BETSY T. TURNER, Executrix of the Estate of Theodore Thompson, Deceased v. COMMISSIONER OF INTERNAL REVENUE On Appeal from the United States Tax Court Tax…

PRECEDENTIAL
UNITED STATES
COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 03-3173
BETSY T. TURNER,
Executrix of the Estate of
Theodore Thompson, Deceased,
Appellant
v.
COMMISSIONER OF
INTERNAL REVENUE
On Appeal from the
United States Tax Court
Tax Court Docket No. 7578-99
(Honorable Julian I. Jacobs)
Argued April 21, 2004
Before: SCIRICA, Chief Judge,
ROSENN and GREENBERG,
Circuit Judges
(Filed: September 1, 2004)
Victor F. Keen, Esquire (Argued)
Thomas W. Ostrander, Esquire
Duane Morris LLP
One Liberty Place, 37th Floor
1650 Market Street
Philadelphia, Pennsylvania 19103-7396
Attorneys for Appellant
Michael J. Haungs, Esquire (Argued)
Jonathan S. Cohen, Esquire
United States Department of Justice
Tax Division
P.O. Box 502
Washington, D.C. 20044
Attorneys for Appellee
OPINION OF THE COURT
SCIRICA, Chief Judge.
This case involves the application
of § 2036(a) of the Internal Revenue Code,
26 U.S.C. § 2036(a), to assets transferred
inter vivos to family limited partnerships.
Theodore R. Thompson transferred $2.8
million in securities and other assets to two
family limited partnerships in exchange for
pro-rata partnership interests. Upon his
death, Thompson’s estate filed a federal
estate tax return which applied a forty
percent discount to the value of decedent’s
partnership interests for lack of control and
marketability. The Commissioner of
Internal Revenue filed a notice of estate
tax deficiency in the amount of $707,054,
applying § 2036(a) to return to the gross
estate the full date of death value of the
transferred assets. The Tax Court
sustained application of § 2036(a) after
finding decedent retained lifetime control
and enjoyment of the transferred assets,
and concluding the transfer of assets was
not a bona fide sale for adequate and full
consideration. Estate of Theodore R.
Thompson v. Comm’r, T.C. Memo 2002-
246; 2002 Tax Ct. Memo LEXIS 254; 84
T.C.M. (CCH) 374 (2002). The estate
appeals. We will affirm.

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I.
In the early 1990s, decedent
Theodore R. Thompson, along with his
son Robert Thompson and daughter Betsy
Turner, began to investigate estate plans
for managing his assets.1 In April 1993,
they implemented the Fortress Plan,2 an
estate plan offered by the Fortress
Financial Group, Inc. that utilized family
limited partnerships to protect family
assets. A financial advisor to decedent’s
family stated the primary advantages of the
Fortress Plan included: “(1) lowering the
taxable value of the estate, (2) maximizing
the preservation of assets, (3) reducing
income taxes by having the corporate
general partner provide medical,
retirement, and ‘income splitting’ benefits
for family members, and (4) facilitating
family and charitable giving.” Thompson,
84 T.C.M. at 376. The advisor also stated
that, “[a]ll of the benefits above can be
achieved while total control of all assets is
retained by the directors of the Corporate
General Partner.” Id. Pursuant to the plan,
decedent and his family formed two
limited partnerships and two corporations
to serve as general partners.
A.
On April 21, 1993, decedent, his
daughter Betsy and her husband George
Turner formed the Turner Partnership and
Turner Corporation. Decedent contributed
$1,286,000 in securities, along with notes
receivable from Betsy Turner’s children
totaling $125,000, in exchange for a 95.4%
limited partnership interest in the Turner
Partnership. George Turner contributed
$1,000 in cash and real property in the
state of Vermont valued at $49,000 in
exchange for a 3.54% limited partnership
interest. Turner Corporation, the sole
general partner, held the remaining 1.06%
interest.3 Shares in Turner Corporation
were issued to decedent (490 shares or
49%), Betsy Turner (245 shares or 24.5%),
1In 1979, decedent executed a will,
subsequently amended by four codicils,
which provided specific gifts to Robert
Thompson, Betsy Turner, and decedent’s
grandchildren and great-grandchildren.
The residue of decedent’s estate went to a
revocable trust, established on January 16,
1969. Decedent amended the trust on
March 17, 1993, to create a new revocable
trust funded with the assets of the 1969
trust, which then totaled approximately
$1.5 million.
2The Tax Court previously examined
inter vivos transfers to family limited
partnerships created under the “Fortress
P l a n ” i n Esta te of S trang i v .
Commissioner, T.C. Memo 2003-145;
2003 Tax Ct. Memo LEXIS 144; 85
T.C.M. (CCH) 1331 (2003). In that case,
the Tax Court applied § 2036 to return to
decedent’s gross estate the value of
property transferred to a family limited
partnership pursuant to the Fortress Plan.
3Turner Corporation did not pay for its
partnership interest directly, but rather
issued decedent a non-interest bearing
promissory note in the amount of $15,000
for its 1.06% interest.

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George Turner (245 shares or 24.5%), and
National Foundation, Inc. (20 shares or
2%), an unrelated tax-exempt entity.
Decedent, Betsy and George Turner served
as directors and officers of Turner
Corporation.
Decedent and his son Robert
Thompson formed the Thompson
Partnership on April 30, 1993, and the
Thompson Corporation on April 21, 1993.
Decedent contributed $1,118,500 in
securities, along with notes receivable
totaling $293,000, in exchange for a
62.27% limited partnership interest.
Robert Thompson contributed mutual
funds worth $372,000, and a ranch
property in Norwood, Colorado, appraised
at $460,000, in exchange for a 36.72%
limited partnership interest. Thompson
Corporation, as general partner, held the
remaining 1.01% interest. Decedent and
Robert Thompson each held 490 shares
(49%) of Thompson Corporation. Robert
H. Thompson, an unrelated third party,
held the remaining 2% interest. Robert
Thompson, Robert H. Thompson and
decedent served as officers and directors
of Thompson Corporation.
As of July 1993, decedent, then age
ninety-five, had transferred $2.8 million in
assets— $2.5 million in the form of
marketable securities—to the Turner and
Thompson Partnerships. Decedent
retained $153,000 in personal assets, and
received an annual income of $14,000
from two annuities and Social Security. At
the time of transfer, decedent had annual
expenses of $57,202, and an actuarial life
expectancy of 4.1 years. Theodore R.
Thompson died on May 15, 1995.
B.
1.
The Turner Partnership assets
consisted primarily of marketable
securities contributed by decedent, which
the partnership continued to hold in
decedent’s brokerage account with
minimal post-transfer trading. After
formation, however, individual partners
contributed additional assets to the Turner
Partnership. In December 1994, Betsy and
George Turner contributed a 22-acre
parcel of land adjacent to their private
residence, known as the Woodlands
Property. Betsy and George Turner also
assigned to the Turner Partnership their
interests in a real estate partnership, known
as Woodside Properties, which held six
apartment units. Phoebe and Betsy Turner
retained title to the underlying real estate
assets after transfer.
The Turner Partnership engaged in
several business transactions, although
none produced economic gains for the
partnership. The structure of the Turner
Partnership facilitated this result. The
partners amended the Turner Partnership
agreement in 1994, retroactively effective
to April 23, 1993, to allocate all gains and
losses from, and distribution of, real estate
contributed to the partnership to the
individual contributing partners. As a
result, income from the sale of timber from
the Vermont property went directly to the
contributing partner, George Turner, and
not to the partnership as a whole.

