t c memo united_states tax_court estate of lorraine c disbrow deceased martha d johnson executrix petitioner v commissioner of internal revenue respondent docket no filed date terrence e smolev for petitioner marie e small for respondent memorandum findings_of_fact and opinion laro judge petitioner petitioned the court to redetermine a dollar_figure deficiency that respondent determined in the federal estate_tax pertaining to the estate of lorraine c disbrow deceased decedent’s estate following concessions we decide whether the fair_market_value of the residence residence of lorraine c disbrow deceased decedent is includable in her gross_estate under sec_2036 decedent gave the residence to a newly formed assetless general_partnership whose partners were decedent her children and her children-in-law ie her daughters-in-law and sons-in-law collectively shortly thereafter decedent gave all of her interest in the partnership to the other partners decedent continued to live at the residence until she died paying the partnership less than fair rental value frv respondent determined that the fair_market_value of the residence is includable in decedent’s gross_estate because decedent until her death retained the possession and enjoyment of the residence within the meaning of sec_2036 we sustain that determination we decide this case as the parties framed it and we express no opinion on the validity of the partnership which as we find below conducted no business and was not operated with an intent to make a profit nor do we consider respondent’s alternative determination that decedent’s estate is not entitled to annual exclusions from gift_tax pursuant to sec_2503 because decedent’s gifts were of a future_interest unless otherwise indicated section references are to the applicable versions of the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure findings of fact2 preface some facts were stipulated we incorporate herein by this reference the parties’ stipulation of facts and the exhibits submitted therewith we find the stipulated facts accordingly martha johnson is the executrix of decedent’s estate martha johnson resided in hampstead new hampshire when the petition in this case was filed decedent and her family decedent was born on date and she died pincite a m on date at the age of she was a u s citizen and a resident of the state of new york she died during trial petitioner elicited testimony from two partners of the partnership and the attorney who recommended and implemented the transaction in issue we have evaluated the testimony of each of these witnesses by observing his or her candor sincerity and demeanor and by assigning weight to the elicited testimony for the primary purpose of finding disputed facts see 115_tc_43 affd 299_f3d_221 3d cir our perception of these witnesses while viewing them testifying at trial coupled with our review of the record and our finding that each of these witnesses has a pecuniary interest in the outcome of this case leads us to discount much of their uncorroborated testimony as unreliable we are not required to and we do not rely on that discounted testimony to support petitioner’s positions herein see eg 667_f2d_551 1st cir affg tcmemo_1980_321 haffner’s serv stations inc v commissioner tcmemo_2002_38 affd 326_f3d_1 1st cir see also kenney v commissioner tcmemo_1995_431 where the court declined to rely upon most of the testimony of the taxpayer and a long list of relatives and close friends who testified in support of her claim for innocent spouse relief testate having executed a last will and testament on date pursuant to that document decedent bequeathed her estate to her children in equal shares decedent’s estate as reported on the federal estate_tax_return consisted primarily of cash stocks bonds and annuities and the reported bequest to each child was dollar_figure decedent’s husband john disbrow had died on date he and decedent had five children martha johnson nancy kerrigan linda labet sarah disbrow and david disbrow when decedent died she also had four children-in-law robert johnson married to martha johnson patrick kerrigan married to nancy kerrigan michael labet married to linda labet and david wishart married to sarah disbrow at the time of the partnership_agreement discussed infra martha johnson and her husband lived in hampstead new york nancy kerrigan and her husband lived in san jose california linda labet and her husband lived in new milford connecticut sarah disbrow and her husband lived in lincoln nebraska and david disbrow lived unmarried in fort lauderdale florida decedent’s children and children-in-law all survived her the residence the residence is pincite little neck road centerport new york and includes a two-story single-family house house and landscaped grounds the house is approximately big_number square feet and has two bedrooms and a bathroom on the second floor and three bedrooms and two bathrooms on the first floor the house was built in or around and has a waterview and a private beach the house is set in a private wooded area on date decedent had the residence valued through a comparative market analysis which concluded that the residence was marketable at dollar_figure john disbrow purchased the residence on date and he and decedent lived there until he died decedent acquired sole ownership of the residence upon his death and the residence was her principal_residence until she died when john disbrow died decedent’s health was failing and her health continued to be poor until she died among other things decedent during the time after her husband’s death suffered a kidney failure and was under kidney dialysis she was affected by a severe case of peritonitis she fractured her pelvis she fractured her hip she broke both of her legs getting out of bed and she had multiple heart attacks