures incurred to effect the proposed transfer of the trust’s assets will not constitute a taxable_expenditure under sec_4945 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts of the transaction described above under any other provision of the code in particular sec_61 we express no opinion on whether trust otherwise qualifies as a charitable_remainder_trust under sec_664 or whether trust a and trust b each will otherwise qualify as charitable_remainder trusts under sec_664 of the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer who requested it sec_6110 plr-147520-04 being sent to trust’s authorized representative pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely beverly katz senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for ' purposes


internal_revenue_service number release date index number department of the treasury washington dc third party communication none date of communication not applicable_person to contact id no telephone number refer reply to cc tege eb qp1 plr-t-101788-15 date date taxpayer plan union qualifying participants dear this is in response to your request dated date supplemented by correspondence dated date and date in which you request a ruling under sec_411 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested pursuant to then-existing federal_law taxpayer taxpayer sponsors a single-employer defined benefit pension_plan for its employees who are members of union the plan states that a participant’s normal_retirement_date is the first day of the month coincident with or next following the participant’s attainment of his or her normal_retirement_age imposed a mandatory_retirement_age for pilots who participate in the plan of age which the plan reflects as its normal_retirement_age the plan contains a provision for the permanent withholding of benefit payments that would otherwise be payable to participants who engage in disqualifying employment which is employment after a participant’s attainment of normal_retirement_age which results in entitlement to credit for i at least hours_of_service for a calendar month or ii at least one hour_of_service performed on each of eight or more days or separate work shifts in a calendar month if the plan has not for any purpose determined or used the actual hours_of_service required to be credited to the participant taxpayer represents that this provision has plr-t-101788-15 been in the plan since its inception and was also in its predecessor_plan since its restatement as of date congress enacted the fair treatment for experienced pilots act of which increased the mandatory_retirement_age for pilots from to years of age accordingly the taxpayer adjusted its mandatory_retirement_age for pilots to the plan’s normal_retirement_age however remains years old pursuant to the income_tax regulations treas reg a participant’s accrued_benefit is immediately distributable prior to the later of the date the participant attains normal_retirement_age and the date he or she reaches age further taxpayer provided notice of suspension_of_benefits to all employed pilots after their birthdays based on the facts and representations stated above taxpayer requests a ruling that the actuarial adjustment requirements of sec_411 of the code and suspension_of_benefits rules of sec_411 of the code apply to the plan even though it is currently frozen in applying the suspension_of_benefits rules of sec_411 of the code to the plan the consent requirements of sec_411 of the code are not applicable for purposes of determining whether a pilot participant is in section a b service if the rulings described in item sec_1 and are issued the plan benefits of participants who are employed in section a b service after the plan’s normal_retirement_age and while their accrued_benefits under the plan are immediately distributable prior to age as provided in sec_1_411_a_-11 may be suspended in accordance to sec_411 of the code without actuarial adjustment sec_401 of the code provides that a_trust shall not constitute a qualified_trust under sec_401 unless the plan of which such trust is a part satisfies the requirements of sec_411 of the code relating to minimum vesting standards sec_401 of the code and sec_1_401_a_-14 provide that unless the participant otherwise elects the payment of benefits under a plan to the participant must begin no later than the day after the latest of the close of the plan_year in which - a occurs the date on which the payment attains the earlier of age or the normal_retirement_age specified under the plan b occurs the anniversary of the year in which the participant commenced participation in the plan or c the participant terminates his service with the employer although sec_401 of the code authorizes in some cases a delay in the commencement of benefits beyond the time a participant attains normal_retirement_age that section does not authorize the forfeiture of such delayed benefits plr-t-101788-15 the general_rule under sec_411 of the code states in part that a_trust shall not constitute a qualified_trust under sec_401 of the code unless the plan of which such trust is a part provides that an employee’s right to his normal_retirement_benefit is nonforfeitable upon the attainment of normal_retirement_age as defined in sec_411 and for defined benefit plans satisfies the requirements of sec_411 sec_411 of the code and sec_1_411_a_-1 and sec_1_411_a_-4 require that certain rights in an employee’s accrued_benefit be nonforfeitable once such an employee’s right becomes nonforfeitable ie it is an unconditional right then generally it may not be forfeited sec_411 of the code provides for limited exceptions to the requirement of nonforfeiture sec_411 of the code and its counterpart section a b of the employee_retirement_income_security_act_of_1974 erisa state that a right to an accrued_benefit derived from employer contributions shall not be treated as forfeitable solely because the plan provides that the payment of benefits is suspended for such period as the employee is employed subsequent to the commencement of payment of such benefits i in the case of a plan other than a multiemployer_plan by the employer who maintains the plan under which such benefits were being paid and ii in the case of a multiemployer_plan in the same industry the same trade or craft and the same geographic area covered by the plan as when such benefits commenced the secretary of labor shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph including regulations with respect to the meaning of the term employed dol reg c defines section a b service and clarifies that for a non-multiemployer plan section a b service can occur not only subsequent to the commencement of payment of benefits but also where payment of benefits would have continued had the employee not remained in or returned to employment after normal_retirement_age dol reg b states in part that no payment shall be withheld by a plan pursuant to this section suspension upon reemployment unless the plan notifies the employee by personal delivery or first class mail during the first calendar month or payroll_period in which the plan withholds payments that his benefits are suspended sec_411 of the code states that for any defined_benefit_plan if an employee's accrued_benefit is to be determined as an amount other than an annual_benefit commencing at normal_retirement_age or if the accrued_benefit derived from contributions made by an employee is to be determined with respect to a benefit other than an annual_benefit in the form of a single_life_annuity without ancillary_benefits plr-t-101 commencing at normal_retirement_age the employee's accrued_benefit or the accrued_benefits derived from contributions made by an employee as the case may be shall be the actuarial equivalent of such benefit or amount determined under paragraph or sec_411 of the code states that if the present_value of any nonforfeitable accrued_benefit exceeds dollar_figure a plan meets the requirements of this paragraph only if such plan provides that such benefit may not be immediately distributed without the consent of the participant sec_1_411_c_-1 states that no adjustment to an accrued_benefit is required on account of any suspension_of_benefits if such suspension is permitted under section a b of erisa sec_1_411_c_-1 states that no actuarial adjustment to an accrued_benefit is required on account of employment after normal_retirement_age for example if a plan with a normal_retirement_age of provides a benefit of dollar_figure a month payable at age the same dollar_figure benefit with no upward adjustment could be paid to an employee who retires at age sec_1_411_a_-11 provides that participant consent is required for any distribution while the accrued_benefit is immediately distributable defined as prior to the later of the time a participant has attained normal_retirement_age or age with respect to your first requested ruling the requirement under sec_411 of the code that a participant’s benefit must be actuarially adjusted if the benefit is calculated as other than an annual_benefit commencing at normal_retirement_age applies whether or not the plan is frozen as this section relates to amounts already accrued however an exception to this rule is provided in sec_41 a b of the code that allows suspension of payments of the accrued_benefit upon reemployment of a retiree the plan contains a provision stating that it can suspend the payment of benefits to a participant that is reemployed with the employer thus as long as the taxpayer properly provides notice of suspended benefits to the participant which was done here the benefits may be suspended without any actuarial adjustment with respect to your second requested ruling the consent requirements of sec_411 of the code are not applicable for purposes of determining whether a participant is reemployed with the employer and thus performing section a b service whether or not a participant consents to begin receiving benefits under the plan is not a factor as to whether or not