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Likewise, when Betsy and George Turner
sold the Woodlands Property along with
their residence for $550,000, the Turner
Partnership received $12,351 of the
proceeds, an amount equal to its basis4 in
the property.
In 1993, the Turner Partnership
invested $186,000 in a modular home
construction project brokered by Phoebe
Turner known as the Lewisville Properties.
The property was sold in 1995 for a loss of
$60,000. Phoebe Turner received a $9,120
commission on the transaction.
The Turner Partnership also made
loans to members of the Turner family.
Although the partnership formally charged
family members interest on these loans,
interest payments were often late or not
paid at all, and loans were frequently
reamortized. But the partnership never
pursued enforcement action against any of
its debtors nor made loans to anyone
outside the Turner family.
2.
Like the Turner Partnership, most
of the Thompson Partnership assets
consisted of m arketable sec urities
contributed by decedent and Robert
Thompson. Here again, post-transfer
trading in the securities was low. The only
other operational activities of the
Thompson Partnership related to the
Norwood, Colorado ranch contributed by
Robert Thompson. Robert previously used
the ranch as his primary residence, and
continued to do so after transfer paying an
annual rent of $12,000. Likewise, Robert
Thompson continued to raise mules on the
property and directly received income
from the sale of mules. The record does
not demonstrate any other business or
commercial activities on the Norwood
ranch. Nevertheless, for the years 1993
through 1995, the Thompson Partnership
paid the Thompson Corporation an annual
management fee for the Norwood ranch in
the amounts of $23,625, $45,000, and
$47,500, respectively. Thompson
Corporation in turn paid Robert Thompson
an annual salary of $32,001, and Karen
Thompson, Robert’s wife, a monthly
salary of $350. Thompson Corporation
also carried insurance on Robert and
Karen Thompson, and paid various
personal expenses. The Thompson
Partnership claimed losses from the
operation of the ranch on its tax returns for
the years 1993 through 1996.
3.
In addition to the foregoing
activities, both the Turner and Thompson
4See Black’s Law Dictionary 145 (7th
ed. 1999) (defining “basis” as the “value
assigned to a taxpayer’s investment in
property and used primarily for computing
gain or loss from a transfer of the
property”); Eitan A. Avneyon, Dictionary
of Finance 53 (1987) (defining “basis” as
“the cost of an asset, or the asset’s value
(in the case of an asset obtained by some
means other than purchase) used to
calculate depreciation, profits and capital
gains.”).

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Partnerships made distributions of cash
and partnership interests to decedent
during his lifetime. In 1993, the Turner
and Thompson Partnerships made cash
distributions of $40,000 each to decedent
which he used to provide holiday gifts to
family members. Again in 1995, the
Thompson and Turner Partnerships made
cash distributions to decedent of $45,500
and $45,220 respectively. During the
same time period, decedent made gifts of
interests in both partnerships to individual
family members. In March 1995, the
Thompson Partnership distributed $12,500
to decedent to pay for certain personal
expenses.5 All of these distributions were
reflected on decedent’s Schedule K-1 and
recorded as reductions in his partnership
capital accounts.
C.
As noted, decedent died testate on
May 15, 1995, at age ninety-seven. At the
time of his death, decedent held
approximately $89,000 in liquid assets, a
promissory note in principal amount of
approximately $9,000, a majority interest
in the Turner and Thompson Partnerships,
and shares in their respective corporate
general partners. On or about May 27,
1995, the Turner and Th ompson
Partnerships respectively sold $347,000
and $350,000 in securities to partially fund
bequests in decedent’s will and pay
decedent’s estate taxes.
Decedent’s executors filed a federal
estate tax return, Form 706, with the
Internal Revenue Service on February 21,
1996, and filed a supplemental return on
December 10, 1996. The estate reported
decedent held a 87.65% interest in the
Turner Partnership and a 54.12% interest
in the Thompson Partnership valued at
$875,811 and $837,691 respectively. The
estate reported decedent held 490 shares of
Turner Corporation stock and 490 shares
of Thompson Corporation stock valued at
$5,190 and $7,888 respectively. The estate
also reported prior adjusted taxable gifts of
$19,324 related to decedent’s lifetime gifts
of partnership interests. The estate
calculated these values by applying a 40%
discount rate to the net asset value of the
partnerships and corporations for lack of
control and marketability.
In January 1999, the IRS issued a
notice of deficiency in the amount of
$707,054, adjusting decedent’s taxable
estate from $1,761,219 to $3,203,506. The
most significant adjustment involved the
reported value of decedent’s interests in
the family limited partnerships.6 The
Commissioner explained the “20 percent
5The Tax Court found that prior to this
distribution, Betsy Turner wrote a letter to
Robert Thompson detailing decedent’s
1994 expenses of $57,202.40 and stating
d e c e d e n t n e e d e d a n “ i n f u si o n .”
Thompson, 84 T.C.M . at 380.
6The Commissioner also increased the
taxable estate by $4,993 for adjustments to
decedent’s reported interest in Thompson
Corporation and Turner Corporation, and
increased the reported taxable gifts from
$19,324 to $166,167.

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minority discount and the 20 percent
marketability discount has been disallowed
on each of the [Turner and Thompson]
partnership s.” As a result, the
Commissioner increased the value of
decede nt’s interest in the Turner
Partnership from $875,811 to $1,717,977,
and increased the value of his interest in
the Thompson Partnership from $837,691
to $1,396,152. These adjustments
increased decedent’s taxable estate by
$1,400,627.7
In its amended answer to the
estate’s petition for redetermination in the
Tax Court, the Commissioner asserted the
family partnerships and corporations
should be disregarded for tax purposes,
and therefore decedent’s gross estate
should include the undiscounted value of
his pro-rata share of the underlying assets.
In the alternative, the Commissioner
contended the full fair market value of the
assets transferred by the decedent to the
Turner and Thompson Partnerships should
be returned to decedent’s gross estate
under § 2036(a) of the Internal Revenue
Code because decedent retained control
and enjoyment over the transferred assets
during his lifetime.
II.
The Tax Court found the family
partnerships were validly formed and
properly recognized for federal estate tax
purposes.8 The court nevertheless
sustained application of § 2036(a)(1)9 to
7Form 3228 of the statutory notice of
deficiency reflected an adjustment of
$1,406,933 to the gross estate. The
additional adjustment resulted from the
inclusion of Delaware state tax refunds for
the years 1994 and 1995 in the amounts of
$1,459 and $4,847.
8The Tax Court concluded the
Commissioner had the burden of proof on
whether the partnerships were validly
formed for tax purposes, and whether the
transferred assets should be returned to the
estate under § 2036 because those
arguments were not presented in the notice
of deficiency. See Wayne Bolt & Nut Co.
v. Comm’r, 93 T.C.M. 500, 507 (1989)
(when a new theory on which the
Commissioner relies is not stated or
described in the notice of deficiency, the
Commissioner bears the burden of proof
on that issue).
9Section 2036(a) provides, in part:
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 the case of a
bona fide sale for an adequate and
full consideration in money or
money’s worth), by trust or
otherwise, under which he has
retained for his life or for any
period not ascertainable without
reference to his death or for any
period which does not in fact end
before his death–

