UNITED STATES TAX COURT



 ESTATE OF ALBERT STRANGI, DECEASED, ROSALIE GULIG, INDEPENDENT
                    EXECUTRIX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4102-99.                     Filed November 30, 2000.



         D formed a family limited partnership (SFLP) and
    transferred assets, including securities, real estate,
    insurance policies, annuities, and partnership
    interests, to SFLP in return for a 99-percent limited
    partnership interest. Held: (1) The partnership was
    valid under State law and will be recognized for estate
    tax purposes. (2) Sec. 2703(a), I.R.C., does not apply
    to the partnership agreement. (3) The transfer of
    assets to SFLP was not a taxable gift. (4) R’s
    expert’s opinion as to valuation discounts is accepted.



    Norman A. Lofgren and G. Tomas Rhodus, for petitioner.

     Deborah H. Delgado, Gerald L. Brantley, Sheila R. Pattison,

and William C. Sabin, Jr., for respondent.
                                 - 2 -



     COHEN, Judge:     On December 1, 1998, respondent determined a

$2,545,826 deficiency in the Federal estate tax of the estate of

Albert Strangi, Rosalie Gulig, independent executrix.    In the

alternative, respondent determined a Federal gift tax deficiency

of $1,629,947.

     After concessions by the parties, the issues for decision

are (alternatively):    (1) Whether the Strangi Family Limited

Partnership (SFLP) should be disregarded for Federal tax purposes

because it lacks business purpose and economic substance;

(2) whether the SFLP is a restriction on the sale or use of

property that should be disregarded pursuant to section

2703(a)(2); (3) whether the transfer of assets to SFLP was a

taxable gift; and (4) if SFLP is not disregarded, the fair market

value of decedent’s interest in SFLP at the date of death.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect as of the date of decedent’s

death, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                           FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.      Albert

Strangi (decedent) was domiciled in Waco, Texas, at the time of

his death, and his estate was administered there.    Rosalie
                               - 3 -

Strangi Gulig (Mrs. Gulig) resided in Waco, Texas, when the

petition in this case was filed.

     Decedent was a self-made multimillionaire.   He married

Genevieve Crowley Strangi (Genevieve Strangi) in the late 1930's

and had four children--Jeanne Strangi, Albert T. Strangi, John

Strangi, and Mrs. Gulig, collectively referred to herein as the

Strangi children.   In 1965, the marriage between decedent and

Genevieve Strangi was terminated by divorce, and decedent

remarried Irene Delores Seymour (Mrs. Strangi).   Mrs. Strangi had

two daughters from a previous marriage, Angela Seymour and Lynda

Seymour.

     In 1975, decedent sold his company, Mangum Manufacturing, in

exchange for Allen Group stock, and he and Mrs. Strangi moved to

Fort Walton Beach, Florida.   Mrs. Gulig married Michael J. Gulig

(Mr. Gulig) in 1985.   Mr. Gulig was an attorney in Waco, Texas,

with the law firm of Sheehy, Lovelace and Mayfield, P.C.

Mr. Gulig has done a substantial amount of estate planning and is

proficient in that field.

     On February 19, 1987, decedent and Mrs. Strangi executed

wills that named the Strangi children, Angela Seymour, and Lynda

Seymour as residual beneficiaries in the event that either

decedent or Mrs. Strangi predeceased the other.   These wills were

prepared by the law offices of Tobolowsky, Prager & Schlinger in

Dallas, Texas.   Mrs. Strangi also executed the Irene Delores
                                - 4 -

Strangi Irrevocable Trust (the Trust).      Decedent was designated

as the executor of Mrs. Strangi’s will and as the trustee of the

Trust.

     Mrs. Strangi’s will provided that her personal effects were

to be left to decedent and that life insurance proceeds, employee

benefits, and the residuary of her estate should be distributed

to the Trust.    The first codicil to Mrs. Strangi’s will provided

that property she owned in Dallas, Texas, should be distributed

to the Jeanne Strangi Brown Trust.      The Trust provided that

lifetime distributions would be made to Mrs. Strangi and that,

upon her death, (1) her property in Florida should be distributed

to Angela Seymour and Lynda Seymour, (2) $50,000 should be

distributed to Mrs. Strangi’s sister, and (3) the residuary

should be distributed to decedent provided that he survived her.

     In 1987 and 1988, Mrs. Strangi suffered a series of serious

medical problems.    In 1988, decedent and Mrs. Strangi moved to

Waco, Texas.    Sylvia Stone (Stone) was hired as decedent’s

housekeeper.    She also provided assistance with the care of

Mrs. Strangi.    On July 19, 1988, decedent executed a power of

attorney, naming Mr. Gulig as his attorney in fact.

     On July 31, 1990, decedent executed a new will, naming his

children as the sole residual beneficiaries if Mrs. Strangi

predeceased him.    This will also named Mrs. Gulig and Ameritrust

Texas, N.A. (Ameritrust), as coexecutors of decedent’s estate.
                                 - 5 -

On December 27, 1990, Mrs. Strangi died in Waco, Texas.    Her will

was admitted to probate in Texas and was not contested.

     In May 1993, decedent had surgery that removed a cancerous

mass from his back.   That summer, Mr. Gulig took decedent to

Dallas to be examined by a physician in the neurology department

of Southwest Medical School.    Decedent was then diagnosed with

supranuclear palsy, a brain disorder that would gradually reduce

his ability to speak, walk, and swallow.    In September 1993,

decedent had prostate surgery.

Formation of Limited Partnership

     After decedent’s prostate surgery, Mr. Gulig took over the

affairs of decedent pursuant to the 1988 power of attorney.

Mr. Gulig consulted a probate judge regarding concerns he had

about decedent’s affairs.   On August 11, 1994, Mr. Gulig attended

a seminar in Dallas, Texas, provided by Fortress Financial Group,

Inc. (Fortress).   Fortress trains and educates professionals on

the use of family limited partnerships as a tool to (1) reduce

income tax, (2) reduce the reported value of property in an

estate, (3) preserve assets, and (4) facilitate charitable

giving.   The Fortress Plan recommends contributing assets to a

family limited partnership with a corporate general partner being

created for control purposes.    The Fortress Plan also suggests

that shares of stock of the corporate general partner or an

interest in the family limited partnership be donated to a
                                - 6 -

charity.    To facilitate the plan, Fortress licenses the use of

copyrighted limited partnership agreements and shareholders’

agreements.

     Following the Fortress seminar, on August 12, 1994,

Mr. Gulig, as decedent’s attorney in fact, formed SFLP, a Texas

limited partnership, and its corporate general partner, Stranco,

Inc. (Stranco), a Texas corporation.    Mr. Gulig handled all of

the details of the formation, executing the limited partnership

agreement and shareholders’ agreement using Fortress documents,

as well as drafting articles of incorporation and bylaws for

Stranco.

     The partnership agreement provided that Stranco had the sole

authority to conduct the business affairs of SFLP without the

concurrence of any limited partner or other general partner.

Thus, limited partners could not act on SFLP’s behalf without the

consent of Stranco.    The partnership agreement also allowed SFLP

to lend money to partners, affiliates, or other persons or

entities.

     Mr. Gulig filed the SFLP certificate of limited partnership

and the Stranco articles of incorporation with the State of

Texas.   He also drafted asset transfer documents, dated

August 12, 1994, assigning decedent’s interest in specified real

estate, securities, accrued interest and dividends, insurance

policies, annuities, receivables, and partnership interests
                               - 7 -

(referred to collectively herein as the contributed property) to

SFLP for a 99-percent limited partnership interest in SFLP.    All

of the contributed property was reflected in decedent’s capital

account.   The fair market value of the contributed property was

$9,876,929.   Approximately 75 percent of that value was

attributable to cash and securities.