the participant is reemployed the consent requirement of sec_411 of the code does not have any effect on whether or not the employer may suspend the payment of a participant's benefit without actuarial adjustment with respect to your third requested ruling sec_1_411_c_-1 states that a plan does not have to provide an actuarial adjustment to a participant's accrued_benefit if that participant continues to be employed by the company after normal_retirement_age because the adjustment is not required it follows that not making that adjustment does plr-t-101788-15 not constitute a forfeiture of benefits a participant under the plan who is reemployed with the taxpayer in section a b service and his or her accrued_benefit is immediately distributable under the plan may have their benefits suspended while reemployed without any actuarial adjustment as long as the plan allows for such a suspension and that as here notice is provided to the participant prior to the suspension of the benefit payments therefore the irs rules that the actuarial adjustment requirements of sec_411 of the code and suspension_of_benefits rules for reemployed participants pursuant to sec_411 of the code apply to the plan these requirements apply despite the fact that the plan is currently frozen in applying the suspension_of_benefits rules of sec_411 of the code to the plan the consent requirements of sec_411 of the code are not applicable for purposes of determining whether a qualified_participant is in section a b service the plan benefits of participants who are employed in section a b service after the plan’s normal_retirement_age and while their accrued_benefits under the plan are immediately distributable prior to age as provided in sec_1 a - c may be suspended in accordance to sec_411 of the code without any actuarial adjustment except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative jason e levine senior tax law specialist qualified_plans branch tax exempt and governmental entities sincerely


tcmemo_2009_212 united_states tax_court estate of roger d malkin deceased jonathan r malkin and melissa malkin executors et al petitioners v commissioner of internal revenue respondent docket nos filed date as part of his estate plan d created two family limited_partnerships flps and four trusts d was the general_partner of each flp he and two trusts were the limited partners of each flp the beneficiaries of the trusts were d’s two children to the first flp mflp d transferred stock to the second flp crflp d transferred stock and his interests in four llcs in the estate_tax notice_of_deficiency r determined that the value of the property d transferred to the flps should be brought back into the value of the gross_estate under either sec_2035 or sec_1cases of the following petitioners are consolidated herewith estate of roger d malkin donor deceased jonathan r malkin and melissa malkin executors docket nos and a or i r c r also disallowed certain deductions in the gift_tax notices of deficiency r viewing the facts somewhat differently determined that the same transferred property should be taxed in the alternative as gifts to d’s children r also determined that several transfers d made during the last years of his life were gifts to his children held because within the meaning of sec_2036 i r c d retained for his life the possession and enjoyment of the stock he transferred to the flps and did not transfer that stock in a bona_fide sale for an adequate_and_full_consideration in money or money’s worth the value of d’s gross_estate includes the value of that transferred stock held further d made indirect gifts to his children of interests in the llcs when he transferred to the trusts limited_partnership interests in crflp and transferred to crflp interests in the llcs held further d made various direct and indirect gifts to his children in the last years of his life held further five deductions of the estate are disallowed one only in part and pursuant to sec_2053 i r c all other deductions may not exceed the value of estate property_subject_to_claims harvey a strickon gerald j fields and edward l peck for petitioners lydia a branche shawna a early and frederick c mutter for respondent memorandum findings_of_fact and opinion halpern judge by separate notices of deficiency the notices respondent determined a deficiency of dollar_figure in the federal estate_tax of the estate of roger d malkin the estate and decedent respectively and deficiencies in decedent’s federal gift_taxes of dollar_figure dollar_figure and dollar_figure for and respectively decedent created two family limited_partnerships flps and four trusts decedent was the general_partner of each flp he and two trusts were the limited partners of each flp the beneficiaries of the trusts were decedent’s two children jonathan r malkin jonathan malkin and melissa malkin to the first limited_partnership the roger d malkin family limited_partnership mflp decedent transferred stock to the second the cotton row family limited_partnership crflp decedent transferred stock and his interests in four limited_liability companies llcs which he controlled with his son all called malkin company llc and after the first denominated by roman numerals eg malkin company iv llc we refer to those llcs individually as malkin i malkin ii etc and together as the malkin llcs 2although decedent and his son controlled five llcs called malkin co decedent transferred to crflp his interests in only four of them see infra unless otherwise stated section references are to the internal_revenue_code in effect for the date of decedent’s death and for the years in issue and rule references are to the tax_court rules_of_practice and procedure we round all dollar amounts to the nearest dollar after concessions and taking into account our disposition of certain issues the issues for decision are as follows within the meaning of sec_2036 whether decedent retained for his life the possession or enjoyment of or the right to the income from the property he transferred to the flps if so whether decedent nonetheless transferred that property in a bona_fide sale for an adequate_and_full_consideration in money or money’s worth in the alternative in and whether decedent made a taxable gift to his children when he transferred property to the flps and transferred limited_partnership interests in those entities to his children’s trusts in whether decedent made a taxable gift to jonathan malkin when he paid a dollar_figure debt of malkin i in whether decedent made taxable_gifts to his children when he paid a dollar_figure debt of malkin i 3regarding the estate_tax notice respondent concedes that petitioners properly valued certain stock and options decedent held at his death petitioners concede that respondent properly valued certain stock decedent held at his death and properly included two bank accounts in his determination of decedent’s gross_estate regarding the and gift_tax notices the parties agree that certain cash transfers decedent made to the trusts were gifts regarding the and gift_tax notices petitioners offer no evidence or argument that decedent was entitled to a dollar_figure as opposed to dollar_figure annual_gift_tax_exclusion we take petitioners’ silence as their concession in whether decedent made taxable_gifts to his children when with respect to malkin iv he paid a dollar_figure debt made a dollar_figure capital_contribution and assigned a promissory note worth approximately dollar_figure million in and whether decedent made taxable_gifts to melissa malkin when he transferred to her dollar_figure dollar_figure and dollar_figure respectively in whether decedent made a taxable gift to jonathan malkin when he transferred to him dollar_figure and whether the estate is entitled to deductions claimed on form_706 united_states estate and generation-skipping_transfer_tax return schedule j schedule k and schedule o of dollar_figure dollar_figure and dollar_figure respectively petitioners bear the burden_of_proof see rule a petitioners have not raised the issue of sec_7491 which shifts the burden_of_proof to the commissioner in certain situations we conclude that sec_7491 does not apply here because petitioners have not produced any evidence that establishes the preconditions for its application findings of fact4 some facts have been stipulated and are so found the stipulation of facts with accompanying exhibits is incorporated herein by this reference at his death decedent resided in mississippi when the petitions were filed jonathan malkin resided in connecticut and melissa malkin resided in virginia background decedent died on date from until his death decedent served as the chairman and chief_executive_officer of delta pine land co d pl during the course of his employment with d pl decedent acquired more than million d pl shares and options formation and funding of mflp jrm trust i and mm trust i in decedent asked his tax_return_preparer and financial planner richard moriarty mr moriarty of the accounting firm arthur andersen llp andersen to assist with his estate_planning specifically decedent wanted to transfer some d pl shares worth more than dollar_figure million to his children 4pursuant to rule e each party in its answering brief must set forth any objections together with the reasons therefor to any proposed findings of any other party petitioners have filed an answering brief but they have failed to set forth objections to respondent’s proposed findings_of_fact accordingly we must conclude that petitioners have conceded that respondent’s proposed findings_of_fact are correct except to the extent that those findings are clearly inconsistent with either evidence in the record or petitioners’ proposed findings_of_fact see eg 118_tc_106 n affd 353_f3d_1181 10th cir but he did not want them to sell those shares mr moriarty not being an expert in estate_planning introduced decedent to his colleague at andersen charles ogeka mr ogeka decedent mr moriarty and mr ogeka in addition to decedent’s attorneys jerome c