Court Opinion

ID: 4336464
Source: CourtListenerOpinion
Date Created: 2018-11-14 02:52:03.715843+00
Date Added: 2024-06-11T14:47:52.859536
License: Public Domain

T.C. Memo. 2007-107

                      UNITED STATES TAX COURT

 ESTATE OF HILDE E. ERICKSON, DECEASED, DONOR, KAREN E. LANGE,
             PERSONAL REPRESENTATIVE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

 ESTATE OF HILDE E. ERICKSON, DECEASED, KAREN E. LANGE, PERSONAL
                   REPRESENTATIVE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket Nos. 17982-05, 18003-05.   Filed April 30, 2007.

     Phillip H. Martin, Nathan Honson, and John Rock, for

petitioner.

     Blaine Holiday, for respondent.

              MEMORANDUM FINDINGS OF FACT AND OPINION

     KROUPA, Judge:   Respondent determined a $734,599 deficiency

in the Federal gift tax and a $718,320 deficiency in the Federal
                                  -2-

estate tax of the Estate of Hilde E. Erickson (the estate).1

After concessions, we are asked to decide whether property Hilde

E. Erickson (decedent or Mrs. Erickson) transferred to a family

limited partnership shortly before her death is included in her

gross estate under section 2036(a)(1).2     We hold that it is.

                         FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Karen E. Lange (Karen),

decedent’s eldest daughter and the personal representative of the

estate, resided in Longboat Key, Florida, when the estate filed

the petition.   Mrs. Erickson resided in Minnesota when she died,

and her estate was admitted to probate in the Steele County

District Court in Minnesota.

The Erickson Family

     Mrs. Erickson and her husband, Arthur E. Erickson (Mr.

Erickson), met at Marquette University, where Mr. Erickson was

studying dentistry and Mrs. Erickson was studying dental hygiene.

Mr. and Mrs. Erickson worked together before they married and,

after they married, moved to Reedsburg, Wisconsin, where Mr.

     1
      These cases have been consolidated for purposes of
briefing, trial, and opinion.
     2
      All section and Code references are to the Internal Revenue
Code, and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
                                -3-

Erickson began his dental practice.   Mrs. Erickson stayed home to

raise the couple’s two daughters.

     Once their daughters were grown, Mrs. Erickson returned to

work at Mr. Erickson’s dental practice until they both retired in

1974.   Mr. and Mrs. Erickson volunteered in several countries

including Madagascar, India, Guatemala, Honduras, and Haiti after

they retired.   Mr. Erickson passed away in May 1984.

Mr. Erickson’s Will and the Credit Trust

     Mr. Erickson’s will left most of his assets to Mrs.

Erickson.   Mr. Erickson’s will also set up a credit trust for

Mrs. Erickson’s benefit.   The credit trust was intended to

provide for Mrs. Erickson’s care in the event she depleted her

own assets.   Any remaining funds in the credit trust after Mrs.

Erickson’s death would pass to the Ericksons’ daughters free of

estate tax.   Mrs. Erickson and Karen were the initial trustees of

the credit trust, and the Ericksons’ younger daughter, Sigrid

Knuti (Sigrid) became a successor trustee several years later.

The Ericksons’ Daughters

     Karen worked as a benefits and insurance manager for the

Owatonna Canning Co., a company her husband’s family owned and

operated.   Karen’s husband, Chad Lange (Chad), was in the third

generation of Lange family members to run the canning company,

which was sold to Chiquita in 1997.   After the sale to Chiquita,

Chiquita hired Karen to work on international business
                                -4-

development, which she did until she retired in 2000.     Chad and

Karen have two children, a daughter and a son.

     Sigrid did nonprofit work and then moved to Moscow in 1998

with her husband, David Knuti (David), an analyst in the Foreign

Commercial Service.   David retired in 2004.    David and Sigrid

have three daughters.

Mrs. Erickson’s Powers of Attorney

     Mrs. Erickson initially granted Karen a durable power of

attorney in 1987.   Mrs. Erickson revoked the 1987 power of

attorney and executed a new power of attorney in 1994.     The 1994

power of attorney remained in effect as of Mrs. Erickson’s death.

The 1994 power of attorney granted Sigrid a successor power of

attorney and also authorized Karen to make gifts to herself.

