Court Opinion

ID: 4337011
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:07:42.36425+00
Date Added: 2024-06-11T14:47:30.743285
License: Public Domain

T.C. Memo. 2008-74

                       UNITED STATES TAX COURT

ESTATE OF ANNA MIROWSKI, DECEASED, GINAT W. MIROWSKI AND ARIELLA
      ROSENGARD, PERSONAL REPRESENTATIVES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 15724-05.               Filed March 26, 2008.

     Albert H. Turkus, Bryon A. Christensen, John P. Marston,

Sidney J. Silver, and Brian L. Alpert, for petitioners.

     William J. Gregg, J. Craig Young, and Warren P. Simonsen,

for respondent.

             MEMORANDUM FINDINGS OF FACT AND OPINION

     CHIECHI, Judge:    Respondent determined a deficiency of

$14,243,208.37 in Federal estate tax (estate tax) with respect to
                               - 2 -

the Estate of Anna Mirowski (decedent’s estate).1

     The issues remaining for decision are whether any of the

assets owned by Mirowski Family Ventures, L.L.C. (MFV), are

includible in the gross estate of Anna Mirowski (Ms. Mirowski or

decedent) under section 2036(a),2 2038(a)(1), or 2035(a).    We

hold that none of the assets owned by MFV is includible in

decedent’s gross estate under any of those sections.

                        FINDINGS OF FACT

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

     Ms. Mirowski was a resident of Owings Mills, Maryland, at

the time of her death on September 11, 2001.   Ginat W. Mirowski

(Ginat Mirowski) and Ariella Rosengard, the personal representa-

tives of decedent’s estate and two of decedent’s three

daughters,3 resided in Carmel, Indiana, and the United Kingdom,

respectively, at the time they filed the petition in this case.

     Ms. Mirowski, who was born on December 22, 1927, was the

youngest of three daughters.   Ms. Mirowski’s parents, who were

     1
      Respondent determined a deficiency of $4,769,233 in dece-
dent’s Federal gift tax (gift tax) for her taxable year 2001.
The parties settled all the gift tax issues in this case.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect on the date of Ms. Mirowski’s
death. All Rule references are to the Tax Court Rules of Prac-
tice and Procedure.
     3
      Ginat Mirowski is the oldest of decedent’s daughters,
Ariella Rosengard is the next oldest daughter, and Doris Frydman
is the youngest daughter.
                               - 3 -

tailors in Lyon, France (Lyon), owned a clothing shop where Ms.

Mirowski worked as a young girl.   Eventually, Ms. Mirowski

managed the family business and had responsibility for family

investments until she moved to Israel after she married

Mieczyslaw (Michel) Mirowski (Dr. Mirowski).

     When Dr. Mirowski, who was born in Poland, was about 14

years old, Germany invaded Poland.     Dr. Mirowski lost his family

in the Holocaust.   Thereafter, Dr. Mirowski moved to France,

where he met and married Ms. Mirowski.    They enjoyed a long,

happy, and successful marriage.

     While Dr. Mirowski was living in France, he attended medical

school.   After medical school, Dr. Mirowski moved with Ms.

Mirowski to Israel where he continued his medical training and

specialized in cardiology.   While living in Israel, Dr. Mirowski

developed a close relationship with Dr. Harry Heller (Dr.

Heller), who was chief of medicine at the hospital where Dr.

Mirowski trained and who became a father figure to Dr. Mirowski.

     Dr. Heller suffered from ventricular fibrillation.    At the

time, the only treatment available for that condition was elec-

tric shock administered by a device known as a defibrillator (so-

called external defibrillator), which, because of its large size,

was located in the hospital.   Despite his condition, Dr. Heller

refused to stay constantly at the hospital close to a defibril-

lator and passed away from an episode of ventricular fibrillation
                               - 4 -

when he was not at the hospital.

     Dr. Mirowski was very upset by Dr. Heller’s death.    He

determined to develop an implantable defibrillator device in

order to prevent people, like Dr. Heller, who suffered from

ventricular fibrillation from dying because they were not in a

hospital near a defibrillator when they suffered an episode of

that condition or from having to stay continuously in a hospital

in order to be near a defibrillator in the event of such an

episode.

     In 1968, in order to obtain funding to develop an im-

plantable defibrillator device, Dr. Mirowski and Ms. Mirowski

emigrated to the United States.    Initially, Dr. Mirowski was

ostracized in the medical community for his efforts to develop

such a device.   He nonetheless persevered.   Over a ten-year

period, Dr. Mirowski and a team of scientists developed an

electronic device known as the automatic implantable cardioverter

defibrillator (ICD) to monitor and correct abnormal heart

rhythms.   In 1980, the ICD was successfully implanted for the

first time in a human.4

     Dr. Mirowski, who eventually became chief of cardiology at

Sinai Hospital in Baltimore, Maryland (Baltimore), and a profes-

     4
      At the time of the trial in this case, more than 1.2 mil-
lion patients worldwide had received ICDs. The ICD has been
referred to as the greatest contribution to cardiology in the
last century.
                                 - 5 -

sor of medicine at Johns Hopkins University School of Medicine in

Baltimore (Johns Hopkins Medical School), held various patents

relating to the ICD (ICD patents).       Dr. Mirowski entered into an

exclusive license agreement with respect to the ICD patents (ICD

patents license agreement), under which, inter alia, he had the

right to receive approximately 73 percent of the royalties paid

for the use of those patents.5    During his lifetime, Dr. Mirowski

received modest royalties under the ICD patents license agree-

ment.

     Some time after Dr. Mirowski and Ms. Mirowski emigrated to

the United States, they and their family started the general

practice of taking an annual one-week summer vacation in Rehoboth

Beach, Delaware (Rehoboth Beach).    That practice continued after

Ms. Mirowski’s daughters married and had families of their own.

When the Mirowski family was vacationing in Rehoboth Beach, they

took the opportunity to have annual meetings (Mirowski family

annual meetings), at which they frequently discussed family

business and investment matters.    At times, accountants or

attorneys were invited to attend those meetings.

     In 1989, it was determined that Ms. Mirowski had diabetes,

and she became the patient of Dr. Charles Angell, an assistant

professor of medicine at Johns Hopkins Medical School.      At a time

     5
      The coinventor of the ICD had the right under the ICD
patents license agreement to receive approximately 27 percent of
the royalties paid for the use of the ICD patents.
                              - 6 -

not disclosed by the record, Ms. Mirowski developed hypertension.

     On March 26, 1990, Dr. Mirowski died.    At the time of Dr.

Mirowski’s death, Ginat Mirowski was a student at Harvard Univer-

sity in Cambridge, Massachusetts, from which she eventually

obtained dental and medical degrees; Ariella Rosengard was a

physician and a pathology resident at Johns Hopkins University

Hospital in Baltimore (John Hopkins Hospital), was married, and

had a daughter; and Doris Frydman was a medical student at Emory

University in Atlanta, Georgia.

     Pursuant to Dr. Mirowski’s will, the ICD patents, his

interest under the ICD patents license agreement, and the remain-

der of his assets, except for $600,000, passed to Ms. Mirowski.

     Ms. Mirowski maintained a long and continuous history of

making gifts to family members and friends.    Throughout the ten-

year period preceding her death in 2001, Ms. Mirowski continued

to evaluate and make gifts to, or for the benefit of, her three

daughters, her grandchildren,6 and others.    Whenever Ms. Mirowski

made gifts to her daughters or to the respective trusts that she

created for them (discussed below), she always paid the related

gift tax.

     On February 27, 1992, Ms. Mirowski created an irrevocable,

so-called spendthrift trust for each of her three daughters and

     6
      At the time of Ms. Mirowski’s death, each of her daughters
had two children.
                                - 7 -

their respective issue in order to provide for each daughter

during the daughter’s life and each daughter’s children after the

daughter died.    (We shall refer to the respective trusts that Ms.

Mirowski created for Ginat Mirowski, Ariella Rosengard, and Doris

Frydman and their respective issue as the Ginat Trust, the

Ariella Trust, and the Doris Trust.     We shall refer collectively

to those trusts as the daughters’ trusts.)    Ms. Mirowski named

all three of her daughters as cotrustees of each of the daugh-

ters’ trusts.    She did so specifically because she wanted her

daughters to work together and have a close working relationship.

     Under the terms of each of the daughters’ trusts, the

trustees (1) had to pay income to the daughter for whom Ms.

Mirowski created the trust and (2) had the discretion to pay

principal to that daughter for her health, maintenance, educa-

tion, and support.    Upon the death of a daughter, the corpus of

that daughter’s trust was to continue to be held in trust or to

be paid over to that daughter’s issue, depending on the age of

such issue.

     On February 27, 1992, the same date on which Ms. Mirowski

created her daughters’ trusts, she funded the Ginat Trust and the

Ariella Trust by transferring to each of those trusts five

percent of her interest under the ICD patents license agreement.

On the same date, Ms. Mirowski funded the Doris Trust by trans-

ferring to that trust ten percent of her interest under that
                                - 8 -

agreement.    On June 30, 1993, Ms. Mirowski provided additional

funding to the Ginat Trust and the Ariella Trust by transferring

to each of those trusts 6.25 percent of her remaining interest

under the ICD patents license agreement.    After the above-de-

scribed funding of the daughters’ trusts, Ms. Mirowski held a

51.09-percent interest in the royalties under that agreement, and

each of those trusts held a 7.2616-percent interest in those

royalties.7

     In addition to a long and continuous history of making gifts

to family members and friends, Ms. Mirowski maintained a long and

continuous history of making philanthropic and charitable gifts.

After Dr. Mirowski died, Ms. Mirowski centered her charitable

endeavors on keeping her husband’s memory alive and furthering

research in cardiology.    To those ends, Ms. Mirowski made dona-

tions to (1) Hadassah Hospital in Israel, (2) Johns Hopkins

Hospital where she created a professorship, a fellowship in

cardiology, and a lectureship, (3) the University of Rochester in

Rochester, New York, and (4) Sinai Hospital in Baltimore.    In

addition, in 1997 Ms. Mirowski created a charitable foundation

known as Mirowski Family Foundation, Inc. (Foundation), through

which she conducted various charitable endeavors.

     7
      Dr. Mirowski’s coinventor of the ICD continued to hold
approximately a 27-percent interest in the royalties under the
ICD patents license agreement.
                                - 9 -

     For various reasons, sales of ICDs increased significantly

after Dr. Mirowski died in 1990.   As a result, the royalties

received under the ICD patents license agreement by Ms. Mirowski

and her daughters’ trusts increased dramatically from thousands

of dollars a year to millions of dollars a year.   At the time of

Ms. Mirowski’s death, the royalties payable under that agreement

to which MFV was entitled totaled millions of dollars a year.

     Before Dr. Mirowski died, he was primarily responsible for

managing the financial affairs of Ms. Mirowski and himself.

After Dr. Mirowski’s death, Ms. Mirowski, who did not remarry,

became primarily responsible for managing her own financial

affairs.   When Ms. Mirowski first started investing, she was a

highly conservative investor.

     In order to assist Ms. Mirowski in managing her financial

affairs after Dr. Mirowski died, Ariella Rosengard began to act

as a bookkeeper for her.   Thereafter, Ginat Mirowski, who fre-

quently discussed her own investments with Ms. Mirowski, also

acted as a bookkeeper for Ms. Mirowski and provided advice and

suggestions to her regarding her investments.   At no time did

Ariella Rosengard or Ginat Mirowski make financial decisions for

Ms. Mirowski.8

     8
      Before Ms. Mirowski’s death, Doris Frydman was not involved
in Ms. Mirowski’s financial affairs.
                               - 10 -

     During the period in which Ariella Rosengard was performing

bookkeeping functions for Ms. Mirowski, Ms. Mirowski’s invest-

ments consisted primarily of securities issued by the United

States Treasury Department (U.S. Treasury securities).   Ms.

Mirowski received directly the checks for any interest payments

on those securities and deposited those checks into one of her

various bank accounts.    During that period, Ms. Mirowski pre-

ferred to have her investments and financial accounts tracked on

a large spreadsheet, which permitted her to monitor them.

     By 1998, after royalties from the ICD patents had increased

dramatically, it became quite burdensome to use a large spread-

sheet in order to track and manage Ms. Mirowski’s investments and

financial accounts.   That was in large part because, even though

Ms. Mirowski’s investments were primarily of the same type (i.e.,

U.S. Treasury securities), she had over 84 accounts in ten

different institutions.

     In February 1998, at the suggestion of Ginat Mirowski, Ms.

Mirowski met with William Lewin (Mr. Lewin) of Goldman, Sachs,

& Co. (Goldman Sachs) regarding the establishment of an invest-

ment account with that firm.    Ginat Mirowski made that suggestion

to Ms. Mirowski because in 1992 she and her husband had met with

Mr. Lewin and thereafter established an account at Goldman Sachs

that Mr. Lewin managed.   Over time, Ginat Mirowski concluded that

the Goldman Sachs account that she and her husband maintained was
                               - 11 -

significantly outperforming investments that she and her husband

managed on their own.    As a result of the investment experience

and success of the Goldman Sachs account of Ginat Mirowski and

her husband, about which Ginat Mirowski told her mother, Ms.

Mirowski began to realize that her investment portfolio could

perform better if she were to diversify that portfolio and

consolidate her investments at one investment firm.

     Ms. Mirowski was a careful, deliberate, and thoughtful

decisionmaker, especially with respect to financial matters.     It

was not until December 26, 1998, approximately 10 months after

Ms. Mirowski first met with Mr. Lewin in February of that year,

that she opened an account with Goldman Sachs (Ms. Mirowski’s

Goldman Sachs account).   For an initial period after she opened

that account, Ms. Mirowski continued to maintain investment

accounts with other investment and financial institutions.

     Beginning in January 1999, Ms. Mirowski deposited certain

cash and securities into Ms. Mirowski’s Goldman Sachs account.

Initially, the securities that Ms. Mirowski deposited into Ms.

Mirowski’s Goldman Sachs account consisted of U.S. Treasury

securities.   Shortly after Ms. Mirowski opened Ms. Mirowski’s

Goldman Sachs account, at her direction, Goldman Sachs purchased

municipal bonds for that account.    Thereafter, at Ms. Mirowski’s

direction, Goldman Sachs purchased equities for Ms. Mirowski’s

Goldman Sachs account.    All of those purchases were part of Ms.
                                - 12 -

Mirowski’s plan to diversify her portfolio with the help of

Goldman Sachs.

     On May 11, 2000, representatives from Goldman Sachs made a

presentation to Ms. Mirowski.    During that presentation, those

representatives described various strategies and considerations

relating to investment management, including an overview of asset

allocation and its importance in various portfolio allocation

scenarios.    Ms. Mirowski met or spoke with representatives from

Goldman Sachs approximately three to five times a month in order

to obtain an update on her investment portfolio and the moneys

(e.g., interest payments) deposited into Ms. Mirowski’s Goldman

Sachs account.   From time to time after Ms. Mirowski opened Ms.

Mirowski’s Goldman Sachs account, representatives of that firm

advised her regarding particular investments or investment

strategies.   At times she accepted the suggestions of those

representatives, and at other times she rejected them.    Ms.

Mirowski was a decisive investor and actively made every decision

regarding the purchase of securities by Goldman Sachs for Ms.

Mirowski’s Goldman Sachs account.    In early 2001, after Ms.

Mirowski came to trust the Goldman Sachs representatives with

whom she was dealing, she decided to consolidate all of her

investments into the one account with Goldman Sachs that she had

established (i.e., Ms. Mirowski’s Goldman Sachs account).
                                - 13 -

     In 1999, Ms. Mirowski’s daughter Doris Frydman had neuro-

logic surgery at Yale University Hospital to treat her chronic

condition of epilepsy.   At least as early as late 1999 or early

2000, in large part because of her daughter Doris Frydman’s

condition, Ms. Mirowski began to think about ways, in addition to

her daughters’ trusts, to provide for her daughters and her

grandchildren on an equal basis.    Moreover, at least as early as

around that time, Ms. Mirowski started thinking about ways, in

addition to her daughters’ working together as trustees of each

of the daughters’ trusts, to allow them to work together and have

a close working relationship.

     In May 2000, Ms. Mirowski met with representatives of U.S.

Trust (May 2000 meeting with U.S. Trust) at the home of Ariella

Rosengard in Philadelphia.   At that time, representatives of U.S.

Trust introduced Ms. Mirowski to the concept of a limited liabil-

ity company (LLC).

     After Ms. Mirowski’s May 2000 meeting with U.S. Trust, she

began discussing with her attorney Sidney J. Silver (Mr. Silver)

the possibility of forming an LLC.       Thereafter, on August 31,

2000, Mr. Silver sent a letter (Mr. Silver’s August 31, 2000

letter) to Ms. Mirowski and enclosed with that letter draft

articles of organization and a draft operating agreement for an

LLC to be named Mirowski Family Ventures, L.L.C.       Mr. Silver sent

copies of that letter and those enclosures to Ms. Mirowski’s
                                - 14 -

daughters.   Mr. Silver’s August 31, 2000 letter stated in perti-

nent part:

          Re:     Financial and Tax Planning

     Dear Anna:

          In accordance with my recent telephone discussion
     with your daughter Ginat and my earlier discussion with
     your daughter Ariella, we have prepared drafts of two
     documents for your review and consideration in connec-
     tion with financial and tax planning on behalf of you
     and your family as follows:

                  1.   Articles of Organization of Mirowski
                       Family Ventures, L.L.C.

                  2.   Operating Agreement of Mirowski Family
                       Ventures, L.L.C.

          By copy of this letter we are forwarding copies of
     these documents to each of your daughters for their
     review. After such documents have been reviewed we
     will be pleased to answer any questions or make such
     modifications you may request thereto.