hafter mr hafter longtime counsel to d pl and marian s alexander ms alexander had a series of conference calls to discuss decedent’s estate plan in the end decedent decided to form an flp to hold the d pl shares and two trusts one for each of his children to hold limited_partnership interests in the flp in ms alexander organized mflp and the two trusts ie the jonathan r malkin irrevocable_trust jrm trust i and the melissa malkin irrevocable_trust mm trust i with jrm trust i the mflp trusts in date decedent executed documents establishing jrm trust i and mm trust i mr hafter and ms alexander were the original trustees of both trusts and they served as trustees until shortly after decedent’s death each trust had its own bank account in date an unidentified source deposited dollar_figure in the bank account of each mflp trust each trust then issued its respective beneficiary a dollar_figure demand promissory note payable to that beneficiary a few days later decedent made gifts of dollar_figure to both trusts on date the following occurred a certificate of mississippi limited_partnership was filed on behalf of mflp with the mississippi secretary of state mflp had big_number partnership units big_number general_partnership units and big_number limited_partnership units decedent transferred big_number d pl shares worth dollar_figure to mflp for big_number general_partnership units and big_number limited_partnership units the trustees of each mflp trust transferred dollar_figure to mflp for limited_partnership units the trustees of each trust then entered into a contract with decedent for the purchase of big_number limited_partnership units for dollar_figure in cash and a 9-year dollar_figure self-canceling_installment_note scin with interest of dollar_figure percent the trustees executed the scins and transferred the cash to decedent and he assigned the limited_partnership interests to the trustees the trustees executed security agreements granting decedent a security_interest in the limited_partnership interests interest payments from the mflp trusts to decedent on date jrm trust i and mm trust i both owed decedent a dollar_figure interest payment on their respective scins on date both trusts transferred dollar_figure to an 5an scin is a debt obligation that is automatically extinguished at the creditor’s death any remaining balance on the note becomes uncollectible self-canceling notes are typically used in estate_planning black’s law dictionary 9th ed unidentified source on date an unidentified source wired dollar_figure to decedent the trustees of mm trust i issued melissa malkin a dollar_figure demand promissory note dated date payable to her on date decedent wired dollar_figure to jonathan malkin the trustees of jrm trust i issued jonathan malkin a dollar_figure demand promissory note dated date payable to him on date an unidentified source wired dollar_figure to decedent on date jrm trust i and mm trust i both owed decedent a dollar_figure interest payment on their respective scins on that day the trustees of jrm trust i issued a dollar_figure demand promissory note to jonathan malkin payable to him and the trustees of mm trust i issued a like note to melissa malkin payable to her on date decedent transferred dollar_figure to the trustees of mm trust i and dollar_figure to the trustees of jrm trust i and dollar_figure to both jonathan malkin and melissa malkin on the same day both jonathan malkin and melissa malkin transferred dollar_figure to their respective trusts also on that day the trustees of jrm trust i issued jonathan malkin a dollar_figure check and the trustees of mm trust i issued melissa malkin a dollar_figure check on date two dollar_figure checks dated date and payable to decedent from the mflp trusts were debited from the trusts’ respective bank accounts decedent’s pledging of mflp assets on date decedent and the trustees of the mflp trusts authorized decedent to pledge mflp assets without limitation to secure his personal debt to bank of america the first resolution that day decedent pledged to bank of america big_number of the big_number d pl shares mflp held on date to support the first resolution decedent executed a personal guaranty the first guaranty promising to use his personal assets to repay his debt plus interest the first guaranty states that decedent agrees to pay mflp a fee of dollar_figure dollar_figure percent of the dollar_figure required as security for his debt on date decedent and the trustees authorized decedent to repledge mflp assets without limitation to secure his personal debt to morgan guaranty trust co of new york the second resolution and morgan guaranty respectively that day decedent repledged the big_number d pl shares to morgan guaranty on date decedent pledged to morgan guaranty the remaining d pl shares mflp held on date to support the second resolution decedent executed a second personal guaranty the second guaranty again promising to use his personal assets to repay his debt plus interest the second guaranty does not state a dollar amount for a fee on date decedent transferred dollar_figure to mflp the malkin llcs decedent and his son were the initial members of the malkin llcs their ownership interests in the malkin llcs as reported for tax purposes were as follows entity malkin i malkin ii malkin iii malkin iv malkin v decedent dollar_figure dollar_figure dollar_figure dollar_figure jonathan malkin dollar_figure dollar_figure dollar_figure dollar_figure other -- -- -- malkin iii and malkin iv were the capital members of a partnership decedent and his son controlled malkin i owned dollar_figure percent of the general_partner of that partnership malkin ii and malkin v each had a single dollar_figure investment in two different private equity ventures decedent’s diagnosis in date decedent was diagnosed with pancreatic cancer several months later decedent decided to create another flp to hold his interests in the malkin llcs and another two trusts for his children to hold limited_partnership interests in that second flp formation and funding of crflp jrm trust ii and mm trust ii ms alexander organized crflp and the two trusts ie j r m irrevocable_trust jrm trust ii and m m irrevocable_trust mm trust ii with jrm trust ii the crflp trusts in date a certificate of mississippi limited_partnership was filed on behalf of crflp with the mississippi secretary of state crflp had big_number partnership units big_number general_partnership units and big_number limited_partnership units on date in exchange for all big_number crflp partnership units decedent transferred to crflp a 30-percent interest in malkin i a 50-percent interest in malkin ii a 99-percent interest in malkin iv and a 50-percent interest in malkin v on the same day decedent executed an agreement purporting to assign big_number crflp limited_partnership interests to each crflp trust on date decedent executed documents establishing the crflp trusts mr hafter and ms alexander were the original trustees of both trusts and they served as trustees until shortly after decedent’s death each trust had its own bank account the trustees of both trusts entered into contracts with decedent for the purchase of big_number crflp limited_partnership units for dollar_figure the terms of the contract for mm trust ii provided for a 10-percent downpayment of dollar_figure and a 9-year dollar_figure promissory note with interest of percent the terms of the contract for jrm trust ii provided for a 10-percent 6we note that decedent transferred percentage interests in the malkin llcs different from those he had reported for tax purposes the parties however stipulated both sets of numbers and do not discuss the discrepancy we follow their stipulation downpayment of dollar_figure and a 9-year dollar_figure promissory note with interest of approximately percent about a week after the signing of the contracts decedent transferred dollar_figure to each crflp trust two days after those transfers each trust transferred dollar_figure to decedent as the 10-percent downpayment for the crflp limited_partnership units the trustees also executed the promissory notes for the remainder of the purchase_price the trustees executed security agreements granting decedent a security_interest in the limited_partnership interests in date decedent transferred big_number d pl shares to crflp before transferring the shares decedent had pledged them as collateral for a personal loan from morgan guaranty and the shares remained as collateral after the transfer the crflp trustees never paid interest on the promissory notes decedent died before the first payment became due and the estate never made any demand mflp and crflp constituted decedent’s entire estate plan for transferring wealth to his two children decedent by his will left nothing to them and his estate was insolvent 7we note the dollar_figure discrepancy between the dollar_figure downpayment mm trust ii owed according to its contract and the dollar_figure it in fact paid decedent’s transfers in november decedent paid a dollar_figure debt of malkin i throughout the year decedent transferred dollar_figure to melissa malkin decedent’s transfers throughout the year decedent transferred dollar_figure to melissa malkin decedent’s transfers in may decedent paid a dollar_figure debt of malkin i and a dollar_figure debt of malkin iv decedent also assigned to malkin iv his interest in a promissory note worth approximately dollar_figure million in september decedent paid dollar_figure to malkin iv related to a capital call in june decedent transferred to jonathan malkin dollar_figure in exchange for a promissory note for that amount in november decedent wired jonathan malkin and melissa malkin both dollar_figure in exchange for a promissory note from each for that amount deductions of the estate on date decedent’s executors filed form_706 on which they claimed deductions of dollar_figure for schedule j administration_expenses dollar_figure for schedule k debts of decedent and dollar_figure for a schedule