Management of Mrs. Erickson’s Affairs and Investments

     Karen began handling her mother’s finances in 1998 or 1999

and signed documents on behalf of her mother when Mrs. Erickson

became unable to sign for herself in 1999 or 2000.     Karen began

dealing with the credit trust on her mother’s behalf and managing

the credit trust’s investments as well as her mother’s own

investments in securities and real estate.     Karen also helped

move her mother’s personal investments in stocks and bonds into

brokerage accounts from Mrs. Erickson’s safe deposit box.     Around

the same time, Karen began managing David and Sigrid’s

condominium investment when David and Sigrid moved to Moscow.
                                  -5-

     The credit trust had over $1 million in assets, consisting

of marketable securities as well as a Florida investment

condominium.   Karen managed the condominium investment when she

took over the financial management of the credit trust.    This

management duty included tasks such as deciding on renovations,

depositing rental checks, and addressing taxes and association

fee matters.

Mrs. Erickson’s Medical History

     Karen first noticed Mrs. Erickson’s confusion on a few

occasions in the late 1990s and became concerned.   Nurses and

doctors also noted a gradual decline in Mrs. Erickson’s cognitive

powers at about the same time, particularly as it affected Mrs.

Erickson’s short-term memory.   Mrs. Erickson’s doctor confirmed a

diagnosis of Alzheimer’s disease on March 5, 1999, when Mrs.

Erickson was 86 years old.   Mrs. Erickson’s Alzheimer’s disease

continued to progress.   By May 2000, Mrs. Erickson no longer

drove or cooked.

     Mrs. Erickson’s health continued to decline, and the family

decided it was best to help Mrs. Erickson move into a supervised

living facility.   Mrs. Erickson was experiencing significant

difficulties recalling family members, and she was disoriented as

to the time, place, and date.   Mrs. Erickson moved into one

facility in June 2000 and moved to a different facility in
                                 -6-

September 2000.    The second facility was able to provide more

medical care and a more structured environment for Mrs. Erickson.

     Mrs. Erickson also experienced other serious physical

problems in 2000 and 2001.    She fell and fractured her right hip

on September 7, 2000.    She fell several additional times over the

next few months and required surgery to replace her left hip

after a fall in May 2001.    Mrs. Erickson’s family expected her to

live another year or two after the hip surgery.    Mrs. Erickson

also fractured her collarbone in July 2001.    Mrs. Erickson had

significant medical expenses, totaling $25,672 in 2000 and

$41,791 in 2001.

     After Mrs. Erickson was diagnosed with Alzheimer’s disease,

Merrill Lynch Financial Foundation prepared a report at the

family’s request regarding Mrs. Erickson’s financial situation

and planning alternatives and recommendations.    The report

indicated that Mrs. Erickson desired to maintain a $100,600

annual budget and minimize estate shrinkage.    The report

estimated that the estate would owe over $500,000 in Federal

estate taxes and advised that tax and estate professionals be

consulted.

Formation of the Arthur and Hilde Erickson Family LLLP (the
Partnership)

     Karen originally considered the possibility of forming a

family limited partnership in a meeting with counsel in March or

April 2001 where Chad and Karen’s own financial affairs were
                                 -7-

being discussed.    Karen waited to discuss the family limited

partnership idea in detail with Sigrid because of the expense of

calling Russia to speak with her sister.    Instead, Karen

suggested the idea to her sister briefly in an e-mail.    When

Sigrid visited her family in Minnesota for Mrs. Erickson’s hip

replacement surgery in 2001, Sigrid and Karen met with counsel

together to talk about a family limited partnership.    Karen also

discussed the concept with Mrs. Erickson, but not the financial

aspects of the transaction in any detail.

     The parties signed the limited partnership agreement

creating the Partnership in May 2001.    Karen acted on behalf of

her mother and herself and as co-trustee of the credit trust in

forming the Partnership.    The same law firm represented all of

the parties to the limited partnership agreement although Sigrid

informally mentioned the idea to an attorney friend of hers.

Sigrid admitted that she did not understand the particulars of

the transaction.    She was aware, however, that a family limited

partnership would have estate tax advantages due to valuation

discounts that apply to the partnership interests.

     The limited partnership agreement provided that Karen and

Sigrid were both general partners and limited partners.      Mrs.

Erickson (acting through Karen as her attorney-in-fact), Chad,

and the trustees of the credit trust (Karen and Sigrid) were

limited partners.    Karen signed the limited partnership agreement
                                  -8-

in multiple capacities.   She signed in her personal capacity as

well as co-trustee of the credit trust and as attorney-in-fact

for Mrs. Erickson.

     The limited partnership agreement provided that Mrs.

Erickson would contribute securities plus a Florida condominium

she owned in exchange for an 86.25-percent interest in the

Partnership.   The parties stipulated that the fair market value

of these assets Mrs. Erickson contributed was approximately $2.1

million.