     Mr. Gulig invited decedent’s children to participate in SFLP

through an interest in Stranco, the corporate general partner of

SFLP.   Decedent purchased 47 percent of Stranco for $49,350, and

Mrs. Gulig purchased the remaining 53 percent of Stranco for

$55,650 on behalf of Jeanne Strangi, John Strangi, Albert T.

Strangi, and herself.   To purchase the Stranco shares, Jeanne

Strangi, John Strangi, and Albert T. Strangi each executed

unsecured notes dated August 12, 1994, to Mrs. Gulig, with a face

amount of $13,912.50 and interest at 8 percent.   Stranco

contributed $100,333 to SFLP in exchange for a 1-percent general

partnership interest.   Subsequently, as a result of the downward

adjustment of the value of decedent’s contributed property,

Stranco’s capital contribution was reduced on its books by $1,000

to $99,333, and a receivable was recorded indicating $1,000 due

from SFLP.

     Decedent and the Strangi children made up the initial board

of directors of Stranco, and Mrs. Gulig served as president.     On

August 17, 1994, the Strangi children and Mr. Gulig met to
                               - 8 -

execute the Stranco shareholders’ agreement, bylaws, and a

Consent of Directors Authorizing Corporate Action in Lieu of

Organizational Meeting that was effective as of August 12, 1994.

They also executed a Unanimous Consent of Directors in Lieu of

Special Meeting to employ Mr. Gulig to manage the day-to-day

affairs of SFLP and Stranco, dated August 12, 1994.    Stranco

never had formal meetings.   All corporate actions were approved

by unanimous consent agreements in lieu of actual meetings.      On

August 18, 1994, McLennan Community College Foundation accepted a

gift of 100 Stranco shares from decedent’s children “in honor of

their father”.

     From September 1993 until his death, decedent required

24-hour home health care that was provided by Olsten Healthcare

(Olsten) and supplemented by Stone.    During this time, Stone

injured her back.   This injury resulted in Stone’s having back

surgery, and SFLP paid for the surgery.    On October 14, 1994,

decedent died of cancer at the age of 81.

     On December 7, 1994, Peter Gross, an attorney from the law

firm of Prager & Benson, P.C., as a representative of decedent’s

estate, requested that Texas Commerce Bank (TCB), successor in

interest to Ameritrust, resign as coexecutor of decedent’s

estate.   The Strangi children also requested that TCB decline to

serve as coexecutor and agreed to indemnify TCB for claims

related to the estate if it declined to serve as coexecutor.
                                 - 9 -

Accordingly, TCB declined to serve as coexecutor of decedent’s

estate and renounced its right to appoint a successor

coindependent executor.    When decedent’s will was admitted to

probate on April 12, 1995, Mrs. Gulig was appointed as the sole

executor of decedent’s estate.

     Angela Seymour consulted two attorneys regarding the

validity of Mrs. Strangi’s will during 1994.    She never intended

to contest decedent’s will, and, ultimately, no claim or will

contest was filed against decedent’s estate.

Partnership Activities

     Following the formation of SFLP, various distributions were

made by SFLP to decedent’s estate and the Strangi children.     When

distributions were made, corresponding and proportionate

distributions were made to Stranco either in cash or in the form

of adjusting journal entries.    In July 1995, SFLP distributed

$3,187,800 to decedent’s estate for State and Federal estate and

inheritance taxes.    Also in 1995 and in 1996, SFLP distributed

$563,000 to each of the Strangi children.    The distributions were

characterized as distributions to decedent’s estate.

     In May 1996, SFLP divided its primary Merrill Lynch account

into four separate accounts in each of the Strangi children’s

names, giving them control over a proportionate share of the

partnership assets.    The partnership also extended lines of

credit to John Strangi, Albert T. Strangi, and Mrs. Gulig for
                                - 10 -

$250,000, $400,000, and $100,000, respectively.    In January 1997,

SFLP increased John Strangi’s line of credit to $350,000 and

Albert T. Strangi’s line of credit to $650,000.    In November

1997, SFLP advanced to decedent’s estate $2.32 million to post

bonds with the Internal Revenue Service and the State of Texas in

connection with the review of decedent’s estate tax return.      In

1998, SFLP made distributions of $102,500 to each of the Strangi

children.    The Strangi children had received $2,662,000 in

distributions from SFLP as of December 31, 1998.

Estate Tax Return

     On January 16, 1996, decedent’s Form 706, United States

Estate (and Generation Skipping Transfer) Tax Return (estate tax

return), was filed by Mr. Gulig.    On the estate tax return,

decedent’s gross estate was reported as $6,823,582.    This

included a $6,560,730 fair market value for SFLP.    For purposes

of the estate tax return, SFLP was valued by Appraisal

Technologies, Inc., on an “ongoing business”, “minority interest

basis”.     The valuation report arrived at a value before discounts

and then applied minority interest discounts totaling 33 percent

for lack of marketability and lack of control.

     The estate tax return also indicated that decedent had

$43,280 in personal debt and other allowable deductions totaling

$107,108, leaving a reported taxable estate of $6,673,194.      The

estate tax return reported a transfer tax due of $2,522,088.     The
                              - 11 -

property that was held by SFLP as of the date of death had

increased in value to $11,100,922 due to the appreciation of

securities, particularly the Allen Group stock.

                              OPINION

     We must decide whether the existence of SFLP will be

recognized for Federal estate tax purposes.    Respondent argues

that, under the business purpose and economic substance

doctrines, SFLP should be disregarded in valuing the assets in

decedent’s estate.   Petitioner contends that the business purpose

and economic substance doctrines do not apply to transfer tax

cases and that SFLP had economic substance and business purpose.

     Taxpayers are generally free to structure transactions as

they please, even if motivated by tax-avoidance considerations.

See Gregory v. Helvering, 

, 469 (1935); Yosha v.

Commissioner, 

, 497 (7th Cir. 1988), affg. Glass v.

Commissioner, 

(1986).     However, the tax effects of a

particular transaction are determined by the substance of the

transaction rather than by its form.    In Frank Lyon Co. v. United

States, 

, 583-584 (1978), the Supreme Court stated

that “a genuine multiple-party transaction with economic

substance * * * compelled or encouraged by business or regulatory

realities, * * * imbued with tax-independent considerations, and

* * * not shaped solely by tax avoidance features” should be

respected for tax purposes.   “[T]ransactions which have no
                                - 12 -

economic purpose or substance other than the avoidance of taxes

will be disregarded.”     Gregory v. Helvering, supra at 469-470;

see also Merryman v. Commissioner, 

(5th Cir. 1989),

affg. T.C. Memo. 1988-72.

     Family partnerships must be closely scrutinized by the

courts because the family relationship “so readily lends itself

to paper arrangements having little or no relationship to

reality.”     Kuney v. Frank, 

, 720 (9th Cir. 1962);

accord Frazee v. Commissioner, 

, 561 (1992); Harwood

v. Commissioner, 

, 258 (1984), affd. without published

opinion 

(9th Cir. 1986); Estate of Kelley v.

Commissioner, 

, 325 (1974); Estate of Tiffany v.

Commissioner, 

, 499 (1967); see also Helvering v.

Clifford, 

, 336-337 (1940).     Family partnerships have

long been recognized where there is a bona fide business carried

on after the partnership is formed.      See, e.g., Drew v.