o charitable_contribution 8respondent has allowed the dollar_figure deduction for funeral_expenses he has disallowed all other schedule j deductions for a total of schedule j k and o deductions of dollar_figure the two largest claims among the schedule k debts are a dollar_figure loan secured_by d pl stock worth dollar_figure and a dollar_figure obligation to malkin iv the form_706 reported assets worth dollar_figure available to satisfy decedent’s debts in addition the estate includes funds from two accounts not reported on schedule c worth dollar_figure and dollar_figure i introduction opinion as part of his estate plan decedent created two flps and four trusts decedent was the general_partner of each flp he and two trusts were the limited partners of each flp the beneficiaries of the trusts were decedent’s two children to the first limited_partnership mflp decedent transferred stock to the second crflp decedent transferred stock and his interests in four llcs which he controlled with his son in the estate_tax notice respondent determined that the value of property decedent transferred to the flps should be brought back into the value of the gross_estate under either sec_2035 or sec_2036 or he also disallowed certain deductions in the gift_tax notices respondent viewing the facts somewhat differently determined that the same transferred property should be taxed in the alternative as gifts to jonathan malkin and melissa malkin respondent also determined that several transfers decedent made during the last years of his life were gifts ii inclusion in the gross_estate sec_2036 a burden_of_proof we have decided supra that petitioners bear the burden_of_proof as stated in 114_tc_144 in the context of transactions involving family members that burden is especially onerous b general rules sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states and sec_2051 defines the taxable_estate as the value of the gross_estate less applicable deductions sec_2031 specifies that the value of the gross_estate comprises the values of all property real or personal tangible or intangible wherever situated to the extent provided in sec_2033 through sec_2033 broadly provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2034 through then explicitly mandate inclusion of several more narrowly defined classes of assets sec_2036 provides the following sec_2036 transfers with retained_life_estate a general_rule --the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death-- the possession or enjoyment of or the right to the income from the property or 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 c mflp crflp and sec_2036 respondent’s argument for purposes of sec_2036 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 supra pincite respondent contends that both an express and an implied agreement existed between decedent and the trustees of the mflp and crflp trusts that decedent would retain the present economic benefits of the property decedent transferred to mflp and crflp according to respondent the actual use of all mflp’s and crflp’s assets to secure and collateralize decedent’s pre- and post-death financial obligations belies the claim that no such understanding existed petitioners’ argument petitioners deny that any express or implied agreement allowed decedent to retain the present economic benefits of the property he transferred to the flps as to mflp petitioners assert that its partners ie decedent the general_partner and mr hafter and ms alexander trustees for the limited partners approved both resolutions pledging the d pl shares even though the shares served as collateral for personal loans to decedent to support each resolution decedent signed a guaranty that he would use his personal assets to repay his debt plus interest petitioners argue that pledging the d pl shares was an investment decision made at arm’s length in the best interests of mflp as to crflp petitioners assert that nothing in the record indicates that decedent pledged any crflp asset to secure his personal obligations noting that decedent had pledged the big_number d pl shares to morgan guaranty before he transferred them to crflp 9indeed the resolutions on which petitioners rely claim as much the first resolution for example resolves that it is in the best interests of mflp for the general_partner to be authorized to pledge partnership assets as additional security for an existing loan to roger d malkin individually analysis we agree with petitioners as to the interests in the four malkin llcs decedent transferred to crflp nothing in the record suggests that any express or implied agreement gave decedent the right to retain the present economic benefits of those llc interestsdollar_figure petitioners fail to convince us however with respect to the d pl stock we agree with respondent that an implied agreement existed between decedent and the mflp and crflp trustees that decedent would retain the right to use that transferred stockdollar_figure sec_20_2036-1 estate_tax regs states that a decedent retains t he ‘use possession right to the income or other enjoyment of the transferred property’ to the extent that the use possession right to the income or other enjoyment is to be applied toward the discharge of a legal_obligation of the decedent or otherwise for his pecuniary benefit decedent applied all the d pl stock he transferred to the flps toward the discharge of his legal obligations he applied the big_number d pl shares he transferred to mflp toward the discharge of a legal 10to the contrary we find that decedent made indirect gifts to his children when he transferred to crflp his interests in the four malkin llcs see infra sec iii d of this report 11because we find an implied agreement we do not address whether an express agreement existed that gave decedent the possession of enjoyment of or right to income from the transferred stock obligation when he and the mflp trustees pledged those shares to secure his personal loans he applied the big_number d pl shares he transferred to crflp toward the discharge of a legal_obligation before he even transferred that stock see 503_f3d_955 9th cir a key problem with the conveyance of the property to the family limited_partnership is for estate_tax purposes that the debt that was secured_by the property was not also transferred this discrepancy indicates that the family limited_partnership repaid the debt in decedent’s stead despite no legal_obligation to do so affg tcmemo_2005_65 417_f3d_468 5th cir certainly part of the ‘possession or enjoyment’ of one’s assets is the assurance that they will be available to pay various debts and expenses upon one’s death affg tcmemo_2003_145 as to the big_number d pl shares mflp held petitioners have failed to show that the decision of decedent mr hafter and ms alexander to pledge those shares to secure the personal debts of decedent was a business decision made at arm’s length first although petitioners offer evidence that almost months after signing the first guaranty and almost a year after signing the first resolution decedent transferred dollar_figure to mflp petitioners offer no evidence that a fee of dollar_figure percent was a reasonable fee see eg bissey v commissioner tcmemo_1994_540 we cannot ascertain whether a price is sufficient if there is no evidence of what an arm’s-length price would have been second petitioners argue that the decision to allow decedent to pledge the d pl stock to secure his personal debt was in the best interests of mflp yet petitioners do not explain what business_purpose of mflp that decision served in the absence of any evidence bearing on that purported business decision we need not and do not attach any weight to petitioners’ baseless assertions see rule b s tatements in briefs do not constitute evidence see also eg van heemst v commissioner tcmemo_1996_305 statements in briefs are not evidence rule b and we do not accept petitioner’s assertion without evidence we find that decedent retained the right to use the big_number d pl shares he transferred to mflp as to the big_number d pl shares crflp held petitioners argue that nothing in the record indicates that decedent ever pledged any crflp assets to secure any personal financial obligation yet petitioners concede that decedent had pledged the big_number d pl shares to morgan guaranty before he transferred those shares to crflp petitioners evidently believe that timing is dispositive but we see no relevant distinction between crflp’s pledging shares itself and receiving previously pledged shares see estate of bigelow v commissioner supra in either case crflp holds property pledged to discharge a personal obligation of decedent moreover petitioners offer no business reason for having crflp hold big_number d pl shares pledged to secure decedent’s personal debt we find that decedent retained the right to use the big_number d pl shares he transferred to crflp conclusion as respondent succinctly argues decedent’s relationship to his d pl shares never changed he controlled them before and after the transfer to mflp and crflp the trusts had no role in the affairs of the partnerships neither the trustees nor decedent’s children objected to his use of the stock to obtain personal loans decedent’s unrestricted use of the d pl shares suggests that there was an implied agreement that the transferred d pl shares would be available for decedent’s use for the reasons stated we find that decedent retained the possession or enjoyment of the d pl shares he transferred to the flps within the meaning of sec_2036 d the bona_fide sale exception we now consider whether decedent’s transfers of d pl stock nonetheless fall within the sec_2036 exception for bona_fide sales for adequate_and_full_consideration in money or money’s worth we find they do not our analysis follows general_rule in 124_tc_95 we stated in the context of family limited_partnerships the bona_fide sale for adequate_and_full_consideration exception is met where the record establishes the existence of a legitimate and