     The limited partnership agreement also provided that Karen

would contribute two partial interests in a Colorado investment

condominium she and Chad owned in exchange for a general

partnership interest and a limited partnership interest,

representing 1.4 percent of the Partnership in the aggregate.

Sigrid would contribute two partial interests in a Colorado

investment condominium she owned in exchange for a general

partnership interest and a limited partnership interest,

representing 2.8 percent of the Partnership in the aggregate.

Chad would contribute a partial interest in the Colorado

condominium he and Karen owned in exchange for a 1.4-percent

limited partnership interest.   The total of Chad and Karen’s

contributions equaled a 100-percent interest in the Colorado

condominium they jointly owned.
                               -9-

     Finally, the limited partnership agreement also provided

that the credit trust would contribute a Florida condominium in

exchange for an 8.2-percent limited partnership interest.   The

credit trust did not contribute any of the $1 million in

marketable securities it owned to the Partnership.   Both Karen

and Sigrid were aware that there were no estate tax concerns

regarding the assets in the credit trust unlike the estate tax

concerns they had regarding Mrs. Erickson’s personal assets.

Instead, Karen and Sigrid would receive the credit trust assets

free of estate tax after Mrs. Erickson’s death.   They thus opted

to leave the credit trust securities outside the Partnership.

Transfer of Assets to the Partnership

     Although the limited partnership agreement contemplated that

the partners’ assets would be contributed to the Partnership

concurrently with the signing of the limited partnership

agreement, no transfers to the Partnership occurred upon

execution of the agreement.

     Karen took care of some administrative matters first, such

as obtaining a certificate of limited partnership from the State

of Colorado and applying for an employer identification number.

The certificate of limited partnership listed a Snowmass Village,

Colorado, address for service of process, an address that had no

mail delivery.
                               -10-

     No transfer of assets to the Partnership began for about 2

months.   Karen instructed Merrill Lynch to transfer all of Mrs.

Erickson’s assets it held, totaling over $1 million in

securities, to the Partnership’s account in July 2001.    Karen

also instructed Wells Fargo to transfer over $500,000 of Mrs.

Erickson’s assets it held to the Partnership’s account.    No other

transfers occurred before Karen went to visit Sigrid in Moscow in

September 2001, other than the execution of quitclaim deeds

relating to the Colorado investment condominiums.

Mrs. Erickson’s Failing Health and the Remaining Partnership
Transfers

     When Karen returned from her Moscow trip, she visited her

mother and noticed that Mrs. Erickson was not feeling well.

Karen took Mrs. Erickson to the hospital on September 27, 2001.

Mrs. Erickson was suffering from a decreased level of

consciousness and pneumonia.   The pneumonia did not appear to be

improving, and the family decided to opt for medical care to

simply keep Mrs. Erickson comfortable in accordance with her

wishes.

     The following day, September 28, 2001, while Mrs. Erickson’s

health was failing, Karen scrambled to make transfers.    Karen,

acting on behalf of Mrs. Erickson, executed a deed transferring

Mrs. Erickson’s Florida condominium unit to the Partnership.

Karen, acting as co-trustee of the credit trust, also signed a

trustee’s deed transferring the Florida condominium unit the
                               -11-

credit trust owned to the Partnership the same day.   Karen, on

behalf of Mrs. Erickson, then finalized gifts to Mrs. Erickson’s

grandchildren by giving limited partnership interests in the

Partnership to three trusts for the grandchildren’s benefit (the

grandchildren’s gifts).   These gifts reduced Mrs. Erickson’s

86.25-percent interest in the Partnership to only a 24.18-percent

interest.

     Karen called Sigrid in Moscow on September 28 to tell her

that their mother’s health was failing.   Sigrid arrived in

Minnesota from Russia on September 29, 2001.   Mrs. Erickson died

the following morning.

     Shortly before she died, Karen, acting as attorney-in-fact,

transferred over $2 million of Mrs. Erickson’s assets to the

Partnership and then substantially reduced Mrs. Erickson’s

partnership interest by making the grandchildren’s gifts.     Most

of the retained personal assets, including the substantially

reduced retained partnership interest, were illiquid.

Operation of the Partnership and Partnership Transactions

     The family continued to operate the Partnership after Mrs.

Erickson’s death.   The condominiums in Florida and Colorado were

managed by the same onsite management companies both before and

after they were contributed to the Partnership.   The management

companies were responsible for the day-to-day work such as

booking reservations, checking in guests, cleaning the units, and
                               -12-

responding to emergencies.   The marketable securities the

Partnership held continued to be managed by investment advisers

at Wells Fargo and Merrill Lynch after they were contributed to

the Partnership.