Commissioner, 

, 12-13 (1949).     Mere suspicion and

speculation about a decedent’s estate planning and testamentary

objectives are not sufficient to disregard an agreement in the

absence of persuasive evidence that the agreement is not

susceptible of enforcement or would not be enforced by parties to

the agreement.    Cf. Estate of Hall v. Commissioner, 

,

335 (1989).
                               - 13 -

     The estate contends that there were “clear and compelling”

nontax motives for creating SFLP, including the provision of a

flexible and efficient means by which to manage and protect

decedent’s assets.    Specifically, the estate argues that its

business purposes for forming SFLP were (1) to reduce executor

and attorney’s fees payable at the death of decedent, (2) to

insulate decedent from an anticipated tort claim and the estate

from a will contest (by creating another layer through which

creditors must go to reach assets conveyed to the partnership),

and (3) to provide a joint investment vehicle for management of

decedent’s assets.    We agree with respondent that there are

reasons to be skeptical about the nontax motives for forming

SFLP.

     We are skeptical of the estate’s claims of business purposes

related to executor and attorney’s fees or potential tort claims.

Mr. Gulig testified that, on various social occasions, he

consulted with a former probate judge about decedent’s

anticipated estate.    Those consultations, however, were not

related in time or purpose to the formation of SFLP.    In our

view, the testimony about consultation is similar to the evidence

described in Estate of Baron v. Commissioner, 

, 555

(1984), affd. 

(2d Cir. 1986), to wit, the

“‘consultation’ was mere window dressing to conceal tax motives.”
                               - 14 -

     We are not persuaded by the testimony that SFLP was formed

to protect assets from will contests by Angela or Lynda Seymour

or from a potential tort claim by Stone.   The Seymour claims were

stale when the partnership was formed, and they never

materialized.   There was no direct corroboration that Stone was

injured by decedent while she was caring for him or any

indication that Stone ever threatened litigation.

     We also do not believe that a “joint investment vehicle” was

the purpose of the partnership.   Mr. Gulig took over control of

decedent’s affairs in September 1993, under the 1988 power of

attorney, and Mr. Gulig continued to manage decedent’s assets

through his management responsibilities in Stranco.   Petitioner

concedes, in disputing respondent’s alternative claim of gift tax

liability, that “directly or indirectly, the Decedent ended up

with 99.47% of the Partnership, having put in essentially 99.47%

of the capital.”

     The formation and subsequent control of SFLP were

orchestrated by Mr. Gulig without regard to “joint enterprise”.

He formed the partnership and the corporation and then invited

Mrs. Gulig’s siblings, funded by her, to invest in the

corporation.    The Strangi children shared in managing the assets

only after and to the extent that the Merrill Lynch account was

fragmented in accordance with their respective beneficial

interests.
                              - 15 -

     The nature of the assets that were contributed to SFLP

supports the conclusion that management of those assets was not

the purpose of SFLP.   There were no operating business assets

contributed to SFLP.   Decedent transferred cash, securities, life

insurance policies, annuities, real estate, and partnership

interests to SFLP.   The cash and securities approximated

75 percent of the value of the assets transferred.   No active

business was conducted by SFLP following its formation.

     The actual control exercised by Mr. Gulig, combined with the

99-percent limited partnership interest in SFLP and the

47-percent interest in Stranco, suggest the possibility of

including the property transferred to the partnership in

decedent’s estate under section 2036.   See, e.g., Estate of

Reichardt v. Commissioner, 

(2000).   Section 2036 is

not an issue in this case, however, because respondent asserted

it only in a proposed amendment to answer tendered shortly before

trial.   Respondent’s motion to amend the answer was denied

because it was untimely.   Applying the economic substance

doctrine in this case on the basis of decedent’s continuing

control would be equivalent to applying section 2036(a) and

including the transferred assets in decedent’s estate.    As

discussed below, absent application of section 2036, Congress has

adopted an alternative approach to perceived valuation abuses.
                               - 16 -

     SFLP was validly formed under State law.   The formalities

were followed, and the proverbial “i’s were dotted” and “t’s were

crossed”.   The partnership, as a legal matter, changed the

relationships between decedent and his heirs and decedent and

actual and potential creditors.   Regardless of subjective

intentions, the partnership had sufficient substance to be

recognized for tax purposes.   Its existence would not be

disregarded by potential purchasers of decedent’s assets, and we

do not disregard it in this case.

Section 2703(a)(2)

     Section 2703(a) provides as follows:

          SEC. 2703. (a) General Rule.--For purposes of
     this subtitle, the value of any property shall be
     determined without regard to–-

                 (1) any option, agreement, or other right to
            acquire or use the property at a price less than
            the fair market value of the property (without
            regard to such option, agreement, or right), or

                 (2) any restriction on the right to sell or
            use such property.

Noting that a right or restriction may be implicit in the capital

structure of an entity, see sec. 25.2703-1(a)(2), Gift Tax Regs.,

respondent argues that section 2703(a)(2) applies to disregard

SFLP for transfer tax purposes.   Respondent further argues that

the SFLP agreement does not satisfy the “safe harbor” exception

in section 2703(b).

     Respondent’s brief states:
                        - 17 -

     Congress recognized substantial valuation abuse in
the law as it existed prior to the enactment of I.R.C.
sec. 2036(c) in 1987. In 1990 Congress replaced
section 2036(c) with a new Chapter 14, including
sections 2701 through 2704, which sets out special
valuation rules for transfer tax purposes. It intended
these new sections to target transfer-tax valuation
abuses in the intra-family transfers more effectively
while relieving taxpayers of section 2036(c)’s broad
sweep. It wanted to value property interests more
accurately when they were transferred, instead of
including previously transferred property in the
transferor’s gross estate. “Discussion Draft” Relating
to Estate Valuation Freezes: Hearing Before the House
Comm. on Ways and Means, 101st Cong. 2d Sess. 102
(April 24, 1990) [House hearing]; Estate Freezes:
Hearing on “Discussion Draft” Before the Subcomm. on
Energy and Agricultural Taxation and Subcomm. on
Taxation and Debt Management of the Senate Comm. on
Finance, 101st Cong. 1233 (June 27, 1990) [Senate
hearing].

     The new special valuation rules in Chapter 14
departed substantially from the hypothetical willing
buyer-willing seller standard. The Treasury Department
recognized that valuing nonpublicly traded assets in
family transactions for transfer tax purposes presented
a significant problem. It testified to Congress that
applying the hypothetical standard of a willing buyer-
willing seller to family transactions allowed
significant amounts to escape taxation. Senate hearing
at 15.

     Congress enacted section 2703(a) to address
abusive intra-family situations. Section 2703(a)(1)
addresses burdening a decedent’s property with options
to purchase at less than fair market value. Section
2703(a)(2), which applies to this case, addresses other
restrictions that reduce the value of a decedent’s
property for estate tax purposes but not in the hands
of the beneficiary. Congress contemplated that the
section would apply to “any restriction, however
created,” including restrictions implicit in the
capital structure of a partnership or contained in a
partnership agreement, articles of incorporation,
corporate bylaws or a shareholders’ agreement.
Informal Senate Report on S. 3209, 101st Cong., 2d
Sess. (1990), 136 Cong. Rec. S15777 (October 18, 1990).
                               - 18 -

     Thus, it intended the word “restriction” in section
     2703(a)(2) to be read as broadly as possible. See
     Treas. Reg. sec. 25.2703-1 (a lease from a father to
     son will to be disregarded for transfer tax valuation
     purposes because it is not similar to arm’s-length
     transactions among unrelated parties. [Fn. ref.
     omitted.]