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return decedent’s transferred assets back to
the estate. The Tax Court found an
implied agreement existed at the time of
transfer that decedent would retain lifetime
enjoyment and economic benefit of the
transferred assets. In support of this
finding, the court noted both Betsy and
George Turner sought assurances from
financial advisors that decedent would be
able to withdraw assets from the
partnerships to make gifts to family
members, and that the partnerships in fact
made such distributions to decedent. The
court further noted decedent “parted with
almost all of his wealth” and found this
“outright transfer of the vast bulk of
[decedent’s] assets . . . can only be
explained if decedent had at least an
implied understanding that his children
would agree to his requests for money
from the assets he contributed to the
partnerships, and that they would do so for
as long as he lived.” Thompson, 84
T.C.M. at 386-87. While acknowledging
the transfers altered the “formal
relationship” between decedent and his
assets, the court concluded, as a practical
matter, that “nothing but legal title
changed.” Id. at 387. The court
summarized:
In light of decedent’s
personal situation, the fact
that the contributed property
constituted the majority of
decedent’s assets, including
nearly all of his investments,
the establishment of the
partnerships is far more
consistent with an estate
plan than with any sort of
arm’s-length joint enterprise
between partners. In
summary, we are satisfied
that the partnerships were
created principally as an
alternate vehicle through
wh ich decedent would
provide for his children at
his death.
Id.
The court also determined the
transfer was not exempt from § 2036(a) as
a “bona fide sale for adequate and full
consideration.” The Tax Court explained
that “[w]hen a family partnership is only a
vehicle for changing the form in which the
decedent held his property—a mere
‘recycling of value’— the decedent’s
receipt of a partnership interest in
exchange for his testamentary assets is not
full and adequate consideration within the
meaning of section 2036.” Id. at 388. The
Tax Court found neither partnership
conducted a legitimate business enterprise,
and the individual partners did not pool
their assets in the partnerships.
Furthermore, the court found neither
partne rship engaged in business
transactions with anyone outside the
family, and the partnership loans to family
members were “testamentary in nature.”
(1) the possession or
enjoyment of, or the right to
the income from , the
property . . .
26 U.S.C. § 2036(a).

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Id. at 389. As a result, the court concluded
there was no transfer for “adequate and
full consideration” within the meaning of
§ 2036(a).
Accordingly, the Tax Court applied
§ 2036(a)(1) to return to the gross estate
the date of death value of decedent’s
transferred assets as well as new
partnership assets derived from the assets
contributed by decedent.10 The Tax Court
also found decedent’s stock in Turner
Corporation and Thompson Corporation
had no v alue a part fro m th ose
corporations’ interests in the family
partnerships, and thus attributed no
additional value from this stock to
decedent’s gross estate. Likewise, the Tax
Court did not include in decedent’s gross
estate a separate value attributable to
decedent’s lifetime transfers of partnership
interests, which the Commissioner had
valued at $166,167. As a result of these
adjustments, the Tax Court reduced the
Commissioner’s notice of deficiency from
$3,335,177 to $2,939,836.11
The estate filed a timely notice of
appeal.12
III.
A.
The Internal Revenue Code
imposes a federal tax on “the taxable estate
of every decedent who is a citizen or
resident of the United States.” 26 U.S.C.
§ 2001(a). A “taxable estate” is defined as
“the value of the gross estate,” less
applicable deductions, id. § 2051, where
the value of the “gross estate” includes
“the value of all property to the extent of
10The Tax Court found decedent’s gross
estate included secu rities totalin g
$1,232,076 transferred to the Turner
Partnership, plus $257,015 in new
partnership assets derived from those
securities. The Tax Court therefore
returned $1,489,091 to decedent’s gross
estate on account of assets transferred to
the Turner Partnership. The court also
returned $1,450,745 to decedent’s estate
for assets transferred to the Thompson
Partnership. The Tax Court did not
include in decedent’s gross estate
$221,850 in new, post-formation
Thompson Partnership assets because it
did not find these new assets were derived
from decedent’s contributed assets.
11The Commissioner subsequently
agreed the estate was entitled to a
deduction of $474,195 for attorneys fees as
an expense of estate administration, and a
deduction of $184,674 for interest incurred
and paid on the estate tax deficiency. The
Tax Court entered a final deficiency for
the reduced amount of $240,769.
12We have jurisdiction under 26 U.S.C.
§ 7482(a)(1). We exercise plenary review
over the Tax Court’s conclusions of law,
including its construction and application
of the Internal Revenue Code. PNC
Bancorp. v. Comm’r, 212 F.3d 822, 827
(3d Cir. 2000). We review the Tax
Court’s factual findings for clear error. Id.
Because the estate’s executor resides in
Pennsylvania, venue is proper under 26
U.S.C. § 7482(b)(1).

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the interest therein of the decedent at the
time of his death.” Id. § 2033. In
addition, § 2036 returns to decedent’s
gross estate any property transferred inter
vivos over which the decedent retains
enjoyment, possession or right to income
during his lifetime. See generally Richard
B. Stephens, et al., Federal Estate and Gift
Taxation ¶ 4.08 (8th ed. 2002). As noted,
§ 2036(a) provides, in part:
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 the case of a
bona fide sale for an adequate and
full consideration in money or
money’s worth), by trust or
otherwise, under which he has
retained for his life or for any
period not ascertainable without
reference to his death or for any
period which does not in fact end
before his death--
(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.
26 U.S.C. § 2036(a); see also 26 C.F.R. §
20.2036-1(a).
Section 2036 addresses the concern
that inter vivos transfers often function as
will substitutes, with the transferor
continuing to enjoy the benefits of his
property during life, and the beneficiary
receiving the property only upon the
transferor’s death. See United States v.
Grace, 395 U.S. 316, 320 (1969) (“[T]he
general purpose of the statute was to
include in a decedent’s gross estate
t r a n s f e r s t h a t a r e e s s e n t i a l l y
testamentary.”). As such, § 2036(a)(1)
returns property transferred inter vivos to
the gross estate if the decedent retains
possession, enjoyment, or the right to
income from the property during his
lifetime.13 Estate of D’Ambrosio v.
Comm’r, 101 F.3d 309, 312 (3d Cir. 1996)
(“Section 2036(a) effectively discourages
manipulative transfers of remainder
interests which are really testamentary in
13The statute also discourages situations
where the decedent retains the right to
determine who, other than himself, will
possess or enjoy the transferred property.
See 26 U.S.C. § 2036(a)(2). In its reply
brief, the Commissioner argues in the
alternative the transferred property should
be included in the gross estate under §
2036(a)(2) because decedent retained the
right to designate persons to possess or
enjoy the property or income from the
property. The parties did not raise this
argument before the Tax Court. Because
we affirm the Tax Court’s decision with
respect to § 2036(a)(1), we do not reach
the question of whether § 2036(a)(2)
applies in this case.