     The Partnership has explored investment opportunities in

real estate and has bought and sold some securities.   Over time,

the Partnership has become less invested in bonds and more

heavily invested in real estate.

     The Partnership has made three loans, two of which were to

its partners.   The Partnership lent $140,000 to Sigrid to enable

her to purchase a Florida condominium in her individual capacity.

The Partnership did not take a security interest in the

condominium but accepted Sigrid’s partnership interest as

collateral.   When Sigrid learned that she could receive a more

favorable interest rate from a different lender, she brought this

to the Partnership’s attention, and the Partnership agreed to

reduce the interest rate on Sigrid’s loan.   Sigrid, acting as

general partner of the Partnership, approved both the original

loan to herself and the subsequent rate reduction.   The

Partnership also lent Chad $70,000.   Sigrid and Chad each repaid

the loans timely.

Administration of the Estate and Payment of Estate Tax
Liabilities

     Karen was appointed the personal representative of the

estate pursuant to Mrs. Erickson’s will.   The estate was unable
                               -13-

to meet its liabilities for estate and gift taxes.    To obtain the

funds necessary to meet the estate’s obligations, Karen engaged

in two transactions.   First, she sold Mrs. Erickson’s home to the

Partnership for $123,500.   Second, the Partnership gave Mrs.

Erickson’s estate cash totaling $104,000.   The parties

characterized the $104,000 disbursement as a redemption of some

of Mrs. Erickson’s partnership interests.

Respondent’s Examination and Tax Court Proceedings

     Respondent examined the estate’s gift tax and estate tax

returns and issued deficiency notices.   The estate timely filed

petitions, and the cases were consolidated.   The parties have

stipulated the fair market values of the assets Mrs. Erickson

contributed to the Partnership and have stipulated the fair

market values of the partnership interest Mrs. Erickson retained

after making the grandchildren’s gifts of partnership interests.

                              OPINION

     We are asked to decide whether the assets Mrs. Erickson

transferred to the Partnership shortly before she died are

included in her gross estate under section 2036.3    Respondent

     3
      Respondent argues in the alternative that the gross estate
includes the property transferred to the Partnership pursuant to
sec. 2038. We find for respondent under sec. 2036 and therefore
need not address respondent’s argument under sec. 2038.
Respondent also makes two additional arguments in his opening
brief, neither of which the estate addressed on brief. First,
respondent argues that the gross estate includes the partnership
interests that Karen, acting on behalf of Mrs. Erickson,
                                                   (continued...)
                               -14-

argues that Mrs. Erickson retained the possession or enjoyment

of, or the right to the income from, the transferred assets.

Respondent argues, further, that the assets were not transferred

in a bona fide sale for adequate and full consideration.    The

estate counters that Mrs. Erickson retained no rights to the

assets once she transferred them to the Partnership and,

alternatively, that the assets were transferred in a bona fide

sale for adequate and full consideration.   We shall consider the

parties’ arguments after first addressing the burden of proof.

I.   Burden of Proof

     The estate orally moved at trial to shift the burden of

proof under section 7491.   We took the oral motion under

advisement and now conclude, after carefully reviewing the

record, that we must deny the estate’s motion to shift the burden

of proof.

     3
      (...continued)
transferred to the trusts for Mrs. Erickson’s grandchildren (the
grandchildren’s gifts) under sec. 2035(a) to the extent that the
grandchildren’s gifts severed the interests Mrs. Erickson
retained in her property under sec. 2036. Second, respondent
argues that the gross estate includes the gift tax on the
grandchildren’s gifts pursuant to sec. 2035(b). The estate did
not address either of these issues at trial or on brief, and we
shall treat the estate as having conceded them. See Rybak v.
Commissioner, 91 T.C. 524, 566 (1988). Finally, the parties do
not dispute that the generation-skipping transfer tax under sec.
2601 applies and the amount of this tax will be calculated
pursuant to our decision.
                               -15-

     The Commissioner’s determinations are generally presumed

correct, and the taxpayer bears the burden of proving that the

Commissioner’s determinations are in error.    See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).     Section 7491(a)

shifts the burden of proof to the Commissioner, however, with

respect to a factual issue relevant to a taxpayer’s liability for

tax under certain circumstances.    The burden shifts to the

Commissioner if the taxpayer introduces credible evidence with

respect to the issue and meets the other requirements of section

7491(a).   Sec. 7491(a)(2)(A) and (B).4

     Credible evidence is defined as the quality of evidence

which, after critical analysis, we would find sufficient upon

which to base our decision.   Higbee v. Commissioner, 116 T.C.
438, 442 (2001); H. Conf. Rept. 105-599, at 240-241 (1998), 1998-