the last of which resulted in her death during centerport new york is on long island new york near huntington bay of the long island sound see rand mcnally road atla sec_73 millennium ed that time decedent also was feeble from age and mentally unstable after john disbrow died decedent did not always stay at the residence because for a significant period of time she was hospitalized in rehabilitation or living with david disbrow as his home in florida when decedent was at the residence she generally confined herself to the first floor because she could not get up the stairs by herself decedent generally lived at the residence without anyone to assist her except to the extent that a family_member was there also one or more of decedent’s children frequently visited or stayed with decedent to assist her funny hats partnership funny hats in addition to her health complications immediately following john disbrow’s death decedent questioned whether she wanted to keep living at the residence with all of her memories and she was unsure of the financial aspects of her life and how she would handle the ownership responsibilities associated with the residence primarily its maintenance john disbrow had always handled the financial aspects and ownership responsibilities decedent hired a legal team to advise her on her finances one of her advisers was anthony curto curto the attorney whom she had recently retained to probate john disbrow’s estate curto advised decedent on the application to her of the probate and estate_tax laws and he advised her that she should respond to those laws by transferring the residence to a family general_partnership according to curto decedent could then give all of her interest in the partnership to her family continue to live at the residence as a tenant of the partnership and remove the residence from the reach of the federal estate_tax decedent followed curto’s advice on date at almost years of age decedent together with her children and children-in-law executed a general_partnership agreement partnership_agreement forming funny hats curto and his firm prepared all of the documentation for that purpose as stated in the partnership_agreement the partners of funny hats and their partnership interests were as follows partner partnership_interest martha johnson robert johnson nancy kerrigan patrick kerrigan linda labet michael labet david wishart sarah disbrow david disbrow1 decedent david disbrow was decedent’s only unmarried child at the time funny hats was formed and he received an interest in funny hats equal to the interest of each married couple the record does not explain the reason for the name funny hats none of the partners of funny hats contributed any asset to funny hats upon its formation later on date decedent transferred her entire_interest in the residence to funny hats for no consideration immediately before that transfer decedent in her capacity as executrix of john disbrow’s estate had transferred the residence to herself from john disbrow’s estate as of the time of decedent’s transfer of the residence to funny hats the partners of funny hats had assured decedent that she could continue to live at the residence as long as she furnished the funds necessary to maintain it by way of an agreement dated date decedent gave her 125-percent interest in funny hats to her children and children-in-law collectively donees in accordance with that agreement the change to each partner’s interest in funny hats was as follows initial subsequent partner partnership_interest partnership_interest martha johnson robert johnson nancy kerrigan patrick kerrigan linda labet michael labet david wishart sarah disbrow david disbrow decedent as reported on the federal estate_tax_return decedent’s adjusted_basis in the residence was dollar_figure the partnership_agreement of funny hats states that funny hats was created to establish and conduct the business of real_estate ownership and management and that its place of business was the address of the residence funny hats conducted no business and was not operated with an intent to make a profit decedent wanted to divest herself of the responsibility of maintaining the residence but the donees wanted her to keep the residence the donees persuaded decedent to retain the residence by telling decedent that they would maintain the residence as long as decedent furnished the funds necessary to do so the donees enjoyed the residence as a place to vacation to get together as a family or simply to relax the only assets of funny hats were the residence and a checking account with four exceptions the checking account of funny hats was funded by dollar_figure of transfers from decedent a dollar_figure loan from her in and dollar_figure of interest we have attached as an appendix our reconciliation of each year’s beginning and ending cash balances of the funny hats checking account the exceptions are funny hats deposited dollar_figure at the end of from a sale of the residence to david disbrow each of the partners of funny hats other than david disbrow contributed to it dollar_figure and dollar_figure in and respectively david disbrow contributed to funny hats an additional dollar_figure and dollar_figure in and respectively and he contributed dollar_figure to funny hats in and funny hats in and received from unspecified sources the proceeds of loans of dollar_figure and dollar_figure respectively decedent when she was not a partner in funny hats wrote on her personal bank account eight checks that were payable to funny hats and that she then endorsed and deposited into the checking account of funny hats six of those checks were for rent the lease agreements curto and his firm also prepared annual lease agreements collectively lease agreements under which funny hats rented the residence to decedent for each year