Respondent next argues that the term “property” in section

2703(a)(2) means the underlying assets in the partnership and

that the partnership form is the restriction that must be

disregarded.   Unfortunately for respondent’s position, neither

the language of the statute nor the language of the regulation

supports respondent’s interpretation.   Absent application of some

other provision, the property included in decedent’s estate is

the limited partnership interest and decedent’s interest in

Stranco.

     In Kerr v. Commissioner, 

(1999), the Court

dealt with a similar issue with respect to interpretation of

section 2704(b).   Sections 2703 and 2704 were enacted as part of

chapter 14, I.R.C., in 1990.   See Omnibus Budget Reconciliation

Act of 1990, Pub. L. 101-508, 104 Stat. 1388.   However, as we

indicated in Kerr v. 

at 470-471, and as

respondent acknowledges in the portion of his brief quoted above,

the new statute was intended to be a targeted substitute for the

complexity, breadth, and vagueness of prior section 2036(c); and

Congress “wanted to value property interests more accurately when
                                - 19 -

they were transferred, instead of including previously

transferred property in the transferor’s gross estate.”    Treating

the partnership assets, rather than decedent’s interest in the

partnership, as the “property” to which section 2703(a) applies

in this case would raise anew the difficulties that Congress

sought to avoid by repealing section 2036(c) and replacing it

with chapter 14.   We conclude that Congress did not intend, by

the enactment of section 2703, to treat partnership assets as if

they were assets of the estate where the legal interest owned by

the decedent at the time of death was a limited partnership or

corporate interest.   See also Estate of Church v. United States,

85 AFTR 2d 2000-804, 2000-1 USTC par. 60,369 (W.D. Tex. 2000).

Thus, we need not address whether the partnership agreement

satisfies the safe harbor provisions of section 2703(b).

Respondent did not argue separately that the Stranco

shareholders’ agreement should be disregarded for lack of

economic substance or under section 2703(a).

Gift at the Inception of SFLP

     Respondent determined in the statutory notice and argues in

the alternative that, if the partnership is recognized for estate

tax purposes, decedent made a gift when he transferred property

to the partnership and received in return a limited partnership

interest of lesser value.   Using the value reported by petitioner

on the estate tax return, if decedent gave up property worth in
                              - 20 -

excess of $10 million and received back a limited partnership

interest worth approximately $6.5 million, he appears to have

made a gift equal to the loss in value.    (Petitioner now claims a

greater discount, as discussed below.)    In analogous

circumstances involving a transfer to a corporation, the Court of

Appeals in Kincaid v. United States, 

(5th Cir.

1982), held that there was a taxable gift and awarded summary

judgment to the Government.   The Court of Appeals rejected the

discounts claimed by the taxpayer, stating that no business

person “would have entered into this transaction, * * * [thus]

the ‘moving impulse for the * * * transaction was a desire to

pass the family fortune on to others’”.     

(quoting

Robinette v. Helvering, 

, 187-188 (1943)).    The Court

of Appeals in Kincaid concluded that, while there may have been

business reasons for the taxpayer to transfer land to a family

corporation in exchange for stock, “there was no business

purpose, only a donative one, for Mrs. Kincaid to accept less

value in return than she gave up.”     

     In this case, the estate claims that the assets were

transferred to SFLP for the business purposes discussed above.

Following the formation of SFLP, decedent owned a 99-percent

limited partnership interest in SFLP and 47 percent of the

corporate general partner, Stranco.    Even assuming arguendo that

decedent’s asserted business purposes were real, we do not
                              - 21 -

believe that decedent would give up over $3 million in value to

achieve those business purposes.

     Nonetheless, in this case, because we do not believe that

decedent gave up control over the assets, his beneficial interest

in them exceeded 99 percent, and his contribution was allocated

to his own capital account, the instinctive reaction that there

was a gift at the inception of the partnership does not lead to a

determination of gift tax liability.    In a situation such as that

in Kincaid, where other shareholders or partners have a

significant interest in an entity that is enhanced as a result of

a transfer to the entity, or in a situation such as Shepherd v.

Commissioner, 115 T.C. __, __ (2000) (slip. op. at 21), where

contributions of a taxpayer are allocated to the capital accounts

of other partners, there is a gift.    However, in view of

decedent’s continuing interest in SFLP and the reflection of the

contributions in his own capital account, he did not transfer

more than a minuscule proportion of the value that would be

“lost” on the conveyance of his assets to the partnership in

exchange for a partnership interest.    See Kincaid v. United

States, supra at 1224.   Realistically, in this case, the

disparity between the value of the assets in the hands of

decedent and the alleged value of his partnership interest

reflects on the credibility of the claimed discount applicable to

the partnership interest.   It does not reflect a taxable gift.
                              - 22 -

Valuation of Decedent’s Limited Partnership Interest

     For the reasons stated above, resolution of this case

requires that we determine the fair market value of decedent’s

limited partnership interest in SFLP.   For reasons stated above

and below, we do not believe that the discounts claimed by

petitioner in this case are reasonable.

     Fair market value is the price at which property would

change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or to sell and both

having reasonable knowledge of relevant facts.   See United States

v. Cartwright, 

, 551 (1973); sec. 20.2031-1(b),

Estate Tax Regs.   Under the hypothetical willing buyer-willing

seller standard, decedent’s interest cannot be valued by assuming

that sales would be made to any particular person.   See Estate of

Bright v. United States, 

, 1001 (5th Cir. 1981).      On

the other hand, transactions that are unlikely and plainly

contrary to the economic interest of a buyer or seller are not

reflective of fair market value.   See Estate of Curry v. United

States, 

, 1429 (7th Cir. 1983); Estate of Newhouse

v. Commissioner, 

, 232 (1990); Estate of Hall v.

Commissioner, 

, 337 (1989); Estate of O’Keeffe v.

Commissioner, T.C. Memo. 1992-210.

     The trier of fact determining fair market value must weigh

all relevant evidence and draw appropriate inferences.   See Hamm
                              - 23 -

v. Commissioner, 

, 938 (8th Cir. 1963), affg. T.C.

Memo. 1961-347; Estate of Andrews v. Commissioner, 

(1982).   Reviewing the facts of this case, at the date of death,

decedent owned a 99-percent limited partnership interest in SFLP

and a 47-percent interest in Stranco, the 1-percent owner and

general partner of SFLP.   Approximately 75 percent of the

partnership’s value consisted of cash and securities.   It is

unlikely and plainly contrary to the interests of a hypothetical

seller to sell these interests separately and without regard to

the liquidity of the underlying assets.   SFLP was not a risky

business or one in which the continuing value of the assets

depended on continuing operations.

     Each of the parties in this case presented expert valuation

testimony.   The experts agreed that the appropriate methodology

was the “net asset value” approach.    Each expert determined and

applied a minority interest discount and a marketability discount

to the net asset value of the partnership assets.

     Both petitioner’s expert and respondent’s expert determined

that a 25-percent lack of marketability discount was appropriate.

Only respondent’s expert, however, considered decedent’s

ownership of Stranco stock.   We agree with respondent that the

relationship between the limited partnership interest and the

interest in Stranco cannot be disregarded.   The entities were
                               - 24 -

created as a unit and operated as a unit and were functionally

inseparable.

     In valuing decedent’s 99-percent limited partnership

interest on the date of death, respondent’s expert applied an

8-percent minority interest discount and a 25-percent

marketability discount, to reach a combined (rounded) discount of

31 percent.    Respondent’s expert valued decedent’s 47-percent

interest in Stranco by applying a 5-percent minority interest

discount and a 15-percent marketability discount, to reach a

combined (rounded) discount of 19 percent.    Petitioner’s expert

applied a 25-percent minority interest discount and a 25-percent

marketability discount, resulting in an effective total discount

of 43.75 percent to the partnership.    He did not value

petitioner’s interest in Stranco because he believed that the

relationship was irrelevant.    In our view, his result is

unreasonable and must be rejected.