     Ms. Mirowski often waited until her family was together in

order to have family discussions regarding any important deci-

sions.   The next time the family planned to be together after

having received Mr. Silver’s August 31, 2000 letter and the draft

articles of organization and the draft operating agreement for an

LLC was in August 2001.    The family planned a meeting with Mr.

Silver at that time, at which he was to explain Ms. Mirowski’s

plans.

     In January 2001, Ms. Mirowski took a trip to France to visit

her sister who had been hit by an automobile.    During that trip,

Ms. Mirowski wore tight shoes that caused a blister on her foot.
                                - 15 -

As a result of that blister and her diabetes, Ms. Mirowski

developed a foot ulcer.   In January 2001, after Ms. Mirowski

returned to the United States from France, she began medical

treatment for her foot ulcer.    Although such an ulcer requires

care and treatment, with proper treatment, a patient with a foot

ulcer resulting from diabetes is expected to recover from such a

condition.

     On March 3, 2001, Ms. Mirowski signed an agreement for

occupancy/residency rights in an apartment at a retirement

community known as North Oaks (North Oaks retirement community),

which is located near where Ms. Mirowski and her friends resided

in Baltimore County, Maryland.

     Ten days later, on March 13, 2001, when she was 73 years

old, Ms. Mirowski underwent a surgical procedure at Johns Hopkins

Hospital to treat her foot ulcer.

     On July 22, 2001, Ms. Mirowski signed an agreement for

occupancy/residency rights in an apartment at a retirement

community known as Waverly Heights, Ltd. (Waverly Heights contin-

uing care retirement community), which is located in Gladwne,

Pennsylvania, near where Ariella Rosengard and Doris Frydman were

living when Ms. Mirowski signed that agreement.    On August 15,

2001, Waverly Heights accepted that agreement.    Ms. Mirowski

committed well over $500,000 for the occupancy/residency rights

at the North Oaks retirement community and the Waverly Heights
                              - 16 -

continuing care retirement community for which she had contracted

in 2001.

     Ms. Mirowski planned to live primarily in the residence at

the North Oaks retirement community.    After Ms. Mirowski con-

tracted in early March 2001 to buy that residence, she spent

considerable resources, and she and her daughters spent consider-

able effort, in renovating it.   Although Ms. Mirowski purchased a

small studio apartment at the Waverly Heights continuing care

retirement community, she did so only because a larger unit that

she intended to acquire was not available; buying a smaller unit

enabled her to obtain a preference on the Waverly Heights contin-

uing care retirement community’s waiting list for larger units.

     Between March and August 2001, Ms. Mirowski received treat-

ment for her foot ulcer from nurses who visited her at home and

from her physician when she made intermittent visits to Johns

Hopkins Hospital.   Throughout the course of Ms. Mirowski’s

treatment for her foot ulcer, her physician talked to her family,

in particular Ariella Rosengard, on numerous occasions about Ms.

Mirowski’s condition and treatment.    Throughout that time, Ms.

Mirowski’s physician presented Ms. Mirowski and her family with a

wide variety of appropriate medical treatment alternatives,

including the possibility of amputation.    From March 2001 until

the time of her death, Ms. Mirowski consistently indicated that

she was not comfortable with amputation because of its debilitat-
                               - 17 -

ing effects.

     In mid-August 2001, Ms. Mirowski’s daughters and their

families took their annual vacation in Rehoboth Beach.   During

that vacation, on August 14, 2001, they held their previously

planned Mirowski family annual meeting (August 14, 2001 Mirowski

family annual meeting), to which they had invited Mr. Silver.

Ms. Mirowski was not present at that meeting.   At the August 14,

2001 Mirowski family annual meeting, Ms. Mirowski’s daughters

discussed with Mr. Silver the following:   (1) Ms. Mirowski’s

plans to form MFV, (2) Ms. Mirowski’s plans to make respective

gifts of interests in MFV to her daughters’ trusts, (3) the

manner in which MFV was to function, and (4) the responsibilities

of her daughters with respect to MFV.

     At the time of the August 14, 2001 Mirowski family annual

meeting, and thereafter until September 10, 2001, Ms. Mirowski’s

health was not rapidly deteriorating.   In fact, on August 15,

2001, Ms. Mirowski visited her physician at Johns Hopkins Hospi-

tal for a preoperative evaluation with respect to the cataract

surgery that she planned to have at that hospital.   Ms. Mirowski

planned to undergo cataract surgery in order to enhance her

vision so that she could continue with her normal activities and

improve her quality of life.

     After the August 14, 2001 Mirowski family annual meeting,

Mr. Silver finalized the documents required for Ms. Mirowski to
                              - 18 -

form MFV.   Although Ms. Mirowski understood that certain tax

benefits could result from forming MFV, those potential tax

benefits were not the most significant factor in her decision to

form MFV.   To the contrary, Ms. Mirowski had the following

legitimate and significant nontax purposes for forming, and

transferring the bulk of her assets to, MFV:   (1) Joint manage-

ment of the family’s assets by her daughters and eventually her

grandchildren; (2) maintenance of the bulk of the family’s assets

in a single pool of assets in order to allow for investment

opportunities that would not be available if Ms. Mirowski were to

make a separate gift of a portion of her assets to each of her

daughters or to each of her daughters’ trusts; and (3) providing

for each of her daughters and eventually each of her grandchil-

dren on an equal basis.

     With respect to Ms. Mirowski’s purpose in forming MFV of

having her daughters, and eventually her grandchildren, jointly

manage the family’s assets, that purpose was rooted in Ms.

Mirowski’s formative years in Lyon, where her family worked

together in the family business.9   Ms. Mirowski valued the family

cohesiveness that joint management of a family business can

foster.   Although Ms. Mirowski was aware that her daughter

     9
      After Ms. Mirowski left France and moved to Israel and
ultimately to the United States with Dr. Mirowski and their
daughters, Ms. Mirowski was unable to continue working together
with her family in the family business in France, which she
regretted very much.
                             - 19 -

Ariella Rosengard would probably move to England with her husband

and children, Ms. Mirowski wanted her daughters, and eventually

her grandchildren, to work together, remain closely knit, and be

jointly involved in managing (1) the investments derived from the

royalties received from Dr. Mirowski’s invention of the ICD and

(2) the business matters relating to the ICD patents and the ICD

patents license agreement, including the litigation arising with

respect to those patents and that license agreement.

     With respect to Ms. Mirowski’s purpose in forming MFV of

maintaining in a single pool the bulk of the family’s assets in

order to allow for investment opportunities that would otherwise

be unavailable, certain investment opportunities at Goldman Sachs

would not have been available if Ms. Mirowski had separated her

assets among her daughters or her daughters’ trusts by giving a

portion of those assets to each daughter or each trust.

     With respect to Ms. Mirowski’s purpose in forming MFV of

providing for each of her daughters and eventually each of her

grandchildren on an equal basis, the formation of MFV and the

transfer by Ms. Mirowski of an equal interest in it to each of

her daughters’ trusts enabled Ms. Mirowski to ensure that her

daughters, and eventually her grandchildren, would continue to

hold respective interests of equal worth in the bulk of the

family’s assets.
                                - 20 -

     In addition to the above-described legitimate and signifi-

cant nontax purposes, another legitimate, but not significant,

nontax reason Ms. Mirowski formed, and transferred the bulk of

her assets to, MFV was that she wanted to provide additional

protection from potential creditors for the interests in the

family’s assets that she intended to provide to her daughters and

eventually her grandchildren.    Although Ms. Mirowski was aware

that her daughters’ trusts included provisions providing spend-

thrift protection from creditors, she desired the additional

creditor protection provided by an LLC, in particular the protec-

tion that an LLC would provide in the event of any negative

developments in the respective marriages of her daughters.10

     On August 22, 2001, Mr. Silver sent a letter (Mr. Silver’s

August 22, 2001 letter) to Ms. Mirowski and enclosed with that

letter final versions of the articles of organization and the

operating agreement for MFV that he had prepared.    Mr. Silver

sent copies of that letter and enclosures to Ms. Mirowski’s three

daughters.   Mr. Silver’s August 22, 2001 letter stated in perti-

nent part:

     10
      At the time of the trial in this case, none of Ms.
Mirowski’s daughters had been married more than once. Nor had
any of them ever been separated from her spouse because of
marital problems.
                                - 21 -

          Re:     Business, Financial & Estate Planning Matters

     Dear Anna:

          Reference is made to my correspondence to you of
     August 9, 2001 and my subsequent telephone discussions
     with you relative to the meeting that was held with
     your daughters Ginat Mirowski, Ariella Rosengard, Doris
     Frydman and their respective spouses on August 14,
     2001. We are beginning the process of implementing the
     Estate Plan which I recently discussed with you.

          I am enclosing herewith bond copies of the follow-
     ing documents, the drafts of which were enclosed in my
     correspondence to you of August 9, 2001:

                  1.   Articles of Organization of Mirowski
                       Family Ventures, L.L.C. * * *

                  2.   Operating Agreement of Mirowski Family
                       Ventures, L.L.C. * * *

          Please sign the Articles of Organization at the
     two places designated for your signature by an arrow.
     Please sign both copies of the Operating Agreement at
     the place designated for your signature on page 24
     thereof, leave the date blank for the time being. Upon
     full execution of both documents please return all
     copies to me in the enclosed Federal Express envelope.

          Please do not hesitate to contact me if you have any
     questions with respect to the foregoing.

     On August 27, 2001, Ms. Mirowski executed the articles of

organization (MFV’s articles of organization) to create Mirowski

Family Ventures, L.L.C.    On the same date, she executed the

operating agreement for MFV (MFV’s operating agreement).11

Except for MFV’s operating agreement, at no time was there any

     11
      MFV’s articles of organization and MFV’s operating agree-
ment listed MFV’s principal office as the address of Ms.
Mirowski’s residence in Owings Mills, Md.
                               - 22 -

express or unwritten agreement or understanding among Ms.

Mirowski and her daughters regarding how MFV would be operated.

On August 30, 2001, the department of assessments and taxation of

the State of Maryland (Maryland department of assessments and

taxation) accepted MFV’s articles of organization for filing.12

     On August 31, 2001, Ms. Mirowski was admitted to Johns

Hopkins Hospital for further treatment of her foot ulcer.

     On September 1, 2001, Ms. Mirowski made a bona fide, arm’s-

length transfer (Ms. Mirowski’s September 1, 2001 transfer) to

MFV of certain property, including the ICD patents and Ms.

Mirowski’s 51.09-percent interest under the ICD patents license

agreement,13 and received in exchange for that property a 100-

percent interest in MFV.   After Ms. Mirowski’s September 1, 2001

transfer, Ms. Mirowski was the only member of MFV.   Since MFV was

formed, no person other than Ms. Mirowski made any transfers of

property to MFV.

     On September 5, 2001, Ms. Mirowski’s physician noted an

intention to discuss with Ms. Mirowski’s daughters the need to

plan for her long-term care when she returned home after her

discharge from the hospital.

     12
      MFV requested expedited processing by the Maryland depart-
ment of assessments and taxation for which it paid an additional
$90 fee.
     13
      Ms. Mirowski transferred her 51.09-percent interest under
the ICD patents license agreement pursuant to a document entitled
“ASSIGNMENT OF ALL RIGHT, TITLE & INTEREST”.
                               - 23 -

     On September 5, 2001, Ms. Mirowski made another bona fide,

arm’s-length transfer (Ms. Mirowski’s September 5, 2001 transfer)

to MFV of certain property consisting of securities with an

aggregate value of $60,578,298.08 that she held in Ms. Mirowski’s

Goldman Sachs account.14   Ms. Mirowski authorized Goldman Sachs

to effect Ms. Mirowski’s September 5, 2001 transfer by transfer-

ring securities valued at $60,578,298.08 from Ms. Mirowski’s

Goldman Sachs account to another account established at Goldman

Sachs in the name of MFV (MFV’s Goldman Sachs account).   After

Ms. Mirowski’s September 5, 2001 transfer, Ms. Mirowski continued

to hold a 100-percent interest in MFV.

     On September 6 and 7, 2001, Ms. Mirowski made additional

bona fide, arm’s-length transfers (Ms. Mirowski’s September 6 and

7, 2001 transfers) to MFV of certain property consisting of

securities and cash with an aggregate value of $1,525,008.80 that

she held in Ms. Mirowski’s Goldman Sachs account.   Ms. Mirowski’s

September 6 and 7, 2001 transfers were effected by Goldman Sachs

in the same manner in which that firm effected Ms. Mirowski’s

September 5, 2001 transfer.   After Ms. Mirowski’s September 6 and

7 transfers, Ms. Mirowski continued to hold a 100-percent inter-

est in MFV.   (We shall refer collectively to Ms. Mirowski’s

September 1, 2001 transfer, Ms. Mirowski’s September 5, 2001

     14
      As of Sept. 1, 2001, Ms. Mirowski’s Goldman Sachs account
had a total value of $72,965,935.71.
                              - 24 -

transfer, and Ms. Mirowski’s September 6 and 7, 2001 transfer to

MFV as Ms. Mirowski’s transfers to MFV.)

     At no time did Ms. Mirowski contemplate forming MFV without

making a gift of an interest in MFV to each of her daughters’

trusts.   Thus, on September 7, 2001, Ms. Mirowski made a gift of

a 16-percent interest in MFV to each of those trusts.15    Those

gifts were an integral part of Ms. Mirowski’s plan in forming and

transferring the bulk of her assets to MFV.   (We shall sometimes

refer collectively to Ms. Mirowski’s respective gifts of 16-

percent interests in MFV to her daughters’ trusts as Ms.

Mirowski’s gifts.)

     Ms. Mirowski understood that, based upon the value of the

assets that she transferred to MFV in exchange for a 100-percent

interest in MFV, her respective gifts of 16-percent interests in

MFV to her daughters’ trusts would result in a substantial gift

tax for 2001.   Ms. Mirowski’s daughters were not aware of specif-

ically how Ms. Mirowski planned to pay the substantial gift tax

on those gifts.   However, they were aware that Ms. Mirowski had

retained substantial personal assets that she did not transfer to

MFV, including over $3 million in cash and cash equivalents.       Ms.

Mirowski’s daughters also knew that Ms. Mirowski anticipated

     15
      Except for the respective gifts to her daughters’ trusts
that Ms. Mirowski made in 1992 and 1993, Ms. Mirowski made no
gifts to those trusts before her respective gifts on Sept. 7,
2001, of 16-percent interests in MFV.
                               - 25 -

receiving as an interest holder in MFV future income of millions

of dollars a year attributable to royalty payments under the ICD

patents license agreement.    In addition, Ms. Mirowski’s daughters

believed that Ms. Mirowski could have borrowed against her

interest in MFV in order to pay the substantial gift tax liabil-

ity attributable to her respective gifts to her daughters’ trusts

of 16-percent interests in MFV.    At no time before Ms. Mirowski’s

death did the members of MFV have any express or unwritten

agreement or understanding to distribute assets of MFV in order

to pay that gift tax liability.

     After the respective gifts to her daughters’ trusts of 16-

percent interests in MFV, Ms. Mirowski held a 52-percent inter-

est, and each of those trusts held a 16-percent interest, in MFV.

As discussed above, MFV held a 51.09-percent interest under the

ICD patents license agreement after Ms. Mirowski’s September 1,

2001 transfer to MFV.   Each of the daughters’ trusts continued to

hold a 7.2616-percent interest under the ICD patents license

agreement after Ms. Mirowski made a gift of a 16-percent interest

in MFV to each of those trusts.

     After Ms. Mirowski’s transfers to MFV, she retained in her

individual name the following assets (personal assets) valued at

approximately $7,598,000:    Ms. Mirowski’s home valued at
                                 - 26 -

$799,000; cash16 and cash equivalents of approximately

$3,308,000; personal property consisting primarily of fine art

valued at approximately $1,892,000; a loan of $305,640 due from

North Oaks retirement community pursuant to the North Oaks

residency agreement and loan agreement that Ms. Mirowski signed

on March 3, 2001; a right to receive a refund of $203,301 that

she paid as an occupancy rights fee pursuant to the Waverly

Heights residence and care agreement dated August 14, 2001; a

promissory note of Ginat Mirowski and her husband that had an

outstanding balance of $136,499.99, plus accrued interest of

$205.96; a promissory note of Ariella Rosengard and her husband

that had an outstanding balance of $460,110.73, plus accrued

interest of $922.26; and a promissory note of Doris Frydman and

her husband that had an outstanding balance of $500,000, plus

accrued interest of $915.67.17    In addition, Ms. Mirowski was the

beneficiary of a trust established under Dr. Mirowski’s will that

had a value of $620,000.   At no time before Ms. Mirowski died

     16
      At the end of 2000, Ms. Mirowski’s cash holdings consisted
of approximately $160,000 in accounts with certain banks.
     17
       Article SECOND, paragraph (b), of the last will and testa-
ment of Ms. Mirowski provided that all indebtedness owed to her
at the time of her death by any of her daughters was to be
canceled. Article SECOND, paragraph (c), of that last will and
testament directed Ms. Mirowski’s personal representative to use
a formula specified therein in order to equalize the aggregate
benefits to be received by each of her daughters from her estate.
That formula was dependent upon the amount of indebtedness owed
to Ms. Mirowski by each of her daughters at the time of her
death.
                             - 27 -

were the assets of MFV commingled with her personal assets.    At

no time was there any express or unwritten agreement or under-

standing among Ms. Mirowski and her daughters that Ms. Mirowski

would distribute assets from MFV in order to pay any unexpected

financial obligations of Ms. Mirowski.