from date through date curto and his firm represented both decedent and funny hats in preparing these agreements and other documents curto had recommended to the parties to the lease agreements that the agreements be in writing and the parties followed that advice the lease agreements were all signed by linda labet in her capacity as a partner of the landlord funny hats and by decedent in her individual capacity as tenant none of the lease agreements states the date on which it was signed by either of those individuals and none of the lease agreements bears the signature of a witness to those individuals’ signatures curto’s firm prepared each of the lease agreements on the the same form document that applies to house leases in general the form contain sec_30 paragraphs of pretyped provisions and requires that a user supply only the following information name of landlord and the landlord’s address for notices name of tenant identification of the premises lease date term of lease including beginning and ending dates amount of yearly rent amount of monthly rent and amount of security the form also has two spaces for the respective signatures of the landlord and the tenant and a single space for the signature of a witness each of the lease agreements as filled out by curto and his firm is identical except for the last two numbers of the applicable_year in the case of the on the form is crossed out and is typed above and the amounts of monthly and yearly rents pursuant to curto’s advice certain of the pretyped provisions of the lease agreements were crossed out ie provisions stating that these charges cost of required maintenance service contracts will be added rent tenant may not alter decorate change or add to the premises and tenant may not sublet all or part of the premises or assign this lease or permit any other person to use the premises curto also advised the parties to the lease agreements as to the amount of rent that decedent should pay under each of the lease agreements and the parties followed that advice as well the lease agreement for states that the lease is between funny hats as landlord and decedent as tenant that the lease is a 1-year lease of the premises for dollar_figure and that the premises are little neck road centerport new york the lease agreement also states that decedent may pay this rent monthly in dollar_figure installments and that the premises must be used to live in only and for no other reason only a party signing this lease spouse and children of that party may use the premises the lease agreement requires as to the payment of rent that the rent payment for each month must be paid on the first day of that month at the landlord’s address above landlord need not give notice to pay the rent rent must be paid in full and no amount subtracted from it the first month’s rent is to be paid when tenant signs this lease tenant may be required to pay other charges to landlord under the terms of this lease they are to be called added rent this added rent is payable as rent together with the next monthly rent due if tenant fails to pay the added rent on time landlord shall have the same rights against tenant as if it were a failure to pay rent the whole amount of rent is due and payable when this lease is effective payment of rent in installments is for tenant’s convenience only if tenant defaults landlord may give notice to tenant that tenant may no longer pay rent in installments the entire rent for the remaining part of the term will then be due and payable the lease agreement states that the failure to pay rent or added rent on time is a default the lease agreement allows decedent to alter decorate change or add to the residence to sublet all or part of the residence to assign the lease and to permit other persons to use the residence the lease agreement states that the tenant may peaceably and quietly have hold and enjoy the premises for the term of this lease and that the tenant has read this lease all promises made by the landlord are in this lease there are no others this lease may be changed only by an agreement in writing signed by and delivered to each party the lease agreement requires that decedent maintain continue and pay for maintenance service contracts and indicates that these payments are not considered added rent the lease agreement states that decedent must give to funny hats as landlord keys to each lock in the residence each of the lease agreements for the years after contains the same terms as the lease agreement except that the post-1994 lease agreements require the payment of the following annual rent and monthly installments year annual rent monthly installments dollar_figure dollar_figure big_number big_number big_number big_number big_number none of the lease agreements restricts decedent’s use of the residence none of the lease agreements requires that decedent pay a security deposit as to the residence although each agreement contains a provision as to security deposits annual and monthly frv of the residence the annual and monthly frvs of the residence were as follows year annual frv monthly frv dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number decedent’s payments as to the residence during decedent’s leasehold funny hats maintained the residence and made capital improvements the dollar amounts of the capital expenses attributable to the residence were reported on the federal estate_tax_return of decedent’s estate as dollar_figure in dollar_figure in and dollar_figure in for a total of dollar_figure the reported maintenance_expenses for each year from through are set forth infra and aggregate dollar_figure decedent paid directly or indirectly most of the expenses connected with the residence the partners of funny hats did not want to incur out-of-pocket costs as to the residence and they asked