     Respondent’s expert selected the lower minority interest

discount after considering the effective control of the limited

partnership interest and the interest in Stranco and considering

the detailed provisions of the partnership agreement and the

shareholders’ agreement.    He examined closed-end funds, many of

which are traded on major exchanges, and determined the range of

discounts from net asset value for those funds.    He selected a

discount toward the lower end of the range.    His analysis was
                               - 25 -

well documented and persuasive.   As respondent notes, normally a

control premium would apply to an interest having effective

control of an entity.

     Petitioner argues that consideration of the stock interest

in Stranco in valuing the limited partnership interest is

erroneous because the shareholders’ agreement granted the

corporation and the other shareholders the right to purchase a

selling shareholder’s stock.   While the shareholders’ agreement

may be a factor to be considered in determining fair market

value, it does not persuade us that a hypothetical seller would

not market the interest in the limited partnership and the

interest in the corporation as a unit or that a transaction would

actually take place in which only the partnership interest or the

stock interest was transferred.   Under the circumstances, the

shareholders’ agreement is merely a factor to be taken into

account but not to be given conclusive weight.   Cf. Estate of

Hall v. Commissioner, 

, 335 (1989); Estate of Lauder

v. Commissioner, T.C. Memo. 1994-527.

     In view of our rejection of respondent’s belated attempt to

raise section 2036 and respondent’s request that we disregard the

partnership agreement altogether, we are constrained to accept

the evidence concerning discounts applicable to decedent’s

interest in the partnership and in Stranco as of the date of

death.   We believe that the result of respondent’s expert’s
                              - 26 -

discounts may still be overgenerous to petitioner, but that

result is the one that we must reach under the evidence and under

the applicable statutes.

     We have considered the other arguments of the parties, and

they do not affect our analysis.   To reflect the foregoing and

the stipulated adjustments,

                                          Decision will be entered

                                    under Rule 155.

     Reviewed by the Court.

     CHABOT, WHALEN, COLVIN, HALPERN, CHIECHI, and THORNTON, JJ.,
agree with this majority opinion.

     LARO, J., concurs in this opinion.
                                  - 27 -


       WELLS, C.J., concurring:    Respectfully, although I concur in

the result reached by the majority in the instant case, I wish to

express my disagreement with the majority’s application of the

economic substance doctrine.      The majority rejects the alleged

business purposes underlying the formation of the disputed

partnership but then concludes that the partnership "had

sufficient substance to be recognized for tax purposes", majority

op. p. 16, because the partnership was validly formed under State

law, which altered the legal relationships between the decedent

and others.

       I believe that the majority’s stated reasons for holding

that the partnership had substance misapplies the economic

substance doctrine.    In cases such as ACM Pshp. v. Commissioner,

(3d Cir. 1998), affg. in part and revg. in part on

another issue T.C. Memo. 1997-115, where the economic substance

doctrine is applied to deny income tax benefits, the doctrine is

applied regardless of the validity of the partnership under State

law.    Because the majority has rejected the alleged business

purposes underlying the formation of the partnership in issue in

the instant case, a proper application of the economic substance

doctrine, if it were to apply, would ignore the partnership and

disallow the discounts for minority interest and lack of

marketability.
                              - 28 -

     I believe that, rather than holding that the economic

substance doctrine is satisfied in the instant case, the Court

should conclude that the economic substance doctrine does not

apply to disregard a validly formed entity where the issue is the

value for Federal gift and estate tax purposes of the interest

transferred in that entity.   In that regard, I agree with Judge

Foley's concurring opinion in Knight v. Commissioner, 115 T.C.

___, ___ (2000).

     FOLEY, J., agrees with this concurring opinion.
                              - 29 -

     PARR, J., dissenting:   The majority, citing Frank Lyon Co.

v. United States, 

, 583-584 (1978), states:     "the tax

effects of a particular transaction are determined by the

substance of the transaction rather than by its form."    Majority

op. p. 11.   The majority also cites a long line of cases, see

Helvering v. Clifford, 

, 336 (1940); Kuney v. Frank,

, 720 (9th Cir. 1962); Frazee v. Commissioner, 

, 561 (1992); Harwood v. Commissioner, 

, 258

(1984), affd. without published opinion 

(9th Cir.

1986); Estate of Kelly v. Commissioner, 

, 325 (1974);

Estate of Tiffany v. Commissioner, 

, 499 (1967), that

require the Court to closely scrutinize family partnerships

"because the family relationship 'so readily lends itself to

paper arrangements having little or no relationship to reality.'"

Majority op. p. 12 (quoting Kuney v. Frank, 

, 720

(9th Cir. 1962)).

     The majority is "skeptical of the estate's claims of

business purposes related to executor and attorney's fees or

potential tort claims", majority op. p. 13, is not persuaded that

SFLP was formed to protect assets from will contests, does not

believe that a joint investment vehicle was the purpose of the

partnership, found that the formation and control of SFLP were

orchestrated by Mr. Gulig without regard to joint enterprise, and
                               - 30 -

found that the management of the assets contributed to SFLP was

not the purpose of SFLP.

     In this case, the facts clearly demonstrate that the paper

arrangement, the written partnership agreement, had no

relationship to the reality of decedent's ownership and control

of the assets contributed to the partnership.    Although under the

partnership agreement a limited partner could not demand a

distribution of partnership capital or income, the partnership

(1) paid for Stone's surgery when she injured her back while

caring for decedent, (2) distributed $3,187,800 to decedent's

estate for State and Federal estate and inheritance taxes, (3)

distributed $563,000 in 1995 and 1996 and $102,500 in 1998 to

each of the Strangi children, (4) divided its primary Merrill

Lynch account into four separate accounts in each of the Strangi

children's names, (5) extended lines of credit to John Strangi,

Albert T. Strangi, and Mrs. Gulig, and (6) advanced to decedent's

estate $3.32 million to post bonds with the Internal Revenue

Service.   It is clear that, contrary to the written partnership

agreement, decedent and his successor in interest to his

partnership interest (decedent's estate) had the ability to

withdraw funds at will.    If a hypothetical third party had

offered to purchase the assets held by the partnership for the

full fair market value of those assets, there is little doubt
                              - 31 -

that decedent could have had the assets distributed to himself to

complete the sale.

     The majority, however, holds that, because the formalities

were followed and SFLP was validly formed under State law, the

partnership had sufficient substance to be recognized for tax

purposes.   The majority then values decedent's partnership

interest as if the restrictions in the written partnership

agreement were actually binding on the partners.   The majority

states, "The actual control exercised by Mr. Gulig, combined with

the 99-percent limited partnership interest in SFLP and the 47-

percent interest in Stranco, suggest the possibility of including

the property transferred to the partnership in decedent's estate

under section 2036."   Majority op. p. 15.   It seems incongruous

that for purposes of section 2036 this Court could look to the

actual control decedent exercised over the assets of the

partnership, but for purposes of determining the appropriate

discounts for valuing decedent's interest in the partnership this

Court is limited to the written partnership agreement.

     Assuming, arguendo, that the partnership must be recognized

for Federal estate tax purposes, I would value the interest under

the agreement that existed in fact, rather than under the written

partnership agreement that had no relationship to the reality of

decedent's ownership and control of the assets contributed to the

partnership.
                                - 32 -

     A person who maintains control over the ultimate disposition

of property is, in practical effect, in a position similar to the

actual owner of the property.    See, e.g., Estate of Kurz v.