     After Ms. Mirowski’s transfers to MFV, Ms. Mirowski retained

more than enough personal assets to meet her living expenses.

However, Ms. Mirowski did not retain enough personal assets in

order to pay from those assets the substantial gift tax for which

she would be liable with respect to her contemplated respective

gifts of 16-percent interests in MFV to her daughters’ trusts.

Nonetheless, in order to pay that anticipated gift tax liability

and any unexpected financial obligations, Ms. Mirowski could have

(1) used a portion of the over $7.5 million of personal assets

that she retained and did not transfer to MFV, including cash and

cash equivalents of over $3.3 million, (2) used a portion or all

of the distributions that she expected to receive as an interest

holder in MFV of the millions of dollars of royalty payments

under the ICD patents license agreement that she expected MFV to

receive, and (3) borrowed against (a) the personal assets that

she retained and did not transfer to MFV and (b) her 52-percent

interest in MFV.

     At the time of and after Ms. Mirowski’s respective gifts of

16-percent interests in MFV to her daughters’ trusts, there was
                              - 28 -

no express or unwritten agreement or understanding among the

members of MFV that Ms. Mirowski, at her own discretion, could

have access to any of the assets that she transferred to MFV for

her own possession or enjoyment, the right to income from those

assets, or the right to determine who could possess or enjoy

those assets.   Nor was there any express or unwritten agreement

or understanding among the members of MFV that Ms. Mirowski

(1) would retain during her life the economic use and benefits of

the assets that she transferred to MFV and (2) would provide for

her daughters and her grandchildren only upon her death.

     Pursuant to section I18 and section 3.6 of MFV’s operating

agreement, the capital account of Ms. Mirowski was to be credited

with the respective contributions of property that she made to

MFV on September 1, 5, 6, and 7, 2001, and her capital account

was to be properly maintained thereafter.

     Pursuant to section I of MFV’s operating agreement, as a

result of Ms. Mirowski’s gift of a 16-percent interest in MFV to

each of her daughters’ trusts, each of those trusts succeeded to

the capital account of Ms. Mirowski to the extent the capital

account was attributable to the 16-percent interest in MFV that

Ms. Mirowski gave to each trust.

     18
      Section I of MFV’s operating agreement is titled “DEFINED
TERMS”. Pertinent portions of that operating agreement are
quoted in the appendix hereto.
                               - 29 -

     Pursuant to section 3.4 of MFV’s operating agreement,19 no

interest holder,20 including Ms. Mirowski, was to have the right

to receive the return of any capital contribution except as

otherwise provided in that agreement.   The only provision in

MFV’s operating agreement for the return of a capital contribu-

tion to an interest holder was in the event of the liquidation

and dissolution of MFV.21   Pursuant to section 4.4.1 of MFV’s

     19
      Section III of MFV’s operating agreement is titled “Mem-
bers; Capital; Capital Accounts”.
     20
      Section I of MFV’s operating agreement defined the term
“Interest Holder” to mean “any Person who holds a Membership
Interest, whether as a Member or as unadmitted assignee of a
Member.” Section I of MFV’s operating agreement defined the term
“Member” to mean “each Person signing this Agreement and any
Person who subsequently is admitted as a member of the Company.”
     21
      Section VII of MFV’s operating agreement, titled “Dissolu-
tions, Liquidation and Termination of the Company”, addressed,
inter alia, the distribution of MFV’s assets upon its liquidation
and dissolution. Section 7.2 of MFV’s operating agreement
provided:

          7.2. Procedure for Winding Up and Dissolution.
     If the Company is dissolved, the General Manager shall
     wind up its affairs. On winding up of the Company, the
     assets of the Company shall be distributed,

               (i) to creditors of the Company, including
     Interest Holders who are creditors, in satisfaction of
     the liabilities of the Company;

               (ii) to Interest Holders and former Interest
     Holders in satisfaction of unpaid distributions;

               (iii) to Interest Holders for the return of
     Capital Contributions; and

                                                    (continued...)
                                 - 30 -

operating agreement,22 if MFV were to be liquidated, its assets

were required to be distributed to the interest holders in MFV in

accordance with the balances in their respective capital ac-

counts.     Pursuant to MFV’s operating agreement, during the normal

course of MFV’s operations, Ms. Mirowski was not entitled to the

return of the assets that she transferred to MFV.

     Pursuant to section 5.1.1 of MFV’s operating agreement,23

MFV was to be managed by a general manager who could be, but did

not have to be, a member of MFV.     That section of MFV’s operating

agreement designated Ms. Mirowski to serve as the initial general

manager of MFV.     All of Ms. Mirowski’s powers as MFV’s initial

general manager were subject to other provisions of MFV’s operat-

ing agreement and the requirements of applicable law, including

the applicable law of the State of Maryland (Maryland law), which

imposed on her a fiduciary duty to the other members of MFV.24

     21
      (...continued)
               (iv) to Interest Holders in proportion to
     their respective Capital Accounts and then to the
     Interest Holders in accordance with Section 4.4 [relat-
     ing to the distribution of MFV’s assets upon its liqui-
     dation and dissolution].
     22
      Section 4.4 of MFV’s operating agreement is titled “Liqui-
dation and Dissolution.”
     23
          Section V of MFV’s operating agreement is titled “Manage-
ment:      Rights, Powers and Duties”.
     24
      Section 5.1.2 of MFV’s operating agreement described the
general powers of MFV’s general manager in pertinent part as
follows:
                                                   (continued...)
                               - 31 -

     Although Ms. Mirowski held a 52-percent interest in MFV and

was its general manager, pursuant to section 5.1.2.3, 5.1.3.1,

and 5.1.3.2 of MFV’s operating agreement, she could not sell or

otherwise dispose of any of the assets of MFV, other than in the

ordinary course of MFV’s operations, without the approval of all

the members of MFV.25   Pursuant to section 7.1.1 of MFV’s operat-

ing agreement, Ms. Mirowski could not liquidate and dissolve MFV

without the approval of all the members of MFV.   Pursuant to

section 5.1.3.1 and 5.1.3.4 of that operating agreement, Ms.

Mirowski could not admit additional members to MFV without the

     24
      (...continued)
          5.1.2. General Powers. The General Manager shall
     have full, exclusive, and complete discretion, power,
     and authority, subject in all cases to the other provi-
     sions of this Agreement and the requirements of appli-
     cable law, to manage, control, administer, and operate
     the business and affairs of the Company for the pur-
     poses herein stated, and to make all decisions affect-
     ing such business and affairs * * *
     25
      In other words, pursuant to section 5.1.3.1 and 5.1.3.2 of
MFV’s operating agreement, Ms. Mirowski could not undertake any
“Capital Transaction” without the approval of all MFV’s members.
The term “Capital Transaction” is defined in section I of MFV’s
operating agreement to mean:

     any transaction not in the ordinary course of business
     which results in the Company’s receipt of cash or other
     consideration other than Capital Contributions, includ-
     ing, without limitation, proceeds of sales or exchanges
     or other dispositions of property not in the ordinary
     course of business, financings, refinancings, condemna-
     tions, recoveries of damage awards, and insurance
     proceeds.

As used hereinafter, the term “capital transaction” shall have
the meaning set forth in section I of MFV’s operating agreement.
                               - 32 -

approval of all the members of MFV.

     Pursuant to section 4.1.1 of MFV’s operating agreement,26

profit or loss (other than profit or loss derived from a capital

transaction) for any taxable year was to be allocated to MFV’s

interest holders in proportion to their respective percentage

interests in MFV.

     Pursuant to section 4.1.2 of MFV’s operating agreement, MFV

was required to make within 75 days after the end of each taxable

year distributions to MFV’s interest holders of MFV’s cash flow27

for the taxable year in proportion to such members’ respective

percentage interests in MFV.

     Pursuant to section 4.2.1 and section 4.2.2 of MFV’s operat-

ing agreement,28 profit or loss from a capital transaction was to

     26
      Section 4.1 of MFV’s operating agreement is titled “Dis-
tributions of Cash Flow and Allocations of Profit or Loss Other
than Capital Transactions.”
     27
      The term “Cash Flow” is defined in section I of MFV’s
operating agreement to mean:

     all cash funds derived from operations of the Company
     (including interest received on reserves), without
     reduction for any non-cash charges, but less cash funds
     used to pay current operating expenses and to pay or
     establish reasonable reserves for future expenses, debt
     payments, capital improvements or replacements as
     determined in the sole discretion of the General Man-
     ager. Cash Flow shall not include Capital Proceeds but
     shall be increased by the reduction of any reserve
     previously established.
     28
      Section 4.2 of MFV’s operating agreement is titled “Dis-
tribution of Capital Proceeds and Allocation of Profit or Loss
                                                   (continued...)
                               - 33 -

be allocated to MFV’s interest holders in proportion to their

respective capital accounts.

     Pursuant to section 4.2.3 of MFV’s operating agreement,

“Capital Proceeds [i.e., gross receipts from a capital transac-

tion] shall be distributed” in proportion to the respective

capital accounts of MFV’s interest holders after the payment of

all expenses incident to the capital transaction, the payment of

debts and liabilities due and outstanding, and the establishment

of any reserves that MFV’s general manager deemed necessary for

MFV’s liabilities or obligations.

     Pursuant to section 4.5.1 of MFV’s operating agreement,29

except as otherwise provided in that agreement, “the timing and

the amount of all distributions shall be determined by the

Members holding a majority of the Percentages then outstanding.”

     Pursuant to section 7.1.2 of MFV’s operating agreement, the

occurrence of a so-called involuntary withdrawal of a member,

which included the death of a member, was to cause MFV to be

dissolved unless the remaining members of MFV unanimously were to

elect to continue MFV’s business pursuant to the terms of MFV’s

operating agreement.

     28
      (...continued)
from Capital Transactions.”
     29
      Section 4.5 of MFV’s operating agreement is titled
“General.”
                               - 34 -

     From August 31, 2001, when Ms. Mirowski was admitted to

Johns Hopkins Hospital for further treatment of her foot ulcer,

until her condition unexpectedly deteriorated significantly on

September 10, 2001, the expectation of the members of the medical

staff at Johns Hopkins Hospital who were responsible for treating

Ms. Mirowski was that the treatment of her foot ulcer would allow

her to recover and return to her home.   At no time before Septem-

ber 10, 2001, did Ms. Mirowski, her family, or her physicians

expect her to die.    Consequently, at no time did Ms. Mirowski and

her daughters discuss or anticipate the estate tax and similar

transfer taxes and the other estate obligations that would arise

only as a result of Ms. Mirowski’s death.

     Ms. Mirowski’s daughters spoke with their mother frequently,

sometimes multiple times a day and at other times several times a

week.   During the period Ms. Mirowski was being treated for her

foot ulcer, Ariella Rosengard spoke to Ms. Mirowski’s physicians

on a regular basis.   As both a daughter and a physician herself,

Ariella Rosengard was highly familiar with her mother’s medical

condition.   Moreover, during that same period, Ariella Rosengard

not only spoke with Ms. Mirowski several times a day but also

visited her almost every weekend and sometimes during the middle

of the week.   Sometime in early September 2001, Ariella Rosengard

and Ms. Mirowski discussed Ms. Mirowski’s intention to travel to

Philadelphia to attend Ariella Rosengard’s annual open house for
                               - 35 -

Rosh Hashanah that was to take place on September 18, 2001.    Ms.

Mirowski told Ariella Rosengard that she intended to bring

various desserts for that open house, as she had done in past

years.

     On September 3, 2001, Ginat Mirowski, her husband, and her

two children visited Ms. Mirowski at Johns Hopkins Hospital.    At

that time, Ginat Mirowski and her family expected Ms. Mirowski to

return home after she received antibiotics and surgical treatment

for her foot ulcer.    Between that time and September 10, 2001,

the day before Ms. Mirowski died, Ginat Mirowski and her family

communicated multiple times with Ms. Mirowski.   At those times,

Ms. Mirowski sounded quite upbeat and spoke of feeling well.

     On September 6, 2001, Ariella Rosengard left the United

States in order to attend a medical conference in Strasbourg,

France (Strasbourg).   While in France, Ariella Rosengard spoke to

Ms. Mirowski on each of the days September 7, 8, and 9, 2001, and

believed that her mother’s life was not in jeopardy on any of

those days.   At that time, Ariella Rosengard (1) understood that

her mother was receiving, as she had in the past, intravenous and

surgical treatment for her foot ulcer and (2) expected her mother

to return home at the conclusion of that treatment.   If Ariella

Rosengard had believed that her mother’s health was rapidly

declining on September 6, 2001, such that her mother’s life was

in jeopardy, she would not have left the United States to attend
                               - 36 -

the medical conference in Strasbourg.    Moreover, if Ms. Mirowski

believed that her health was rapidly declining on September 6,

2001, she would have wanted Ariella Rosengard to remain in the

United States to be close to her sisters.

     On September 10, 2001, Ginat Mirowski called her mother at

Johns Hopkins Hospital and noticed that she did not sound like

herself.    Later that day, Ginat Mirowski canceled her clinic

appointments for the week and traveled to Johns Hopkins Hospital

to visit her mother.

     Unexpectedly, on September 10, 2001, Ms. Mirowski’s condi-

tion deteriorated significantly.    At that point, amputation was

recommended by her physician as a means of avoiding further

complications, including possible life-threatening infections.

Ms. Mirowski declined amputation.    On September 10, 2001, Ms.

Mirowski began to suffer from multiple system failure and refused

all additional medical treatment.    As a result of the signif-

icantly worsening condition of Ms. Mirowski’s foot ulcer and her

decision not to have the infected limb amputated, she developed

sepsis, a severe and often life-threatening illness caused by an

overwhelming infection of the blood stream by toxin-producing

bacteria.

     On September 11, 2001, at 8:55 a.m. approximately one day

after the onset of Ms. Mirowski’s development of sepsis, she

died.
                             - 37 -

     Shortly after Ms. Mirowski died, on September 16, 2001,

decedent’s estate, through its personal representatives, and the

remaining members of MFV (i.e., the daughters’ trusts), through

their respective trustees (i.e., Ms. Mirowski’s daughters),

executed a memorandum regarding MFV’s operating agreement.    In

that memorandum, inter alia, each of those trusts, through its

trustees, acknowledged receipt of an interest and membership in

MFV.30

     On September 16, 2001, the remaining members of MFV (i.e.,

the daughters’ trusts), through their respective trustees, also

held a special meeting (September 16, 2001 special meeting).    At

that meeting, those members elected the following officers in

order to continue MFV’s business:   Ginat Mirowski as its general

manager and president, Doris Frydman as its vice president, and

Ariella Rosengard as its secretary/treasurer.   At the September

16, 2001 special meeting, the remaining members of MFV (i.e., the

daughters’ trusts) also discussed, through their respective

trustees, MFV’s Goldman Sachs account that MFV had recently

opened, and they passed a resolution authorizing and ratifying

the establishment and maintenance of that account.

     30
      An exhibit attached to the memorandum regarding MFV’s
operating agreement reflected the Sept. 7, 2001 respective
membership interests in MFV of decedent and the daughters’ trusts
after Ms. Mirowski’s respective gifts of 16-percent interests in
MFV to those trusts, as well as the amount of decedent’s basis in
the 16-percent interest that she gave to each of those trusts,
which carried over to each trust.
                                - 38 -

       Pursuant to Ms. Mirowski’s will, the daughters’ trusts

inherited, in equal shares, Ms. Mirowski’s 52-percent interest in

MFV.    As a result, after the probate of decedent’s will is

closed, those trusts will own collectively 100 percent of MFV in

three equal shares.

       Ms. Mirowski died on the day on which there were terrorist

attacks in the United States.    Those terrorist attacks created

market conditions that were particularly advantageous to diversi-

fying MFV’s investment holdings, and MFV’s investment holdings

were further diversified shortly after Ms. Mirowski died.

Although the precise timing of the diversification of MFV’s

investment holdings following Ms. Mirowski’s death was attribut-

able to the terrorist attacks on the date of her death, that

diversification was in accordance with the intentions of Ms.

Mirowski before she died.

       Since Ms. Mirowski’s death, the daughters’ trusts, as the

remaining members of MFV, have chosen not to receive distribu-

tions of all of MFV’s annual cash flow, as defined in MFV’s

operating agreement.    Instead, they decided that MFV will rein-

vest all of that cash flow beyond that required for payment of

taxes and expenses by the members.       MFV’s members feel strongly

that the benefits of reinvesting MFV’s annual cash flow far

outweigh any benefits that could be derived from distributing it.
                              - 39 -

     At all relevant times, including after Ms. Mirowski’s death,

MFV has been a valid functioning investment operation and has

been managing business matters relating to the ICD patents and

the ICD patents license agreement, including related litigation.

As Ms. Mirowski had hoped, her daughters, in their capacities as

officers of MFV and as trustees of MFV’s members, have actively

worked together to manage MFV’s assets.   Ms. Mirowski’s daughters

have held meetings with representatives of Goldman Sachs approxi-

mately three to four times a year in order to review MFV’s

Goldman Sachs’ account performance and asset allocation and to

determine what, if any, changes should be made in the future.

For at least one of those meetings each year, all of Ms.

Mirowski’s daughters have been present in person.   For the

several other meetings each year, the daughters have met together

in person or have participated in a meeting by teleconference.

All of Ms. Mirowski’s daughters jointly have made investment

decisions for MFV and plan to have each of their respective

children also become involved in such decisionmaking when they

reach the appropriate age.   In addition, Ms. Mirowski’s daughters

have worked together on matters concerning the business of

managing the ICD patents, the ICD patents license agreement, and

related litigation.   At the time of the trial in this case, there

was substantial ongoing litigation relating to those patents and

that license agreement with respect to which Ms. Mirowski’s
                                - 40 -

daughters communicated several times a week with MFV’s attorney

Mr. Silver.