significant nontax reason for creating the family limited_partnership and the transferors received partnership interests proportionate to the value of the property transferred the objective evidence must indicate that the nontax reason was a significant factor that motivated the partnership’s creation a significant purpose must be an actual motivation not a theoretical justification respondent’s argument respondent argues simply that with regard to the d pl stock decedent had no legitimate and significant nontax reason for creating either of the flps petitioners’ argument petitioners contest respondent’s conclusion petitioners claim that decedent had many legitimate and significant nontax reasons for creating the flps first the flps allowed decedent to provide for his children by preserving the upside potential value of the shares and keep ing that growth in his children’s hands and not his hands second the flps allowed decedent to prevent a sale of d pl shares thus protecting d pl from a sale of shares that would undoubtedly depress the value of the shares and avoiding the appearance that decedent was losing confidence in the upside potential of the company third the flps allowed decedent to centralize management of the family’s wealth analysis we agree with respondent with regard to the d pl stock decedent had no legitimate and significant nontax reason for creating either of the flps we address petitioners’ arguments in orderdollar_figure first petitioners state that decedent created mflp to provide for his children although l egitimate nontax purposes are often inextricably interwoven with testamentary objectives estate of bongard v commissioner t c pincite a ‘good faith’ transfer to a family limited_partnership must provide the transferor some potential for benefit other than the potential estate_tax advantages that might result from holding assets in the partnership form 382_f3d_367 3d cir affg tcmemo_2002_246 second petitioners argue that the flps in particular mflp served a business_purpose by preventing a sale of any d pl 12petitioners in a footnote in their brief allude to my dissent in 124_tc_95 halpern j dissenting petitioners’ reliance on that dissent is misplaced however as the majority opinion not any dissent represents the view of this court with respect to the issues in estate of bongard under the analysis in that dissent however the conclusion reached in this case would be no different stock yet only decedent transferred d pl stock to the flps the parties have stipulated that jonathan malkin owned at least big_number d pl shares which he pledged as collateral to secure his father’s personal debt had decedent wanted to prevent the sale of any d pl stock his family owned he would have demanded or at least requested that his son contribute his own d pl stock he did not obviously decedent did not need the flps to control his own d pl stock he already controlled it third petitioners argue that decedent created the flps to centralize management of the family’s wealth--yet decedent contributed all or almost all13 the assets the flps held because there was no pooling of the family’s assets in the flps there was no pooled wealth to managedollar_figure see estate of strangi v commissioner tcmemo_2003_145 decedent contributed more than percent of the total property and received back an interest the value of which derived almost exclusively from the assets he had just assigned the property the flps passively held ie the d pl stock was simply decedent’s wealth see estate of rosen v commissioner tcmemo_2006_115 t he mere holding of an untraded portfolio of marketable_securities weighs 13whether decedent or his children made the two dollar_figure transfers to the mflp trusts is unclear and irrelevant 14melissa malkin and jonathan malkin both had the means to contribute petitioners offer evidence that as of date melissa malkin had a net_worth of more than dollar_figure and jonathan malkin testified he was worth more than dollar_figure million against the finding of a nontax benefit for a transfer of that portfolio to a family entity citing estate of thompson v commissioner supra pincite conclusion favorable estate_tax treatment was the aim of the change in form we are unable to identify a legitimate and significant nontax reason for the transfers see estate of thompson v commissioner supra pincite other than favorable estate_tax treatment resulting from the change in form it is difficult to see what benefit could be derived from holding an untraded portfolio of securities in this family limited_partnership with no ongoing business operations we find that decedent’s transfers of d pl stock to the flps achieved nothing more than testamentary objectives and tax benefits and thus those transfers do not qualify for the bona_fide sale exception in sec_2036 e conclusion we find that decedent retained the possession or enjoyment of the d pl shares he transferred to the flps within the meaning of sec_2036 and that he did not transfer those shares in bona_fide sales for adequate_and_full_consideration in money or money’s worth dollar_figure therefore under sec_2036 sec_15for that reason we find that during his life decedent did not make indirect gifts to his children of present interests continued the value of decedent’s gross_estate includes the value of the big_number d pl shares he transferred to mflp and the value of the big_number d pl shares he transferred to crflp iii gift_taxes and a general rules sec_2501 imposes a tax on the transfer of property by gift under sec_2511 that gift_tax applies whether the gift is direct or indirect see 465_us_330 the language of sec_2501 and sec_2511 is clear and admits of but one reasonable interpretation transfers of property by gift by whatever means effected are subject_to the federal gift_tax t he gift_tax was designed to encompass all transfers of property b respondent’s argument respondent argues that decedent’s gifts to his children of llc interests and cash and cash equivalents fall into four categories indirect gifts involving the interests in the malkin llcs decedent transferred to crflp simple cash transfers cash exchanged for promissory notes which the continued in those shares in sec iii d infra of this report we find that decedent made indirect gifts to his children when he transferred to crflp his interests in the malkin llcs because we find for respondent with regard to all assets decedent transferred to the flps albeit under two different theories we do not address respondent’s alternative arguments under sec_2035 and sec_2036 estate listed on schedule c of its form_706 and indirect gifts involving additional transfers and payments related to malkin i and malkin iv first respondent argues that decedent made indirect gifts of the interests in the malkin llcs and not indirect gifts of limited_partnership interests second and third respondent contends that neither the cash transfers nor the purported loans constituted bona_fide debt fourth respondent argues the following were indirect gifts the payment of a dollar_figure debt of malkin i the payment of a dollar_figure debt of malkin i the payment of a dollar_figure debt of malkin iv the assignment of a promissory note worth approximately dollar_figure million to malkin iv and the payment of dollar_figure related to a capital call of malkin iv c petitioners’ argument petitioners argue that because the trusts purchased the limited_partnership interests in bona_fide sales no asset decedent transferred to the flps was a gift to his children petitioners assert that all cash transfers--both those exchanged for promissory notes and those made gratuitously--constituted bona_fide debt petitioners declare t he evidence presented in these cases is sufficient to establish a true expectation of repayment and intent to enforce collection of these debts as to the indirect gifts petitioners contend that decedent paid those debts for which he was personally liable and not only was decedent contractually obligated to make the capital contributions but also every capital_contribution he made increased his capital_account accordingly d analysis we agree with respondent petitioners have failed to present evidence sufficient to satisfy their burden with respect to any gift respondent asserts decedent made decedent’s interests in the malkin llcs decedent made indirect gifts to his children when he transferred to crflp interests in the malkin llcs and subsequently transferred to his children’s trusts limited_partnership interests in crflp the gifts were of the interests in the malkin llcs not of the limited_partnership interests a indirect gifts and shepherd v commissioner the facts here are analogous to those of 115_tc_376 affd 283_f3d_1258 11th cir in that case a father the taxpayer and his two sons formed a partnership in which the father held a 50-percent partnership_interest and each son held a 25-percent partnership_interest id pincite on the same day the father signed the partnership_agreement he executed a deed purporting to transfer real_property to the partnership id pincite the next day his sons signed the partnership_agreement id pincite we held that because state law did not recognize a one-person partnership the partnership was valid only after the sons signed the partnership_agreement id pincite for that reason the deed of land also was not effective until that second day id because the creation of the partnership preceded the effectiveness of the deed the sons acquired interests in the real_property by virtue of their status as partners of the partnership id pincite because the taxpayer’s contribution of the property was allocated to his and his sons’ capital accounts according to their respective partnership shares we held that the taxpayer’s transfer of real_property to the partnership was an indirect gift to each son of an undivided 25-percent interest in that real_property id pincite the facts here are indistinguishable on date decedent and the trustees of the crflp trusts signed the crflp partnership_agreement