decedent to pay rent greater than that stated in the lease agreements to the extent that the stated rent was insufficient to pay expenses connected with the residence decedent wrote the following personal checks to funny hats for rent date of check amount of check notation on face of check date dollar_figure rent jan feb mar apr date big_number may june date big_number rent july aug sept date big_number rent big_number date big_number rent jan feb mar big_number date big_number rent apr may jun date big_number --- date big_number rent oct nov dec big_number date big_number rent jan feb mar date big_number --- date big_number rent july aug sept big_number date big_number --- date big_number rent apr may june date big_number rent july aug sept big_number date big_number rent jan feb mar date big_number rent apr may jun big_number date big_number rent apr may jun date big_number 3q rent date big_number rent oct nov dec big_number decedent also wrote the following three personal checks to funny hats in addition to the checks listed below for decedent made one other dollar_figure payment of rent to funny hats sometime during that year date of check amount of check notation on face of check date dollar_figure --- date big_number --- date big_number transfer big_number decedent did not designate on the face of any of these three checks that she was writing the check for rent and the parties have not stipulated that the check represented rent nor do we find that decedent gave any of these three checks to funny hats as rent decedent’s bank also paid from decedent’s personal account a dollar_figure check that was dated date and was payable to funny hats the face of the check bears the signed name of decedent on the signature line and contains no notation as to its purpose decedent did not write or sign this check the check was written and signed by linda labet and she gave it to another individual not decedent to endorse and to deposit into the checking account of funny hats as shown on the back of this dollar_figure check the check was deposited into the checking account of funny hats on date in addition to the payments discussed above during her leasehold decedent directly paid the following expenses associated with the residence telephone heating water and cable decedent also paid these same types of expenses before she transferred the residence to funny hats decedent’s use of the residence funny hats did not treat decedent in her capacity as a tenant the same way that funny hats would have treated a tenant who was a stranger decedent did not regularly pay her rent as required by the lease agreements she did not always pay the amount of rent that was stated in the lease agreements and she often paid her rent later than the time required by the lease agreements funny hats never mailed decedent a notice demanding that she pay her rent nor did funny hats ever send to decedent a notice of eviction the donees knew that decedent would respect the integrity of the residence and they wanted her to live there as long as she could the donees also wanted decedent to continue to use the residence after its transfer to funny hats as she had before its transfer decedent always had the exclusive use and enjoyment of the entire residence and she always had the right to use the entire residence there were no lease agreements with anyone other than decedent with respect to the residence and no individual had a right superior to that of decedent to use the residence from date through decedent’s death decedent permitted the donees and their families and friends to visit and stay at the residence rent free during various times from date through decedent’s death relevant financial information funny hats filed a form_1065 u s partnership return of income for each year from through these returns state that the principal business activity of funny hats is rental and that its principal product or service is real_estate according to the returns funny hats received rent and incurred related expenses depreciation and net losses as follows gross rents dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure cash expenses insurance -0- -0- big_number big_number big_number big_number legal fee sec_280 taxes -0- big_number big_number big_number big_number big_number big_number miscellaneous -0- -0- -0- -0- -0- travel -0- -0- -0- -0- -0- -0- big_number business meals -0- -0- -0- -0- -0- -0- repairs maint big_number big_number big_number big_number exterminating -0- -0- -0- bank charges -0- -0- -0- big_number big_number big_number big_number big_number big_number big_number depreciation1 big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number net_loss big_number big_number big_number big_number big_number big_number big_number portion of the residence that was purportedly rented to decedent funny hats also reported for through that it had 1funny hats claimed depreciation on the entire house and not just on the received interest_income of dollar_figure dollar_figure dollar_figure and dollar_figure respectively funny hats also reported for that it had realized a dollar_figure net sec_1231 gain funny hats also filed a form_1065 that did not report any income or expense the form_1065 reported that the residence was an asset of funny hats and that the principal business activity of funny hats was inactive for each of the years through and for the amount of gross_rent reported for the year corresponds to the amount of rent that decedent paid funny hats during that year the dollar_figure reported for apparently corresponds to the dollar_figure of rent paid during that year plus the dollar_figure payment that decedent made to funny hats on date the dollar_figure reported for apparently corresponds to the dollar_figure of rent paid during that year plus the dollar_figure payment that decedent