     As Ms. Mirowski also had hoped, MFV’s members have benefited

from having MFV’s assets held in a single pool, rather than held

separately by Ms. Mirowski’s daughters or the daughters’ trusts.

For example, Goldman Sachs charges lower fees for larger ac-

counts.     In addition, MFV has had the opportunity to participate

in certain investments that would not have been available on an

individual basis to Ms. Mirowski’s daughters or her daughters’

trusts if, instead of creating MFV, transferring the bulk of her

assets to it, and giving certain interests in MFV to those

trusts, Ms. Mirowski had made a separate gift of her assets to

each of her daughters or each of those trusts.

     During 2002, MFV, which had made no distributions during

2001, made distributions totaling $36,415,810 to decedent’s

estate in order for decedent’s estate to pay Federal and State

transfer taxes, legal fees, and other obligations of decedent’s

estate.31    At the time in 2002 when MFV made distributions to

decedent’s estate, MFV’s members (i.e., the daughters’ trusts),

through their respective trustees (i.e., Ms. Mirowski’s daugh-

ters), agreed and decided that MFV should not make distributions

     31
      The Federal and State transfer     taxes paid with funds that
MFV distributed to decedent’s estate     during 2002 totaled
$30,911,301.77, of which $11,750,623     was Ms. Mirowski’s estimated
gift tax for 2001 that, as discussed     below, decedent’s estate
paid in April 2002.
                                 - 41 -

to themselves.32     In making that decision, MFV’s members had in

mind that those members will own collectively 100 percent of MFV,

in three equal shares, after decedent’s estate is closed.

     For each of the years 1991 through 2001, Ms. Mirowski filed

Form 709, United States Gift (and Generation-Skipping Transfer)

Tax Return (Form 709), to reflect the substantial gifts that she

made during each of those years to, or for the benefit of, her

daughters, her grandchildren, and certain others.33     The aggre-

gate value of the gifts that Ms. Mirowski made during the years

1991 through 2001 was $24,715,921.34

     On April 14, 2002, decedent’s estate paid estimated gift tax

of $11,750,623 with funds that MFV distributed to it.     Thereaf-

ter, on or about July 20, 2002, decedent’s personal representa-

tives timely filed Form 709 for 2001 on behalf of decedent (2001

Form 709).35     Those representatives reported in that form Ms.

     32
      In other words, MFV’s members agreed and decided that
during 2002 MFV should not make pro rata distributions to all of
the interest holders of MFV. Form 1065, U.S. Return of Partner-
ship Income (Form 1065), for MFV’s taxable year 2002 erroneously
reported for reasons not disclosed by the record that the distri-
butions that MFV made during that year were charged against the
respective capital accounts of MFV’s interest holders on virtu-
ally a pro rata basis.
     33
      Ms. Mirowski also filed amended Form 709 for each of the
years 1992 and 1993.
     34
      From 1991 through 2000, Ms. Mirowski made charitable gifts
totaling in excess of $12,500,000.
     35
          The 2001 Form 709 erroneously reported for reasons not
                                                       (continued...)
                                 - 42 -

Mirowski’s gift on September 7, 2001, to each of her daughters’

trusts of a 16-percent interest in MFV and valued each of those

gifts at $5,700,000.36     In the 2001 Form 709, decedent’s personal

representatives reported gift tax for 2001 of $9,729,280, which

resulted in a credit to decedent’s estate of $2,021,343.37

     Decedent’s estate timely filed Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return.     Form 706

showed estate tax of $14,119,863.13, which decedent’s estate paid

on June 10, 2002, with funds that MFV distributed to it.38

     Respondent issued to decedent’s estate a notice of defi-

ciency, in which respondent determined an estate tax deficiency

of $14,243,208.37.     In support of that deficiency determination,

respondent determined, inter alia, to increase decedent’s gross

     35
      (...continued)
disclosed by the record that Ms. Mirowski made gifts of furniture
on Sept. 10, 2001, to Ariella Rosengard valued at $25,500 and
gifts of jewelry on the same date to Doris Frydman valued at
$45,295. Ms. Mirowski did not in fact make those gifts on Sept.
10, 2001, as reported in the 2001 Form 709. When Ms. Mirowski
purchased the items of furniture and jewelry in question, she had
her daughters Ariella Rosengard and Doris Frydman in mind and
intended to make those respective gifts to them during her life.
     36
      In the parties’ stipulation of settled issues, the parties
agreed that the value of the 16-percent interest in MFV that Ms.
Mirowski gave to each of her daughters’ trusts is $6,810,350.
See supra note 1.
     37
          See supra notes 1 and 36.
     38
      The liability shown in the Maryland estate tax return that
decedent’s estate filed was $5,040,815.64, which decedent’s
estate paid on June 10, 2002, with funds that MFV distributed to
it. See supra note 31.
                                   - 43 -

estate by $43,385,000 (i.e., from $27,768,000 to $71,153,000)

with respect to decedent’s interest in MFV.         Respondent did so

because respondent determined that the total of the respective

date-of-death fair market values of all of the assets that

decedent transferred to MFV is includible in her gross estate

under section 2036(a).

        On October 7, 2003, more than two years after Ms. Mirowski

died, MFV unintentionally forfeited its charter under Maryland

law because it failed to file required personal property tax

returns.39       It was one of respondent’s employees who brought that

forfeiture to the attention of MFV.         Immediately thereafter,

steps were taken to reinstate the charter under Maryland law,

which included filing a personal property tax return on behalf of

MFV with the State of Maryland for each of the years 2002 through

2004.        On February 9, 2004, the department of assessments and

taxation of Maryland issued a certificate of good standing to

transact business to MFV, thereby reinstating its charter.         Under

Maryland law, the reinstatement of a forfeited charter is retro-

active to the date of forfeiture.        As a result, a company subject

to Maryland law is treated as if the forfeiture never occurred.

Since MFV’s charter was reinstated in February 2004, MFV has

remained in good standing under Maryland law and has filed

        39
      Since its formation in 2001, MFV did not hold any personal
property within the State of Maryland.
                                 - 44 -

personal property returns required by the State of Maryland.

                                OPINION

     The issues remaining for decision are whether any of the

assets owned by MFV are includible in decedent’s gross estate

under section 2036(a), 2038(a)(1), or 2035(a).

     Respondent does not address the burden of proof in this

case.40     According to decedent’s estate,

     Generally, for issues or theories put forth by Respon-
     dent in the notice of deficiency, the taxpayer bears
     the burden of proof, and for Respondent’s issues or
     theories not included in the notice of deficiency,
     Respondent bears the burden of proof. * * * Because
     Respondent did not raise IRC sections 2038 and 2035 in
     its notice of deficiency in this case, Respondent bears
     the burden with respect to its theories under those
     sections; however, in any case the evidence will not
     support a decision in Respondent’s favor.

Neither party addresses section 7491(a).      We conclude that

resolution of the issues presented under sections 2036(a),

2038(a)(1), and 2035(a) does not depend on who has the burden of

proof.

     40
          With respect to sec. 2036(a), respondent asserts on brief:

          The burden of disproving the existence of an
     agreement regarding retained economic enjoyment of the
     transferred property rests on the estate, and this
     burden has been characterized as particularly onerous
     in intrafamily situations. * * * [Citations omitted.]
                                   - 45 -

Section 2036(a)

     In order to resolve the parties’ dispute under section

2036(a),41 we must consider the following factual issues (1) with

respect to Ms. Mirowski’s transfers to MFV and (2) with respect

to her respective gifts of 16-percent interests in MFV to her

daughters’ trusts:

     (1) Was there a transfer of property by Ms. Mirowski?

     (2) If there was a transfer of property by Ms. Mirowski, was

such a transfer not a bona fide sale for an adequate and full

consideration in money or money’s worth?

     (3) If there was a transfer of property by Ms. Mirowski that

was not a bona fide sale for an adequate and full consideration

in money or money’s worth, (a) did Ms. Mirowski retain the

     41
          Sec. 2036(a) 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 ascer-
     tainable without reference to his death or for any
     period which does not in fact end before his death--

                  (1) the possession or enjoyment of, or the
             right to the income from, the property, or

                  (2) the right, either alone or in conjunction
             with any person, to designate the persons who
             shall possess or enjoy the property or the income
             therefrom.
                              - 46 -

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

the property transferred within the meaning of section 2036(a)(1)

or (b) did she retain, either alone or in conjunction with any

person, the right to designate the persons who shall possess or

enjoy the property transferred or the income therefrom within the

meaning of section 2036(a)(2)?

     Ms. Mirowski’s Transfers to MFV

           Transfer of Property by Ms. Mirowski

     Decedent’s estate acknowledges that Ms. Mirowski made

transfers of property to MFV on September 1, 5, 6, and 7, 2001.

In light of that acknowledgment by decedent’s estate, we find

that Ms. Mirowski’s transfers to MFV were transfers of property

under section 2036(a).

           Transfer Other Than a Bona Fide Sale for an Adequate
           and Full Consideration in Money or Money’s Worth

     Section 2036(a) excepts from its application any transfer of

property otherwise subject to that section which is a “bona fide

sale for an adequate and full consideration in money or money’s

worth”.   The foregoing exception is limited to a transfer of

property where the transferor “has received benefit in full

consideration in a genuine arm’s length transaction”.     Estate of

Goetchius v. Commissioner, 17 T.C. 495, 503 (1951).     More re-

cently, we held that the exception in section 2036(a) for a bona

fide sale for an adequate and full consideration in money or

money’s worth is satisfied in the context of a family limited
                              - 47 -

partnership

     where the record establishes the existence of a legiti-
     mate and significant nontax reason for creating the
     family limited partnership, and the transferors re-
     ceived partnership interests proportionate to the value
     of the property transferred. See, e.g., Estate of
     Stone v. Commissioner, * * * [T.C. Memo. 2003-309].
     The objective evidence must indicate that the nontax
     reason was a significant factor that motivated the
     partnership’s creation. A significant purpose must be
     an actual motivation, not a theoretical justification.
     [Certain citations omitted.]

Estate of Bongard v. Commissioner, 124 T.C. 95, 118 (2005).

     It is the position of decedent’s estate that Ms. Mirowski’s

transfers to MFV were bona fide sales for adequate and full

consideration in money or money’s worth under section 2036(a).

In support of that position, decedent’s estate contends that Ms.

Mirowski had legitimate and substantial nontax purposes for

forming, and transferring assets to, MFV, that Ms. Mirowski

received an interest in MFV proportionate to the value of the

assets that she transferred to it, that Ms. Mirowski’s capital

account was properly credited with those assets, and that, in the

event of a liquidation and dissolution of MFV, Ms. Mirowski had

the right to a distribution of property from MFV in accordance

with her capital account.

     Respondent counters that the exception under section 2036(a)

for a bona fide sale for an adequate and full consideration in

money or money’s worth does not apply to Ms. Mirowski’s transfers

to MFV.   In support of that position, respondent contends that
                              - 48 -

there was no legitimate, significant nontax reason for Ms.

Mirowski’s forming, and transferring assets to, MFV.   In advanc-

ing that contention, respondent asks the Court to disregard the

respective testimonies of Ginat Mirowski and Ariella Rosengard,

two of decedent’s three daughters and the personal representa-

tives of decedent’s estate, regarding the nontax reasons Ms.

Mirowski decided to form and fund MFV.   According to respondent,

the relationship of those witnesses to decedent and to decedent’s

estate colored their respective testimonies.42   As the trier of

     42
      In support of respondent’s argument that the Court should
disregard the respective testimonies of Ginat Mirowski and
Ariella Rosengard regarding the nontax reasons Ms. Mirowski
formed and funded MFV, respondent also maintains (1) that those
reasons “are unsupported by any contemporaneous corroborating
evidence” and (2) that the “only contemporaneous” evidence in the
record regarding the reasons Ms. Mirowski formed and funded MFV
is Mr. Silver’s August 22, 2001 letter to Ms. Mirowski, which
contradicts the respective testimonies of Ginat Mirowski and
Ariella Rosengard and supports respondent’s position that Ms.
Mirowski did so for estate tax reasons.

     With respect to respondent’s assertion that there is no
“contemporaneous corroborating evidence” supporting the nontax
reasons for forming and funding MFV about which Ginat Mirowski
and Ariella Rosengard testified, as discussed below, we found
Ginat Mirowski and Ariella Rosengard to be completely candid,
sincere, and credible and accorded controlling weight to their
respective testimonies.

     With respect to respondent’s assertion that the “only
contemporaneous” evidence in the record regarding the reasons Ms.
Mirowski formed and funded MFV is Mr. Silver’s August 22, 2001
letter to Ms. Mirowski, which contradicts the respective testimo-
nies of Ginat Mirowski and Ariella Rosengard and supports respon-
dent’s position that Ms. Mirowski did so for estate tax reasons,
respondent quotes the following sentence from Mr. Silver’s August
22, 2001 letter: “‘We are beginning the process of implementing
                                                   (continued...)
                              - 49 -

fact, we disagree.

     We evaluated the respective testimonies of Ginat Mirowski

and Ariella Rosengard by observing each of those witnesses’

candor, sincerity, and demeanor.   We also evaluated the reason-

ableness of the respective testimonies of those witnesses.    We

found Ginat Mirowski and Ariella Rosengard to be completely

candid, sincere, and credible and their respective testimonies to

be reasonable.   We accorded controlling weight to the respective

testimonies of Ginat Mirowski and Ariella Rosengard, which we

concluded was appropriate on the record before us.   We relied on

those testimonies in making our findings of fact, including our

findings that Ms. Mirowski had the following legitimate and

significant nontax reasons for forming, and transferring certain

     42
      (...continued)
the Estate Plan which I recently discussed with you’ (emphasis
added).” What respondent ignores is that Mr. Silver’s August 22,
2001 letter enclosing final articles of organization and a final
operating agreement for MFV describes the matters discussed in
that letter as “Business, Financial & Estate Planning Matters”.
Respondent also ignores that Mr. Silver’s August 31, 2000 letter
to Ms. Mirowski enclosing draft articles of organization and a
draft operating agreement for MFV, which were virtually identical
to the final versions of those documents, states that those
drafts were undertaken “in connection with financial and tax
planning on behalf of” Ms. Mirowski and her family. Decedent’s
estate does not deny, and we have found on the record before us,
that Ms. Mirowski understood that certain tax benefits could
result from forming MFV. However, decedent’s estate maintains,
and we have found on that record, that potential tax benefits
were not the most significant factor in her decision to do so.
                               - 50 -

assets to, MFV:43   (1) Joint management of the family’s assets by

her daughters and eventually her grandchildren;44 (2) maintenance

of the bulk of the family’s assets in a single pool of assets in

order to allow for investment opportunities that would not be

     43
      We also found on the basis of the respective testimonies
of Ginat Mirowski and Ariella Rosengard that another legitimate
nontax reason Ms. Mirowski formed and funded MFV was that she
wanted to provide protection from potential creditors for the
interests in the family’s assets that she intended to provide to
her daughters and her grandchildren in addition to the creditor
protection provided by her daughters’ trusts that, as so-called
spendthrift trusts, were penetrable by creditors for purposes of
alimony or child support. See Zouck v. Zouck, 104 A.2d 573, 575,
578-580 (Md. 1954); Safe Deposit & Trust Co. v. Robertson, 65
A.2d 292 (Md. 1949). We found that Ms. Mirowski’s desire for
additional creditor protection was not a significant reason in
her decision to form and fund MFV.
     44
      On the record before us, we find that Ms. Mirowski’s
significant and legitimate nontax purpose in forming and funding
MFV of ensuring joint management of the family’s assets by her
daughters and eventually her grandchildren, standing alone, is
sufficient to satisfy the requirement that, in order to qualify
for the exception in sec. 2036(a) for a bona fide sale for an
adequate and full consideration in money or money’s worth, there
must be a legitimate and significant nontax reason for creating
the entity in question. Ms. Mirowski’s nontax reason in forming
and funding MFV of ensuring joint management of the family’s
assets by her daughters and eventually her grandchildren was
rooted in Ms. Mirowski’s formative years in Lyon where she and
her family worked together in the family business. Ms. Mirowski
valued the family cohesiveness that joint management of a family
business can foster. Although Ms. Mirowski was aware that her
daughter Ariella Rosengard would probably move to England with
her husband and children, Ms. Mirowski wanted her daughters, and
eventually her grandchildren, to work together, remain closely
knit, and be jointly involved in managing (1) the investments
derived from the royalties received from Dr. Mirowski’s invention
of the ICD and (2) the business matters relating to the ICD
patents and the ICD patents license agreement, including the
litigation arising with respect to those patents and that license
agreement. Her daughters have done so.
                             - 51 -

available if Ms. Mirowski were to make a separate gift of a

portion of her assets to each of her daughters or to each of her

daughters’ trusts; and (3) providing for each of her daughters

and eventually each of her grandchildren on an equal basis.45

     In support of respondent’s position that the exception under

section 2036(a) for a bona fide sale for an adequate and full

consideration in money or money’s worth does not apply to Ms.

Mirowski’s transfers to MFV, respondent advances certain other

contentions, including the following:   (1) Ms. Mirowski failed to

retain sufficient assets outside of MFV for her anticipated

financial obligations (respondent’s contention (1)); (2) MFV

lacked any valid functioning business operation (respondent’s

contention (2)); (3) Ms. Mirowski delayed forming and funding MFV

until shortly before her death and her health had begun to fail

(respondent’s contention (3)); (4) Ms. Mirowski sat on both sides

of Ms. Mirowski’s transfers to MFV (respondent’s contention (4));

     45
      Ms. Mirowski’s formation of MFV and her lifetime gift of
an equal interest in it to each of her daughters’ trusts enabled
Ms. Mirowski to ensure that her daughters and eventually her
grandchildren would continue to hold respective interests of
equal worth in the bulk of the family’s assets.