Commissioner, 

, 50-51, 59-60 (1993), supplemented by

T.C. Memo. 1994-221, affd. 

(7th Cir. 1995).      The

Court should not allow a taxpayer who is not in fact limited by

an agreement to claim a discount that is premised on that very

limitation.   A minority discount is allowed because a limited

partner cannot cause the partnership to make distributions.

Decedent and decedent's estate in fact caused the partnership to

make distributions at will.   The minority discount is not

appropriate in this case.

     Additionally, a discount for lack of marketability is

allowed because a hypothetical third party would pay less for the

partnership interest than for the assets.      But in this case,

under the actual partnership arrangement, decedent could have had

all the assets distributed to himself and then sold them directly

to the buyer.   The lack of marketability discount, therefore,

also is inappropriate in this case.      Because the actual

partnership arrangement provided for distributions at will, I

would value the partnership interest at the value of the

partnership's assets without any discount.

     For the above reasons, I respectfully dissent.

     BEGHE and MARVEL, JJ., agree with this dissenting opinion.
                                - 33 -

      RUWE, J., dissenting:    Decedent transferred property to a

newly formed partnership in return for a 99-percent limited

partnership interest.     This was done 2 months before he died, as

part of a plan to reduce tax on his estate.     The estate presented

testimony to support its argument that these actions were taken

for business purposes.     The trial judge clearly rejects these

arguments and describes the testimony offered by the estate as

“mere window dressing to conceal tax motives.”     Majority op. p.

13.   Tax savings was the only motivating factor for transferring

property to the partnership.     Nevertheless, the majority

validates this scheme by valuing decedent’s 99-percent

partnership interest at 31 percent below the value of the

property that decedent transferred to the partnership.

      Respondent argues that if the partnership interest that

decedent received is to be valued at 31 percent less than the

value of the property that decedent transferred to the

partnership, then the difference should be considered to be a

gift.     The majority rejects respondent’s gift argument.1


      1
      One of the reasons given by the majority for rejecting
respondent’s gift argument is “we do not believe that decedent
gave up control over the assets”. Majority op. p. 21. This
finding is inconsistent with the majority’s allowance of a 31
percent discount. If decedent owned assets worth $9,876,929,
transferred legal title to those assets to a partnership in which
he had a beneficial interest that exceeded 99 percent, and
thereafter retained control over the transferred assets, how
could the value of his property rights be 31 percent less after
                                                   (continued...)
                              - 34 -

     Respondent’s gift tax argument is supported by the

applicable statutes, regulations, and controlling opinions.    If

the value of the property that decedent transferred to the

partnership was more than the value of the consideration that he

received, and the transfer was not made for bona fide nontax

business reasons, then the amount by which the value of the

property transferred exceeds the value of the consideration is

deemed to be a gift pursuant to section 2512(b).

     Section 2512(b) provides:

     SEC. 2512.   VALUATION OF GIFTS.

          (b) 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, and shall be included in computing
     the amount of gifts made during the calendar year.

Section 25.2512-8, Gift Tax Regs., provides:

           Sec. 25.2512-8. Transfers for insufficient
     consideration.--Transfers reached by 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.
     * * *


     1
      (...continued)
the transfer? Certainly, a hypothetical willing buyer and seller
with reasonable knowledge of the relevant facts would be aware
that decedent’s property interests included control over the
assets. The majority’s analysis fails to adequately explain this
apparent anomaly.
                             - 35 -

Transactions made in the ordinary course of business are exempt

from the above gift tax provisions.   Thus, section 25.2512-8,

Gift Tax Regs., provides:

     However, a sale, exchange, or other transfer of
     property made in the ordinary course of business (a
     transaction which is bona fide, at arm’s length, and
     free from any donative intent), will be considered as
     made for an adequate and full consideration in money or
     money’s worth. * * *

     The Supreme Court has described previous versions of the

gift tax statutes (section 501 imposing the tax on gifts and

section 503 which is virtually identical to present section

2512(b)) in the following terms:

          Sections 501 and 503 are not disparate provisions.
     Congress directed them to the same purpose, and they
     should not be separated in application. Had Congress
     taxed “gifts” simpliciter, it would be appropriate to
     assume that the term was used in its colloquial sense,
     and a search for “donative intent” would be indicated.
     But Congress intended to use the term “gifts” in its
     broadest and most comprehensive sense. H. Rep. No.
     708, 72d Cong., 1st Sess., p.27; S. Rep. No. 665, 72d
     Cong., 1st Sess., p.39; cf. Smith v. Shaughnessy, 

; Robinette v. Helvering, 

.
     Congress chose not to require an ascertainment of what
     too often is an elusive state of mind. For purposes of
     the gift tax it not only dispensed with the test of
     “donative intent.” It formulated a much more workable
     external test, that where “property is transferred for
     less than an adequate and full consideration in money
     or money’s worth,” the excess in such money value
     “shall, for the purpose of the tax imposed by this
     title, be deemed a gift...” And Treasury Regulations
     have emphasized that common law considerations were not
     embodied in the gift tax.

          To reinforce the evident desire of Congress to hit
     all the protean arrangements which the wit of man can
     devise that are not business transactions within the
                              - 36 -

     meaning of ordinary speech, the Treasury Regulations
     make clear that no genuine business transaction comes
     within the purport of the gift tax by excluding “a
     sale, exchange, or other transfer of property made in
     the ordinary course of business (a transaction which is
     bona fide, at arm’s length, and free from any donative
     intent).” Treas. Reg. 79 (1936 ed.) Art. 8. Thus on
     finding that a transfer in the circumstances of a
     particular case is not made in the ordinary course of
     business, the transfer becomes subject to the gift tax
     to the extent that it is not made “for an adequate and
     full consideration in money or money’s worth.” See 2
     Paul, Federal Estate and Gift Taxation (1942) p. 1113.
     [Commissioner v. Wemyss, 

, 306 (1945); fn.
     ref. omitted; emphasis added.]

     In light of what the Supreme Court said, the estate

attempted to portray the transfer of property to the partnership

as a business transaction.   The majority soundly rejects this as

a masquerade.   Indeed, it is clear that the transfer was made to

reduce the value of decedent’s assets for estate tax purposes,

while at the same time allowing the full value of decedent’s

property to pass to his children.

     The Supreme Court has described the objective of the gift

tax as follows:

     The section taxing as gifts transfers that are not made
     for “adequate and full [money] consideration” aims to
     reach those transfers which are withdrawn from the
     donor’s estate. * * * [Commissioner v. Wemyss, supra at
     307.]

Under the applicable gift tax provisions and Supreme Court

precedent, it is unnecessary to consider what decedent’s children

received on the date of the transfer in order to determine the

value of the deemed gift under section 2512(b).   Indeed, it is
                              - 37 -

not even necessary to identify the donees.   Section 25.2511-2(a),

Gift Tax Regs., provides:

          Sec. 25.2511-2. Cessation of donor’s dominion and
     control.--(a) The gift tax is not imposed upon the
     receipt of the property by the donee, nor is it
     necessarily determined by the measure of enrichment
     resulting to the donee from the transfer, nor is it
     conditioned upon ability to identify the donee at the
     time of the transfer. On the contrary, the tax is a
     primary and personal liability of the donor, is an
     excise upon his act of making the transfer, is measured
     by the value of the property passing from the donor,
     and attaches regardless of the fact that the identity
     of the donee may not then be known or ascertainable.

