On March 28, 2001, Mrs. Kite met with Ms. Cooper, Mr. Kite, Jr., and the family attorney to prepare for the annuity transaction. At this meeting Mrs. Kite executed three documents that replaced the current trustees of the QTIP trusts and the marital deduction trust with the Kite children retroactively effective as of January 1, 2001. The Kite children, in their capacity as trustees, contemporaneously executed subsequent documents to terminate the QTIP trusts and the marital deduction trust effective January 1, 2001. ^{232013 Tax Ct. Memo LEXIS 43">*60} The assets in the *58 QTIP trusts and the marital deduction trust, which consisted solely of KIC general partnership interests, were transferred to Mrs. Kite's lifetime revocable trust. As a result, Mrs. Kite's lifetime revocable trust held a 99% interest in KIC. ²⁴

The next day, March 29, 2001, Baldwin, which was now wholly owned by the Kite children or their trusts, contributed $13,684,136.13 of assets to KIC, more than doubling KIC's previous capital and diversifying its holdings. In return, Baldwin received a 55.8215% general partnership interest in KIC. Mrs. Kite's lifetime revocable trust and EasterlyTexas owned KIC's remaining interests, 43.7367% and less than 1%, respectively. ^{252013 Tax Ct. Memo LEXIS 43">*61} EasterlyTexas and Baldwin executed an amended and restated general partnership agreement admitting Baldwin as a *59 general partner and reflecting their postcontribution ownership interests in KIC. Mrs. Kite, as trustee of her lifetime revocable trust, never signed the amended and restated general partnership agreement.

On March 30, 2001, Mrs. Kite's lifetime revocable trust sold its entire remaining interest in KIC to the Kite children for three unsecured annuity agreements. ^{262013 Tax Ct. Memo LEXIS 43">*62} Each of the Kite children promised to pay $1,900,679.34 to Mrs. Kite's lifetime revocable trust on March 30 of every year beginning in 2011 and ending on Mrs. Kite's death. On the same day, the Kite children, EasterlyTexas, and Baldwin entered into an amended and restated general partnership agreement to record their ownership interests in KIC.

The Kite children did not make any annuity payments to Mrs. Kite before she died on April 28, 2004. On her 2001 through 2003 Federal income tax returns, Mrs. Kite reported income of $429,278, $654,962, and $302,176, respectively, and Federal income tax of $77,371 (as amended), $118,357, and *60 $1,460, respectively. Mrs. Kite's reported medical expense deductions for 2001 through 2003 were $131,100, $142,136, and $176,982, respectively, of which $115,780, $114,587, and $170,845, respectively, were attributed to home health care. In addition to Mrs. Kite's reported income and trust assets, her lifetime revocable trust borrowed $779,984 from six family ancestor trusts in 2003. In 2004 her final income tax return through her date of death reported income of $10,227 and 2013 Tax Ct. Memo LEXIS 43">*63 zero Federal income tax due.

Mrs. Kite died on April 28, 2004. The executor of Mrs. Kite's estate timely filed a Federal estate tax return on January 28, 2005, reporting a gross estate of $3,551,120 and a taxable estate of $2,281,517. The executor did not include Mrs. Kite's transferred interests in the Baldwin notes or KIC in the gross estate or adjusted taxable gifts. Respondent issued two notices of deficiency determining a $6,053,752 deficiency in Mrs. Kite's Federal gift tax for 2001 and a $5,100,493 deficiency in the estate's Federal estate tax. The estate's executor timely petitioned the Court.

Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving it incorrect. SeeRule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115, 54 S. Ct. 8">54 S. Ct. 8, 78 L. Ed. 212">78 L. Ed. 212, 1933-2 C.B. 112 (1933). Under section 7491(a), the burden of proof may shift to the Commissioner if the taxpayer produces credible evidence with respect to any relevant factual issue and meets other requirements. The estate has not argued or established that section 7491(a) applies, and therefore the burden of proof remains on the estate.

Section 2501(a) generally imposes a tax for each calendar year on the transfer of property by gift during the year. Although the Code does not define what constitutes a gift for purposes of section 2501, transfers subject to the gift tax "are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money's worth of the consideration given therefor." Sec. 25.2512-8, Gift Tax *62 Regs. Section 2512(b) further provides that "Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift." Thus, the gift tax does not apply to a transfer for full and adequate consideration in money or money's worth. Seesec. 25.2511-1(g)(1), Gift Tax Regs.