made to funny hats on date the dollar_figure reported for apparently corresponds to the dollar_figure check dated date that was paid to funny hats from the checking account of decedent david disbrow david disbrow has worked as a commercial airline pilot since flying mostly international routes in and out of new york new york he lived at the residence from his birth in or around until approximately he returned to the residence in and lived there through he visited at the residence periodically from through the record does not explain the purpose of the dollar_figure check that decedent wrote to funny hats on date for other than rent it appears from our reconciliation in the appendix that this dollar_figure while deposited into the checking account of funny hats was withdrawn for use by someone other than funny hats david disbrow resided principally in florida during some or all of the time discussed herein in late after he was reassigned to fly in and out of new york new york he began to stay approximately days a week at the residence with the consent of decedent also with her consent he allowed his girlfriend to stay periodically at the residence beginning in or about date the girlfriend worked out of new york new york as a flight attendant and she had recently been reassigned there she was without any other place to stay and she became david disbrow’s wife in late or early when david disbrow and his girlfriend stayed at the residence they slept on the second floor of the house they did not pay any rent for their use of the residence and they did not pay any expense connected with the residence sale of the residence when decedent died on date the fair_market_value of the residence was dollar_figure on date funny hats sold the residence to david disbrow for dollar_figure funny hats sold the residence to david disbrow upon his request and did not attempt to obtain a second bid for the residence or otherwise sell it in the market through forms in addition to the forms mentioned above funny hats filed through forms each of the post-2000 returns reports that funny hats’ principal business activity was rental and that its principal product or service was real_estate none of those returns reports any rent for those years the return reports that funny hats realized dollar_figure of interest_income during and was entitled to claim dollar_figure in miscellaneous deductions the return reports that funny hats realized dollar_figure of interest_income during and was entitled to claim dollar_figure in miscellaneous deductions the return reports that this return was a final return and that funny hats had realized dollar_figure of interest_income during estate_tax_return and notice_of_deficiency on or about date martha johnson filed a federal estate_tax_return for decedent’s estate the return reports in part that decedent’s estate owes funny hats dollar_figure for the balance of annual rent due pursuant to lease agreement and that decedent’s estate incurred a dollar_figure expense for the clean out and removal of property re decedent’s home by notice_of_deficiency dated date respondent determined the estate_tax deficiency in issue the parties now agree that decedent’s estate is not entitled to deduct any of the dollar_figure as rent payable to funny hats and that decedent’s estate is entitled to deduct only dollar_figure as a cleaning expense opinion respondent determined that the fair_market_value of the residence is includable in decedent’s gross_estate under sec_2036 because decedent until her death retained the possession and enjoyment of the residence within the meaning of that section petitioner argues that sec_2036 does not apply to this case because decedent paid frv for her use of the residence petitioner asserts that decedent did not have to pay frv for the entire residence because she shared the residence with the donees and their families and friends including david disbrow’s girlfriend petitioner recognizes that the lease agreement required rent installment payments of dollar_figure per month but asserts that this amount was written erroneously into the agreement petitioner asserts that the parties to the lease agreement modified the agreement orally to require that decedent pay monthly rent of dollar_figure which petitioner claims was no less than the frv for decedent’s shared restricted use of the residence the federal estate_tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states see sec_2001 decedent’s taxable_estate equals her gross_estate less applicable deductions see sec_2051 decedent’s gross_estate includes the fair_market_value of all property to the extent provided in sec_2031 through see sec_2031 for purposes of this computation the parties dispute whether sec_2036 applies to the residence in relevant part sec_2036 provides 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 income from the property congress enacted sec_2036 intending to bring within a decedent’s gross_estate ‘transfers that are essentially testamentary--ie transfers which leave the transferor a significant interest in or control_over the property transferred during his lifetime ’ 408_f3d_26 1st cir quoting 395_us_316 affg tcmemo_2004_39 see also 831_f2d_641 6th cir pursuant to sec_2036 decedent’s gross_estate will include the fair_market_value of the residence if decedent retained an interest in the residence for her life or for any other period that does not end before her death in order not to have retained an interest described in sec_2036 decedent must have absolutely unequivocally irrevocably and without possible reservations parted with all of her title possession and enjoyment of the residence 335_us_632 decedent will have retained such an interest in the residence if she transferred the residence to funny hats with an understanding or agreement express or implied