     Respondent asserts that under Estate of Bongard v. Commis-
sioner, 124 T.C. 95 (2005), facilitation of lifetime giving may
never qualify as a significant nontax reason for forming and
funding a family LLC or a family partnership. We reject respon-
dent’s assertion. In Estate of Bongard, we did not conclude that
an intention to facilitate lifetime giving may never be a signif-
icant nontax factor. Rather, we found on the record presented
there that such an intention was not a significant nontax reason
for forming the partnership involved in that case. Id. at 127.
                              - 52 -

and (5) after Ms. Mirowski died, MFV made distributions totaling

$36,415,810 to decedent’s estate that that estate used to pay

Federal and State transfer taxes, legal fees, and other estate

obligations (respondent’s contention (5)).46   According to re-

spondent, certain caselaw47 supports respondent’s view that the

presence of the foregoing types of factors necessarily estab-

lishes in the instant case the absence of a bona fide sale for an

adequate and full consideration in money or money’s worth under

section 2036(a).

     With respect to respondent’s contentions (1), (2), and (3),

those contentions are not supported by the record in this case

and/or ignore material facts that we have found on the basis of

that record.   We reject those contentions.

     With respect to respondent’s contention (1), we have found

that the only anticipated significant financial obligation of Ms.

     46
      Respondent also points out that MFV’s Form 1065 for its
taxable year 2002 erroneously reported that the distributions
that MFV made during that year were charged against its respec-
tive members’ capital accounts on virtually a pro rata basis.
The record does not disclose why that form contained that error.
In any event, we do not find that error to be a material factor
in our resolving the issues presented.
     47
      The caselaw on which respondent relies includes Estate of
Korby v. Commissioner, 471 F.3d 848 (8th Cir. 2006), affg. T.C.
Memo. 2005-103, Estate of Thompson v. Commissioner, 382 F.3d 367
(3d Cir. 2004), affg. T.C. Memo. 2002-246, Estate of Rosen v.
Commissioner, T.C. Memo. 2006-115, Estate of Strangi v. Commis-
sioner, T.C. Memo. 2003-145, affd. on one ground only 417 F.3d
468 (5th Cir. 2005), Estate of Harper v. Commissioner, T.C. Memo.
2002-121, and Estate of Harrison v. Commissioner, T.C. Memo.
1987-8.
                              - 53 -

Mirowski when she formed and funded MFV was the substantial gift

tax for which she would be liable with respect to her contem-

plated respective gifts of 16-percent interests in MFV to her

daughters’ trusts.   We have also found that at no time before Ms.

Mirowski’s death did the members of MFV have any express or

unwritten agreement or understanding to distribute assets of MFV

in order to pay that gift tax liability.   In order to pay the

anticipated gift tax liability with respect to her contemplated

respective gifts of 16-percent interests in MFV to her daughters’

trusts, Ms. Mirowski could have (1) used a portion of the over

$7.5 million of personal assets that she retained and did not

transfer to MFV, including cash and cash equivalents of over $3.3

million, (2) used a portion or all of the distributions that she

expected to receive as a 52-percent interest holder in MFV of the

millions of dollars of royalty payments under the ICD patents

license agreement that she expected MFV to receive, and

(3) borrowed against (a) the personal assets that she retained

and did not transfer to MFV and (b) her 52-percent interest in

MFV,48 see Md. Code Ann., Corps. & Assns. sec. 4A-602 (West

     48
      Under applicable Maryland law, the interest of a member in
an LLC constitutes personal property, Md. Code Ann., Corps. &
Assns. sec. 4A-602 (West 2008), and the term “security interest”
is defined as an interest in personal property that secures
payment or performance of an obligation, Md. Code Ann., Com. Law
sec. 1-201(37) (West 2008). Thus, under applicable Maryland law,
a member of an LLC may grant an interest in that member’s inter-
est in the LLC in order to secure payment of a loan.
                              - 54 -

2008); Md. Code Ann., Com. Law sec. 1-201(37) (West 2008).

     With respect to respondent’s contention (1), we have also

found that at no time before September 10, 2001, when Ms.

Mirowski’s condition unexpectedly deteriorated significantly, did

Ms. Mirowski, her daughters, or her physicians expect her to die

and that consequently at no time did Ms. Mirowski and her daugh-

ters discuss or anticipate the estate tax and similar transfer

taxes and the other estate obligations that would arise only as a

result of Ms. Mirowski’s death.49

     With respect to respondent’s contention (2), we have found

that at all relevant times, including after Ms. Mirowski’s death,

MFV has been a valid functioning investment operation and has

been managing the business matters relating to the ICD patents

and the ICD patents license agreement, including related litiga-

     49
      The estate tax that would arise only as a result of Ms.
Mirowski’s death would not have been the obligation of Ms.
Mirowski. The estate tax is imposed on “the transfer of the
taxable estate” of a person who dies, sec. 2001(a), and the
liability for the payment of the estate tax is imposed on the
executor (or other personal representative) of the estate, sec.
2002. Moreover, unless the estate tax is paid in full or becomes
unenforceable by reason of the lapse of time, the estate tax
generally

     shall be a lien upon the gross estate of the decedent
     for 10 years from the date of death, except that such
     part of the gross estate as is used for the payment of
     charges against the estate and expenses of its adminis-
     tration, allowed by any court having jurisdiction
     thereof, shall be divested of such lien.

Sec. 6324(a)(1).
                                - 55 -

tion.     Moreover, we reject the suggestion in respondent’s conten-

tion (2) that the activities of MFV had to rise to the level of a

“business” under the Federal income tax laws in order for the

exception under section 2036(a) for a bona fide sale for an

adequate and full consideration in money or money’s worth to

apply.50

     With respect to respondent’s contention (3), as discussed

above with respect to respondent’s contention (1), we have found

that at no time before September 10, 2001, when Ms. Mirowski’s

condition unexpectedly deteriorated significantly, did Ms.

Mirowski, her daughters, or her physicians expect her to die and

that consequently at no time did Ms. Mirowski and her daughters

discuss or anticipate the estate tax and similar transfer taxes

and the other estate obligations that would arise only as a

result of Ms. Mirowski’s death.    We have also found that Ms.

Mirowski was being treated since January 2001 both at home and at

Johns Hopkins Hospital for a diabetic foot ulcer and that she was

admitted to Johns Hopkins Hospital on August 31, 2001, for

further treatment of that ulcer.    In addition, we have found that

at all times throughout the course of her treatment from January

2001 until September 10, 2001, when Ms. Mirowski’s condition

unexpectedly deteriorated significantly, the expectations of the

     50
      See, e.g., Estate of Stone v. Commissioner, T.C. Memo.
2003-309.
                               - 56 -

members of the medical staff at that hospital who were responsi-

ble for treating Ms. Mirowski and the expectations of Ms.

Mirowski and her daughters were that the treatment of her foot

ulcer would allow her to recover.

     With respect to respondent’s contention (4), that contention

reads out of section 2036(a) in the case of any single-member LLC

the exception for a bona fide sale for an adequate and full

consideration in money or money’s worth that Congress expressly

prescribed when it enacted that statute.   Respondent’s contention

(4) also ignores that Ms. Mirowski fully funded MFV; her daugh-

ters’ trusts did not contribute any assets to that company.

Instead, each of those trusts was the recipient of a gift from

Ms. Mirowski consisting of a 16-percent interest in MFV.    We

reject respondent’s contention (4).

     With respect to respondent’s contention (5), that contention

ignores our findings that at no time before September 10, 2001,

when Ms. Mirowski’s condition unexpectedly deteriorated signifi-

cantly, did Ms. Mirowski, her family, or her physicians expect

her to die and that consequently at no time did Ms. Mirowski and

her daughters discuss or anticipate the estate tax and similar

transfer taxes and the other estate obligations that would arise

only as a result of Ms. Mirowski’s death.51   Moreover, we reject

the suggestion of respondent that respondent’s contention (5) is

     51
          See supra note 49.
                              - 57 -

determinative in the instant case of whether Ms. Mirowski’s

transfers to MFV were bona fide sales for adequate and full

consideration in money or money’s worth under section 2036(a).

     With respect to respondent’s reliance on certain caselaw to

support respondent’s view that the existence of the various

alleged contentions advanced by respondent necessarily estab-

lishes in the instant case the absence of a bona fide sale for an

adequate and full consideration in money or money’s worth under

section 2036(a), we find the cases on which respondent relies to

be factually distinguishable from the instant case and respon-

dent’s reliance on them to be misplaced.52

     In support of respondent’s position that the exception under

section 2036(a) for a bona fide sale for an adequate and full

consideration in money or money’s worth does not apply to Ms.

Mirowski’s transfers to MFV, respondent also contends that,

because Ms. Mirowski did not at any time contemplate forming and

funding MFV without making respective gifts of 16-percent inter-

ests in MFV to her daughters’ trusts, Ms. Mirowski, “in sub-

stance, * * * received only a 52% MFV interest” in exchange for

Ms. Mirowski’s transfers to MFV of 100 percent of its assets.    As

a result, according to respondent, Ms. Mirowski “did not receive

     52
      For example, the Court did not find in any of the cases on
which respondent relies that there was a significant and legiti-
mate nontax reason for the transfer involved to which the Court
held sec. 2036(a) applied.
                              - 58 -

adequate and full consideration in the form of a proportionate

MFV interest.”   On the record before us, we reject respondent’s

contention.   Ms. Mirowski made two separate, albeit integrally

related, transfers of property that are at issue in this case,

namely, Ms. Mirowski’s transfers to MFV of certain assets on

September 1, 5, 6, and 7, 2001, and Ms. Mirowski’s respective

gifts of 16-percent interests in MFV to her daughters’ trusts on

September 7, 2001.   In return for Ms. Mirowski’s transfers to

MFV, Ms. Mirowski received and held 100 percent of the interests

in MFV.   In return for Ms. Mirowski’s respective gifts to her

daughters’ trusts, Ms. Mirowski received and held nothing.53

     On the record before us, we find that Ms. Mirowski received

an interest in MFV proportionate to the value of the assets that

she transferred to it on September 1, 5, 6, and 7, 2001.   On that

record, we also find that Ms. Mirowski’s capital account was

properly credited with the assets that she transferred to it on

September 1, 5, 6, and 7, 2001, and that, in the event of a

liquidation and dissolution of MFV, Ms. Mirowski had the right to

a distribution of property from MFV in accordance with her

capital account.

     53
      Decedent’s personal representatives timely filed Form 709
for 2001 on behalf of decedent, in which those representatives
reported Ms. Mirowski’s gifts. The parties have resolved their
dispute relating to the total value of those gifts.
                              - 59 -

     Based upon our examination of the entire record before us,

we find that Ms. Mirowski’s transfers to MFV were bona fide sales

for adequate and full consideration in money or money’s worth

under section 2036(a).   Based upon that examination, we further

find that the exception under section 2036(a) for a bona fide

sale for an adequate and full consideration in money or money’s

worth applies to Ms. Mirowski’s transfers to MFV.

          Possession or Enjoyment of, or Right to Income From,
          the Property Transferred or Right To Designate the
          Persons Who Shall Possess or Enjoy the Property
          Transferred or the Income From Such Property

     We have found that Ms. Mirowski’s transfers to MFV were bona

fide sales for adequate and full consideration in money or

money’s worth under section 2036(a).   Consequently, we need not,

and we shall not, address with respect to those transfers the

factual issue presented under section 2036(a)(1) as to whether

Ms. Mirowski retained for life the possession or the enjoyment

of, or the right to the income from, the property transferred or

the factual issue presented under section 2036(a)(2) as to

whether Ms. Mirowski retained for life the right, either alone or

in conjunction with any person, to designate who shall possess or

enjoy the property transferred or the income therefrom.

     Based upon our examination of the entire record before us,

we hold that section 2036(a) does not apply to Ms. Mirowski’s

transfers to MFV.
                              - 60 -

     Ms. Mirowski’s Gifts

           Transfer of Property by Ms. Mirowski

     Decedent’s estate acknowledges that Ms. Mirowski’s respec-

tive gifts of 16-percent interests in MFV to her daughters’

trusts on September 7, 2001, were transfers of property.   In

light of that acknowledgment by decedent’s estate, we find that

Ms. Mirowski’s gifts were transfers of property under section

2036(a).

           Transfer Other Than a Bona Fide Sale for an Adequate
           and Full Consideration in Money or Money’s Worth

     Decedent’s estate also acknowledges that Ms. Mirowski’s

gifts were not bona fide sales for adequate and full consider-

ation in money and money’s worth under section 2036(a).    In light

of that acknowledgment by decedent’s estate, we find that Ms.

Mirowski’s gifts were not bona fide sales for adequate and full

consideration in money or money’s worth under section 2036(a).

           Possession or Enjoyment of, or Right to Income From,
           the Property Transferred or Right To Designate the
           Persons Who Shall Possess or Enjoy the Property
           Transferred or the Income From Such Property

     The parties agree that an interest or a right described in

section 2036(a)(1) and (2) is treated as having been retained if

at the time of the transfer of property there was an express or

implied agreement or understanding that the interest or right

would later be conferred.   See sec. 20.2036-1(a), Estate Tax

Regs.   They disagree over whether there was such an express or
                             - 61 -

implied agreement or understanding at the time Ms. Mirowski made

respective gifts of 16-percent interests in MFV to her daughters’

trusts.

               Possession or Enjoyment of, or Right to
               Income From, the Property Transferred

     It is the position of decedent’s estate that

     there was no understanding, express or implied, that
     decedent retained [sic] any interest in the 16% MFV
     interests that had been transferred to the [respective]
     Trusts for the benefit of decedent’s daughters and
     their issue. * * * Decedent completed those gifts of
     MFV interests on September 7, 2001, and thereafter had
     no right to receive, and did not receive, any benefit
     whatsoever from such interests. * * *

          Moreover, this case does not involve the kinds of
     facts that have led courts to find implied agreements
     that a decedent has retained an interest in the
     decedent-transferred property. * * *

     Respondent counters that at the time of Ms. Mirowski’s gifts

and at the time of her death an agreement, both express and

implied, existed that Ms. Mirowski retain the possession or the

enjoyment of, or the right to the income from, the respective 16-

percent interests in MFV that she gave to her daughters’

trusts.54

     In support of respondent’s contention that at the time of

Ms. Mirowski’s gifts and at the time of her death there was an

     54
      As discussed below, respondent advances the same conten-
tion with respect to the respective 16-percent interests in MFV
that Ms. Mirowski gave to her daughters’ trusts in support of
respondent’s argument under sec. 2036(a)(2) that Ms. Mirowski
“retained the right to designate the persons who could possess or
enjoy the assets or the income therefrom during her lifetime.”
                              - 62 -

express agreement that Ms. Mirowski retain an interest or a right

described in section 2036(a)(1) with respect to the respective

16-percent interests in MFV that she gave to her daughters’

trusts, respondent asserts:

          Decedent was designated MFV’s General Manager at
     the time of its formation, and continued to be its
     General Manager until the time of her death. * * *
     [MFV’s operating agreement section] 5.1.1. * * * As
     General Manager, decedent had sole and exclusive au-
     thority to manage MFV’s affairs. * * * [MFV’s operating
     agreement section] 5.1.2. * * * Her authority included
     the authority to decide the timing and amounts of
     distributions from MFV. * * * [MFV’s operating agree-
     ment section] 4.5.1. * * * Decedent could not be re-
     moved and replaced as General Manager because, even
     after the gifts to the daughters’ trusts, she still
     held a majority (52%) interest. * * * [MFV’s operating
     agreement section] 5.1.5. * * * Thus, when decedent
     formed and funded MFV and at her death, she expressly
     retained, [sic] the right to possession or enjoyment
     of, or the right to the income from, the transferred
     assets * * *.

     The linchpin in respondent’s argument that at the time of

Ms. Mirowski’s gifts and at the time of her death Ms. Mirowski

expressly retained the right to the possession or the enjoyment

of, or the right to the income from, the respective 16-percent

interests in MFV that she gave to her daughters’ trusts is that

under section 4.5.1 of MFV’s operating agreement “Her authority

[as MFV’s general manager] included the authority to decide the

timing and amounts of distributions from MFV.”   Before addressing

respondent’s contention regarding section 4.5.1 of MFV’s operat-

ing agreement, we shall describe the authority that Ms. Mirowski

had as MFV’s general manager under that agreement.
                             - 63 -

     Pursuant to section 5.1.1 of MFV’s operating agreement, MFV

was to be managed by a general manager, and the initial general

manager was to be Ms. Mirowski.   Section 5.1.2 of MFV’s operating

agreement provided:

     The General Manager shall have full, exclusive, and
     complete discretion, power, and authority, subject in
     all cases to the other provisions of this Agreement and
     the requirements of applicable law, to manage, control,
     administer, and operate the business and affairs of the
     Company for the purposes herein stated, and to make all
     decisions affecting such business and affairs * * *[55]

     On the record before us, we find that, pursuant to section

5.1.2 of MFV’s operating agreement, Ms. Mirowski’s discretion,

power, and authority as MFV’s general manager were subject to the

other provisions of MFV’s operating agreement, including section

4.1 (regarding the distribution of cash flow and the allocation

of profit or loss from transactions other than capital transac-

tions); section 4.2 (regarding the distribution of capital

proceeds and the allocation of profit or loss from capital

transactions); section 4.4 (regarding the distribution of MFV’s

assets upon the liquidation and dissolution of MFV); section

     55
      MFV’s operating agreement expressly listed in section
5.1.2 various powers, including the following, that were among
the powers of MFV’s general manager, subject in all cases to the
other provisions of that operating agreement and the requirements
of applicable law: Acquire by purchase, lease, or otherwise any
real or personal property; sell, dispose of, trade, or exchange
MFV’s assets in the ordinary course of MFV’s business; borrow
money for and on behalf of MFV; enter into any kind of activity
necessary to, in connection with, or incidental to the accom-
plishment of the purposes of MFV; and invest and reinvest MFV
reserves in short-term instruments or money market funds.
                              - 64 -

5.1.3 (regarding extraordinary transactions); section 7.1 (re-

garding events resulting in the dissolution of MFV); and section

7.2 (regarding the procedure for winding up and dissolving MFV).