In Robinette v. Helvering, 

(1943), the taxpayer

argued that there could be no gift of a remainder interest where

the putative remaindermen (prospective unborn children of the

grantor) did not even exist at the time of the transfer.    The

Supreme Court rejected this argument stating that the gift tax is

a primary and personal liability of the donor measured by the

value of the property passing from the donor.

     This case involves an attempt by a dying man (or his

attorney) to transfer property to a partnership in consideration

for a 99-percent partnership interest that would be valued at

substantially less than the value of the assets transferred to

the partnership, while at the same time assuring that 100 percent

of the value of the transferred assets would be passed to

decedent’s beneficiaries.   Assuming, as the majority has found,

that decedent’s partnership interest was worth less than the
                                  - 38 -

property he transferred,2 section 2512(b) should be applied.

Pursuant to that section the excess of the value of the property

decedent transferred to the partnership over the value of the

consideration he received is “deemed a gift” subject to the gift

tax.       By failing to apply section 2512(b) in this case, the

majority thwarts the purpose of section 2512(b) which the Supreme

Court described as “the evident desire of Congress to hit all the

protean arrangements which the wit of man can devise that are not

business transactions”.       Commissioner v. Wemyss, supra at 306.

     PARR, BEGHE, GALE, and MARVEL, JJ., agree with this
dissenting opinion.




       2
      The majority’s allowance of a 31-percent discount is in
stark contrast to its rejection of respondent’s gift argument on
the ground that decedent did not give up control of the assets
when he transferred them to the partnership. See majority op. p.
21. While the basis for finding that decedent did not give up
control of the assets is not fully explained, it appears not to
be based on the literal terms of the partnership agreement which
gave control to Stranco, the corporate general partner. Decedent
owned only 47 percent of the Stranco stock. Since the majority
also rejects respondent’s economic substance argument, the only
other conceivable basis for concluding that decedent retained
control over the assets that he contributed to the partnership is
that the partnership arrangement was a factual sham. If that
were the case, the partnership arrangement itself would be “mere
window dressing” masking the true facts and the terms of the
partnership arrangement should be disregarded. In an analogous
situation the Court of Appeals for the Tenth Circuit disregarded
the written terms of a transfer document as fraudulent. See
Heyen v. United States, 

(10th Cir. 1991).
                              - 39 -

     BEGHE, J., dissenting:   Having joined the dissents of Judges

Parr and Ruwe, I write separately to describe another path to the

conclusion that SFLP had no effect on the value of Mr. Strangi’s

gross estate under sections 2031 and 2033.   In my view, the

property to be valued is the property originally held by Mr.

Strangi, the so-called contributed property.   Notwithstanding

that the property in question may have been contributed to a

partnership formed on Mr. Strangi’s behalf in exchange for a 99-

percent limited partnership interest, we’re not bound to accept

the estate’s contention that the property to be valued is its

interest in SFLP, subject to all the disabilities and resulting

valuation discounts entailed by ownership of an interest in a

limited partnership.   Instead, the facts of this case invite us

to use the end-result version of the step-transaction doctrine to

treat the underlying partnership assets--the property originally

held by the decedent--as the property to be valued for estate tax

purposes.

     The value of property for transfer tax purposes is the price

at which the property would change hands between a willing buyer

and a willing seller, neither being under any compulsion to buy

or to sell and both having reasonable knowledge of relevant

facts.   See United States v. Cartwright, 

, 550-551

(1973); sec. 20.2031-1(b), Estate Tax Regs.; sec. 25.2512-1, Gift

Tax Regs.   The majority state that SFLP’s existence “would not be
                              - 40 -

disregarded by potential purchasers of decedent’s assets”; the

majority also suggest that this is why the partnership should not

be disregarded as a substantive sham.   See majority op. p. 16.

     I support the use of substance over form analysis to decide

whether a transaction qualifies for the tax-law defined status

its form suggests.   A formally correct transaction without a

business purpose may not be a “reorganization”, and a title

holder of property without an economic interest may not be the

tax “owner”.   However, I share the majority’s concerns about

using substance over form analysis to alter the conclusion about

a real-world fact, such as the fair market value of property,

which the law tells us is the price at which the property

actually could be sold.1


     1
       Against the grain of the majority’s conclusions that the
SFLP arrangements were neither a factual sham nor a substantive
sham, I would observe that another “conceivable basis for
concluding that decedent retained control over the assets that he
contributed to the partnership” (Ruwe, J., dissenting opinion
page 38 note 2) are the multiple roles played by Mr. Gulig, who
had decedent’s power of attorney and caused himself to be
employed by Stranco to manage the affairs of SFLP, and the tacit
understanding of the other family members that he would look out
for their interests. Although I would agree with the majority
that use of substantive sham analysis may not be appropriate in
transfer tax cases, I believe that factual sham analysis can be
used in appropriate cases in the transfer tax area and that the
case at hand is one of those cases; the terms of the SFLP
partnership agreement should be disregarded because the parties
to the agreement didn’t pay any attention to them. Cf. Heyen v.
United States, 

(10th Cir. 1991). To adapt to the
case at hand the hypothetical posed by the Court of Appeals in
Citizens Bank & Trust Co. v. Commissioner, 

, 1254-
                                                   (continued...)
                              - 41 -

     Although my approach to the case at hand employs a step-

transaction analysis, which is a variant of substance over form,

I do not use that analysis to conclude anything about fair market

value.   Instead, I use it to identify the property whose transfer

is subject to tax.   Step-transaction analysis has often been used

in transfer tax cases to identify the transferor or the property

transferred.

     The step-transaction doctrine is a judicially created

concept that treats a series of formally separate “steps” as a

single transaction if those steps are “in substance integrated,

interdependent and focused toward a particular end result.”

Penrod v. Commissioner, 

, 1428 (1987).   The most far-

reaching version of the step-transaction doctrine, the end-result

test, applies if it appears that a series of formally separate

steps are really prearranged parts of a single transaction that

are intended from the outset to reach the ultimate result.    See

Penrod v. Commissioner, 

, 1430 (citing Helvering

v. Alabama Asphaltic Limestone Co., 

(1942); South

Bay Corp. v. Commissioner, 

(2d Cir. 1965); Morgan

Manufacturing Co. v. Commissioner, 

(4th Cir. 1941);



     1
      (...continued)
1255 (7th Cir. 1988), the magic marker the Guligs used to paint
the mustache on the Mona Lisa was filled with disappearing ink.
However, the discussion in the text is presented as an
alternative to a factual sham analysis.
                               - 42 -

Heintz v. Commissioner, 

(1955); Ericsson Screw

Machine Prods. Co., v. Commissioner, 

(1950); King

Enters., Inc. v. United States, 

, 475, 

, 516 (1969)).   The end-result test is flexible and grounds

tax consequences on what actually happened, not on formalisms

chosen by the participants.    See Penrod v. 

.

     The sole purpose of the transactions orchestrated by Mr. and

Mrs. Gulig was to reduce Federal transfer taxes by depressing the

value of Mr. Strangi’s assets as they   passed through his gross

estate, to his children, via the partnership.   The arrangement

merely operated to convey the assets to the same individuals who

would have received the assets in any event under Mr. Strangi’s

will.   Nothing of substance was intended to change as a result of

the transactions and, indeed, the transactions did nothing to

affect Mr. Strangi’s or his children’s interests in the

underlying assets except to evidence an effort to reduce Federal

transfer taxes.   The control exercised by Mr. Strangi and his

children over the assets did not change at all as a result of the

transactions.   For instance, shortly after Mr. Strangi’s death

SFLP made substantial distributions to the children, the Merrill

Lynch account was divided into 4 separate accounts to allow each

child to control his or her proportionate share of SFLP assets,

and distributions were made to the estate to enable it to pay

death taxes and post a bond.   Mr. Strangi’s testamentary
                             - 43 -

objectives are further evidenced by his practical incompetency

and failing health at formation and funding of SFLP and Stranco

and the short time between the partnership transactions and Mr.