3 C.B. 747, 994-995.   Evidence will not meet this standard if we

are unconvinced it is worthy of belief.    H. Conf. Rept. 105-599,

supra at 241, 1998-3 C.B. at 995.     Moreover, we are not compelled

to believe evidence that seems improbable or to accept as true

uncorroborated, although uncontradicted, evidence by interested

witnesses.   Blodgett v. Commissioner, 394 F.3d 1030, 1036 (8th

Cir. 2005) (quoting Marcella v. Commissioner, 222 F.2d 878, 883

     4
      Sec. 7491 is effective with respect to court proceedings
arising in connection with examinations by the Commissioner
commencing after July 22, 1998, the date of enactment of the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.
                                -16-

(8th Cir. 1955), affg. in part and vacating in part a Memorandum

Opinion of this Court), affg. T.C. Memo. 2003-212.

     We have carefully reviewed the testimony and exhibits the

estate offered.   The two witnesses the estate called were Mrs.

Erickson’s daughters.   Both were partners in the Partnership, and

one was on all sides of the formation transaction.   Karen signed

the limited partnership agreement several times in her multiple

capacities.   While we acknowledge much of the daughters’

testimony was uncontradicted, we find their testimony,

particularly regarding the rationale for the Partnership and the

timelines of the transfers, to be self-serving and, more

importantly, not credible.   Neither are we required to nor do we

accept self-serving testimony we find to be not credible.     We

find the daughters’ testimony represents an after-the-fact

rationalization rather than a candid recollection of the facts

and circumstances surrounding the transactions at issue.    We

therefore find that the evidence the estate introduced is not

credible.

     Accordingly, we conclude that the estate has not met the

requirements of section 7491 because the estate has not

introduced credible evidence.   We therefore shall deny the

estate’s oral motion to shift the burden of proof under section

7491.
                                 -17-

II.   Inclusion of Transferred Assets With Retained Interests in
      Gross Estate Under Section 2036(a)(1)

      We now focus on whether the transferred assets are

includable in the gross estate and begin by outlining a few

general principles.   The Code generally imposes tax on the

transfer of the taxable estate of any decedent who is a United

States citizen or resident.     Sec. 2001(a).   The determination of

the taxable estate begins with the value of the gross estate,

which includes the fair market value of all property to the

extent provided in sections 2031 through 2046.     Secs. 2031, 2051.

      If a decedent makes an inter vivos transfer of property

(other than a bona fide sale for adequate and full consideration)

and retains certain specific rights or interests in the property

that are not relinquished until death, the full value of the

transferred property will generally be included in the decedent’s

gross estate.   Sec. 2036(a).    The purpose of section 2036(a) is

to include in the gross estate those transfers made during a

decedent’s life that are essentially testamentary in nature.

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

There are three requirements for the property to be included in a

decedent’s gross estate under section 2036(a).     First, the

decedent must have made an inter vivos transfer of property.

Second, the decedent must have retained an interest or a right

specified in section 2036(a)(1) or (2) or (b) in the transferred

property that he or she did not relinquish until death.     Finally,
                               -18-

the transfer must not have been a bona fide sale for adequate and

full consideration.   Estate of Bongard v. Commissioner, 124 T.C.
95, 112 (2005).

     The parties agree that Mrs. Erickson made an inter vivos

transfer of assets to the Partnership.    We therefore consider

whether Mrs. Erickson retained rights or interests in the

property she transferred.   If she did, we then must consider

whether Mrs. Erickson’s transfer meets the exception for bona

fide sales for adequate and full consideration.

     A.   Whether Mrs. Erickson Retained Possession or Enjoyment
          of the Transferred Property

     Property is included in a decedent’s gross estate if the

decedent retained, by express or implied agreement, possession,

enjoyment, or the right to income.    Sec. 2036(a).   The term

“enjoyment” in section 2036(a) is synonymous with substantial

present economic benefit, not speculative and contingent benefit.

Estate of Abraham v. Commissioner, 408 F.3d 26, 39 (1st Cir.

2005), affg. T.C. Memo. 2004-39; Estate of McNichol v.

Commissioner, 265 F.2d 667, 671 (3d Cir. 1959), affg. 29 T.C.
1179 (1958); Estate of Reichardt v. Commissioner, 114 T.C. 144,

151 (2000).   Part of the possession and enjoyment of one’s assets

is the assurance that these assets will be available to pay debts

and expenses after death.   Strangi v. Commissioner, 417 F.3d 468,

477 (5th Cir. 2005), affg. T.C. Memo. 2003-145.
                                -19-

     A decedent retains possession or enjoyment of transferred

property under section 2036 where there is an express or implied

understanding to that effect among the parties, even if the

retained interest is not legally enforceable.    Estate of Maxwell

v. Commissioner, 3 F.3d 591, 593 (2d Cir. 1993), affg. 98 T.C.
594 (1992); Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir.