On that record, we further find that, pursuant to section 5.1.2

of MFV’s operating agreement, Ms. Mirowski’s discretion, power,

and authority as MFV’s general manager were subject to the

requirements of applicable Maryland law, including the Maryland

law that imposed on her fiduciary duties to the other members of

MFV, namely, her daughters’ trusts56 to which she made respective

gifts of 16-percent interests in MFV.57   See Robinson v. Geo

Licensing Co., L.L.C., 173 F. Supp. 2d 419, 427 (D. Md. 2001);

Froelich v. Erikson, 96 F. Supp. 2d 507, 526 (D. Md. 2000), affd.

per curiam sub nom. Froelich v. Senior Campus Living, L.L.C., 5
Fed. Appx. 287 (4th Cir. 2001).

     On the record before us, we find that the discretion, power,

and authority that MFV’s operating agreement granted to Ms.

Mirowski as MFV’s general manager do not require us to find that

at the time of Ms. Mirowski’s gifts and at the time of her death

there was an express agreement that Ms. Mirowski retain an

     56
      Ms. Mirowski held no powers over her daughters’ trusts.
Ms. Mirowski’s daughters as the trustees of each of the daugh-
ters’ trusts were subject to the fiduciary duties imposed on them
by Maryland law. See, e.g., Madden v. Mercantile-Safe Deposit
& Trust Co., 339 A.2d 340, 348 (Md. Ct. Spec. App. 1975).
     57
      We find nothing in the record that establishes that Ms.
Mirowski intended to, or did, violate her fiduciary duties under
Maryland law.
                                - 65 -

interest or a right described in section 2036(a)(1) (or section

2036(a)(2)) with respect to the respective 16-percent interests

in MFV that she gave to her daughters’ trusts.

     We turn now to the linchpin in respondent’s contention that

at the time of Ms. Mirowski’s gifts and at the time of her death

there was an express agreement in section 4.5.1 of MFV’s operat-

ing agreement that Ms. Mirowski retain an interest or a right

described in section 2036(a)(1) with respect to the respective

16-percent interests in MFV that she gave to her daughters’

trusts.     According to respondent, under section 4.5.1 of MFV’s

operating agreement, as MFV’s general manager, Ms. Mirowski’s

“authority included the authority to decide the timing and

amounts of distributions from MFV.”58    That section of MFV’s

operating agreement provides:    “Except as otherwise provided in

this Agreement, the timing and amount of all distributions shall

be determined by the Members holding a majority of the Percent-

ages then outstanding.”

     Contrary to respondent’s contention, section 4.5.1 of MFV’s

operating agreement did not give Ms. Mirowski as MFV’s general

manager the authority to determine the timing and the amount of

all distributions from MFV.    Any authority that Ms. Mirowski had

under that section was in her capacity as the member of MFV who

owned a majority of the outstanding percentage interests in MFV

     58
          See supra note 54.
                              - 66 -

(majority percentage member of MFV).    Moreover, any authority

that section 4.5.1 of MFV’s operating agreement gave Ms. Mirowski

as the majority percentage member of MFV did not include the

authority to determine the timing and the amount of distributions

from MFV where that agreement “otherwise provided”.    That agree-

ment otherwise provided in, inter alia, section 4.1 and 4.2.

     Pursuant to section 4.1 of MFV’s operating agreement, Ms.

Mirowski had no authority as the majority percentage member of

MFV (or as MFV’s general manager) to determine for each taxable

year the distribution of MFV’s cash flow (i.e., cash funds

derived in the ordinary course of MFV’s operations) or the

allocation of MFV’s profit or loss from the ordinary course of

MFV’s operations.   With respect to the distribution of MFV’s cash

flow, section 4.1.2 of MFV’s operating agreement provided that

“Cash Flow for each taxable year * * * shall be distributed to

the Interest Holders * * * no later than seventy-five (75) days

after the end of the taxable year.”59   Section 4.1.2 of MFV’s

operating agreement is unequivocal in mandating the distribution

of MFV’s cash flow no later than 75 days after the end of a

taxable year.

     59
      Section 4.1 of MFV’s operating agreement required for each
taxable year the allocation of profit or loss from the ordinary
course of MFV’s operations and the distribution of MFV’s cash
flow to MFV’s interest holders in proportion to their respective
percentage interests in MFV.
                               - 67 -

     Pursuant to section 4.2 of MFV’s operating agreement, Ms.

Mirowski had no authority as the majority percentage member of

MFV (or as MFV’s general manager) to determine the distribution

of MFV’s capital proceeds (i.e., gross receipts from a capital

transaction, namely, a transaction not in the ordinary course of

MFV’s operations) or the allocation of profit or loss from any

capital transaction.60   With respect to the distribution of MFV’s

capital proceeds, section 4.2.3 of MFV’s operating agreement

provided that “Capital Proceeds shall be distributed and applied

by the Company” as specified in that section.61   Section 4.2.3 of

MFV’s operating agreement is unequivocal in mandating the distri-

bution (and application) of MFV’s capital proceeds as specified

in that section.

     In an attempt to qualify the unequivocal words of section

4.2.3 of MFV’s operating agreement mandating the distribution of

MFV’s capital proceeds, respondent attempts to inflate the

     60
      Pursuant to section 5.1.3.1 and 5.1.3.2 of MFV’s operating
agreement, Ms. Mirowski did not have the authority as MFV’s
general manager (or as the majority percentage member of MFV) to
undertake, inter alia, a capital transaction, the only type of
transaction under that operating agreement giving rise to capital
proceeds, unless all of MFV’s members approved.
     61
      Section 4.2 of MFV’s operating agreement required the
allocation of profit or loss from any MFV capital transaction and
the distribution of MFV’s capital proceeds to MFV’s interest
holders in proportion to their respective capital accounts.
Respondent does not dispute that, in general, the respective
capital account balances of MFV’s interest holders matched those
interest holders’ respective percentage interests in MFV.
                               - 68 -

significance of the language “no later than seventy-five (75)

days after the end of the taxable year” appearing in section

4.1.2 of MFV’s operating agreement that mandates the distribution

of MFV’s cash flow.    We reject respondent’s reliance on that

language to change the unequivocal words of section 4.2.3 of

MFV’s operating agreement mandating the distribution of MFV’s

capital proceeds.

     Section 4.1.2 of MFV’s operating agreement governs the

distribution of MFV’s cash flow “for each taxable year” of MFV.

Thus, that section cannot be implemented until a taxable year of

MFV has ended.   It is only after the end of a taxable year that

cash flow and profit or loss from the ordinary course of MFV’s

operations for the taxable year may be computed, allocated, and

distributed as required by section 4.1 of MFV’s operating agree-

ment.   Section 4.1.2 of MFV’s operating agreement ensures that

there will be enough time after the end of each taxable year, but

no more than 75 days after the end of each such year, within

which to make the computations, allocations, and distributions

for each such taxable year required by section 4.1 of MFV’s

operating agreement.   There was no reason to add similar language

to section 4.2 of MFV’s operating agreement.   That is because the

term “capital proceeds” is defined in section I of MFV’s operat-

ing agreement as “the gross receipts received by the Company from

a Capital Transaction.”   As soon as each capital transaction of
                              - 69 -

MFV is undertaken, section 4.2 of MFV’s operating agreement

requires the allocation of profit or loss and the distribution

and the application of capital proceeds from that capital trans-

action as specified in that section.

     On the record before us, we find that section 4.5.1 of MFV’s

operating agreement did not give Ms. Mirowski as the majority

percentage member of MFV (or as MFV’s general manager) the

authority to determine the timing and the amount of distributions

of MFV’s cash flow and MFV’s capital proceeds.62   On that record,

     62
      In so finding, we have considered respondent’s contention
that Ms. Mirowski had “by implication” the power to determine the
respective amounts of MFV’s cash flow and MFV’s capital proceeds
to be distributed. According to respondent,

     [MFV’s operating agreement] Section 4.2.3, which states
     that the amount of capital proceeds to be distributed
     is to be reduced by “any reserves which the General
     Manager deems necessary for liabilities or obligations
     of the Company . . . .”, gives decedent the power to
     determine the amount of such reserves, and by implica-
     tion, the amount of such distributions. [MFV’s operat-
     ing agreement] Section 1 [defines] “Cash Flow” [and]
     gives decedent a similar power “to pay or establish
     reasonable reserves for future expenses, debt payments,
     capital improvements or replacements . . .” and thereby
     the amount of distributable cash flow. * * *

     Ms. Mirowski’s authority as MFV’s general manager to estab-
lish reserves was limited to establishing reserves for MFV’s
liabilities and obligations and future expenses, debt payments,
capital improvements, and replacements. Moreover, Ms. Mirowski’s
authority as MFV’s general manager to establish the types of
reserves in question was subject to the fiduciary duties imposed
on her by Maryland law. See Robinson v. Geo Licensing Co.,
L.L.C., 173 F. Supp. 2d 419, 427 (D. Md. 2001); Froelich v.
Erikson, 96 F. Supp. 2d 507, 526 (D. Md. 2000), affd. per curiam
sub nom. Froelich v. Senior Campus Living, L.L.C., 5 Fed. Appx.
                                                   (continued...)
                             - 70 -

we further find that section 4.5.1 of MFV’s operating agreement

did not give Ms. Mirowski as the majority percentage member of

MFV (or as MFV’s general manager) the authority to determine the

timing and the amount of distributions upon the liquidation and

dissolution of MFV.63

     On the record before us, we find that at the time of Ms.

Mirowski’s gifts and at the time of her death there was no

express agreement in MFV’s operating agreement (or elsewhere)

that Ms. Mirowski retain the possession or the enjoyment of, or

the right to the income from, the respective 16-percent interests

in MFV that she gave to her daughters’ trusts.

     62
      (...continued)
287 (4th Cir. 2001). We find nothing in the record that shows
that Ms. Mirowski intended to establish, or would have estab-
lished, the reserves in question in violation of those duties.
On the record before us, we conclude that Ms. Mirowski’s author-
ity as MFV’s general manager to establish reserves as specified
in MFV’s operating agreement did not give Ms. Mirowski an inter-
est or a right described in sec. 2036(a)(1) (or sec. 2036(a)(2)).
     63
      Section 4.4.1 of MFV’s operating agreement provides that
if MFV were to be liquidated, its assets

     shall be distributed to the Interest Holders in accor-
     dance with the balances in their respective Capital
     Accounts, after taking into account the allocations of
     Profit or Loss pursuant to Section 4.1 or 4.2, if any,
     and distributions, if any, of cash or property, if any,
     pursuant to Sections 4.1 and 4.2.3 [of MFV’s operating
     agreement].

     We conclude that section 4.5.1 of MFV’s operating agreement
merely served as a backstop to the other sections of MFV’s
operating agreement that controlled the timing and the amount of
distributions by MFV.
                              - 71 -

     In support of respondent’s contention that at the time of

Ms. Mirowski’s gifts and at the time of her death there was an

implied agreement that Ms. Mirowski retain an interest or a right

described in section 2036(a)(1) with respect to the respective

16-percent interests in MFV that she gave to her daughters’

trusts, respondent relies on essentially the same contentions on

which respondent relies in support of respondent’s argument that

Ms. Mirowski’s transfers to MFV were not bona fide sales for

adequate and full consideration in money or money’s worth under

section 2036(a).   We have considered and rejected those conten-

tions.   For the reasons stated above, we reject respondent’s

contentions here in determining whether at the time of Ms.

Mirowski’s gifts and at the time of her death there was an

implied agreement that she retain an interest or a right de-

scribed in section 2036(a)(1) with respect to the respective 16-

percent interests in MFV that she gave to her daughters’ trusts.

     We shall, however, address again what respondent considers

to be of “particular significance” in our determining whether at

the time of Ms. Mirowski’s gifts and at the time of her death

there was an implied agreement that she retain an interest or a

right described in section 2036(a)(1) with respect to the respec-

tive 16-percent interests in MFV that she gave to her daughters’

trusts, namely, during 2002, MFV distributed $36,415,810 to

decedent’s estate which that estate used to pay Federal and State
                             - 72 -

transfer taxes, legal fees, and other estate obligations.64   As

discussed above, we have found that the only anticipated signifi-

cant financial obligation of Ms. Mirowski when she formed and

funded MFV and when she made the respective gifts to her daugh-

ters’ trusts was the substantial gift tax for which she would be

liable with respect to those gifts.   We have also found that at

no time before Ms. Mirowski’s death did the members of MFV have

any express or unwritten agreement or understanding to distribute

assets of MFV in order to pay that gift tax liability.   In order

to pay the anticipated gift tax liability with respect to her

contemplated respective gifts of 16-percent interests in MFV to

her daughters’ trusts, Ms. Mirowski could have (1) used a portion

of the over $7.5 million of personal assets that she retained and

did not transfer to MFV, including cash and cash equivalents of

over $3.3 million, (2) used a portion or all of the distributions

that she expected to receive as an interest holder in MFV of the

millions of dollars of royalty payments under the ICD patents

     64
      Included in the Federal and State transfer taxes was
$11,750,623 that decedent’s personal representatives paid in
April 2002 as the estimated gift tax liability with respect to
Ms. Mirowski’s respective gifts of 16-percent interests in MFV to
her daughters’ trusts. In July 2002, those representatives filed
on behalf of Ms. Mirowski the 2001 Form 709 that showed actual
gift tax liability for 2001 of $9,729,280, resulting in a credit
to decedent’s estate. Respondent determined a deficiency in Ms.
Mirowski’s gift tax for 2001 attributable to the value of each of
Ms. Mirowski’s gifts. The parties have resolved their dispute as
to the gift tax of Ms. Mirowski for 2001. See supra notes 1 and
36.
                                - 73 -

license agreement that she expected MFV to receive, and

(3) borrowed against (a) the personal assets that she retained

and did not transfer to MFV and (b) her 52-percent interest in

MFV,65 see Md. Code Ann., Corps. & Assns. sec. 4A-602 (West

2008); Md. Code Ann., Com. Law sec. 1-201(37) (West 2008).

     In addition, as also discussed above, we have found that at

no time before September 10, 2001, when Ms. Mirowski’s condition

unexpectedly deteriorated significantly, did Ms. Mirowski, her

daughters, or her physicians expect her to die and that conse-

quently at no time did Ms. Mirowski and her daughters discuss or

anticipate the estate tax and similar transfer taxes and the

other estate obligations that would arise only as a result of Ms.

Mirowski’s death.66

     In 2002, after Ms. Mirowski died, MFV distributed over $36

million to decedent’s estate in order for the estate to pay

Federal and State transfer taxes, legal fees, and other estate

obligations.     At the time in 2002 when MFV made those distribu-

tions to decedent’s estate, MFV’s members (i.e., the daughters’

trusts),67 through their respective trustees (i.e., Ms.

     65
          See supra note 48.
     66
      As discussed supra note 49, the estate tax that would
arise only as a result of Ms. Mirowski’s death would not have
been the obligation of Ms. Mirowski.
     67
      The daughters’ trusts were the remaining members of MFV
after Ms. Mirowski’s death.
                                - 74 -

Mirowski’s daughters), agreed and decided that MFV should not

make distributions to them.68   In making that decision, MFV’s

members had in mind that those members will own collectively 100

percent of MFV, in three equal shares, after decedent’s estate is

closed.

     On the record before us, we conclude that the decision by

MFV’s members after Ms. Mirowski died to have MFV distribute

during 2002 over $36 million to decedent’s estate, which the

estate used to pay Federal and State transfer taxes, legal fees,

and other estate obligations, is not determinative in the instant

case of whether at the time of Ms. Mirowski’s gifts and at the

time of her death there was an implied agreement that Ms.

Mirowski retain an interest or a right described in section

2036(a)(1) with respect to the respective 16-percent interests in

MFV that she gave to her daughters’ trusts.

     On the record before us, we find that at the time of Ms.

Mirowski’s gifts and at the time of her death there was no

implied agreement or understanding that Ms. Mirowski retain the

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

the respective 16-percent interests in MFV that she gave to her

daughters’ trusts.

     68
      In other words, MFV’s members (i.e., the daughters’
trusts) agreed and decided that during 2002 MFV should not make
pro rata distributions to all of the interest holders of MFV.
                             - 75 -

     Based upon our examination of the entire record before us,

we find that at the time of Ms. Mirowski’s gifts and at the time

of her death Ms. Mirowski did not retain the possession or the

enjoyment of, or the right to the income from, the 16-percent

interests in MFV that she gave to her daughters’ trusts within

the meaning of section 2036(a)(1).

               Right To Designate the Persons Who Shall
               Possess or Enjoy the Property Transferred
               or the Income From Such Property

     It is the position of decedent’s estate that Ms. Mirowski

did not retain a right described in section 2036(a)(2) with

respect to the respective 16-percent interests in MFV that she

gave to her daughters’ trusts.