Strangi’s death.

     The estate asserts that property with a stated value of

$9,876,929, in the form of cash and securities, when funneled

through the partnership, took on a reduced value of $6,560,730.

It is inconceivable that Mr. Strangi would have accepted, if

dealing at arm’s length, a partnership interest purportedly worth

only two-thirds of the value of the assets he transferred.     This

is especially the case given Mr. Strangi’s age and health,

because it would have been impossible for him ever to recoup this

immediate loss.

     It is also inconceivable that Mr. Strangi (or his

representatives) would transfer the bulk of his liquid assets to

a partnership, in exchange for a limited interest (plus a

minority interest in the corporate general partner) that would

terminate his control over the assets and their income streams,

if the other partners had not been family members.   See Estate of

Trenchard v. Commissioner, T.C. Memo. 1995-121; there the Court

found “incredible” the assertion of the executrix that the

decedent’s transfer of property to a family corporation in

exchange for stock was in the ordinary course of business.     It is

clear that the sole purpose of SFLP was to depress the value of
                              - 44 -

Mr. Strangi’s assets artificially for a brief time as the assets

passed through his estate to his children.   See Estate of Murphy

v. Commissioner, T.C. Memo. 1990-472, in which this Court denied

decedent’s estate a minority discount on a 49.65-percent stock

interest because the prior inter vivos transfer of a 1.76-percent

interest did “not appreciably affect decedent’s beneficial

interest except to reduce Federal transfer taxes.”   Estate of

Murphy v. 

, 

, 661, 1990

T.C.M. (RIA) par. 90,472, at 90-2261.

      Thus, under the end-result test, the formally separate

steps of the transaction (the creation and funding of the

partnership within 2 months of Mr. Strangi’s death, the

substantial outright distributions to the estate and to the

children, and the carving up of the Merrill Lynch account) that

were employed to achieve Mr. Strangi’s testamentary objectives

should be collapsed and viewed as a single integrated

transaction:   the transfer at Mr. Strangi’s death of the

underlying assets.

     In many cases courts have collapsed multistep transactions

or recast them to identify the parties (usually the donor or

donee) or the property to be valued for transfer tax purposes.

See, e.g., Estate of Bies v. Commissioner, T.C. Memo. 2000-338

(identifying transferors for purposes of gift tax annual

exclusions); Estate of Cidulka v. Commissioner, T.C. Memo. 1996-
                              - 45 -

149 (donor’s gift of minority stock interests to shareholders

followed by a redemption of donor’s remaining shares treated as

single transfer of a controlling interest); Estate of Murphy v.

(decedent’s inter vivos transfer of a

minority interest followed by a testamentary transfer of her

remaining shares treated as an integrated plan to transfer

control to decedent’s children); Griffin v. United States, 42 F.

Supp. 2d 700 (W.D. Tex. 1998) (transfer of 45 percent of donor’s

stock to donor’s spouse followed by a transfer by spouse and

donor of all their stock to a trust for the benefit of their

child treated as one gift by donor of the entire block).2

     The reciprocal trust doctrine, another application of

substance over form, has been used in the estate and gift tax

area to determine who is the transferor of property for the

purposes of inclusion in the gross estate.   See United States v.

Grace, 

, 321 (1969) (applying the reciprocal trust

doctrine in the estate tax context to identify the grantor, and

quoting with approval Lehman v. Commissioner, 

, 100

(2d Cir. 1940): “The law searches out the reality and is not

concerned with the form.”).   More recently, Sather v.

Commissioner, T.C. Memo. 1999-309, applied the reciprocal trust


     2
      In Griffin v. United States, 

, 706 n.4
(W.D. Tex. 1998), the court distinguished Estate of Frank v.
Commissioner, T.C. Memo. 1995-132, where this Court declined to
integrate the steps of the transaction.
                                - 46 -

doctrine to cut down the number of present interest annual

exclusions for gift tax purposes:

          We must peel away the veil of cross-transfers to
     seek out the economic substance of the foregoing series
     of transfers. * * *

                *     *     *       *    *    *     *

          We are led to the inescapable conclusion that the
     form in which the transfers were cast, i.e., gifts to
     the nieces and nephews, had no purpose aside from the
     tax benefits petitioners sought by way of inflating
     their exclusion amounts. The substance and purpose of
     the series of transfers was for each married couple to
     give to their own children their Sathers stock. After
     the transfers, each child was left in the same economic
     position as he or she would have been in had the
     parents given the stock directly to him or her. Each
     niece and nephew received an identical amount of stock
     from his or her aunts and uncles and was left in the
     same economic position in relation to the others. This
     was not a coincidence but rather was the result of a
     plan among the donors to give gifts to their own
     children in a form that would avoid taxes. * * *
     [Sather v. Commissioner, T.C. Memo. 1999-309, 78 T.C.M.
     (CCH) 456, 459-460, 1999 T.C.M. (RIA) par. 99,309, at
     99-1964-99-1965.]

All this is set out most clearly in our reviewed opinion in

Bischoff v. Commissioner, 

(1977), as explained by the

Court of Appeals for the Federal Circuit in Exchange Bank & Trust

Co. v. United States, 

, 1269 (Fed. Cir. 1982):

“We agree with the majority in Bischoff and the appellee in this

action [the United States] that the reciprocal trust doctrine

merely identifies the true transferor, but the actual basis for

taxation is founded upon specific statutory authority.”
                               - 47 -

     In Estate of Montgomery v. Commissioner, 

(1971),

affd. 

(5th Cir. 1972), an elderly decedent, who was

otherwise uninsurable, purchased a single premium annuity and was

thereby able to obtain life insurance that he assigned to trusts.

The Court held that the arrangement was not life insurance within

the meaning of the parenthetical exception contained in section

2039, and therefore, the proceeds of the policies were includable

in decedent’s gross estate.    In so holding, the Court used the

language of step transactions to find that the annuity and

insurance were part of a single investment agreement.

     Daniels v. Commissioner, T.C. Memo. 1994-591, applied the

step-transaction doctrine in a gift tax case in favor of the

taxpayers to conclude that an outright gift of common stock to

children and a simultaneous exchange of some common for preferred

were parts of the same gift.    As a result, the Commissioner’s

belated attempt to tax the imbalance in values on the common-

preferred exchange was barred by the statute of limitations.

     My conclusion that the property to be valued for estate tax

purposes should be the property transferred to SFLP is further

supported by the decision of Citizens Bank & Trust Co. v.

Commissioner, 

(7th Cir. 1988), affg. Northern Trust

Co. v. Commissioner, 

(1986).    There, the Court of

Appeals for the Seventh Circuit held that the taxable value of a

gift is not altered by the terms of the conveyance; therefore,
                              - 48 -

“restrictions imposed in the instrument of transfer are to be

ignored for purposes of making estate or gift tax valuations”.

  I conclude that the formation of SFLP and

subsequent distributions of partnership assets should be treated

as parts of a single, integrated transaction, and that the SFLP

agreement is properly viewed as a restriction included in the

testamentary conveyance to the Strangi children.   Accordingly,

under Citizens Bank & Trust Co. v. 

, and the

other authorities previously discussed, any reduction in values

allegedly caused by the SFLP agreement should be disregarded;

under sections 2031 and 2033, the contributed property is the

property to be included and valued in the gross estate.

     PARR, J., agrees with this dissenting opinion.