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character by ‘pulling back’ the full, fee
simple value of the transferred property
into the gross estate.”). Section 2036
provides an exception for any inter vivos
transfer that is a “bona fide sale for an
adequate and full consideration in money
or money’s worth.” 26 U.S.C. § 2036(a).
B.
Section 2036(a)(1) returns an inter
vivos transfer to decedent’s gross estate if
there is an express or implied agreement at
the time of transfer that the transferor will
retain lifetime possession or enjoyment of,
or right to income from, the transferred
property. 26 C.F.R. § 20.2036-1(a) (“An
interest or right is treated as having been
retained or reserved if at the time of
transfer there was an understanding,
express or implied, that the interest or right
would later be conferred.”); see also Estate
of McNichol v. Comm’r, 265 F.2d 667, 671
(3d Cir. 1959). The existence of formal
legal structures which prevent de jure
retention of benefits of the transferred
property does not preclude an implicit
retention of such benefits. Strangi, 85
T.C.M. at 1338 (“[A lthough] the
proverbial ‘i’s were dotted’ and ‘t’s were
crossed’. . . [t]hey do not preclude implicit
retention by decedent of economic benefit
from the transferred property.”) (internal
citation omitted); McNichol, 265 F.2d at
673 (“Substance and not form is made the
touchstone of taxability . . . [T]echnical
concepts pertaining to the law of
conveyancing cannot be used as a shield
against the impact of death taxes when in
fact possession of enjoyment of the
property by the transferor . . . ceases only
with his death.”). An implied agreement
may be inferred from the circumstances
surrounding both the transfer and
subsequent use of the property. Estate of
Reichardt v. Comm’r, 114 T.C. 144, 151
(2000). Whether an implied agreement
existed between decedent and his family at
the time of the transfer is a question of
fact, which we review for clear error. See
Estate of Maxwell v. Comm’r, 3 F.3d 591,
594 (2d Cir. 1993).
After reviewing the record
evidence, we see no clear error in the Tax
Court’s finding of an implied agreement
between decedent and his family that
decedent would “continue[] to be the
principal economic beneficiary of the
contributed property” and retain enjoyment
of the transferred property sufficient to
trigger § 2036(a)(1). Thompson, 84
T.C.M. at 387. Decedent transferred 95%
of his assets to the family partnerships
when he was ninety-five years old. As the
Tax Court correctly found, decedent did
not retain sufficient assets to support
himself for the remainder of his life, as
calculated at the time of transfer.14 This
fact supports the inference that decedent
had “an implied understanding that his
14Decedent retained assets of $153,000
and had an annual income of $14,000.
These assets were sufficient to cover
decedent’s fixed annual expenses of
$57,202 for approximately three and half
years. That is: $153,000/($57,202 -
$14,000) = 3.54. Decedent had an
actuarial life expectancy of 4.1 years at the
time of transfer.

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children would agree to his requests for
money from the assets he contributed to
the partnerships, and that they would do so
for as long as he lived.” Id. at 387. The
record reflects Betsy and George Turner
anticipated and prepared for this
eventuality by seeking assurances from
financial advisors that decedent would be
able to withdraw assets from the
partnerships to make cash gifts to the
family.15 Moreover, when decedent’s
remaining assets eventually ran low, Betsy
Turner secured approval from the limited
partnership to provide decedent with an
“infusion” to cover his expenses.
Decedent’s de jure lack of control
over the transferred property does not
defeat the inference of an implied
agreement in these circumstances. See
McNichol, 265 F.2d at 673 (“Substance
and not form is made the touchstone of
taxability.”). The Tax Court recognized
that although “some change ensued in the
formal relationship of decedent to the
assets he contributed to the partnership, . .
. [the] practical effect of these changes
during decedent’s life was minimal.”
Thompson, 84 T.C.M. at 387. Decedent
could not formally withdraw funds from
the partnerships without the permission of
their respective corporate general partners,
in each case, a corporation directed by
Betsy Turner or Robert Thompson in
which decedent held a 49% interest. But
both Betsy Turner and Robert Thompson
testified, and the estate concedes, they
would not have refused decedent’s request
for such distributions. As such, it is clear
from the operation of the partnerships
during decedent’s lifetime that “nothing
beyond formal title changed in decedent’s
relationship to his assets.” Strangi, 85
T.C.M. at 1339.16 The fact that the other
15In a letter dated April 4, 2003, Betsy
Turner asked a financial advisor whether
decedent would be able to withdraw
money from the Dean W itter securities
account in order to make $10,000 gifts to
his children, grandchildren and great-
grandchildren. Likewise, in a letter dated
November 28, 1993, George Turner wrote
to a different financial advisor asking:
“How does Betsy’s father get $40,000 to
give away as Christmas presents (with
checks dated January 1994)? (Bob
Thompson has a similar question.).”
Thompson, 84 T.C.M . at 379.
16The estate argues the partnership
d i s tr i b u ti o n s t o d e c e d e n t w e r e
accompanied by reductions in decedent’s
partnership interests, and were credited to
his partnership capital accounts. The
estate avers the distributions to decedent’s
partnership capital accounts (totaling
$183,220) do not constitute “enjoyment”
of the property, but merely involve a
partial sale of decedent’s partnership
interests. Here again, “substance and not
form” guides our analysis. Under these
circumstances, the fact that decedent
complied with the formalities of
partnership distribution does not defeat an
inference that he retained control over the
assets after transfer. See Strangi, 85
T.C.M. at 1339 (“[A]ccounting entries
alone are of small moment in belying the

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12
partners similarly retained de facto control
over assets contributed to the partnerships
further supports this inference.17 Where a
decedent’s relationship to the transferred
assets remains the same both before and
after transfer, § 2036(a)(1) returns those
assets to the gross estate. Guynn v. United
States, 437 F.2d 1148, 1150 (4th Cir.
1971).
Finally, the general testamentary
character of the partnership arrangements
supports the inference of an implied
agreement. Decedent transferred the vast
majority of his investment assets to two
family limited partnerships when he was
ninety-five years old. The record reveals,
with one exce ption, that neither
partnership engaged in business or loan
transactions with anyone outside of the
family.18 Transferring this type and
volume of assets to family partnerships
under these circumstances is more
consistent with an estate plan than an
investment in a legitimate business.
In sum, we see no clear error in the
Tax Court’s finding of an implied
agreement at the time of transfer that
decedent would retain enjoyment and
economic benefit of the property
transferred to the family limited
partnerships, and that decedent, in fact,
continued to be the principal economic
beneficiary of the transferred property
during his lifetime.19
existence of an agreement for retained
possession and enjoyment.”).
17For example, Betsy and Phoebe
Turner each contributed partnership
interests in a real estate partnership to the
Turner Partnership, but retained title to the
underlying real estate assets. Likewise,
George Turner retained the right to income
from timber produced on the Vermont
property he contributed to the Turner
Partnership.
18The exception is the Lewisville
Properties purchased by the Turner
Partnership. Apparently, this was a
transaction between the Turner Partnership
and a third-party brokered by Phoebe
Turner.
19The Commissioner argues §
2036(a)(1) applies for the additional
reason that decedent expressly retained a
“right to income” from the transferred
property as a limited partner in the family
partnerships. The estate contends
decedent retained a legal right to income
from the property only in his capacity as
partner, and that this interest alone is
insufficient to trigger § 2036(a)(1).
We are not convinced decedent
expressly retained a “right to income”
from the transferred property. The cases
relied upon by the Commissioner involved
an explicit reservation of rights in the
governing partnership or trust documents
not present in this case. For example, in
Strangi v. Commissioner, 85 T.C.M.
(CCH) 1331, the Tax Court found
decedent retained a right to income from a
family limited partnership established, as