     Respondent counters:

     With the approval of the daughters (now the other
     interest holders), decedent had the authority to
     dispose of assets in other than the ordinary course of
     business. [MFV’s operating agreement] Section 5.1.3.1.
     As the holder of a majority of the MFV interests,
     decedent alone held the power to determine the timing
     of the distribution of the capital transaction
     proceeds. [MFV’s operating agreement] Section 4.5.1.
     Thus, after the transfer of the three 16 percent
     interests, decedent held the right, in conjunction with
     her daughters, to designate the person or persons who
     shall possess or enjoy the proceeds of the transferred
     property, within the meaning of section 2036(a)(2),
     with the result that the assets transferred to MFV are
     includible in the gross estate. * * *

     Before addressing the linchpin in respondent’s argument

under section 2036(a)(2), we reject respondent’s contention that

Ms. Mirowski’s daughters were members of MFV after Ms. Mirowski’s
                                - 76 -

gifts.     After those gifts, the daughters’ trusts, and not Ms.

Mirowski’s daughters, were members of MFV.69

     We turn now to the linchpin in respondent’s argument under

section 2036(a)(2), namely, under section 4.5.1 of MFV’s

operating agreement Ms. Mirowski “alone held the power to

determine the timing of the distribution of the capital

transaction proceeds.”     We have considered and rejected that

contention when we addressed respondent’s argument under section

2036(a)(1) with respect to Ms. Mirowski’s gifts.     For the reasons

stated above, we reject respondent’s contention here in

determining whether at the time of Ms. Mirowski’s gifts and at

the time of her death Ms. Mirowski retained a right described in

section 2036(a)(2) with respect to the respective 16-percent

interests in MFV that she gave to her daughters’ trusts.

     Based upon our examination of the entire record before us,

we find that at the time of Ms. Mirowski’s gifts and at the time

of her death Ms. Mirowski did not retain, either alone or in

conjunction with any person, the right to designate the persons

who shall possess or enjoy the respective 16-percent interests in

MFV that she gave to her daughters’ trusts or the income from

such interests within the meaning of section 2036(a)(2).

     Based upon our examination of the entire record before us,

we hold that section 2036(a) does not apply to Ms. Mirowski’s

     69
          See supra note 56.
                                 - 77 -

respective gifts of 16-percent interests in MFV to her daughters’

trusts.

Section 2038(a)(1)

     In order to resolve the parties’ dispute under section

2038(a)(1),70 we must consider the following factual issues

(1) with respect to Ms. Mirowski’s transfers to MFV and (2) with

respect to Ms. Mirowski’s gifts:

     (1) Was there a transfer of property by Ms. Mirowski?

     (2) If there was a transfer of property by Ms. Mirowski, was

such a transfer not a bona fide sale for an adequate and full

consideration in money or money’s worth?

     70
          Sec. 2038(a)(1) provides:

     SEC. 2038.     REVOCABLE TRANSFERS.

          (a) In General.--The value of the gross estate
     shall include the value of all property--

                  (1) Transfers after June 22, 1936.--To the
             extent of any interest therein of which the
             decedent has at any time made a transfer (except
             in case of a bona fide sale for an adequate and
             full consideration in money or money’s worth), by
             trust or otherwise, where the enjoyment thereof
             was subject at the date of his death to any change
             through the exercise of a power (in whatever
             capacity exercisable) by the decedent alone or by
             the decedent in conjunction with any other person
             (without regard to when or from what source the
             decedent acquired such power), to alter, amend,
             revoke, or terminate, or where any such power is
             relinquished during the 3-year period ending on
             the date of the decedent’s death.
                                 - 78 -

     (3) If there was a transfer of property by Ms. Mirowski that

was not a bona fide sale for an adequate and full consideration

in money or money’s worth, (a) at the time of her death was the

enjoyment of the property transferred subject to any change

through the exercise of a power by Ms. Mirowski, alone or in

conjunction with any other person,71 to alter, amend, revoke, or

terminate within the meaning of section 2038(a)(1) or (b) did Ms.

Mirowski relinquish any such power during the three-year period

ending on the date of her death within the meaning of that

section?

     Ms. Mirowski’s Transfers to MFV

             Transfer of Property by Decedent

     As discussed above, decedent’s estate acknowledges that Ms.

Mirowski made transfers of assets to MFV on September 1, 5, 6,

and 7, 2001.     In light of that acknowledgment by decedent’s

estate, we find that Ms. Mirowski’s transfers to MFV were

transfers of property under section 2038(a)(1).

     71
          Sec. 2038(a)(1) does not apply

     If the decedent’s power could be exercised only with
     the consent of all parties having an interest (vested
     or contingent) in the transferred property, and if the
     power adds nothing to the rights of the parties under
     local law * * *

Sec. 20.2038-1(a)(2), Estate Tax Regs.
                              - 79 -

           Transfer Other Than a Bona Fide Sale for an Adequate
           and Full Consideration in Money or Money’s Worth

     Like section 2036(a), section 2038(a)(1) excepts from its

application any transfer of property otherwise subject to that

section which is a “bona fide sale for an adequate and full

consideration in money or money’s worth”.    The respective

exceptions in sections 2036(a) and 2038(a)(1) have the same

meaning.   Based upon our examination of the entire record before

us and for the reasons stated above with respect to our finding

that Ms. Mirowski’s transfers to MFV were bona fide sales for

adequate and full consideration in money or money’s worth under

section 2036(a), we find that Ms. Mirowski’s transfers to MFV

were bona fide sales for adequate and full consideration in money

or money’s worth under section 2038(a)(1).    Based upon that

examination and for those reasons, we further find that the

exception under section 2038(a)(1) for a bona fide sale for an

adequate and full consideration in money or money’s worth applies

to Ms. Mirowski’s transfers to MFV.

           Power To Alter, Amend, Revoke, or Terminate
           the Enjoyment of the Property Transferred or
           Relinquishment of Any Such Power During the
           Three-Year Period Ending on the Date of Death

     We have found that Ms. Mirowski’s transfers to MFV were bona

fide sales for adequate and full consideration in money or

money’s worth under section 2038(a)(1).   Consequently, we need

not, and we shall not, address the factual issues presented under
                               - 80 -

section 2038(a)(1) as to (1) whether at the time of Ms.

Mirowski’s death the enjoyment of the property transferred was

subject to any change through the exercise of a power by Ms.

Mirowski, alone or in conjunction with any other person, to

alter, amend, revoke, or terminate or (2) whether Ms. Mirowski

relinquished any such power during the three-year period ending

on the date of her death.

     Based upon our examination of the entire record before us,

we hold that section 2038(a)(1) does not apply to Ms. Mirowski’s

transfers to MFV.

     Ms. Mirowski’s Gifts

            Transfer of Property by Ms. Mirowski

     As discussed above, decedent’s estate acknowledges that Ms.

Mirowski’s respective gifts of 16-percent interests in MFV to her

daughters’ trusts on September 7, 2001, were transfers of

property.    In light of that acknowledgment by decedent’s estate,

we find that Ms. Mirowski’s gifts were transfers of property

under section 2038(a)(1).

            Transfer Other Than a Bona Fide Sale for an Adequate
            and Full Consideration in Money or Money’s Worth

     Decedent’s estate also acknowledges that Ms. Mirowski’s

gifts were not bona fide sales for adequate and full

consideration in money or money’s worth under section 2038(a)(1).

In light of that acknowledgment by decedent’s estate, we find

that Ms. Mirowski’s gifts were not bona fide sales for adequate
                              - 81 -

and full consideration in money or money’s worth under section

2038(a)(1).

          Power To Alter, Amend, Revoke, or Terminate
          the Enjoyment of the Property Transferred or
          Relinquishment of Any Such Power During the
          Three-Year Period Ending on the Date of Death

                Power To Alter, Amend, Revoke, or Terminate
                the Enjoyment of the Property Transferred

     It is the position of decedent’s estate that at no time was

the enjoyment of the respective 16-percent interests that Ms.

Mirowski gave to her daughters’ trusts subject to change through

the exercise of a power by Ms. Mirowski to alter, amend, revoke,

or terminate.

     Respondent counters that after Ms. Mirowski’s respective

gifts of 16-percent interests in her daughters’ trusts,

     With the approval of the other interest holders (the
     daughters),[72] decedent had the authority to dispose of
     assets in other than the ordinary course of business.
     [MFV’s operating agreement] Section 5.1.3.1. As the
     holder of a majority of the MFV interests, decedent
     alone held the power to determine the timing of the
     distribution of the capital transaction proceeds.
     [MFV’s operating agreement] Section 4.5.1. Thus, after
     the transfer of the three 16 percent interests,
     decedent held the power, in conjunction with her
     daughters, to affect the time or manner of enjoyment of
     the transferred property within the meaning of section
     2038(a)(1), with the result that despite the gifts, the
     assets transferred to MFV are includible in the gross
     estate. As decedent retained this power until her
     death, there is no need to discuss the application of
     the three-year rule * * * of section * * * 2038[(a)(1)]
     * * *.

     72
      We reject here, as we did above, respondent’s contention
that after Ms. Mirowski’s gifts her daughters, and not her
daughters’ trusts, were members of MFV.
                              - 82 -

     In support of respondent’s argument under section

2038(a)(1), respondent relies on essentially the same contentions

on which respondent relies in support of respondent’s argument

under section 2036(a)(2).   We considered and rejected those

contentions when we addressed respondent’s argument under section

2036(a)(2).   For the reasons stated above, we reject respondent’s

contentions here in determining whether at the time of Ms.

Mirowski’s death Ms. Mirowski held the power to alter, amend,

revoke, or terminate the enjoyment of the respective 16-percent

interests in MFV that she gave to her daughters’ trusts.

     Based upon our examination of the entire record before us,

we find that at no time, including at the time of Ms. Mirowski’s

death, was the enjoyment of the respective 16-percent interests

in MFV that Ms. Mirowski gave to her daughters’ trusts subject to

any change through the exercise of a power by her, alone or in

conjunction with any other person, to alter, amend, revoke, or

terminate within the meaning of section 2038(a)(1).

                Relinquishment During the Three-Year
                Period Ending on the Date of Death of a
                Power To Alter, Amend, Revoke, or Terminate
                the Enjoyment of the Property Transferred

     We have found that at no time, including at the time of Ms.

Mirowski’s death, was the enjoyment of the respective 16-percent

interests in MFV that Ms. Mirowski gave to her daughters’ trusts

subject to any change through the exercise of a power by her,

alone or in conjunction with any other person, to alter, amend,
                                   - 83 -

revoke, or terminate within the meaning of section 2038(a)(1).     A

fortiori, Ms. Mirowski could not have relinquished, and we find

on the record before us that she did not relinquish, any such

power during the three-year period ending on the date of her

death within the meaning of that section.

     Based upon our examination of the entire record before us,

we hold that section 2038(a)(1) does not apply to Ms. Mirowski’s

respective gifts of 16-percent interests in MFV to her daughters’

trusts.

Section 2035(a)

     In order to resolve the parties’ dispute under section

2035(a),73 we must consider the following issues with respect to

     73
          Sec. 2035(a) provides:

     SEC. 2035.     ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3
                    YEARS OF DECEDENT’S DEATH.

          (a) Inclusion of Certain Property in Gross
     Estate.--If--

                  (1) the decedent made a transfer (by trust or
             otherwise) of an interest in any property, or
             relinquished a power with respect to any property,
             during the 3-year period ending on the date of the
             decedent’s death, and

                  (2) the value of such property (or an
             interest herein) would have been included in the
             decedent’s gross estate under section 2036, 2037,
             2038, or 2042 if such transferred interest or
             relinquished power had been retained by the
             decedent on the date of his death, the value of
             the gross estate shall include the value of any
             property (or interest therein) which would have
                                                      (continued...)
                                  - 84 -

Ms. Mirowski’s respective gifts of 16-percent interests in MFV to

her daughters’ trusts:74

     (1) Was there a transfer of property by Ms. Mirowski during

the three-year period ending on the date of her death?

     (2) If there was a transfer of property by Ms. Mirowski

during the three-year period ending on the date of her death,

would the value of any such property have been included in her

gross estate under section 2036 or 203875 if the property

transferred by Ms. Mirowski had been retained by her on the date

of her death?

     Transfer of Property During the Three-Year
     Period Ending on the Date of Death

     Decedent’s estate acknowledges that Ms. Mirowski’s

respective gifts of 16-percent interests in MFV to her daughters’

trusts on September 7, 2001, were transfers of property during

the three-year period ending on the date of her death.    In light

     73
          (...continued)
              been so included.
     74
      In advancing respondent’s alternative argument under sec.
2035(a), respondent does not assert that during the three-year
period ending on the date of Ms. Mirowski’s death Ms. Mirowski
relinquished a power with respect to the respective 16-percent
interests in MFV that she gave to her daughters’ trusts.
Therefore, our discussion of sec. 2035(a) is limited to Ms.
Mirowski’s gifts.
     75
      In advancing respondent’s alternative argument under sec.
2035(a), respondent does not assert that Ms. Mirowski’s transfers
to MFV are includible in her gross estate under sec. 2037 or
2042. Therefore, our discussion of sec. 2035(a) is limited to
secs. 2036 and 2038.
                             - 85 -

of that acknowledgment by decedent’s estate, we find that Ms.

Mirowski’s gifts were transfers of property during the three-year

period ending on the date of her death under section 2035(a).

     Property Transferred Otherwise Includible in Gross Estate

     We have found that sections 2036(a) and 2038(a)(1) do not

apply to Ms. Mirowski’s transfers to MFV.   A fortiori, section

2035(a) could not apply, and we hold that that section does not

apply, to Ms. Mirowski’s respective gifts of 16-percent interests

in MFV to her daughters’ trusts.

     Based upon our examination of the entire record before us

and our holdings under sections 2036(a) and 2038(a)(1) with

respect to Ms. Mirowski’s transfers to MFV, we hold that section

2035(a) does not apply to Ms. Mirowski’s respective gifts of 16-

percent interests in MFV to her daughters’ trusts.

     We have considered all of the parties’ respective

contentions and arguments that are not discussed herein, and we

find them to be without merit, irrelevant, and/or moot.

     To reflect the foregoing and the concessions of the parties,

                                        Decision will be entered

                                   under Rule 155.
                          - 86 -

                         APPENDIX

MFV’s operating agreement provided in pertinent part:

                         SECTION I
                       DEFINED TERMS

   *       *       *        *          *   *       *

     “Adjusted Capital Balance” means, as of any day,
an Interest Holder’s total Capital Contributions less
all amounts actually distributed to the Interest Holder
pursuant to Sections 4.2.3.4.1 and 4.4 hereof. If any
Interest is transferred in accordance with the terms of
this Agreement, the transferee shall succeed to the
Adjusted Capital Balance of the transferor to the
extent the Adjusted Capital Balance relates to the
Interest transferred.

   *       *       *        *          *   *       *

     “Capital Account” means the account to be
maintained by the Company for each Interest Holder in
accordance with the following provisions:

     (i) an Interest Holder’s Capital Account shall be
credited with the Interest Holder’s Capital
Contributions, the amount of any Company liabilities
assumed by the Interest Holder (or which are secured by
Company property distributed to the Interest Holder),
the Interest Holder’s allocable share of Profit, and
any item in the nature of income or gain specially
allocated to the Interest Holder pursuant to the
provisions of Section IV (other than Section 4.3.3);
and

     (ii) an Interest Holder’s Capital Account shall be
debited with the amount of money and the fair market
value of any Company property distributed to the
Interest Holder, the amount of any liabilities of the
Interest Holder assumed by the Company (or which are
secured by property contributed by the Interest Holder
to the Company), the Interest Holder’s allocable share
of Loss, and any item in the nature of expenses or
losses specially allocated to the Interest Holder
pursuant to the provisions of Section IV (other than
Section 4.3.3).
                        - 87 -

     If any Membership Interest is transferred pursuant
to the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the
extent the Capital Account is attributable to the
transferred Membership Interest. If the book value of
Company property is adjusted pursuant to Section 4.3.3.
the Capital Account of each Membership Interest Holder
shall be adjusted to reflect the aggregate adjustment
in the same manner as if the Company had recognized a
gain or loss equal to the amount of such aggregate
adjustment. It is intended that the Capital Accounts
of all Interest Holders shall be maintained in
compliance with the provisions of Regulation Section
1.704-1(b), and all provisions of this Agreement
relating to the maintenance of Capital Accounts shall
be interpreted and applied in a manner consistent with
that Regulation.

     “Capital Contribution” means that total amount of
cash and the fair market value of any other assets
contributed (or deemed contributed under Regulation
Section 1.704-1(b)(2)(iv)(d)) to the Company by a
Member, net of liabilities assumed or to which the
assets are subject.

     “Capital Proceeds” means the gross receipts
received by the Company from a Capital Transaction.

     “Capital Transaction” means any transaction not in
the ordinary course of business which results in the
Company’s receipt of cash or other consideration other
than Capital Contributions, including, without
limitation, proceeds of sales or exchanges or other
dispositions of property not in the ordinary course of
business, financings, refinancings, condemnations,
recoveries of damage awards, and insurance proceeds.

     “Cash Flow” means all cash funds derived from
operations of the Company (including interest received
on reserves), without reduction for any non-cash
charges, but less cash funds used to pay current
operating expenses and to pay or establish reasonable
reserves for future expenses, debt payments, capital
improvements or replacements as determined in the sole
discretion of the General Manager. Cash Flow shall not
include Capital Proceeds but shall be increased by the
reduction of any reserve previously established.
                        - 88 -

   *       *       *       *       *       *       *

     “Interest Holder” means any Person who holds a
Membership Interest, whether as a Member or as an
unadmitted assignee of a Member.