The parties dispute whether the transfer of the KIC partnership interests 2013 Tax Ct. Memo LEXIS 43">*65 to Mrs. Kite's children in exchange for the annuity agreements was made for adequate and full consideration. ^{272013 Tax Ct. Memo LEXIS 43">*66} Respondent argues that the transfer was a disguised gift subject to gift tax. Specifically, respondent argues that the annuity agreements did not constitute adequate consideration because they were structured to ensure that no annuity payment would be made and there was no real expectation of payment. *63 Relying on Estate of McLendon v. Commissioner, 135 F.3d 1017">135 F.3d 1017 (5th Cir. 1998), rev'gT.C. Memo. 1996-307, the estate argues that the annuity transaction was for adequate and full consideration because the parties used IRS actuarial tables to properly value the annuities. The estate further contends that the parties intended to comply with the terms of the annuity agreements, which were legally enforceable under State law, and that intent is supported by, inter alia, the Kite children's ability to make payments under the annuity agreements and Mrs. Kite's profit motive.

When determining whether adequate and full consideration has been exchanged, the Court generally considers whether the consideration received by the transferor is roughly equivalent to the value of the property given up. See Estate of Hurford v. Commissioner, T.C. Memo. 2008-278 ("'[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"'." (quoting Kimbell v. United States, 371 F.3d 257">371 F.3d 257, 371 F.3d 257">262 (5th Cir. 2004))). Here the transfer at issue is the March 30 exchange of Mrs. Kite's remaining interests in KIC, held by her lifetime revocable trust, for the annuity agreements. Thus, the question of whether the annuity transaction was for *64 adequate and full consideration turns on the proper valuation of Mrs. Kite's KIC interests and the annuities. See, e.g., Estate of McLendon v. Commissioner, 135 F.3d 1017">135 F.3d at 1021.

Section 75202013 Tax Ct. Memo LEXIS 43">*67 provides that the value of any annuity shall be determined under tables prescribed by the Secretary. Mrs. Kite and her children used IRS actuarial tables to value the annuities, and respondent does not argue that they used the tables improperly. Rather, respondent contends that they should not have used the actuarial tables to value a 10-year deferred annuity because Mrs. Kite's deteriorating health in 2001 made her death within 10 years foreseeable. In addition to the high probability of Mrs. Kite's death within 10 years, respondent argues that the lack of security for the annuity agreements, among other things, demonstrates that the parties had no real expectation of payment, and, consequently, the annuity transaction lacked substance. Respondent, as the party seeking to depart from the actuarial tables, bears the burden of proving that the circumstances justify the departure. See Estate of McLendon v. Commissioner, T.C. Memo. 1996-307 (citing Bank of Cal. v. United States, 672 F.2d 758">672 F.2d 758, 672 F.2d 758">759-760 (9th Cir. 1982)).

According to IRS actuarial tables in 2001, a 75-year-old woman without a terminal illness was expected to live 12.5 years, which was 2.5 years after the first *65 annuity payments 2013 Tax Ct. Memo LEXIS 43">*68 were due. Section 1.7520-3(b)(3), Income Tax Regs., provides that the mortality component of the actuarial tables may not be used to determine the present value of an annuity if the individual who is the measuring life is terminally ill at the time of the transaction. A "terminal illness" is defined as an "incurable illness or other deteriorating physical condition" with at least a 50% chance of death within a year. Sec. 1.7520-3(b)(3), Income Tax Regs. In Estate of McLendon v. Commissioner, 135 F.3d 1017">135 F.3d 1017, a taxpayer who had terminal cancer, received 24-hour home health care, and, according to his physician, had a 10% chance of surviving for more than one year was not terminally ill for purposes of using IRS actuarial tables to value a private annuity transaction.

Before the annuity transaction, Mrs. Kite received a letter from her physician attesting to her health and longevity. He affirmed that Mrs. Kite did not have an incurable illness or other deteriorating physical condition that would cause her to die within one year. The physician further opined that Mrs. Kite had at least a 50% probability of surviving for 18 months or longer.