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13
IV.
A.
An inter vivos transfer with a
retained lifetime interest will not be
returned to the gross estate if the transfer
constitutes a “bona fide sale for adequate
and full consideration.” 26 U.S.C. §
2036(a). The Tax Court concluded there
were no transfers for consideration in this
case because the transactions “were not
motivated by . . . legitimate business
concerns.” Thompson, 84 T.C.M. at 388.
It found none of the individual partners
conducted an active business in the
partnerships or pooled their assets with the
assets contributed by the decedent. Each
contributing partner directly received any
income derived from the assets he or she
contributed to the partnerships.20 The
partnerships held the securities transferred
by the decedent without any substantial
here, pursuant to the Fortress Plan. The
partnership agreement in Strangi permitted
distributions of partnership proceeds at the
sole discretion of the managing corporate
general partner. The corporate general
partner appointed decedent’s attorney-in-
fact to manage the day-to-day operation of
both the partnership and corporate general
partner. As a result, the Tax Court found
the “governing documents contain no
restrictions that would preclude decedent
himself, acting through [his attorney-in-
fact], from being designated as a recipient
of income from [the partnership].” Id. at
1337. Based on the language in the
governing documents, the court concluded
decedent retained a “right to income” from
the partnership assets. Id.; see also Estate
of Pardee v. Comm’r, 49 T.C. 140, 148
(1967) (finding a “right to income” within
the meaning of § 2036(a)(1) where trust
indenture expressly enabled decedent as
trustee to pay out corpus and income for
the “education, maintenance, medical
expenses, or other needs of the
Beneficiaries occasioned by emergency”).
Here, by contrast, neither the
partnership nor corporate documents
expressly provide decedent a legal right to
receive income distributions from the
partnerships. Such distributions still
required the approval of the corporate
general partner, even though such approval
was all but guaranteed as a practical
matter. Nevertheless, we do not rely on
this ground as a basis for applying §
2036(a)(1), given the Tax Court found that
an implied agreement existed at the time of
transfer that decedent would retain the
enjoyment and economic benefit of the
transferred property, and that decedent
continued to be the principal economic
beneficiary of the transferred property
during his lifetime.
20For example, by an undated
amendment to the Turner Partnership
agreement, retroactive to April 23, 1993,
the partners allocated all gains and losses
from, and distribution of real estate
contributed to, the partnership to the
contributing partner. Similarly, income
from the sale of mules raised on the
Norwood, Colorado ranch was paid
directly to Robert Thompson.

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14
change in investment strategy, and did not
engage in business transactions with
anyone outside of the family. As such, the
Tax Court found the family limited
partnerships served as “a vehicle for
changing the form in which the decedent
held his property— a mere ‘recycling of
value,’” and therefore concluded there was
no transfer for consideration within the
meaning of § 2036(a). Id.
The Tax Court first announced the
“recycling” of value concept in Estate of
Harper v. Commissioner, T.C. Memo
2002-121; 2002 Tax Ct. Memo LEXIS
127; 83 T.C.M . (CCH) 1641 (2002). In
Harper, the Tax Court denied the bona
fide sale exception to an inter vivos
transfer where:
[A]ll decedent did was
change the form in which he
held his beneficial interest
in the contributed property .
. . . Essentially, the value of
the partnership interest the
Trust received derived
solely from the assets the
Trust had just contributed.
W i t h o u t a n y c h an g e
w h a t s o e v e r i n t h e
underlying pool of assets or
prospect for profit . . . there
exists noth ing b ut a
circuitous “recycling” of
value. We are satisfied that
such instances of pure
recycling do not rise to the
level of a payment of
consideration. To hold
otherwise would open
section 2036 to a myriad of
abuses engendered by
u n i l a t e r a l p a p e r
transformations.
Id. at 1653. The Tax Court concluded that
where a “transaction involves only the
genre of value ‘recycling’ . . . and does not
appear to be motivated primarily by
legitimate business concerns, no transfer
within the meaning of section 2036(a) has
taken place.” Id. at 1654.
More recently, the Tax Court
affirmed this reasoning in Strangi v.
Commissioner, 85 T.C.M. (CCH) 1331
(2003). Similar to the facts at issue here,
Strangi involved an inter vivos transfer of
assets to a family limited partnership as
part of a Fortress estate plan. Decedent
transferred 98% of his total assets,
including his residence, to a family limited
partnership. From the time of its funding
until decedent’s death, the Strangi family
limited partnership engaged in no business
operations or commercial transactions.
The only economic activity conducted by
the partnership involved paying for
decedent’s health and nursing expenses,
funeral and estate tax costs. As such, the
Tax Court concluded decedent’s inter
vivos transfers to the family limited
partnership were not transfers for
consideration within the meaning of §
2036(a):
We see no distinction of
consequence between the
scenario analyzed in Estate
of Harper v. Commissioner,
supra, and that of the

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15
present case. Decedent
contributed more than 99
percent of the total property
placed in the [family limited
partnership] and received
back an interest the value of
which derived almost
exclusively from the assets
he had just assigned.
Furthermore, the [family
limited partnership] patently
fails to qualify as the sort of
f u n c t i o n i n g b u s i n e s s
e n t e r p ri s e t h a t co u l d
potentially inject intangibles
that would lift the situation
beyond mere recycling.
Strangi, 85 T.C.M . at 1344.
For essentially the same reasons, we
conclude there was no transfer for
consideration within the meaning of §
2036(a). The record demonstrates that
neither the Turner Partnership nor the
Thompson Partnership engaged in any
valid, functioning business enterprise. As
the estate concedes “the primary objective
of the partners in forming the Partnerships
was not to engage in or acquire active
trades or business.” Although the
partnerships did conduct some economic
activity, these transactions did not rise to
the level of legitimate business operations.
In the case of the Thompson
Partnership, the only “active operations”
claimed by the estate involved leasing the
Norwood, Colorado ranch back to its
contributing partner and former resident,
Robert Thompson, for an annual fee of
$12,000. The Norwood ranch was not
otherwise operated as an income
producing business, either before or after
Robert Thompson contributed the property
to the partnership. Robert Thompson
apparently generated some income from
the sale of mules raised on the property,
but income from these sales went to
Robert directly and not to the partnership.
Nevertheless, the Thompson Partnership
paid an annual “management fee” ranging
between $23,625 and $47,500 to the
Thompson Corporation, which in turn paid
Robert Thompson an annual salary of
$32,001. We see no error in the Tax
Court’s finding this putative business
arrangement amounted to no more than a
contrivance, and did not constitute the type
of legitimate business operations that
might provide a substantive non-tax
benefit for transferring assets to the
Thompson Partnership.
The operations of the Turner
Partnership were more extensive, but still
fail to provide sufficient objective indicia
of a legitimate business operation.
Although the Turner Partnership made
numerous loans to Betsy Turner’s children
and grandchildren, this lending activity
appears largely testamentary in practice.
Loans were not made to anyone outside
the extended Turner family, interest
payments were often late or never paid,
and the partnership took no enforcement
action against delinquent debtors. We
agree with the Tax Court that these lending
activities “lacked any semblance of
business transactions,” and were
“testamentary in nature, using decedent’s

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16
money as a source of financing for the
needs of individual family members, not
for business purposes.” Thompson, 84
T.C.M. at 388. Furthermore, the partners
amended the Turner Partnership
agreement, retroactive to April 23, 1993,
to allocate all gains and losses from, and
distribution of real estate contributed to the
partnership, to the individual contributing
partner. Aside from decedent’s securities,
the Turner Partnership consisted primarily
of real estate assets. Directing all income
derived from the partnership’s real estate
a s s e t s t o t h e c o n t r i b u t i n g
p artn er— including any appreciation
r e a l i z e d i n t h e sa l e o f s u ch
assets21—denied decedent any non-tax
benefit potentially derived from the assets
collected in the partnership.
The Turner Partnership’s $186,000
investment in the Lewisville Properties
gives us some pause, but ultimately does
not alter our conclusion. Unlike the other
activities of the Turner and Thompson
Partnerships, this investment seems to
qualify as a legitimate business transaction
with a third-party.22 However, based on
the record evidence in this case, we
conclude that any legitimizing effect of the
Turner Partnership’s investment in the
Lewisville Properties is overwhelmed by
the testamentary nature of the transfer and
subsequent operation of the partnership.
In addition to the lack of legitimate
business operations, the form of the
t r a n sferre d a s s e ts — p r e d o m i n a t e ly
marketable securities—is significant to our
assessment of the potential non-tax
benefits available to decedent as a result of
the transfer. Other than favorable estate
tax treatment resulting from the change in
form, it is difficult to see what benefit
could be derived from holding an untraded
portfolio of securities in this family limited
partnership with no ongoing business
operations. Compare Church v. United
States, No. SA-97-CA-0774-OG, 2000 U.S.
Dist. LEXIS 714 (W.D. Tex. Jan 18,
2000), aff’d without published opinion,
268 F.3d 1063 (5th Cir. 2001) (applying §
2036(a) exception to assets transferred to
a limited partnership that consolidated
undivided ownership interests and
administration of a family ranching
business); Estate of Stone v. Comm’r, T.C.
Memo 2003-309; 2003 Tax Ct. Memo
LEXIS 312; 86 T.C.M. (CCH) 551 (2003)
(applying § 2036(a) exception to assets
transferred to family partnerships operated
21This is evident in the sale of the
Woodlands Property. When Betsy and
George Turner sold the 22-acre
Woodlands Property parcel along with
their Woodside Farm residence, they
allocated to the Turner Partnership an
amount of the Woodside Farm/Woodland
Property sale proceeds exactly equal to the
Turner Partnership’s basis in the
Woodlands Property. This effectively
eliminated any gain or loss in the sale
price.
22With respect to the Turner Partnership
therefore, the Tax Court erred in finding
the “partnerships did not engage in
transactions with anyone outside the
family.” Thompson, 84 T.C.M . at 388.