that same day decedent transferred his interests in the malkin llcs to crflp in return for all big_number partnership units and assigned big_number crflp limited_partnership units to each crflp trust on date decedent established the crflp trusts because mississippi state law does not recognize a one-person partnership crflp was valid only after the formation of the trusts see miss code ann sec west supp ‘limited partnership’ means a partnership formed by two or more persons under the laws of this state only after crflp was validly formed on date could decedent transfer his interests in the malkin llcs to it thus at the time of that transfer the crflp trusts were already limited partners and they acquired interests in the malkin llcs by virtue of their status as limited partners there is one difference between these cases and shepherd petitioners argue that the crflp trusts purchased the limited_partnership interests for their fair_market_value and thus that decedent made an indirect gift of neither limited_partnership interests nor interests in the malkin llcs we disagree with petitioners because we find that decedent’s purported sale of limited_partnership interests was a sham b the sham sale of crflp partnership interests on date each crflp trust entered into a contract with decedent for the purchase of big_number crflp limited_partnership units for dollar_figure the terms of the contracts were similar both called for a downpayment of approximately percent and for a 9-year promissory note at interest of percent for the balance about a week after the signing of the contracts decedent transferred dollar_figure to each crflp trust two days after those transfers each trust transferred dollar_figure to decedent as the 10-percent downpayment for the crflp limited_partnership units the crflp trusts never paid any interest on the promissory notes decedent died before the first payment became due and the estate never made any demand decedent’s purported sale of crflp limited_partnership interests was a sham at the time decedent and the trusts executed the contracts decedent was terminally illdollar_figure decedent provided all the money for the 10-percent downpayments in effect the notes constituted the only consideration the trusts gave decedent both children however could have paid a dollar_figure downpayment petitioners offer evidence that as of date melissa malkin had a net_worth of more than dollar_figure and jonathan malkin testified he was worth more than dollar_figure million petitioners do not explain how decedent’s actions comported with an arm’s-length sale moreover petitioners offer no evidence beyond the self-serving testimony of decedent’s children that decedent expected the trusts or his children to pay the promissory notes given that decedent gave his children the money to pay the interest on the mflp scins we find their testimony as to the crflp promissory notes unconvincing petitioners offer no explanation for decedent’s actions other than his generosity and a donative_intent those are motivations for a gift however not a sale 16indeed mr ogeka explaining the reason the crflp promissory notes were not scins testified w e knew that roger malkin was ill and using scins would not have been appropriate 17decedent gave his son the money for both interest payments due on his trust’s scin and gave his daughter the money for at least one interest payment due on her trust’s scin petitioners also do not explain the estate’s failure to demand payment on the promissory notes jonathan malkin testified that although he expected his trust to pay the interest and did not expect himself to pay it he had sufficient business knowledge to know that if the interest isn’t paid the transaction doesn’t hold we agree c conclusion we find that the purported sale of crflp limited_partnership interests to the crflp trusts was a sham and therefore find that shepherd controls because a gift to a_trust is a gift to its beneficiary see 312_us_393 we find that in decedent made gifts to his children of his interests in the malkin llcs the cash loans a purported loan between family members is always subject_to close scrutiny the presumption for tax purposes at least is that a transfer between family members is a gift 92_tc_470 affd without published opinion 912_f2d_1466 5th cir a and purported loans to melissa malkin in and decedent gave his daughter dollar_figure and dollar_figure respectively petitioners attest that those cash transfers were bona_fide loans to melissa malkin and that she had every expectation of repaying that indebtedness nevertheless melissa malkin never executed any promissory note with respect to those transfers and by her own admission never repaid a dollar of the alleged debt the only evidence petitioners offer to support their conclusion that those transfers were bona_fide loans is melissa malkin’s testimony that i offered to pay him back and he said keep it in the company you’ll need it for operating capital the company was melissa malkin’s business in los angeles representing writers and directors yet moments after averring that she offered to repay her father and immediately after confirming that she never in fact repaid any amount she stated in date i closed my company down to be with him to take care of him melissa malkin did not explain the reason she did not repay her father at that time her failure to explain suggests to us that the transfers were not truly for operating capital we find her testimony unconvincing we find much more plausible her admission that the and transfers were part of decedent’s attempts after almost a decade of estrangement to reconcile with her petitioners have failed to satisfy their burden b purported loans in in exchange for promissory notes decedent gave his son dollar_figure and his daughter dollar_figure decedent made two wire transfers to jonathan malkin one for dollar_figure and one for dollar_figure as to the former jonathan malkin testified that he did not recall signing the promissory note and that decedent never demanded payment as to the latter jonathan malkin testified that as his father’s health declined he and his family were flying every week to spend time with my father and he was trying to defray my expenses as to the dollar_figure transfer to melissa malkin she testified that she did not make any payments on the promissory note and did not even recall it other than the promissory notes and the self-serving testimony of jonathan malkin and melissa malkin petitioners offer no evidence to support their claim that the transfers were bona_fide loans we need not and do not accept that testimony see 121_tc_308 this court is not bound to accept a taxpayer’s self-serving unverified and undocumented testimony petitioners have failed to convince us either that jonathan malkin and melissa malkin intended to repay the transfers or that decedent or the estate intended to demand repayment see eg estate of rosen v commissioner tcmemo_2006_115 security adequately stated_interest and repayment arrangements or efforts to secure the same are important proofs of intent and such proofs are notably lacking here petitioners have failed to satisfy their burden c conclusion we find that decedent in and made cash gifts to melissa malkin of dollar_figure dollar_figure and dollar_figure respectively and in made a cash gift to jonathan malkin of dollar_figure as a result the value of the gross_estate should be decreased by the amounts of the promissory notes and the cash transfers should be reported as gifts on decedent’s form sec_709 united_states gift and generation-skipping_transfer_tax return for the years in issue the indirect gifts a the debts of malkin i and malkin iv in and decedent paid debts of malkin i of dollar_figure and dollar_figure respectively and in he paid a dollar_figure debt of malkin iv malkin i and malkin iv indeed all the malkin llcs were delaware llcs under delaware law although a member of an llc may agree to be liable for its debts no member of an llc is obligated personally for any such debt solely by reason of being a member or acting as a manager of the llc see del code ann tit sec citing the agreements for malkin i and malkin iv petitioners aver that decedent was personally liable for those debts by virtue of his having made capital commitments to malkin i and malkin iv yet both llc agreements state that n o member shall be required to make any capital_contribution or loans to the company other than the payment in full of the initial capital commitment moreover the evidence belies petitioners’ averment for example jonathan malkin’s schedule_k-1 partner’s share of income credits deductions etc of the form_1065 u s partnership return of income for malkin i shows that jonathan malkin had a percent share of total liabilities making his share of the dollar_figure debt dollar_figure petitioners have failed to satisfy their burden accordingly we find that decedent made indirect gifts to the beneficial owners of malkin i and malkin iv ie his children when he paid the debts of those llcsdollar_figure b the promissory note and the capital_contribution in date decedent assigned to malkin iv a promissory note worth approximately dollar_figure million in date decedent paid dollar_figure to malkin iv in response to a capital call from malkin iv effective date however decedent had transferred his entire_interest in malkin iv to crflp and so he no longer had any interest in malkin iv at the time of those transfers a transfer of property to an entity by an unrelated_person generally represents a gift to its owners to the extent of their proportionate interests in it see 682_f2d_1220 5th cir 88_tc_590 where property is gratuitously transferred by a nonshareholder to a closely_held_corporation the transfer is generally an indirect gift to 18to clarify when decedent paid the dollar_figure debt of malkin i he made an indirect gift to his son alone when decedent paid the other debts however he made indirect gifts to both his children the shareholders internal quotation