Respondent did not challenge the physician's letter 2013 Tax Ct. Memo LEXIS 43">*69 or present evidence contradicting the physician. Instead, respondent relied on Mrs. Kite's 24-hour medical care at home, which began in 2001, and her increased medical costs from *66 2001 through 2003 to conclude that her death within the next 10 years was foreseeable. Mrs. Kite's increased medical costs, however, were due primarily to the cost of home health care. Mrs. Kite's Federal income tax returns filed for 2001 through 2003 claimed medical expense deductions of $131,100, $142,136, and $176,982, respectively, of which $115,780, $114,587, and $170,845, respectively, were attributed to home health care. Although the increased medical costs ²⁸ and home health care indicate that Mrs. Kite's health was in decline, they alone do not suggest, let alone prove, that Mrs. Kite had a terminal illness or an incurable disease. Rather, Mrs. Kite's increased medical costs merely demonstrate that Mrs. Kite was a wealthy, 75-year-old woman who, when faced with certain health problems, decided to employ health care aids at her home. Her decision to hire home health care was not unusual for a woman who was accustomed to hiring personal assistants. Moreover, as exemplified in Estate of McLendon, increased 2013 Tax Ct. Memo LEXIS 43">*70 medical costs and home health care do not prove a terminal illness or other incurable disease for purposes of section 7520. Accordingly, Mrs. Kite was not precluded from relying on IRS actuarial tables to value the annuity transaction. *67 The annuity agreements therefore constituted adequate and full consideration and consequently were not subject to Federal gift tax.

Respondent's additional argument that the annuity transaction was illusory is also rejected. Generally, the Court considers separately whether a transfer was bona fide and whether it was supported by adequate and full consideration. Estate of Bongard v. Commissioner, 124 T.C. 95">124 T.C. 95, 124 T.C. 95">122-125 (2005). In Estate of Hurford v. Commissioner, T.C. Memo. 2008-278, for example, the Court held that the transfer of a surviving spouse's interests in a family limited partnership (FLP) to her children for private annuity agreements, while the surviving spouse was being treated for stage 3 liver cancer, was not bona fide. In reaching this holding, the Court 2013 Tax Ct. Memo LEXIS 43">*71 relied upon the following: (1) the parties to the private annuity agreements intended to ignore the agreements they signed; and (2) the children, who did not have assets of their own to make the annuity payments, used the assets underlying the FLP interests to transfer income back to their mother beginning with the first month after the agreements were executed and each month thereafter. Id.

Unlike the private annuity agreements inEstate of Hurford, the annuity agreements between Mrs. Kite and her children were enforceable, and the parties demonstrated their intention to comply with the terms of the annuity agreements or, in the case of Mrs. Kite, to demand compliance. See, e.g., Estate of Strangi v.*68 Commissioner, 115 T.C. 478">115 T.C. 478, 115 T.C. 478">484-485 (2000) (holding that the Court generally accepts the validity of an agreement unless persuasive evidence shows that the agreement would not be enforced by the parties), aff'd in part, rev'd in part on other grounds, 293 F.3d 279">293 F.3d 279 (5th Cir. 2002); see also Estate of Hall v. Commissioner, 92 T.C. 312">92 T.C. 312, 92 T.C. 312">335 (1989). Before participating in the annuity transaction, Baldwin, which was wholly owned by the Kite children or their trusts, contributed approximately 2013 Tax Ct. Memo LEXIS 43">*72 $13.6 million of assets to KIC. As a result, the Kite children did not need to rely on the assets already held by KIC to make the annuity payments. In addition, the Kite children did not transfer the assets underlying the KIC interests back to Mrs. Kite after the annuity transaction was completed. In fact, they did not make any distributions from KIC, but allowed the KIC assets to accumulate in order to have income available when the annuity payments became due. ²⁹ The Kite children therefore expected to make payments under the annuity agreements and were prepared to do so.

Mrs. Kite also demonstrated an expectation that she would receive payments. Mrs. Kite actively participated in her finances and over the course of her life demonstrated an immense business acumen. Accordingly, it is unlikely that Mrs. Kite would have entered into the annuity agreements unless they were *69 enforceable and, more importantly, she could profit from them. In addition, Mrs. Kite, unlike the surviving spouse in Estate of Hurford, was not diagnosed with cancer or other terminal or incurable illness. In fact, the record, which includes 2013 Tax Ct. Memo LEXIS 43">*73 a letter from Mrs. Kite's physician, establishes to the contrary—that Mrs. Kite was not terminally ill and she did not have an incurable illness or other deteriorating physical condition. Mrs. Kite and her children reasonably expected that she would live through the life expectancy determined by IRS actuarial tables, which was 12.5 years after the annuity transaction. Indeed, if Mrs. Kite lived to her life expectancy as determined by IRS actuarial tables, she would have received approximately $800,000 more in annuity payments than the value of her KIC interests. At a minimum, Mrs. Kite would have made a profit with the potential of a greater return if she lived longer.