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17
as going concern businesses in order to
transfer management of businesses to
children); Kimbell v. United States, 371
F.3d 257, 267-68 (5th Cir. 2004) (applying
§ 2036(a) exception to working oil and gas
interests transferred to a family partnership
to provide, among other things, centralized
management and protection from personal
environmental liabilities). The form of
assets transferred supports our conclusion
there was no transfer for consideration
within the meaning of § 2036(a).
The estate claims decedent’s
transfer of liquid, marketable securities
and other assets to the family limited
partnerships reduced the value of those
assets by 40% because of the resulting lack
of control and marketability. Indeed, as
the Tax Court found, decedent’s financial
advisors presented this reduction in value
for estate tax purposes as one of the
primary advantages of using the Fortress
Plan. In one sense, claiming an estate tax
discount on assets received in exchange
for an inter vivos transfer should defeat the
§ 2036(a) exception outright. If assets are
transferred inter vivos in exchange for
other assets of lesser value, it seems
reasonable to conclude there is no transfer
for “adequate and full consideration”
because the decedent has not replenished
the estate with other assets of equal value.
See Wheeler v. United States, 116 F.3d
749, 762 (5th Cir. 1997) (“[U]nless a
transfer that depletes the transferor’s estate
is joined with a transfer that augments the
estate by a commensurate (monetary)
amount, there is no ‘adequate and full
consideration’ for the purposes of either
the estate or gift tax.”).
That said, the Tax Court has held
that the dissipation of value resulting from
the transfer of marketable assets to a
closely-held entity will not automatically
constitute inadequate consideration for
purposes of § 2036(a). See Harper, 83
T.C.M. at 1654 (noting partnership
interests may constitute “adequate and full
consideration” if there is also a “potential
[for] intangibles stemming from pooling
for joint enterprise”); Stone, 86 T.C.M. at
581 (concluding the lack of marketability
discount applied to limited partnership
interests does not, on its own, result in
inadequate consideration for purposes of §
2036).
Nonetheless, we believe this sort of
dissipation of value in the estate tax
context should trigger heightened scrutiny
into the actual substance of the transaction.
Where, as here, the transferee partnership
does not operate a legitimate business, and
the record demonstrates the valuation
discount provides the sole benefit for
converting liquid, marketable assets into
illiquid partnership interests, there is no
transfer for consideration within the
meaning of § 2036(a).
B.
We also conclude decedent’s
transfers to the family limited partnership
do not constitute “bona fide sales” within
the meaning of § 2036(a), although for
somewhat different reasons than the
C o m m i s s i o n e r s u g g e s ts . T h e
Commissioner argues there was no “bona

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18
fide sale” in this case because decedent
“stood on both sides of the transaction” as
transferor and a limited partner of the
family partnerships. The Commissioner’s
position is supported by several cases
which have concluded that a “bona fide
sale” requires an arm’s length bargain.
See, e.g., Bank of New York v. United
States, 526 F.2d 1012, 1016 (3d Cir. 1975)
(“[T]he value of the claim settled by the
estate may not be deducted if the
agreement on which the claim was based
was not bargained at arm’s length.”);
Harper, 83 T.C.M. at 1653 (denying the §
2036 exception, in part, where there was
no “arm’s length bargaining” because
decedent “stood on both sides of the
transaction”); Strangi, 85 T.C.M. at 1343
(finding no bona fide sale where “decedent
essentially stood on both sides of the
transaction”). As a practical matter, an
“arm’s length” transaction provides good
evidence of a “bona fide sale,” especially
with intra-family transactions. But some
courts have also found a bargained-for
exchange in the family context when the
interests of individual family members
were sufficiently divergent. See, e.g.,
Bank of New York, 526 F.2d at 1017
(“Even a family agreement, although
achieved without apparent bitterness, has
been regarded as bargained for when
members of the family had interests
contrary to those of other family
members.”); Stone, 86 T.C.M. at 579
(finding an arm’s length bargain in intra-
family transaction where each family
member retained independent counsel).
That said, however, neither the
Internal Revenue Code nor the governing
Treasury Regulations define “bona fide
sale” to include an “arm’s length
transaction.” Treasury Regulation
20.2036-1(a) defines “bona fide sale for an
adequate and full consideration” as a
transfer made “in good faith” and for a
price that is “adequate and full equivalent
reducible to a money value.” 26 C.F.R. §
20.2036-1(a) (referring to 26 C.F.R. §
20.2043-1(a)). Based in part on an
interpretation of this regulation, the Court
of Appeals for the Fifth Circuit concluded
a “bona fide sale” only requires “a sale in
which the decedent/transferor actually
parted with her interest in the assets
transferred and the partnership/transferee
actually parted with the partnership
interest issued in exchange.” See Kimbell,
371 F.3d at 265. The court reasoned:
[J]ust because a transaction
takes place between family
members does not impose
an additional requirement
not set forth in the statute to
establish that it is bona fide.
A transaction that is a bona
fide sale between strangers
must also be bona fide
between members of the
same family. In addition,
the absence of negotiations
between family members
over price or terms is not a
compelling factor in the
d e t e r m i n a t i o n . . .
particularly when the