marks omitted sec_25_2511-1 gift_tax regsdollar_figure petitioners offer no evidence that the transfer of the promissory note represented anything other than a gift and fail to explain how decedent could be obligated to contribute capital to an llc of which he was no longer a member petitioners have failed to satisfy their burden accordingly we find that decedent made indirect gifts to the beneficial owners of malkin iv ie his children when he transferred the promissory note and cash to malkin iv e conclusion in decedent made indirect gifts to his children when he transferred to crflp his interests in the malkin llcs in and decedent made direct gifts to his children when he transferred cash to them in and decedent made indirect gifts to his children when he paid debts of malkin i and malkin iv and transferred cash and a promissory note to malkin iv iv deductions of the estate with the exception of the deduction for funeral_expenses see supra note respondent has disallowed all deductions of the 19we note that decedent paid the dollar_figure debt of malkin i and the dollar_figure debt of malkin iv see supra sec iii d a of this report in date months after decedent had transferred his entire_interest in both llcs to crflp for that reason the argument and the authority presented here apply with equal force to decedent’s payments of those two debts estate he has done so on the grounds that some expenses have not been paid and that total expenses nonetheless exceed the value of property_subject_to_claims within the meaning of sec_2053 respondent objects to only two deductions on the merits we now discuss those objections and the expenses that respondent asserts have not been paid a morgan guaranty debt an estate may deduct the value of a claim based on a decedent’s promise to pay only if the liability was contracted bona_fide and for an adequate_and_full_consideration in money or money’s worth sec_2053 see eg 88_tc_1265 t he estate may deduct only that amount which represents a binding legal_obligation against the estate a taxpayer may not reduce his taxable_estate through transactions that are in substance gifts see eg estate of hughes v commissioner tcmemo_2005_296 with respect to the dollar_figure debt of decedent to morgan guaranty respondent allowed a deduction of dollar_figure but disallowed the remainder on the ground that the debt exceeded the value of the collateral securing itdollar_figure in effect respondent 20although petitioners allege that respondent first challenged the estate’s deduction of the morgan guaranty debt in his pretrial memorandum which might affect who bears the burden_of_proof on that issue see rule a that is incorrect in par y of the explanation of adjustments the amended estate_tax notice states that the deduction of dollar_figure for the continued argues that the debt is nonrecourse see sec_20_2053-4 estate_tax regs the amounts that may be deducted as claims against a decedent’s estate are such only as represent personal obligations of the decedent existing at the time of his death petitioners contend that the stipulated and uncontroverted evidence shows the morgan guaranty debt to be a valid and enforceable debt of decedent and that respondent failed to introduce any evidence that the debt was anything other than the obligation of the decedent petitioners miss the point respondent does not deny that the morgan guaranty debt was a valid and enforceable debt of decedent respondent denies only that the debt was enforceable against decedent personally the several exhibits petitioners cite relating to the debt fail to show that decedent was personally liable for it petitioners have failed to satisfy their burden and we deny the deduction to the extent the debt was unsecured by collateral b malkin iv capital_contribution respondent disallowed the entire deduction with respect to the dollar_figure claimed obligation of decedent to malkin iv petitioners object and citing the agreement governing malkin iv argue that decedent was contractually obligated to pay for all big_number llc units to which he initially subscribed that continued indebtedness to morgan guaranty is limited to dollar_figure the fair_market_value of the collateral securing the debt agreement however suggests the opposite is true an amended schedule of units of membership attached to the agreement shows that as of date decedent was no longer a member of malkin iv jonathan malkin held unit and crflp held big_number units petitioners have failed to show that decedent was at his death contractually obligated to pay malkin iv for llc units to which crflp was entitled as decedent’s successor-in-interestdollar_figure decedent’s will states that if at decedent’s death there remains any unfunded capital commitment of malkin iv the estate shall fund that obligation nevertheless the will of the decedent cannot be allowed to define what is an ‘obligation’ or a ‘claim’ 375_us_118 rather as respondent observes decedent’s request is indicative of a donative_intent petitioners have failed to satisfy their burden and we deny the deduction c executors’ commission attorney’s fees accounting fees respondent disallowed deductions of dollar_figure dollar_figure and dollar_figure for the executors’ commission attorney’s fees and accounting fees respectively petitioners offer no evidence 21citing the report in which andersen valued assets of the estate petitioners observe that andersen listed the dollar_figure receivable as an asset of malkin iv to the extent petitioners suggest that decedent was personally liable for the dollar_figure because malkin iv anticipated such capital commitment we disagree that those amounts were paid and therefore have failed to prove that the estate is entitled to the claimed deductions d conclusion we deny the estate any deduction for the morgan guaranty debt above the value of the collateral the claimed obligation of decedent to malkin iv and the executors’ commission attorney’s fees and accounting fees the sum of all deductions of the estate may not exceed the value of property includable in the estate for federal estate_tax purposesdollar_figure see sec_2053 v conclusion in summary our holdings in these cases are as follows because within the meaning of sec_2036 decedent retained for his life the possession and enjoyment of the big_number d pl shares and the big_number d pl shares he transferred to mflp and crflp respectively and did not transfer those shares in a bona_fide sale for an adequate_and_full_consideration in money or money’s worth the value of decedent’s gross_estate includes the value of that transferred stock in decedent made gifts to his children of interests in the malkin llcs when he transferred to his children’s trusts limited_partnership interests in crflp and transferred to crflp interests in those llcs in decedent made a gift to jonathan malkin when he paid a dollar_figure debt of malkin i 22petitioners assert that certain deductions respondent disallowed involve expenses of the estate that petitioners paid on its behalf the parties have agreed to consider the deductibility of those expenses during the rule computation in decedent made gifts to his children when he paid a dollar_figure debt of malkin i in decedent made gifts to his children when with respect to malkin iv he paid a dollar_figure debt made a dollar_figure capital_contribution and assigned a promissory note worth approximately dollar_figure million in and decedent made gifts to melissa malkin when he transferred to her dollar_figure dollar_figure and dollar_figure respectively in decedent made a gift to jonathan malkin when he transferred to him dollar_figure the estate assets subject_to claims are form_706 schedule a real_estate of dollar_figure schedule b stocks and bonds of dollar_figure schedule c cash of dollar_figure schedule d insurance proceeds of dollar_figure and schedule f property of dollar_figure plus the value of the 11-percent interest in crflp decedent held at his deathdollar_figure the estate is entitled to form_706 schedule j schedule k and schedule o deductions of up to dollar_figure dollar_figure and dollar_figure to the extent the claimed expenses were paid and total deductions do not exceed the value of property in the estate subject_to claims decisions will be entered under rule 23during the rule computation the parties will need to recalculate the value of decedent’s 11-percent interest in crflp and to adjust the value of the estate’s schedule f property accordingly because we hold that the big_number d pl shares are sec_2036 property see supra sec ii c of this report the value of that stock is properly included under schedule g for that reason for purposes of valuing decedent’s 11-percent interest in crflp crflp holds only interests in the malkin llcs the values of which the parties will also need to recalculate in the light of our holdings see eg supra sec iv b of this report