Mrs. Kite's profit motive is further underscored by her access to other financial assets, making her interests in KIC dispensable and available for a potentially risky investment. After executing the annuity agreements, Mrs. Kite was still the current income beneficiary of eight trusts holding approximately $20.8 million of marketable securities and her net worth exceeded $3.5 million, which was held primarily by Mrs. Kite's lifetime revocable trust. Her lifetime *70 revocable trust also had a line of credit of up to $800,000 2013 Tax Ct. Memo LEXIS 43">*74 ³⁰ of which she borrowed $779,984 from six family ancestor trusts in 2003. Mrs. Kite therefore did not need her income interest that flowed from KIC interests to maintain her lifestyle and, instead, opted to risk those interests for the potential profit from the annuity transaction.

Accordingly, based on the unique circumstances of these cases and, in particular, Mrs. Kite's position of independent wealth and sophisticated business acumen, the Court finds that the annuity transaction was a bona fide sale for adequate and full consideration.

Alternatively, respondent argues that the annuity transaction, and the events leading up to it, should be disregarded and, as a result, Mrs. Kite's $10,605,278 of KIC interests is includible in her gross estate under section 2033. For the reasons discussed above, the Court disagrees with respondent's position that the annuity transaction lacked economic substance. However, because the trustee of Mrs. Kite's lifetime revocable trust did 2013 Tax Ct. Memo LEXIS 43">*75 not sign the KIC partnership agreement admitting Baldwin into KIC, the Court must consider to what extent Mrs. Kite *71 maintained an indirect ownership interest in KIC after Baldwin's admission and, if so, the value thereof. A retained interest in KIC would be includible in Mrs. Kite's estate under section 2036.

To determine the exact nature of Mrs. Kite's interest in KIC after Baldwin's admission, the Court must look to State law of the entity, and in these cases, Texas partnership law. See Adams v. United States, 218 F.3d 383">218 F.3d 383, 218 F.3d 383">386 (5th Cir. 2000). Texas caselaw demonstrates that Texas courts generally rely on a partner's intent, whether direct or implied, as controlling when determining the legal consequences of certain transfers of partnership property. See, e.g., Logan v. Logan, 138 Tex. 40">138 Tex. 40, 156 S.W.2d 507">156 S.W.2d 507, 156 S.W.2d 507">511-512 (Tex. 1941); see also Keller v. United States, 697 F.3d 238">697 F.3d 238 (5th Cir. 2012); Church v. United States, 85 A.F.T.R.2d (RIA) 2000">85 A.F.T.R.2d (RIA) 2000-804 (W.D. Tex. 2000) (applying Texas law to hold that the decedent's intention to transfer property to a family limited partnership overcame the decedent's failure to organize the partnership's planned corporate general partner with the Texas secretary of state 2013 Tax Ct. Memo LEXIS 43">*76 before the decedent's death), aff'd, 268 F.3d 1063">268 F.3d 1063 (5th Cir. 2001).

On March 29, 2001, Baldwin contributed $13,684,136.13 of additional assets to KIC, which, up until that time, primarily held the Baldwin notes that Mrs. Kite had contributed. In return, Baldwin received a 55.8215% general partnership interest in KIC, thereby diluting Mrs. Kite's indirect interest in KIC from 99% to *72 43.7367%. The trustee of Mrs. Kite's lifetime revocable trust did not sign KIC's amended and restated general partnership agreement admitting Baldwin as a general partner.

On March 30, 2001, only one day after Baldwin's admission, the trustee of Mrs. Kite's lifetime revocable trust executed the annuity agreements. In each of the annuity agreements, the trustee represented that the lifetime revocable trust owned only a 43.7367% interest in KIC. Moreover, Mrs. Kite had approximately three years after the annuity transaction to correct the discrepancy, if any, in the amount or value of her KIC interests transferred subject to the annuity agreement. Therefore, despite the flawed partnership agreement purporting to document Baldwin's admission as a general partner of KIC, Mrs. Kite's subsequent actions manifest 2013 Tax Ct. Memo LEXIS 43">*77 the requisite intent affirming Baldwin's admission and, consequently, Mrs. Kite's diminished interest in KIC. Accordingly, Mrs. Kite did not maintain an indirect interest in KIC that would otherwise be included in the estate under section 2036.