1971); Estate of Reichardt v. Commissioner, supra at 151; see

also sec. 20.2036-1(a), Estate Tax Regs.   The accounting

treatment of the transactions is also not controlling.      Estate of

Strangi v. Commissioner, T.C. Memo. 2003-145.

     Whether the parties had an understanding amongst themselves

is determined from the facts and circumstances surrounding the

transfer and the subsequent use of the property.    Estate of

Abraham v. Commissioner, supra at 39; Estate of Reichardt v.

Commissioner, supra at 151.    No one fact is determinative.    We

must carefully scrutinize the facts and circumstances here

because intrafamily transactions are involved.   See Estate of

Maxwell v. Commissioner, 98 T.C. 602.    We examine whether the

terms and conditions of the transfer of assets to the family

limited partnership are the same as if unrelated parties had

engaged in the same transaction.   See Estate of Rosen v.

Commissioner, T.C. Memo. 2006-115 (citing Estate of Bongard v.

Commissioner, supra at 123).
                               -20-

     Some factors we have previously considered important in

assessing whether a decedent impliedly retained the right to

possession and enjoyment of the transferred assets include

commingling of funds, a history of disproportionate

distributions, testamentary characteristics of the arrangement,

the extent to which the decedent transferred nearly all of his or

her assets, the unilateral formation of the partnership, the type

of assets transferred, and the personal situation of the

decedent.   Estate of Rosen v. Commissioner, supra; Estate of

Harper v. Commissioner, T.C. Memo. 2002-121.    The likelihood that

an implied agreement will permit the individual to keep using

contributed assets is the greatest when the individual conveys

nearly all of his or her assets.   Estate of Reichardt v.

Commissioner, supra; Estate of Rosen v. Commissioner, supra.

     Respondent argues that the facts and circumstances indicate

Mrs. Erickson retained the right to possess or enjoy the assets

transferred to the Partnership pursuant to an implied

understanding or agreement among the parties to the transactions.

We agree.

     We are troubled by the delay in transferring the assets to

the Partnership.   The delay suggests that the parties did not

respect the formalities of the Partnership.    Specifically, the

partnership agreement provided that the partners would contribute

assets concurrently with the execution of the partnership
                               -21-

agreement, yet no assets were transferred then; many transfers

occurred only 2 days before Mrs. Erickson died.   Although the

Partnership had separate accounts from its partners, the record

reflects that the partners were in no hurry to alter their

relationship to their assets until decedent’s death was imminent.

     The Partnership also had to provide the estate with funds to

meet its liabilities.   This fact is telling in two respects.

First, disbursing funds to the estate is tantamount to making

funds available to Mrs. Erickson (or the estate) if needed.

Second, although the estate designated the funds disbursed to the

estate as a purchase of Mrs. Erickson’s home and a redemption of

units rather than a distribution, the estate received

disbursements at a time that no other partners did.   These

disbursements provide strong support that Mrs. Erickson (or the

estate) could use the assets if needed.

     Finally, the Partnership had little practical effect during

Mrs. Erickson’s life, particularly because the Partnership was

not fully funded until days before she died.   Indeed, the

Partnership was mainly an alternate method through which Mrs.

Erickson could provide for her heirs.   Karen, acting on behalf of

Mrs. Erickson, transferred substantial amounts of her partnership

interests in making the grandchildren’s gifts 2 days before she

died.   Moreover, Mrs. Erickson had been in declining health for

some time.   She was diagnosed with Alzheimer’s disease in March
                               -22-

1999 and died at age 88 after a period of declining health and

physical problems.

     Although no one factor is determinative, these facts and

circumstances, when taken together, show that an implied

agreement existed among the parties that Mrs. Erickson retained

the right to possess or enjoy the assets she transferred to the

Partnership.   The transaction represents decedent’s daughters’

last-minute efforts to reduce their mother’s estate’s tax

liability while retaining for decedent the ability to use the

assets if she needed them.