t c memo united_states tax_court steven carl akerson petitioner v commissioner of internal revenue respondent docket no filed date held p's resort activity constituted an activity engaged in for profit sec_183 i r c not applicable held further sec_6662 i r c accuracy- related penalties not applicable steven carl akerson pro_se emile l herbert iii for respondent memorandum findings_of_fact and opinion halpern judge by notice_of_deficiency dated date respondent determined deficiencies and penalties against petitioner as follows year penalty deficiency sec_6662 dollar_figure big_number dollar_figure big_number unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the issues for decision are whether petitioner's resort operations constituted an activity_not_engaged_in_for_profit within the meaning of sec_183 and whether petitioner is subject_to the sec_6662 accuracy-related_penalty for and findings_of_fact some facts have been stipulated and are so found the stipulation of facts with attached exhibits is incorporated herein by this reference at the time of filing the petition petitioner resided in puntarenas costa rica background petitioner is a physicist who is dedicated to the use and promotion of solar_energy in and petitioner chartered sailboats and installed solar equipment in mexico and petitioner holds united_states patents on several inverter designs inverters change dc electricity to ac electricity solar_energy panels produce dc electricity most homes use ac electricity costa rica in while living in costa rica petitioner started a business heart interface heart to manufacture and sell electronic and solar powered equipment shortly thereafter heart was incorporated in and petitioner moved to washington state from through petitioner was president and part- owner of heart in petitioner decided that he wished to end his involvement with heart and move back to costa rica thereafter in petitioner signed a contract with valley forge corp to sell his interest in and phase out his employment with heart the sale was completed in date heart continued to employ petitioner until sometime in for the years through petitioner earned dollar_figure dollar_figure dollar_figure and dollar_figure respectively as an employee of heart playa de los vivos having determined that he would return to costa rica petitioner considered how he would earn a living there in petitioner purchased an approximately 29-hectare improved tract of bayfront real_property in puntarenas costa rica located on the property was a hotel with five rooms a kitchen a restaurant and a swimming pool in petitioner purchased approximately additional adjoining hectares petitioner named the hectares playa de los vivos and since has operated a resort on the property the resort or playa de los vivos petitioner kept computers and electronic equipment in one of the hotel rooms which he used for the development of solar electronic equipment petitioner bought four sailboats one in and three in to attract guests to the resort petitioner intended to attract customers to the resort who were interested in a healthy and naturalistic environment bernadette hendricks hendricks has been petitioner’s companion since before the years in issue and during the years in issue hendricks her children and petitioner's children regularly helped operate the resort petitioner hired costa rican attorney federico alvarado alvarado and his law firm bufete robles lacle y asociados to provide legal services and to assist in the maintenance of playa de los vivos when petitioner was not present at the property petitioner kept accurate books_and_records of the resort activity's income and expenses petitioner printed brochures to advertise the resort and he offered the rooms for rent from through most of the repair and maintenance_expenses incurred at the resort were for parts and supplies and not labor because petitioner minimized costs by doing all of the repair work at the resort himself by the land value of playa de los vivos had appreciated substantially petitioner’s home in costa rica is located on a separate piece of property from playa de los vivos external factors affecting playa de los vivos the tourist industry in costa rica was adversely affected by international tension toward the end of in addition although the costa rican government promised to pave the roads surrounding playa de los vivos and begin a new ferry service by as late as neither had been done so it was hard for tourists to reach the property moreover although the phone company promised telephone service in playa de los vivos did not have telephone service until solar equipment in petitioner bought a solar powered ozone generator to purify the water in the resort's swimming pool without the use of chemicals and a battery powered cart that he converted to solar power and used at the resort an advertising brochure describing playa de los vivos and the amenities available there suggests that the resort was made possible through solar electronic technology and that petitioner's intent is to continue using such technology petitioner's first sale of solar electronic equipment in costa rica subsequent to his purchase of playa de los vivos was in petitioner's tax returns petitioner reported the results of the resort activity on schedules c attached to his federal_income_tax returns form sec_1040 for his taxable calendar years through for his taxable years through he described his principal business as hotel resort for his taxable years through he described his principal business activity as hotel resort solar electronics manufacture sale he reported gross_income and expenses as follows year gross_income dollar_figure big_number big_number big_number big_number expenses dollar_figure big_number big_number big_number big_number big_number big_number big_number net gain loss dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number for those years petitioner's gross_income is broken down further as follows year total gross_income dollar_figure big_number big_number big_number big_number gross_income from resort dollar_figure big_number big_number big_number big_number gross_income from solar sales dollar_figure big_number big_number big_number big_number i deficiencies opinion a section 183--for-profit requirement sec_183 provides in the case of an activity engaged in by an individual or an s_corporation if such activity is not engaged in for profit no deduction attributable to such activity shall be allowed under this chapter except as provided in this section sec_183 provides for purposes of this section the term 'activity not engaged in for profit' means any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 the question we must decide is whether petitioner's activity of operating playa de los vivos constituted an activity_not_engaged_in_for_profit b actual and honest profit objective an activity is engaged in for profit if the taxpayer has an actual and honest objective of making a profit 94_tc_41 quoting 78_tc_642 affd without opinion 702_f2d_1205 d c cir although the expectation of profit need not be reasonable a bona_fide profit objective must exist keanini v commissioner supra pincite dreicer v commissioner supra 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs profit in this context means economic profit independent of tax savings 91_tc_686 affd 893_f2d_656 4th cir 91_tc_371 petitioner's objective is a question of fact to be determined from all the facts and circumstances keeping in mind that petitioner bears the burden_of_proof rule a keanini v commissioner supra pincite golanty v commissioner supra pincite sec_1_183-2 income_tax regs the regulations promulgated under sec_183 provide a nonexclusive list of factors to be considered in determining whether an activity is engaged in for profit sec_1_183-2 income_tax regs no single factor is determinative keanini v commissioner supra pincite 88_tc_464 sec_1_183-2 income_tax regs taking those factors into account and based on the record as a whole we conclude that the resort activity was an activity entered into for profit c petitioner had an objective to make a profit the regulations provide although a reasonable expectation of profit is not required the facts and circumstances must indicate that the taxpayer entered into the activity with the objective of making a profit sec_1_183-2 income_tax regs respondent contends that petitioner did not have a profit objective with his resort activity and that he was engaged in the activity only to shelter income we disagree when petitioner bought playa de los vivos he was in the process of selling heart phasing out his employment at heart and trying to find a source_of_income to replace the salary heart paid him at the same time that petitioner bought the resort he bought a home on a different piece of property than the resort additionally petitioner kept accurate books_and_records of the resort activity's income and expenses he printed brochures to advertise the resort and he offered rooms for rent he expended energy and minimized costs by doing all of the repair work himself he hired alvarado to provide legal services and to assist in the maintenance of the resort when petitioner was not present at the property petitioner was experienced in operating sailboats so he bought sailboats to attract guests to the resort moreover it was not unreasonable to expect that the value of playa de los vivos would increase given the property's location and the promise of future infrastructure development while the losses may have been greater than what they would have been if petitioner had not tried to convert the resort activity to solar power that does not mean he was not trying to operate it for profit petitioner credibly testified that he had a profit_motive when he bought playa de los vivos and that he continues to have one today generally a taxpayer's unimpeached competent and relevant testimony may not be arbitrarily discredited and disregarded by the court 211_f2d_210 6th cir respondent did not refute petitioner's testimony and we believe petitioner based on all the facts and circumstances we conclude that petitioner had a profit_motive in operating his resort activity d one activity or two respondent contends that petitioner operated two activities a resort activity with no profit_motive and a solar equipment activity with a profit_motive because we find that petitioner engaged in the resort activity with a profit_motive it is not necessary for us to decide whether the solar equipment business was a separate activity e conclusion petitioner's activity of operating playa de los vivos was an activity engaged in for profit within the meaning of sec_183 accordingly petitioner's expenses attributable to that activity are allowable as deductions ii negligence respondent determined that petitioner is liable for the accuracy-related_penalty prescribed by sec_6662 with respect to and because we have not sustained respondent's determination of tax deficiencies in petitioner's income_tax for the years in issue there is no basis for the imposition of the penalties determined by respondent in light of the foregoing decision will be entered for petitioner