In the alternative, respondent argues that the annuity transaction constituted a disposition of the qualifying income interests for life, as described in section 2056(b)(7), which Mrs. Kite held in the corpuses of the QTIP trusts such that the *73 dispositions constituted taxable gifts under section 2519. Respondent also argues that Mrs. Kite made a taxable transfer under section 2514 when she effectively released her general power of appointment over the corpus of the marital deduction trust.

Section 2056(a) provides that an estate may deduct the value of any interest in property passing from the decedent to his or her surviving spouse (marital deduction) to the extent such interest is included in determining the value of the gross estate. The policy behind the marital deduction is that property passes untaxed from a predeceasing spouse to a surviving spouse but is then included in the estate of 2013 Tax Ct. Memo LEXIS 43">*78 the surviving spouse. Estate of Letts v. Commissioner, 109 T.C. 290">109 T.C. 290, 109 T.C. 290">295 (1997), aff'd without published opinion, 212 F.3d 600">212 F.3d 600 (11th Cir. 2000). Thus, as a general rule, the marital deduction does not eliminate the estate tax on marital assets, but merely permits a deferral of tax until the death of the surviving spouse. ^{312013 Tax Ct. Memo LEXIS 43">*79} *74 A marital deduction is generally not allowed if the conveyance is terminable interest property under section 2056(b)(1). A terminable interest is an interest in property that passes from a predeceasing spouse to a surviving spouse that will end on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur. Id. Upon termination of the surviving spouse's interest, the remainder interest passes to beneficiaries (other than the surviving spouse or her estate) selected by the predeceasing spouse, id., and thereby avoids inclusion in the surviving spouse's estate. The general purpose of the terminable interest rule is to not allow a marital deduction for transfers from a predeceasing spouse to the surviving spouse that have been structured to avoid estate tax when the surviving spouse dies. Estate of Novotny v. Commissioner, 93 T.C. 12">93 T.C. 12, 93 T.C. 12">16 (1989).

Section 2056(b)(7) provides an exception to the terminable interest rule and allows a marital deduction for qualified terminable interest property, i.e., QTIP. ³²Under section 2056(b)(7), the first spouse to die may pass to the surviving spouse an income interest in property for the surviving spouse's lifetime, and after the *75 death of the surviving spouse, the property passes to beneficiaries designated by the first spouse to die. To qualify as QTIP: (1) the terminable interest property must pass from the first spouse to die, (2) the surviving spouse must have a qualifying income interest for life in the property, and (3) the executor of the estate of the first spouse to die must elect to designate the property as QTIP. Sec. 2056(b)(7)(B). The surviving spouse has a qualifying income interest for life if he or she is entitled to all income from the property, payable annually or more frequently, or has a usufruct interest for life in the 2013 Tax Ct. Memo LEXIS 43">*80 property, and no person has the power to appoint any part of the property to any person other than the surviving spouse. Sec. 2056(b)(7)(B)(ii).

According to the House report explaining the expansion of the marital deduction and the QTIP provisions, QTIP will be subject to transfer taxes at the earlier of (1) the date on which the surviving spouse disposes (either by gift, sale, or otherwise) of all or part of the qualifying income interest, or (2) upon the surviving spouse's death. See H.R. Rept. No. 97-201, at 161 (1981), 1981-2 C.B. 352, 378. Therefore, after the death of the surviving spouse, the value of his or her gross estate includes the value of QTIP. Sec. 2044. Alternatively, if the surviving spouse disposes of all or part of a qualifying income interest for life, *76 section 2519 treats the disposition as a transfer of all interest in QTIP other than the qualifying income interest. ^{332013 Tax Ct. Memo LEXIS 43">*81}