that the possession or enjoyment of the residence would be for her pecuniary benefit see 437_f2d_1148 4th cir 73_tc_82 sec_20_2036-1 estate_tax regs see also 408_us_125 ndollar_figure in the context of sec_2036 the word enjoyment denotes the receipt of a substantial present economic benefit 3_f3d_591 2d cir in the context of sec_2036 the terms possession and enjoyment as applied to real_property denote ‘the lifetime use of the property’ quoting united_states v byrum supra pincite affg 98_tc_594 such is so even if the retained_interest is not legally enforceable see estate of abraham v commissioner supra pincite estate of maxwell v commissioner supra pincite 114_tc_144 estate of rapelje v commissioner supra pincite whether decedent had an understanding or agreement to retain possession or enjoyment of the residence following its transfer to funny hats is determined from all of the facts and circumstances surrounding both the transfer itself and the subsequent use of the residence see estate of abraham v commissioner supra pincite we carefully scrutinize the facts and circumstances of a case such as this that involves an intrafamily transaction see estate of 402_f2d_592 n 2d cir affg 48_tc_882 100_tc_313 58_tc_745 affd per curiam without published opinion 502_f2d_1158 1st cir cf estate of abraham v commissioner supra pincite estate of maxwell v commissioner t c pincite sec_7491 was added to the code by the internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 effective for court proceedings arising from examinations commencing after date sec_7491 provides that the burden_of_proof is on the commissioner in specified circumstances while petitioner makes no argument that sec_7491 applies here we need not and do not decide whether petitioner has met all of the prerequisites for that section to apply see eg sec_7491 sec_7491 applies only when certain limitations are met we decide this case without regard to which party bears the burden_of_proof specifically on the basis of the record at hand we find that decedent made a transfer of the residence to funny hats whereby she retained lifetime possession and enjoyment of the residence pursuant to her express and implied understandings and agreements with the donees it seems to us plainly inferable that decedent’s children meant for her to stay at the residence until she died unless of course they had to put her in an assisted living facility or a nursing home the express understandings and agreements of retention are memorialized in the lease agreements these agreements gave decedent the right to the same quiet enjoyment of the entire residence that she had enjoyed before transferring the residence to funny hats the lease agreements stated specifically and without reservation that the leased property was the address of the residence and they contained no relevant limitation on decedent’s exclusive use of the leased property the lease agreements also stated specifically and without reservation that decedent might peaceably and quietly have hold and enjoy the residence for the term of the lease and allowed decedent to further her possession and enjoyment of the residence by altering decorating changing or adding to it the lease agreements even gave decedent the right to sublet all or part of the residence to assign the lease or to permit any other person to use the residence while the presence of a lease may sometimes lead to a finding of a lack of retention for purposes of sec_2036 see eg 55_tc_666 possession and enjoyment of real_property pursuant to a lease was not a retention of the possession or enjoyment of the property for purposes of sec_2036 where the tenant paid frv such is not true where as here the tenant pays less than frv as to the lease of the property decedent’s rights under the lease agreements to the exclusive possession and enjoyment of the residence triggers the application of sec_2036 to the residence in that decedent did not pay frv for that possession and enjoyment as to the implied understanding and agreement between decedent and funny hats as to her continued possession and enjoyment of the residence following its transfer to funny hats we find such an understanding or agreement when we view the conduct of the parties to the lease agreements as well as the lease agreements themselves see estate of reichardt v commissioner supra pincite estate of rapelje v commissioner supra pincite we further find that the annual lease agreements were a subterfuge to disguise the testamentary nature of the transfer first funny hats was not a business operated for profit but was a testamentary device whose goal was to remove the residence from decedent’s gross_estate during decedent’s life funny hats operated solely as a conduit for the payment of expenses related to the residence and operated for the most part only to the extent that decedent furnished it with funds funny hats used the funds that it received from decedent to pay indirectly the same types of expenses that she had paid directly before she transferred the residence to funny hats shortly after decedent died funny hats sold the residence and conducted no activity except for limited tasks related to the liquidation of funny hats second decedent’s relationship to the residence following its transfer to funny hats was not treated by either decedent or funny hats as that of a tenant to leased property decedent was frequently delinquent in paying or failed to pay rent due under the terms of the lease agreements decedent also did not pay rent every year upon signing the lease as also was required by the terms of the lease agreements yet in no instance did funny hats send decedent a late notice accelerate her installment payments make a written demand for payment seek her eviction or ask her to post a security deposit nor did funny hats set decedent’s