     B.    Bona Fide Sale for Adequate and Full Consideration

     Having concluded that Mrs. Erickson implicitly retained the

enjoyment of the assets she transferred to the Partnership, we

must now determine whether the bona fide sale exception of

section 2036 applies.   Under the bona fide sale exception,

transfers a decedent makes before death are not included in the

decedent’s gross estate if the transfers are bona fide sales for

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

2036(a).   We have recently stated that the bona fide sale

exception applies if the record shows that a family limited

partnership was formed for a legitimate and significant nontax

reason and that each transferor received a partnership interest

proportionate to the fair market value of the property

transferred.   Estate of Bongard v. Commissioner, 124 T.C. 118.
                                  -23-

     We begin by examining whether the estate has proven that the

Partnership was formed for a legitimate and significant nontax

purpose.    The nontax reason for forming the partnership must have

been a significant factor and must be established by objective

evidence. Id.   The purpose must be the actual motivation, not

simply a theoretical justification. Id.

     We have identified several factors indicating that a

transaction was not motivated by a legitimate and significant

nontax purpose. Id.   These factors include the taxpayer’s

standing on both sides of the transaction, the taxpayer’s

financial dependence on distributions from the partnership, the

partners’ commingling of partnership funds with their own, and

the taxpayer’s actual failure to transfer money to the

partnership. Id. at 118-119.

     We have found a significant nontax purpose where the

justification for the transaction was the decedent’s personal

views and concerns regarding the operation of an income-producing

activity and not a business exigency.     See Estate of Schutt v.

Commissioner, T.C. Memo. 2005-126 (family limited partnership had

a significant nontax purpose of facilitating the decedent’s buy

and hold investment strategy and assuaging the decedent’s worry

that his heirs would sell his investments after his death).

There is no significant nontax purpose, however, where a family

limited partnership is just a vehicle for changing the form of
                                -24-

the investment in the assets, a mere asset container.    Estate of

Rosen v. Commissioner, T.C. Memo. 2006-115; Estate of Harper v.

Commissioner, T.C. Memo. 2002-121.

     We now examine both the estate’s asserted nontax purposes

for forming the Partnership and the objective facts.    While

Sigrid admitted at trial that the estate tax advantage of

obtaining a decreased fair market value of Mrs. Erickson’s assets

was certainly a motivating factor, the estate asserts several

possible nontax reasons for forming the Partnership.

     First, the estate argues that forming the Partnership

allowed the family to centralize the management of the family

assets and give the management responsibilities to Karen.    We

note, however, that Karen already had significant management

responsibilities with respect to family assets before the

Partnership was formed.   In fact, Karen had held Mrs. Erickson’s

power of attorney since 1987.    It is not clear from the record

what advantage the family members believed they would receive

through another layer of “centralized management” of these

assets.5   Second, the estate argues that the Partnership afforded

greater creditor protection.    A creditor who sought funds from

     5
      The estate does not argue, and we do not find, that the
family members decided to form the Partnership to manage Mrs.
Erickson’s assets after her diagnosis of Alzheimer’s disease.
Karen had already managed Mrs. Erickson’s financial affairs for
many years before the diagnosis by serving as attorney-in-fact
under a durable power of attorney.
                               -25-

the Partnership, however, would have a significant asset base

from which to recover from the Partnership, over $2 million.

Finally, the estate argues that the Partnership facilitated Mrs.

Erickson’s gift-giving plan.   Facilitating a gift-giving plan is

not a significant nontax purpose.     See Estate of Rosen v.

Commissioner, supra.   We find none of the estate’s asserted

nontax purposes for forming the Partnership compelling.

     Moreover, the facts and circumstances surrounding the

transaction also fail to show any nontax purpose for the

Partnership.   The Partnership was mainly a collection of passive

assets, primarily marketable securities and rental properties

that remained in the same state as when they were contributed.

In addition, the same investment advisers and property managers

managed the assets both before and after the transfers to the

Partnership.   The estate highlights the slight shift in the

Partnership’s investment allocation from bonds to real estate as

proof that the partners made deliberate, businesslike investment

decisions.   We cannot discern, however, any business goals or any

particular reasons for the Partnership to invest in certain

assets.   We note also that the Partnership made loans to family

members and, indeed, in at least one instance, even lowered an

interest rate that a partner had previously agreed to pay.     We

find that the Partnership was a mere collection of mostly passive
                                -26-

assets intended to assist Mrs. Erickson’s tax planning and

benefit the family.

     While Karen and Sigrid discussed the Partnership before it

was formed, the circumstances suggest that the Partnership was

essentially formed unilaterally, with Karen controlling the

transaction.   Sigrid admitted at trial that she did not

understand the particulars of the transaction, nor is there any

credible evidence that Mrs. Erickson understood the transaction.

Karen was on every side of the transaction.   She acted as

attorney-in-fact for her mother, she was the personal

representative of her mother’s estate, she was both a general

partner and a limited partner in the Partnership in her

individual capacity, and she was a co-trustee of the credit

trust, which was also a partner in the Partnership.   Moreover,

the same law firm represented all parties to the transaction.