Although section 2519 does not define a "disposition", section 25.2519-1(f), Gift Tax Regs., provides that the sale of QTIP, followed by the payment to the surviving spouse of a portion of the proceeds equal to the value of the surviving spouse's income interest, is considered a disposition of the qualifying income interest. As an example, section 25.2519-1(g), Gift Tax Regs., describes the tax consequences of the sale of a surviving spouse's life estate to a decedent's 2013 Tax Ct. Memo LEXIS 43">*82 children. In section 25.2519-1(g), Example (2), Gift Tax Regs., which uses the same facts as example (1), ^{342013 Tax Ct. Memo LEXIS 43">*83} a personal residence valued at $250,000 passes from *77 the decedent to the surviving spouse for life, and after the spouse's death, to the decedent's children. The decedent's executor made a valid election to treat the property as QTIP. During 1995, when the fair market value of the property is $300,000 and the value of the surviving spouse's life interest is $100,000, the surviving spouse sells her interest in the property to the decedent's children for $100,000. The example concludes that under section 2519 the surviving spouse has made a gift of $200,000 (i.e., $300,000, the fair market value of the QTIP, less $100,000, the value of the qualifying income interest in the property). The surviving spouse does not make a gift of the income interest under section 2511 because the consideration received for the income interest is equal to the value of the income interest.

Not included as a disposition for purposes of section 2519 is the conversion of QTIP into other property in which the surviving spouse has a qualifying income *78 interest for life. Sec. 25.2519-1(f), Gift Tax Regs. Section 25.2519-1(f)Section 25.2519-1(f), Gift Tax Regs., Gift Tax Regs., provides that the sale and reinvestment of assets of a trust holding QTIP is 2013 Tax Ct. Memo LEXIS 43">*84 not a disposition of the qualifying income interest, provided that the surviving spouse continues to have a qualifying income interest for life in the trust after the sale and reinvestment.

When Mr. Kite died, his estate made a section 2056(b)(7) election to treat the marital deduction property passing to the QTIP trusts as QTIP assets. Mrs. Kite, as Mr. Kite's surviving spouse, received a lifetime income interest in the trust assets; and after her death the trust assets were to be distributed into three separate trusts of equal value for each of the Kite children. Mr. Kite's estate claimed a marital deduction for the value of the trust assets as follows: $4,291,327 for QTIP trust-1 (which included the original $4,246,075.60 marital gift from Mrs. Kite) and $825,213 for QTIP trust-2. Accordingly, under the QTIP regime, the QTIP trust assets underlying the marital deduction were to be subject to either gift tax under section 2519 if Mrs. Kite disposed of the income interest during her lifetime or estate tax under section 2044 if Mrs. Kite retained the income interest until her death.

*79 In 1996 Mrs. Kite, through her trusts, contributed her trust assets to Brentwood in 2013 Tax Ct. Memo LEXIS 43">*85 exchange for Brentwood limited partnership interests. As a result, instead of holding the trust assets underlying Mr. Kite's marital deduction, the QTIP trusts held Brentwood limited partnership interests. As the lifetime income beneficiary of these trusts, Mrs. Kite continued to receive the income interest from the QTIP trust assets that now passed from Brentwood to Mrs. Kite's trusts. Thus, under section 25.2519-1(f), Gift Tax Regs., Mrs. Kite did not dispose of her qualifying income interest because she continued to have a qualifying income interest for life in the QTIP trusts after reinvestment of the trust assets.

In 1997 Mrs. Kite, through her trusts, transferred limited partnership interests in Brentwood to her children and filed a Federal gift tax return reporting the transfers. ³⁵ Although it is not clear from Mrs. Kite's 1997 Federal gift tax return whether she viewed, in part, her transfers as taxable gifts under sections 2519 and 2511, her payment of gift tax preserved the integrity of the QTIP election for the QTIP trust assets underlying the Brentwood limited partnership *80 interests. The QTIP trust assets, which avoided tax when transferred to the QTIP trusts upon Mr. Kite's 2013 Tax Ct. Memo LEXIS 43">*86 death and later reinvested in Brentwood, was now taxable when transferred by Mrs. Kite in its reinvested form, i.e., as Brentwood limited partnership interests, to her children.

In 1998 and in 2000 Mrs. Kite, through her trusts, made three more transfers of the QTIP trust assets; but because Mrs. Kite maintained a qualifying income interest in the converted property, the transfers were not taxable under section 2519. In January 1998 Brentwood reorganized as Baldwin by merging into Baldwin. The ownership interests in Baldwin, formerly Brentwood, remained the same, and, accordingly, Mrs. Kite continued to receive her qualifying income interest in the QTIP trust 2013 Tax Ct. Memo LEXIS 43">*87 assets indirectly through Baldwin.