   *       *       *       *       *       *       *

     “Member” means each Person signing this Agreement
and any Person who subsequently is admitted as a member
of the Company.

   *       *       *       *       *       *       *

     “Negative Capital Account” means a Capital Account
with a balance of less than zero.

   *       *       *       *       *       *       *

     “Positive Capital Account” means a Capital Account
with a balance greater than zero.

   *       *       *       *       *       *       *

                      SECTION III
          Members; Capital; Capital Accounts

   *       *       *       *       *       *       *

     3.4. Return of Capital Contributions. Except as
otherwise provided in this Agreement, no Interest older
shall have the right to receive the return of any
Capital Contribution.

     3.5. Form of Return of Capital. If an Interest
Holder is entitled to receive a return of a Capital
Contribution, the Company may distribute cash, notes,
property or a combination thereof to the Interest
Holder in return of the Interest Holder’s Capital
Contribution.

     3.6. Capital Accounts. A separate Capital
Account shall be maintained for each Interest Holder.

   *       *       *       *       *       *       *
                        - 89 -

                      SECTION IV
            Profit, Loss and Distributions

     4.1. Distributions of Cash Flow and Allocations
of Profit or Loss Other than Capital Transactions.

          4.1.1. Profit or Loss other than from a
Capital Transaction. After giving effect to the
special allocations [for purposes of subchapter K of
the Internal Revenue Code] set forth in Section 4.3,
for any taxable year of the Company, Profit or Loss
(other than Profit or Loss resulting from a Capital
Transaction, which Profit or Loss shall be allocated in
accordance with the provisions of Section 4.2.1. and
4.2.2.) shall be allocated to the Interest Holders in
proportion to their Percentages.

          4.1.2. Distributions of Cash Flow. Cash
Flow for each taxable year of the Company shall be
distributed to the Interest Holders in proportion to
their Percentages no later than seventy-five (75) days
after the end of the taxable year.

     4.2. Distribution of Capital Proceeds and
Allocation of Profit or Loss from Capital Transactions.

          4.2.1. Profit. After giving effect to the
special allocations [for purposes of subchapter K of
the Internal Revenue Code] set forth in Section 4.3,
Profit from a Capital Transaction shall be allocated as
follows:

               4.2.1.1. If one or more Interest
Holders has a Negative Capital Account, to those
Interest Holders, in proportion to their Negative
Capital Accounts, until all of those Negative Capital
Accounts have been reduced to zero.

               4.2.1.2. Any Profit not allocated
pursuant to Section 4.2.1.1 shall be allocated to the
Interest Holders in proportion to, and to the extent
of, the amounts distributable to them pursuant to
Section 4.2.3.4.1. and 4.2.3.4.3

               4.2.1.3. Any Profit in excess of the
foregoing allocation shall be allocated to the Interest
Holders in proportion to their Percentages.
                          - 90 -

          4.2.2. Loss. After giving effect to the
special allocation [for purposes of subchapter K of the
Internal Revenue Code] set forth in Section 4.3, Loss
from a Capital Transaction shall be allocated as
follows:

               4.2.2.1. If one or more Interest
Holder(s) has a Positive Capital Account, to those
Interest Holders, in proportion to their Positive
Capital Accounts, until all Positive Capital Accounts
have been reduced to zero.

               4.2.2.2. Any Loss not allocated to
reduce Positive Capital Accounts to zero pursuant to
Section 4.2.2.1. shall be allocated to the Interest
Holders in proportion to their Percentages.

          4.2.3. Capital Proceeds. Capital Proceeds
shall be distributed and applied by the Company in the
following order and priority:

               4.2.3.1. to the payment of all expenses
of the Company incident to the Capital Transaction;
then

               4.2.3.2. to the payment of debts and
liabilities of the Company then due and outstanding
(including all debts due to any Interest Holder); then

               4.2.3.3. to the establishment of any
reserves which the General Manager deems necessary for
liabilities or obligations of the Company; then

               4.2.3.4.   the balance shall be
distributed as follows:

                    4.2.3.4.1. to the Interest Holders
in proportion to their Adjusted Capital Balances, until
their remaining Adjusted Capital Balances have been
paid in full;

                    4.2.3.4.2. if any Interest Holder
has a Positive Capital Account after the distributions
made pursuant to Section 4.2.3.4.1 and before any
further allocation of Profit pursuant to Section
4.2.1.3., to those Interest Holders in proportion to
their Positive Capital Accounts; then
                            - 91 -

                    4.2.3.4.3. the balance, to the
Interest Holders in proportion to their Percentages.

   *          *      *        *       *       *      *

       4.4.   Liquidation and Dissolution.

           4.4.1. If the Company is liquidated, the
assets if the Company shall be distributed to the
Interest Holders in accordance with the balances in
their respective Capital Accounts, after taking into
account the allocations of Profit or Loss pursuant to
Section 4.1 or 4.2, if any, and distributions, if any,
of cash or property, if any, pursuant to Sections 4.1
and 4.2.3.

   *          *      *        *       *       *      *

          4.5.1. Except as otherwise provided in this
Agreement, the timing and amount of all distributions
shall be determined by the Members holding a majority
of the Percentages then outstanding.

   *          *      *        *       *       *      *

                           SECTION V
          Management:    Rights, Powers and Duties

       5.1.   Management.

          5.1.1. General Manager. The Company shall
be managed by a General Manager, who may, but need not,
be a Member. Anna Mirowski is hereby designated to
serve as the initial General Manager.

          5.1.2. General Powers. The General Manager
shall have full, exclusive, and complete discretion,
power, and authority, subject in all cases to the other
provisions of this Agreement and the requirements of
applicable law, to manage, control, administer, and
operate the business and affairs of the Company for the
purposes herein stated, and to make all decisions
affecting such business and affairs, including without
limitation, for Company purposes, the power to:

               5.1.2.1. acquire by purchase, lease, or
otherwise, any real or personal property, tangible or
intangible;
                        - 92 -

               5.1.2.2. construct, operate, maintain,
finance, and improve, and to own, sell, convey, assign,
mortgage, or lease any real estate and any personal
property;

               5.1.2.3. sell, dispose, trade, or
exchange Company assets in the ordinary course of the
Company’s business;

               5.1.2.4. enter into agreements and
contract and to give receipts, releases and discharges;

               5.1.2.5. purchase liability and other
insurance to protect the Company’s properties and
business;

               5.1.2.6. borrow money for and on behalf
of the Company, and, in connection therewith, execute
and deliver instruments authorizing the confession of
judgment against the Company.

               5.1.2.7. execute or modify leases with
respect to any part or all of the assets of the
Company;

               5.1.2.8. prepay, in whole or in part,
refinance, amend, modify, or extend any mortgages or
deeds of trust which may affect any asset of the
Company and in connection therewith to execute for and
on behalf of the Company any extensions, renewals, or
modifications of such mortgages or deeds of trust;

               5.1.2.9. execute any and all other
instruments and documents which may be necessary or in
the opinion of the General Manager desirable to carry
out the intent and purpose of this Agreement,
including, but not limited to, documents whose
operation and effect extend beyond the term of the
Company;

               5.1.2.10. make any and all expenditures
which the General Manager, it its sole discretion,
deems necessary or appropriate in connection with the
management of the affairs of the Company and the
carrying out of its obligations and responsibilities
under this Agreement, including, without limitation,
all legal, accounting, and other related expenses
incurred in connection with the organization and
financing and operation of the Company;
                              - 93 -

               5.1.2.11. enter into any kind of
activity necessary to, in connection with, or
incidental to, the accomplishment of the purposes of
the Company; and

               5.1.2.12. invest and reinvest Company
reserves in short-term instruments or money market
funds.

              5.1.3.   Extraordinary Transactions.

               5.1.3.1. Notwithstanding anything to
the contrary in this Agreement, the General Manager
shall not undertake any of the following without the
approval of the Members:

                   5.1.3.2.   any Capital Transaction;

               5.1.3.3. the Company’s lending more than
$50,000 of its money on any one occasion;

               5.1.3.4.       the admission of additional
Members to the Company;

               5.1.3.5. the Company’s engaging in
business in any jurisdiction which does not provide for
the registration of limited liability companies; and

               5.1.3.6. the Company’s electing to
exercise any Purchase Option pursuant to Section 6.4.

   *          *        *        *      *       *         *

          5.1.5. Removal of General Manager. A
majority of the Percentages held by all Members, at any
time and from time to time and for any reason, may
remove the General manager then acting and elect a new
General Manager.

   *          *        *        *      *       *         *

                      SECTION VI
   Transfer of Interests and Withdrawals of Members

       6.1.    Transfers.

              6.1.1.   No Person may Transfer all or any
                        - 94 -

portion of or any interest or rights in the Person’s
Membership Rights or Membership Interest unless the
following conditions (“Conditions of Transfer”) are
satisfied:

               6.1.1.1. the Transfer will not require
registration of Membership Interests or Membership
Rights under any federal or state securities laws;

               6.1.1.2. the transferee delivers to the
Company a written instrument agreeing to be bound by
the terms of Section VI of this Agreement;

               6.1.1.3. the Transfer will not result
in the termination of the Company pursuant to Code
Section 708;

               6.1.1.4. the Transfer will not result
in the Company being subject to the Investment Company
Act of 1940, as amended;

               6.1.1.5. the transferor or the
transferee delivers the following information to the
Company: (i) the transferee’s taxpayer identification
number; and (ii) the transferee’s initial tax basis in
the Transferred Interest; and

               6.1.1.6. the transferor complies with
the provisions set forth in Section 6.1.4.

          6.1.2. If the Conditions of Transfer are
satisfied, then a Member or Interest Holder may
Transfer all or any portion of that Person’s Membership
Interest. The Transfer of a Membership Interest
pursuant to this Section 6.1. shall not result,
however, in the Transfer of any of the transferor’s
other Membership Rights, if any, and the transferee of
the Membership Interest shall have no right to: (i)
become a Member; (ii) exercise any Membership Rights
other than those specifically pertaining to the
ownership of a Membership Interest; or (iii) act as na
agent of the Company.

          6.1.3. Each Member hereby acknowledges the
reasonableness of the prohibition contained in this
Section 6.1. in view of the purposes of the Company and
the relationship of the Members. The Transfer of any
Membership Rights or Membership Interests in violation
                         - 95 -

of the prohibition contained in this Section 6.1 shall
be deemed invalid, null and void, and of no force or
effect. Any Person to whom Membership Rights are
attempted to be transferred in violation of this
Section 6.1. shall not be entitled to vote on matters
coming before the Members, participate in the
management of the Company, act as an agent of the
Company, receive distributions from the Company, or
have any other rights in or with respect to the
Membership Rights.

          6.1.4.   Right of First Offer.

               6.1.4.1. If an Interest Holder (a
“Transferor”) desires to Transfer all or any portion
of, or any interest or rights in, the Transferor’s
Interest (the “Transferor Interest”), the Transferor
shall notify the Company of that desire (the “Transfer
Notice”). The Transfer Notice shall describe the
Transferor Interest. The Company shall have the option
(the “Purchase Option”) to purchase all of the
Transferor Interest for a price, (the “Purchase
Price”), equal to the Transferor’s Percentage times
Appraised Value.

               6.1.4.2. The Purchase Option shall be
and remain irrevocable for a period (the “Transfer
Period”) ending at 11:59 p.m. local time at the
Company’s principal office on the thirtieth (30th) Day
following the date the Transfer Notice is given to the
Company.

               6.1.4.3. At any time during the
Transfer Period, the Company may elect to exercise the
Purchase Option by giving written notice of its
election to the Transferor. The Transferor shall not
be deemed a Member for the purpose of voting on whether
the Company shall elect to exercise the Purchase
Option.

               6.1.4.4. If the Company elects to
exercise the Purchase Option, the Company’s notice of
its election shall fix a closing date (the “Transfer
Closing Date”) for the purchase, which shall not be
earlier than five (5) days after the date of the notice
of election or more than thirty (30) days after the
expiration of the Transfer Period.
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               6.1.4.5. If the Company elects to
exercise the Purchase Option, the Purchase Price shall
be paid in cash (or in cash and a promissory note in
accordance with Section 6.5) on the Transfer Closing
Date.

               6.1.4.6. If the Company fails to
exercise the Purchase Option, the Transferor shall be
permitted to offer and sell for a period of ninety (90)
days (the “Free Transfer Period”) after the expiration
fo the Transfer Period at a price not less than the
Purchase Price. If the Transferor does not Transfer
the Transferor Interest within the Free Transfer
Period, the Transferor’s right to Transfer the
Transferor Interest pursuant to this Section shall
cease and terminate.

               6.1.4.7. Any Transfer of the Transferor
Interest made after the last day of the Free Transfer
Period or without strict compliance with terms,
provisions, and conditions of this Section and other
terms, provisions, and conditions of this Agreement,
shall be null, void and of no force or effect.

          6.1.5. Transfers to Affiliates and Family.
Notwithstanding anything set forth in this Agreement to
the contrary, but provided that the Conditions of
Transfer other than Section 6.1.6. are satisfied, any
Member may at any time, and from time to time, Transfer
all, or any portion of, or any interest or rights in,
the Member’s Membership Interest or Membership Rights
to (i) any other Member; (ii) any member of the
Member’s Family; or (iii) any Affiliate of the Member.

          6.1.6. Admission of Transferee as Member.
Notwithstanding anything contained herein to the
contrary, the transferee of all or any portion of or
any interest or rights in any Membership Right shall
not be entitled to become a Member or exercise any
rights of a Member and shall only be admitted as a
Member upon the unanimous consent of the Members. The
transferee shall be entitled to receive, to the extent
transferred, only the distributions to which the
transferor would be entitled.

     6.2. Voluntary Withdrawal. No Member shall have
the right or power to Voluntarily Withdraw from the
                         - 97 -

Company.

     6.3. Involuntary Withdrawal. Immediately upon
the occurrence of an Involuntary Withdrawal, the
successor of the withdrawn Member shall thereupon
become an Interest Holder bu shall not become a Member.
If the Company is continued as provided in Section
7.1.3., the successor Interest Holder shall have all
the rights of an Interest Holder but shall not be
entitled to receive in liquidation of the Membership
Interest the fair market value of the Member’s
Membership Interest as of the date the Member
involuntarily withdrew from the Company.

     6.4.   Appraised Value.

          6.4.1. The term “Appraised Value” means the
appraised value of the equity of the Company’s assets
as hereinafter provided. Within fifteen (15) days
after demand by either one or the other, the Company
and the Withdrawing Member shall each appoint an
appraiser to determine the value of the equity of the
Company’s Assets. If the two appraisers agree upon the
equity value of the Company’s assets, they shall joint-
ly render a single written report stating that value.
If the two appraisers cannot agree upon the equity
value of the Company’s assets, they shall each render a
separate written report and shall appoint a third
appraiser, who shall appraise the Company’s assets and
determine the value of the equity therein, and shall
render a written report of his or her opinion thereon.
Each party shall pay the fees and costs of the
appraiser appointed by that party, and the fees and
other costs of the third appraiser shall be shared
equally by both parties.

          6.4.2. The equity value contained in the
joint written report of the initial appraisers or the
written report of the third appraiser, as the case may
be, shall by the Appraised Value; provided, however,
that if the value of the equity contained in the
appraisal report of the third appraiser is more than
the higher of the first two appraisals, the higher of
the first two appraisals shall govern; and provided,
further, that if the value of the equity contained in
the appraisal report of the third appraiser is less
than the lower of the first two appraisals, the lower
                          - 98 -

of the first two appraisals shall govern.

     6.5. Installment Buy-Outs. Rather than pay all
cash on the Closing Date, the Company may elect, on ten
(10) days prior notice to the Transferor, to pay the
Purchase Price on an installment basis. If it does so,
then it shall pay 25% of the Purchase Price in cash on
the Closing Date and the balance by executing and
delivering its promissory note, in a form acceptable to
both the Company and the Transferor, to the Transferor.

     6.6.   Insolvency.

          6.6.1. If, immediately following the
purchase of any Interest or Membership Rights, the
Company would be insolvent, the Company shall be
relieved of its obligation to purchase that portion of
the Interest of Membership Rights that would render the
Company insolvent or may nominate a purchaser for that
portion of the Interest or Membership Rights Interest
or Membership Rights.

          6.6.2. If the Company is unable to pay
lawfully for all of the Interests purchased under the
applicable provisions of this Agreement, then no
surviving or remaining Members shall be liable for or
shall be required to assume the Company’s obligation to
purchase the balance of the Interests.

                      SECTION VII
Dissolution, Liquidation and Termination of the Company

     7.1. Events of Dissolution. The Company shall be
dissolved upon the happening of any of the following
events:

          7.1.1. upon the unanimous written agreement
of all of the Members; or

          7.1.2. upon the occurrence of an Involuntary
Withdrawal of a Member, unless the remaining Members,
within ninety (90) days after the occurrence of the
Involuntary Withdrawal, unanimously elect to continue
the business of the Company pursuant to the terms of
this Agreement.

     7.2. Procedure for Winding Up and Dissolution.
If the Company is dissolved, the General Manager shall
                        - 99 -

wind up its affairs. On winding up of the Company, the
assets of the Company shall be distributed,

          (i) to creditors of the Company, including
interest Holders who are creditors, in satisfaction of
the liabilities of the Company;

          (ii) to Interest Holders and former Interest
Holders in satisfaction of unpaid distributions;

          (iii) to Interest Holders for the return of
Capital Contributions; and

          (iv) to Interest Holders in proportion to
their respective Capital Accounts

and then to the Interest Holders in accordance with
Section 4.4. [Reproduced literally.]