While retaining counsel to assist in an important transaction is

entirely appropriate, the fact that no family member was

represented by different counsel also suggests a unilateral

approach to the transaction.6

     Another key fact indicating that no significant nontax

purpose existed was the delay in contributing assets to the

     6
      Sigrid’s informal mention of the arrangement to an attorney
friend is not probative. Sigrid admitted that their discussion
was informal and that she never signed an engagement letter.
Sigrid’s own testimony indicates that Sigrid’s friend was not
acting as Sigrid’s attorney in the formation of the Partnership.
                                -27-

Partnership.   The need to manage Mrs. Erickson’s assets existed

early.   Karen had been assisting her mother for years with her

financial affairs.   Despite the need to assist Mrs. Erickson, the

partners did not immediately fund the Partnership when they

executed the partnership agreement.    Meanwhile, Mrs. Erickson’s

health continued to decline.    It was only after Mrs. Erickson had

been admitted to the hospital with pneumonia, two days before she

died, that the partners finally completed their transfers.    While

we acknowledge that a few months’ delay is not a long time in

absolute terms, the months’ delay here was significant as it came

as Mrs. Erickson’s health was declining and ultimately resulted

in the family members’ finalizing the transfers to the

Partnership while Mrs. Erickson was dying in the hospital.    The

haste with which they were able to transfer the assets shortly

before Mrs. Erickson died belies the estate’s argument that the

parties needed time to transfer their assets and the delay was

out of the partners’ control.   Despite Mrs. Erickson being an

octogenarian in declining medical health, the parties waited

until the prospect of her death loomed to finish the transaction

and make sure the partnership affairs were in order.

     The estate was financially dependent on the Partnership and

needed approximately $200,000 to help pay its liabilities.    We

are unpersuaded by the estate’s arguments that Mrs. Erickson’s

death was unforeseen and a decline in the stock market caused her
                                -28-

assets to decrease in value.   The record reflects that

insufficient assets were left to allow the estate to pay its

debts.   We acknowledge that the Partnership characterized the

disbursements of funds to the estate as a purchase of Mrs.

Erickson’s home and redemption of some of the estate’s

partnership interests.   The form of the transaction, however, is

not controlling.    Moreover, the record does not reflect that the

Partnership and the estate would have engaged in these

transactions absent the estate’s need for funds.

     Mrs. Erickson’s age and health at the time of the

transaction strongly indicate that the transfers were made to

avoid estate tax.   Mrs. Erickson was 88 years old when the

parties formed the Partnership in 2001 and had been suffering

from Alzheimer’s disease for several years.   Mrs. Erickson was by

then unable to handle her own financial affairs, was no longer

cooking for herself or driving, had difficulties recalling family

members, and was disoriented regarding the date, time, or place.

Mrs. Erickson’s age and declining health weigh against a finding

that the parties formed the Partnership for any reason other than

to help reduce Mrs. Erickson’s estate tax liability.

     Finally, while it is undisputed that each partner

contributed assets of value to the partnership in exchange for

his or her partnership interest, the existence of these

legitimate transfers of value does not mandate a conclusion that
                                -29-

the bona fide sale exception is met.    The transaction must have a

legitimate and significant nontax purpose as well as adequate and

full consideration.    See Estate of Bongard v. Commissioner, 124
T.C. 118.

     We conclude, considering the totality of the facts and

circumstances and bearing in mind that no one factor is

necessarily determinative, that the estate has failed to show a

legitimate and significant nontax purpose for the Partnership,

and, therefore, Mrs. Erickson’s transfer of assets to the

Partnership was not a bona fide sale.   The estate failed to

identify any legitimate nontax purpose, and the objective facts

indicate that no such legitimate nontax purpose existed.    Because

we have found that Mrs. Erickson’s transfer was not a bona fide

sale, we need not examine whether adequate and full consideration

existed for the transfer.   The exception to section 2036 for bona

fide sales for adequate and full consideration does not apply.

III. Conclusion

     We have found that an implied agreement existed under which

Mrs. Erickson retained possession and enjoyment of the assets she

transferred.    We have also found that the property Mrs. Erickson

contributed to the Partnership was not transferred in a bona fide

sale.   Accordingly, section 2036(a)(1) applies, and the property

Mrs. Erickson transferred to the Partnership is included in her

gross estate.
                         -30-

To reflect the foregoing and the concessions of the parties,

                                       An appropriate order will

                                be issued denying petitioner’s

                                oral motion to shift the

                                burden of proof, and decisions

                                will be entered under Rule

                                155.