Later in May 1998 Mrs. Kite, through her trusts, sold her remaining interest in Baldwin to her children for the Baldwin notes. Again, Mrs. Kite converted the QTIP trust assets underlying the Baldwin limited partnership interests into reinvested property, in this case the Baldwin notes. Mrs. Kite, as the grantor and current income beneficiary of her trusts, was the recipient of any payments made on the Baldwin notes and therefore continued to have the right to all income from the QTIP trust assets, payable at least annually.

*81 In 2000 Mrs. Kite, through her trusts, contributed the Baldwin notes to KIC in exchange for KIC partnership interests. Like Mrs. Kite's initial investment of the QTIP trust assets in Brentwood, the transfer of the Baldwin notes to KIC was not taxable under section 2519 because Mrs. Kite, through her trusts' interests in KIC, continued to have a right to all payments on the Baldwin notes. Thus, from 1996 through 2000 Mrs. Kite's transfers and reinvestments of the QTIP trust assets satisfied the requirements of the QTIP rules because she either continued to have a qualifying income interest in the reinvested property or, upon the 2013 Tax Ct. Memo LEXIS 43">*88 transfer of the reinvested property to her children, she reported and paid Federal gift tax.

The liquidation of the QTIP trusts and subsequent sale of Mrs. Kite's interests in KIC, however, disregarded the QTIP rules. In 2001 Mrs. Kite appointed the Kite children as trustees of the marital trusts, and the Kite children, as trustees, contemporaneously terminated the marital trusts. ³⁶ The marital trust assets were transferred to Mrs. Kite's lifetime revocable trust. ^{372013 Tax Ct. Memo LEXIS 43">*89} Two days later *82 Mrs. Kite's lifetime revocable trust sold its entire interest in KIC to the Kite children for three unsecured private annuity agreements with a value of $10,605,278. The first annuity payments were due 10 years later, in 2011, and would continue every year until Mrs. Kite's death.

Respondent asks the Court to view the termination of the marital trusts and the annuity transaction as an integrated transaction. Respondent argues that "[i]n substance * * * [Mrs. Kite] has disposed of her income interest in the Q-TIP trusts in exchange for the deferred annuity." Courts use substance over form and its related judicial doctrines to determine the true meaning of a transaction disguised by mere formalisms, which 2013 Tax Ct. Memo LEXIS 43">*90 exist solely to alter tax liabilities. See United States v. R.F. Ball Constr. Co., 355 U.S. 587">355 U.S. 587, 78 S. Ct. 442">78 S. Ct. 442, 2 L. Ed. 2d 510">2 L. Ed. 2d 510 (1958); Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, 65 S. Ct. 707">65 S. Ct. 707, 89 L. Ed. 981">89 L. Ed. 981, 1945 C.B. 58">1945 C.B. 58 (1945) . In such instances the substance of a transaction, rather than its form, will be given effect.

*83 According to the record, which included testimony regarding the family attorney's presentation of the annuity transaction to the Kite children and subsequent negotiations of the annuity transaction with Mrs. Kite, the termination of the QTIP trusts was part of a prearranged and simultaneous transfer of the QTIP trust assets, i.e., Mrs. Kite's ownership interests in KIC. Although the QTIP trust agreements authorized the Kite children, as trustees, to terminate the QTIP trusts in their discretion, the estate has presented no explanation of why the QTIP trusts were terminated immediately before the transfer of the QTIP trust assets. Instead, by creating an intermediary step in the annuity transaction, i.e., terminating the QTIP trusts before selling the QTIP trust assets to the Kite children, Mrs. Kite's transfer of her ownership interests in KIC would circumvent the QTIP regime and avoid any transfer tax imposed by section 2519. Accordingly, 2013 Tax Ct. Memo LEXIS 43">*91 the Court finds that the termination of the QTIP trusts and the following immediate transfer of the QTIP trust assets to the Kite children are treated as a single transaction for purposes of section 2519.