rent at frv the rent was set at a lesser amount that was considered necessary to maintain the residence it also appears that decedent directly paid the taxes on the residence in and that she directly paid the insurance on the residence in both and third decedent transferred the residence to funny hats when she was almost years old and in poor health following the transfer decedent continued to live at the residence until she died and funny hats never rented or sought to rent the residence after decedent died instead funny hats sold the residence to david disbrow for dollar_figure shortly after decedent’s death without attempting to sell the residence in the market for a higher price the dollar_figure sale price was dollar_figure less than the fair_market_value of the residence at the time of decedent’s death and we find nothing in the record that would account for the purported 5-percent decline in the fair_market_value of the residence from the time of decedent’s death until the time of the sale we also note that the dollar_figure sale price equaled the market_value of the residence as of date as ascertained through the comparative market analysis obtained by decedent on that date fourth as admitted at trial by a partner of funny hats the donees wanted decedent to continue to use and possess the residence as she had before its transfer and wanted decedent to live at the residence for as long as she could the substance of this admission is not remarkable given that decedent was elderly and infirm at the time of the transfer that she had lived in the residence for approximately years before the transfer and that the donees were the natural objects of decedent’s affection and bounty while petitioner places great weight on the fact that funny hats could have theoretically evicted decedent from the residence at the end of a year by not renewing her lease for the next year we do not as stated above lifetime enjoyment and possession may be retained by implied agreement even though not legally enforceable in addition from a factual point of view the partners of funny hats were all members of decedent’s immediate_family and the record gives us no reason to find that they would have evicted decedent from the residence such is especially so given our finding that many of the children traveled from afar to visit decedent both before and after the transfer we also add that decedent during her leasehold retained much wealth in her name and that the children were the equal beneficiaries of that wealth fifth decedent transferred the residence to funny hats on the advice of counsel to minimize the tax on her estate decedent appears to have understood that transferring the residence to funny hats and executing the lease agreements with funny hats was merely a mechanism for removing the residence from her gross_estate while allowing her to retain beneficial_ownership of the residence as the beneficial_owner of the residence but not as a partner of funny hats decedent constantly wrote checks to funny hats and personally cashed those checks to generate funds that were used to maintain the residence petitioner attempts to equate decedent’s payment of rent with frv by arguing that decedent shared the residence with others as we understand petitioner’s argument funny hats retained a right under the lease agreements to use or designate who could use the residence in derogation of decedent’s wishes and without the payment of rent in that the agreements stated that the children of the party decedent may use the premises the partners of funny hats were decedent’s children and children-in-law and the partners as effective owners of the residence through their interests in funny hats did not have to pay themselves rent for their or their designated person’s use of the residence as we further understand petitioner’s argument funny hats pursuant to these retained rights allowed david disbrow to possess all of the residence except for decedent’s bedroom which decedent possessed under the lease agreements and decedent therefore was required to pay only the portion of the frv of the residence that corresponded to the portion of the residence that she possessed as we understand the conclusion of petitioner’s argument decedent paid frv for her shared usage of the residence in in that she paid funny hats dollar_figure in rent for the first quarter of that year we find petitioner’s argument unavailing we find no credible_evidence in the record to establish that someone other than decedent was entitled to use the residence without decedent’s consent the record contains no agreement with the exception of the lease agreements that governs the use of the residence and the lease agreements contain no provision permitting any individual to use any part of the residence in derogation of decedent’s wishes although we find that individuals other than decedent visited and stayed at the residence after the transfer most of these individuals also visited and stayed with decedent before the transfer as was true in both cases the individuals who visited and stayed with decedent were obviously there with decedent’s consent express or tacit in fact although we find that legal_title to the residence changed on account of the transfer we find no substantial change in the way that decedent possessed and enjoyed the residence we also note inconsistencies between petitioner’s claim of decedent’s shared usage and the manner in which funny hats and decedent’s estate reported the rental for federal tax purposes on its partnership returns funny hats reported its rental of the residence to decedent as that of the entire residence in that funny hats deducted percent of its related expenses and claimed depreciation on the entire house the estate_tax_return of decedent’s estate reports that decedent’s estate was