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19
exchange value is set by
objective factors.
Id. at 263 (discussing Wheeler, 116 F.3d
749) (internal citations omitted).
We similarly believe a “bona fide
sale” does not necessarily require an
“arm’s length transaction” between the
transferor and an unrelated third-party. Of
course, evidence of an “arm’s length
transaction” or “bargained-for exchange”
is highly probative to the § 2036 inquiry.
But we see no statutory basis for adopting
an interpretation of “bona fide sale” that
would automatically defeat the § 2036
exception for all intra-family transfers.
Wheeler, 116 F.3d at 766 (“Unless and
until the Congress declares that intrafamily
transfers are to be treated differently . . .
we must rely on the objective criteria set
forth in the statute and Treasury
Regulations to determine whether a sale
comes within the ambit of the exception to
section 2036(a).”).
We are mindful of the mischief that
may arise in the family estate planning
context. As the Supreme Court observed,
“the family relationship often makes it
possible for one to shift tax incidence by
surface changes of ownership without
disturbing in the least his dominion and
control over the subject of the gift or the
purposes for which the income from the
property is used.” Comm’r v. Culbertson,
337 U.S. 733, 746 (1949). But such
mischief can be adequately monitored by
heightened scrutiny of intra-family
transfers, and does not require a uniform
prohibition on transfers to family limited
partnerships. See id. (“[The] existence of
the family relationship does not create a
status which itself determines tax
questions, but is simply a warning that
things may not be what they seem.”);
Kimbell, 371 F.3d at 265 (“[W]hen the
transaction is between family members, it
is subject to heightened scrutiny.”).
Moreover, the facts here are
distinguishable from those Tax Court cases
which have denied the “bona fide sale”
exception after finding decedent “stood on
both sides of the transaction.” For
example, in Harper, the Tax Court was
“unable to find any other independent
party involved in the creation” of the
family partnerships. 83 T.C.M. at 1653.
The Tax Court found that “[d]ecedent,
independently of any other anticipated
interest-holder, determined how the
[partnership] was to be structured and
operated, decided what property would be
contributed to capitalize the entity, and
declared what interest the Trust would
receive therein.” Id. Likewise in Strangi,
decedent’s attorney-in-fact prepared the
family partnership structure, including the
assets c o ntrib uted , w i t h o u t a n y
participation from the contributing family
members. 85 T.C.M. at 1344. In both
cases, the decedent contributed over 99%
of the total partnership assets. See id.;
Harper, 83 T.C.M. at 1653. Here, by
contrast, both the formation and funding of
the Turner and Thompson Partnerships
involved substantial participation by
decedent’s family members and their
respective spouses.

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20
However, while a “bona fide sale”
does not necessarily require an “arm’s
length transaction,” it still must be made in
good faith. See 26 C.F.R. § 20.2043-1(a).
A “good faith” transfer to a family limited
partnership must provide the transferor
some potential for benefit other than the
potential estate tax advantages that might
result from holding assets in the
partnership form. Even when all the “i’s
are dotted and t’s are crossed,” a
transaction motivated solely by tax
planning and with “no business or
corporate purpose . . . is nothing more than
a contrivance.” Gregory v. Helvring, 293
U.S. 465, 469 (1935). “To hold otherwise
would be to exalt artifice above reality and
to deprive the statutory provision in
question of all serious purpose.” Id. As
discussed in the context of “adequate and
full consideration,” objective indicia that
the partnership operates a legitimate
business may provide a sufficient factual
basis for finding a good faith transfer. But
if there is no discernable purpose or
benefit for the transfer other than estate tax
savings, the sale is not “bona fide” within
the meaning of § 2036. See, e.g., id.
(ignoring a transaction for estate tax
purposes after finding “no business or
corporate purpose” for the transaction);
compare Kimbell, 371 F.3d at 267 (finding
a “bona fide sale” where the transaction
was entered into for “substantial business
and other non-tax reasons”).
After a thorough review of the
record, we agree with the Tax Court that
decedent’s inter vivos transfers do not
qualify for the § 2036(a) exception
because neither the Thompson Partnership
nor Turner Partnership conducted any
legitimate business operations, nor
provided decedent with any potential non-
tax benefit from the transfers.
V.
For the foregoing reasons, we will
affirm the decision of the Tax Court.

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21
Turner v. Commissioner of Internal
Revenue, No. 03-3173
GREENBERG, Circuit Judge, concurring.
I join in Chief Judge Scirica’s
opinion in this case without reservation but
want to add a few thoughts with respect to
the issue of whether we are dealing with
transfers for “adequate and full
consideration in money or money’s
worth.” Preliminarily on this point I think
that Chief Judge Scirica gets to the heart of
the matter by noting that “[i]n one sense,
claiming an estate tax discount on assets
received in exchange for an inter vivos
transfer should defeat the § 2036(a)
exception outright [for] [i]f assets are
transferred inter vivos in exchange for
other assets of lesser value, it seems
reasonable to conclude that there is no
transf e r for ‘adequate and full
consideration’ because the decedent has
not replenished the estate with other assets
of equal value.” Maj. opinion at 17.
This conclusion is consistent with
Estate of D’Ambrosio v. Commissioner,
101 F.3d 309, 312 (3d Cir. 1996) (quoting
Estate of Frothingham v. Commissioner,
60 T.C. 211, 215 (1973)), in which we
indicated that a transfer is for adequate and
full consideration when “the transferred
property is replaced by other property of
equal value received in exchange.” Our
c o n c l u s i o n i n D ’ A m b r o s i o w a s
unassailable inasmuch as section 2036(a)
sets the standard for “adequate and full
consideration” in the unmistakable term of
“money or money’s worth” and thus does
not permit the use of intangible
n o n m o n e t a r y c o n s i d e r a t i o n s i n
determining value. Therefore, a transfer of
$1,000,000 in assets will be for an
adequate and full consideration if it is for
$1,000,000 in money. If a transfer is for
property then the “money’s worth” of the
property should be of the same value as
money received for the transferred
property would have had to have been, i.e.,
$1,000,000.23
In this case, inasmuch as the
transfers were not for money the exception
can apply only if the transfers were for
property that can be regarded as being for
“money’s worth.” Yet one of the
motivations for the transfers was that there
would be a substantial discount, claimed
by the estate to be 40%, when the assets
transferred instead of being valued directly
were valued indirectly as the direct
valuation for estate tax purposes was of
the estate’s interests in the partnerships
and corporations holding the assets. To
me nothing could be clearer than a
conclusion that if the discount was
justified (even if in a lesser percentage
than the estate claimed) in a valuation
sense then the decedent could not have
r e c e iv e d a n a d e q u a t e a n d f u ll
consideration for his transfers in terms of
23I do not suggest that absolute parity is
required.

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22
“money’s worth.” Thus, I think it clear
that the Fortress Plan as applied in a case
in which the decedent retained for his life
the enjoyment from the transferred
property should be completely ineffective
to create a tax benefit by reducing the
value of the decedent’s estate as the
transferred property must be recaptured by
the estate for estate tax purposes.
Accordingly, in joining in Chief Judge
Scirica’s opinion I agree with it on the
consideration issue.
I, however, wish to make three
additional points. The first point relates to
the estate’s vigorous argument, which
Chief Judge Scirica does not address, that
the decedent did not make a gift for gift
tax purposes upon the formation of the
partnerships and therefore there must have
been an adequate and full consideration for
his transfers. The estate explains its
argument as follows:
Here, the IRS has not
contended nor did the Tax
Court find that there was a
gift on formation of the
Partnerships and no such
gift was m ade . No
gratuitous transfer occurred
upon the formation of the
Partnerships because each
participant’s interest in the
P a r t n e r s h i p s w a s
proportional to the capital
contributed. The partners
received a pro-rata interest
in each Partnership equal to
their pro-rata contribution.
[ T h e d e c e d e n t ’ s ]
contribution did not enhance
any other partner’s interests.
None of the partners
received any property from
[the decedent] directly or
i n d i r e c t l y w h e n t h e
Partnerships were formed.
Therefore, no gratuitous
transfer occurred upon the
f o r m a t i o n o f t h e
Partnerships and section
2036(a)(1) is inapplicable.
Appellant’s br. at 24 (footnote omitted).
The estate’s predicate for the argument is
that the gift tax and estate tax are in pari
materia so that a transfer made for an
adequate and full consideration for gift tax
purposes also is made for an adequate and
full consideration under section 2036(a).
The Commissioner answers that “[t]here
were no gifts on formation [of the
partnerships] not because there was full
consideration, but because there were no
gifts at all. Decedent’s retention of control
over the assets is inconsistent with a
donative transfer.” Appellee’s br. at 47
n.12.
The Commissioner is not being
inconsistent in contending that there was
not an adequate and full consideration for
the transfers under section 2036(a) while
acknowledging that the decedent did not
make taxable gifts upon the creation of the
partnerships. Even if the estate’s claim
that the discount is justified would be well
founded were it not for section 2036(a),
that assumption does not mean that the