As discussed above, the sale of QTIP assets, followed by the payment to the surviving spouse of a portion of the proceeds equal to the value of the surviving spouse's income interest, is considered a disposition of the qualifying income interest. Seesec. 25.2519-1(f), Gift Tax Regs. The Court held in Part II, above, *84 that Mrs. Kite received adequate and full consideration for her interest in KIC. Accordingly, Mrs. Kite made a disposition of her qualifying income interest, which can be traced from KIC to the QTIP trusts. ³⁸

A surviving spouse who makes a disposition of all or part of a qualifying income interest for life in any property for which a deduction was allowed under section 2056(b)(7)2013 Tax Ct. Memo LEXIS 43">*92 is treated as transferring all interests in property other than the qualifying income interest. Seesec. 25.2519-1(a), Gift Tax Regs. The amount treated as a transfer under section 2519 is equal to the fair market value of the entire property subject to the qualifying income interest, determined on the date of the disposition, less the value of the qualifying income interest in the property on the date of the disposition. Sec. 25.2519-1(c)(1), Gift Tax Regs. The gift tax consequences of the disposition of the qualifying income interest are determined separately under section 2511. Id.

As a result, the sale of Mrs. Kite's interest in KIC that can be traced to the QTIP trusts was subject to Federal gift tax under section 2519 to the extent of the *85 fair market value ^{392013 Tax Ct. Memo LEXIS 43">*93} of the entire property subject to Mrs. Kite's qualifying income interest, determined on the date of the annuity transaction, less the value of her qualifying income interest. However, because Mrs. Kite received adequate and full consideration for her income interest in KIC, she did not make a gift of her qualifying income interest under section 2511. ⁴⁰

As discussed above, section 2056(b)(1) generally prohibits a deduction for terminable interest property. Section 2056(b)(5)(B) provides another exception to the terminable interest rule where the surviving spouse receives an income interest for life and a general power of appointment. If the surviving spouse dies without exercising the power, he or she will be subject to the estate tax 2013 Tax Ct. Memo LEXIS 43">*94 under section 2041(a). Alternatively, if the surviving spouse, during his or her life, releases this *86 power or exercises it in favor of someone else, he or she will be subject to gift tax under section 2514.

Section 2514(b) provides that an individual who exercises or releases a general power of appointment created after October 21, 1942, is deemed to have transferred the related property. A general power of appointment is a power which is exercisable in favor of the individual possessing the power, his estate, his creditors or the creditors of his estate. Seesec. 2514(c). Under section 25.2514-1(b)(1), Gift Tax Regs., a surviving spouse who has the power to discharge and appoint successor trustees is considered as having a power of appointment. Accordingly, even though someone other than the surviving spouse may serve as trustee, the power to appoint corpus will be attributed to the surviving spouse. See First Nat'l Bank of Denver v. United States, 648 F.2d 1286">648 F.2d 1286, 648 F.2d 1286">1289 (10th Cir. 1981); see also Estate of Wilson v. Commissioner, T.C. Memo. 1992-479.

In 1995 Mr. Kite's estate funded the marital deduction trust with a portion of Mr. Kite's marital estate and claimed a $10,143,808 marital 2013 Tax Ct. Memo LEXIS 43">*95 deduction under section 2056(b)(5) for the value of the trust property. In March 2001 Mrs. Kite, pursuant to her authority to discharge and appoint successor trustees, replaced the trustee of the marital deduction trust with her children. Contemporaneously, the *87 Kite children, as trustees, terminated the marital deduction trust and transferred its assets to Mrs. Kite's lifetime revocable trust.

A "transfer of property" is defined as "any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or the devise employed". Sec. 25.2511-1(c), Gift Tax Regs. The transfer of the trust assets to Mrs. Kite's lifetime revocable trust was not a transfer of property for gift tax purposes because Mrs. Kite did not transfer an interest in the property to another. See, e.g., Estate of Robinson v. Commissioner, 101 T.C. 499">101 T.C. 499, 101 T.C. 499">508-509 (1993). Instead, Mrs. Kite maintained her interest in the property as the grantor and the sole income beneficiary of her lifetime revocable trust. Therefore, Mrs. Kite did not make a taxable transfer of the marital deduction trust assets under section 2514.

In conclusion, the Court holds that the portions of the 2013 Tax Ct. Memo LEXIS 43">*96 annuity value originally traceable to the ownership interest of QTIP trust-1 and QTIP trust-2 in Kite Family Investment Co., a Texas general partnership, ⁴¹ less the value of Mrs. Kite's qualifying income interests in QTIP trust-1 and QTIP trust-2, are subject to Federal gift tax as of the simultaneous termination of the marital trusts and the transfer of the marital trust assets in 2001.

*88 The Court has considered the parties' arguments and, to the extent not addressed herein, concludes that they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decisions will be entered under Rule 155.