entitled to deduct a dollar_figure expense for cleaning out decedent’s home we also find nothing credible in the record to persuade us that decedent agreed to pay monthly installments of rent for in amounts other than the dollar_figure shown in the lease agreement or that decedent was liable in for more than dollar_figure per month petitioner invites the court to find that there was an oral agreement modifying the lease agreement and to find that decedent paid dollar_figure of rent for the first quarter of by means of the date check we decline to make either finding first decedent’s estate admitted on the estate_tax_return that it considered dollar_figure of rent to be owing to funny hats decedent died in date and this dollar_figure corresponds to the product of the remaining months in that year multiplied by the dollar_figure-per-month rate shown in the lease agreement the dollar_figure-per-month rate is also consistent with each of the rates of rent set forth in the lease agreements for prior years although petitioner now asks the court to find that decedent’s rent for years after actually reflected decedent’s shared use of the residence with david disbrow and others second even if we were to assume arguendo that the parties to the lease agreement could modify that agreement orally an assumption that we make with much reservation the record does not support a finding that the referenced dollar_figure check was decedent’s payment of rent for in addition to the fact that the check was not written by decedent nor do we find that it was written by another individual at the direction of decedent the check was written days before decedent died and was not deposited into the account of funny hats until days after decedent died we are skeptical of the legitimacy of that check as one payable from decedent’s account we hold for respondent we have considered all arguments by petitioner for a contrary holding and find those arguments not discussed herein to be without merit given respondent’s concessions decision will be entered under rule petitioner also seeks a contrary holding relying upon 55_tc_666 estate of roemer v commissioner tcmemo_1983_509 diehl v united_states aftr 2d ustc par big_number w d tenn and 238_fsupp_660 w d va each of those cases is factually distinguishable from the case at hand mainly in that decedent did not pay nor did she agree to pay frv for her use of the residence after its transfer to funny hats and decedent and the donees had an understanding and agreement that she would retain possession and enjoyment of the residence until she died appendix cash beginning -0- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure transfers by decedent payment of rent dollar_figure big_number big_number big_number big_number big_number -0- -0- -0- -0- other checks -0- -0- -0- big_number -0- big_number big_number -0- -0- -0- partners’ contributions david disbrow -0- big_number -0- big_number -0- -0- big_number -0- -0- -0- other partners equally -0- big_number -0- big_number -0- -0- -0- -0- -0- -0- interest_income -0- -0- -0- proceeds from loans from decedent -0- -0- -0- -0- -0- big_number -0- -0- -0- -0- from unspecified sources -0- -0- -0- -0- -0- big_number -0- -0- -0- proceeds from sale of residence -0- -0- -0- -0- -0- -0- big_number -0- -0- -0- payment of expenses big_number big_number big_number big_number big_number big_number big_number big_number -0- purchase of capital assets -0- big_number -0- -0- big_number -0- -0- -0- -0- nondeductible portion of business meals -0- -0- -0- -0- -0- -0- -0- -0- -0- distributions to partners david disbrow -0- -0- -0- -0- -0- -0- -0- big_number -0- other partners equally -0- -0- -0- -0- -0- -0- -0- big_number -0- big_number repayment of loans -0- -0- -0- -0- -0- -0- -0- big_number -0- -0- unaccounted withdrawal -0- -0- -0- big_number -0- -0- -0- -0- -0- -0- cash ending big_number big_number big_number big_number big_number big_number big_number big_number -0- 1we note that dollar_figure equals dollar_figure plus dollar_figure six thousand seven hundred and fourteen dollars corresponds to david disbrow’s contribution for and dollar_figure approximates the product of david disbrow’s 20-percent partnership_interest in funny hats and the difference between the total distributions for and dollar_figure dollar_figure dollar_figure - dollar_figure dollar_figure dollar_figure x dollar_figure big_number


internal_revenue_service number release date index number ------------------------------------------ ------------------------------------------------------------ --------------------- ----------------------------------- ----------------------------- in re ------------------------------------------ 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 psi b04 plr-116534-16 date november legend decedent spouse date date dear ----------------- ------------------------------ ---------------------- ------------------- ---------------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election plr-116534-16 spouse as executor of decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during his lifetime as executor spouse requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis 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 sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-116534-16 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a plr-116534-16 see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date it is represented that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void plr-116534-16 this ruling is directed only to the taxpayer requesting it sec_6110 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 sincerely associate chief_counsel passthroughs special industries by karlene m lesho karlene m lesho senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copies for sec_6110 purposes