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value decedent lost upon the creation of
the partnerships went to someone else.
Rather, the recycling of the assets so that
they were valued indirectly rather than
directly simply caused them to lose value.
Therefore, precisely as the Commissioner
contends, there were no gifts at all when
the partnerships were formed. Indeed, as
the estate’s brief plainly reveals, the estate,
perhaps not recognizing the significance of
its concession, acknowledges that none of
the partners received any property from the
decedent “directly or indirectly” when the
partnerships were formed. Thus, there
were no gifts and the estate’s observation
that the gift tax and estate tax are in pari
materia is immaterial as this relationship
does not change the fact that the decedent
enjoyed the property he transferred until
his death and did not receive adequate and
full consideration for it in money’s worth.
The second point I make is that the
logic of the court in this case should not be
applied too broadly and I see no reason
why it will be. In this regard I
acknowledge that there surely are
numerous partnerships in which a partner
dies after contributing assets to the
partnership and therefore has made a
transfer that arguably could be said to be
within section 2036(a). Certainly the court
is not holding that in all such
circumstances section 2036(a) could be
applicable requiring that the valuation of
the decedent’s interest at death be made by
looking through his interest in the
partnership directly to its assets, thus
disregarding the partnership’s existence
for purposes of estate tax valuation.
Here, however, we have a narrow
situation in which the partnerships were
created in furtherance of what the estate
calls an “estate plan” with “[t]he primary
purposes . . . to provide a vehicle for gift
giving, to preserve assets and ultimately to
transfer the partnership interests . . . in an
orderly and efficient fashion.” Appellant’s
br. at 5. In addition, as the Tax Court
pointed out, the parties intended that
implementation of the plan save taxes by
lowering the taxable value of the estate.
Furthermore, as the estate acknowledges,
“the primary objective of the partners in
forming the Partnerships was not to
engage in or acquire active trades and
businesses, [though] the Partnerships were
involved in various investments and
activities.” Id. at 29. In fact, the
Commissioner emphasizes that the “estate
concedes that the partnerships never
intended to carry on any sort of active
trade or business,” and he points out that
“the partnerships [did not] carry on any
sort of common investment activity of any
significance.” Appellee’s br. at 45-46. It
therefore appears that the Commissioner
implicitly recognizes that there are
limitations on his argument.
I make this second point as I do not
want it thought that the court’s reasoning
here should be applied in routine
commercial circumstances and in this
regard I note that Chief Judge Scirica
observes that the partnerships do not
o p e r a t e l e g i ti m a t e b u s in e s s e s .
Accordingly, I believe that the court’s
opinion here should not discourage
transfers in ord inary com merc ial

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transactions, even within families. Cf.
Estate of Strangi, 115 T.C. 478, 484
(2000) (“Family partnerships have long
been recognized where there is a bona fide
business carried on after the partnership is
formed.”), aff’d in part, rev’d in part on
other grounds, 293 F.3d 279 (5th Cir.
2002). Rather, we are addressing a
situation in which the family partnerships
obviously were used as tax dodges in
circumstances that section 2036(a) was
intended to thwart. Therefore, the result
the court reaches on the adequate and full
consideration issue readily accommodates
the estate’s observation that “[a]n interest
received in a closely held business entity
typically has a value less than a pro rata
part of the contributed assets for reasons
relating to lack of marketability, minority
interest and the like.” Appellant’s reply
br. at 14.
This second point is important
because courts should not apply section
2036(a) in a way that will impede the
socially important goal of encouraging
accumulation of capital for commercial
enterprises. Therefore in an ordinary
commercial context there should not be a
recapture under section 2036(a) and thus
the value of the estate’s interest in the
entity, though less than the value of a pro
rata portion of the entity’s assets, will be
determinative for estate tax purposes. This
case simply does not come within that
category.
My third point relates to Estate of
Stone v. Commissioner, 86 T.C.M. (CCH)
551, 581 (2003), in which, in language
similar to that of the estate that I quoted
above, the court indicated:
[The Commissioner]
nonetheless argues that,
because Mr. Stone and Ms.
Stone received respective
partnership interests in each
of the Five Partnerships the
value of which, taking into
a c c o u n t a p p r o p r i a t e
discounts, was less than the
value of the respective
assets that they transferred
to each such partnership,
they did not receiv e
a d e q u a t e a n d f u l l
consideration for the assets
t r a n s f e r r e d . [ T h e
Commissioner’s] argument
in effect reads out of section
2036(a) the exception for ‘a
bona fide sale for an
a d e q u a t e a n d f u l l
consideration in money or
money’s worth’ in any case
where there is a bona fide,
arm’s-length transfer of
property to a business entity
(e.g., a partnership or a
corporation) for which the
transferor receives an
interest in such entity (e.g., a
partnership interest or stock)
that is proportionate to the
fair market value of the
property transferred to such
entity and the determination
of the value of such an
interest takes into account

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a p p r o p r i a t e
discounts. We reject
such an argument by
[the Commissioner]
that reads out of
section 2036(a) the
e x c e p t i o n t h a t
Congress expressly
prescribed when it
enacted that statute.
The Commissioner correctly recognizes
that Stone is inconsistent with his position
here and the estate understandably relies
on Stone. I reject Stone on the quoted
point as the Commissioner’s position in no
way reads the exception out of section
2036(a) and the Tax Court does not
explain why it does.24 Rather, the
24In Kimbell v. United States, 371 F.3d
257, 265-66 (5th Cir. 2004), the court
quoted the above language from Stone
with approval and went on to point out
that:
We would only add
to the Tax Court’s rejection
o f t h e g o v e r n m e n t ’ s
inconsistency argument that
it is a classic mixing of
apples and oranges: The
government is attempting to
e q u a te t h e v e n e ra b le
‘ w i l li n g b u y e r - wil l i n g
seller’ test of fair market
value (which applies when
calculating gift or estate tax)
with the proper test for
a d e q u a t e a n d f u l l
consideration under §
2036(a). This conflation
misses the mark: The
b u s i n e s s d e c i s io n t o
exchange cash or other
assets for a transfer-
restricted, non-managerial
interest in a limite d
p a r t n e r s h i p i n v o l v e s
financial considerations
other than the purchaser’s
ability to turn right around
and sell the newly acquired
limited partnership interest
for 100 cents on the dollar.
Investors who acquire such
interests do so with the
expectation of realizing
b e n e f i t s s u c h a s
m a n agement expe rtis e ,
security and preservation of
assets, capital appreciation
and avoidance of personal
liability. Thus there is
nothing inconsistent in
acknowledging, on the one
hand, that the investor’s
dollars have acquired a
limited partnership interest
at arm’s length for adequate
and full consideration and,
on the other hand, that the
asset thus acquired has a
present fair market value,
i . e . , i m m ed i a t e s a l e
potential, of substantially
less than the dollars just

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Commissioner seeks to apply the exception
precisely as written as his position should
not be applied in ordinary commercial
circumstances even though the decedent
may be said to have enjoyed the property
until his death.
Judge Rosenn joins in this
concurring opinion.
p a i d - - a c l a s s i c
informed trade-off.
I believe, however, that Kimbell
does not take into account that to avoid the
recapture provision of section 2036(a) the
property transferred must be “replaced by
property of equal value that could be
exposed to inclusion in the decedent’s
gross estate” D’Ambrosio, 101 F.3d at
313 (quoting Frothingham, 60 T.C. at 216
(omitting emphasis)), on a “money or
money’s worth” basis.

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