UNITED STATES TAX COURT



           CHRISTINE M. HACKL, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

          ALBERT J. HACKL, SR., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 6921-00, 6922-00.      Filed March 27, 2002.


     In 1995 and 1996, Ps A and C made gifts to their
children and grandchildren of membership units in
Treeco, LLC, a limited liability company. Treeco had
previously been organized by A to hold and operate tree
farming properties. This timberland had been purchased
by A to provide investment diversification in the form
of long-term growth and future income. Treeco was
governed by an Operating Agreement which set forth the
rights and duties conferred on members and the manager
and which designated A as manager. At the time of the
gifts, it was correctly anticipated that Treeco and its
successor entities would generate losses and make no
distributions for a number of years.

     Held: The gifts of Treeco units made by Ps fail
to qualify for the annual gift tax exclusion provided
in sec. 2503(b), I.R.C.
                               - 2 -

     Barton T. Sprunger and Mark J. Richards, for petitioners.

     Russell D. Pinkerton, for respondent.



                              OPINION


     NIMS, Judge:   By separate statutory notices, respondent

determined a deficiency in the 1996 Federal gift tax liability of

petitioner Christine M. Hackl (Christine Hackl) in the amount of

$309,866 and in the 1996 Federal gift tax liability of Albert J.

Hackl, Sr. (A.J. Hackl), in the amount of $309,950.   Petitioners

each timely filed for redetermination by this Court, and, due to

an identity of issues, the cases were consolidated for purposes

of trial, briefing, and opinion.   In accordance with stipulations

of partial settlement filed by the parties, the sole matter

remaining for decision is whether gifts made by petitioners of

units in a limited liability company qualify for the annual

exclusion provided by section 2503(b).

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the year at

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

Practice and Procedure.

                            Background

     These cases were submitted fully stipulated pursuant to Rule

122, and the facts stipulated are so found (except as noted in

footnote 1).   The stipulations of the parties, with accompanying
                                - 3 -

exhibits, are incorporated herein by this reference.    At the time

their respective petitions were filed, petitioners resided in

Indianapolis, Indiana.

Personal, Educational, and Occupational Background

     Petitioners are husband and wife and are the parents of

eight children.   As of the date of the gifts at issue, they were

also the grandparents of 25 minor grandchildren.

     A.J. Hackl was born on December 29, 1925, and Christine

Hackl was born on June 16, 1927.    Since obtaining a Bachelor of

Mechanical Engineering degree from Georgia Institute of

Technology in 1946, A.J. Hackl has pursued a successful career in

business.   He was employed by The Trane Company from 1946 to

1959, during which time he became a licensed professional

engineer and worked in several management positions.    He next

accepted employment with Worthington Corporation, serving in

management and executive capacities within the company’s air

conditioning division from 1959 to 1968.    Then, from 1968 until

his retirement in 1995, A.J. Hackl served as chief executive

officer of Herff Jones, Inc.    During that period, Herff Jones

grew from a small, publicly held manufacturer of scholastic

recognition and motivational awards, with $18 million in annual

sales, to a national company with a broad line of products and

annual sales of $265 million.    At the time of his retirement in

1995, A.J. Hackl owned a significant amount of Herff Jones stock,
                                 - 4 -

which he sold to the company’s employee stock ownership plan.      He

then remained as chairman of the board of directors until 1998.

Initiation of Tree Farm Investment

     In the mid-1990s, in anticipation of the sale of his Herff

Jones stock, A.J. Hackl began to research ways to diversify his

financial net worth into investments other than publicly traded

U.S. marketable securities, of which he had already accumulated a

substantial portfolio.   He concluded that an investment in real

estate would achieve his objective of diversification and, after

consideration of a wide range of real estate ventures, decided

that tree farming presented an attractive business opportunity

which would both include the acquisition of significant parcels

of real estate and also fulfill his interest of remaining

personally active in business.

      Since his other investments were generating a considerable

amount of current income, A.J. Hackl’s investment goal with

respect to his tree farming business was long-term growth.    He

therefore chose to purchase land for use in the tree farming

business with little or no existing merchantable timber because

such land was significantly cheaper, and would provide a greater

long-term return on investment, than land with a substantial

quantity of merchantable timber.

     In 1995, A.J. Hackl purchased two tree farms:   (1) A 3,813.8

acre tract in Putnam County, Florida (Putnam County Farm) and (2)
                                - 5 -

a 7,771.88 acre tract in McIntosh County, Georgia (McIntosh

County Farm).    The Putnam County Farm was purchased on January 6,

1995, for $1,945,038, and contained merchantable timber valued at

$140,451 as of the time of purchase.    The McIntosh County Farm

was purchased on June 23, 1995, and contained no merchantable

timber as of that date.

Formation of Treeco, LLC, and Gifting of Interests Therein

     A.J. Hackl determined that the tree farming operations

should be conducted by a separate business entity (1) to shield

his assets not related to the tree farming business from

potential liability associated with that business, (2) to create

a separate enterprise in which family members could participate,

and (3) to facilitate the transfer of ownership interests in the

tree farming business to his children, their spouses, and his

grandchildren.   Accordingly, A.J. Hackl executed Articles of

Organization creating Treeco, LLC, and on October 6, 1995, such

articles were filed with the Office of the Indiana Secretary of

State.   As a result, Treeco was duly and validly organized as a

limited liability company (LLC) under the Indiana Business

Flexibility Act.   The LLC format was selected by A.J. Hackl to

obtain liability protection for members, to provide protection of

assets inside the LLC from members’ creditors, to provide pass-

through income tax treatment, and to provide for centralized

management for the operation of the family tree farming business.
                              - 6 -

     On December 7, 1995, A.J. Hackl contributed the Putnam and

McIntosh County Farms to Treeco.    Thereafter, on December 11,

1995, petitioners each recorded a capital contribution to Treeco

of $500 in exchange for 50,000 voting and 450,000 nonvoting units

in the LLC, thereby becoming the initial members of the entity

and each holding 50-percent ownership.    They also on that date,

in their capacities as initial members, executed an Operating

Agreement to govern the Treeco enterprise.

     The Operating Agreement provided that “Management of the

Company’s business shall be exclusively vested in a Manager” and

specified that such manager “shall perform the Manager’s duties

as the Manager in good faith, in a manner the Manager reasonably

believes to be in the best interests of the Company, and with

such care as an ordinarily prudent person in a like position

would use under similar circumstances.”    The document designated

A.J. Hackl as the initial manager to serve for life, or until

resignation, removal, or incapacity, and also conferred on him

the authority to name a successor manager during his lifetime or

by will.

     As regards distributions, the Agreement stated that the

manager “may direct that the Available Cash, if any, be

distributed to the Members, pro rata in accordance with their

respective Percentage Interests.”    Available cash was defined as

cash funds on hand after payment of or provision for all
                                - 7 -

operating expenses, all outstanding and unpaid current

obligations, and a working capital reserve.    In addition, the

Agreement provided that, prior to dissolution, “no Member shall

have the right to withdraw the Member’s Capital Contribution or

to demand and receive property of the Company or any distribution

in return for the Member’s Capital Contribution, except as may be

approved by the Manager.”    Members also in the Agreement waived

the right to have any company property partitioned.

     Concerning changes in members and disposition of membership

interests, the Operating Agreement set forth specific terms with

respect both to withdrawal of members and transfer of membership

interests.   Members could not withdraw from Treeco without the

prior consent of the manager.    However, under the Agreement “A

Member desiring to withdraw may offer his Units for sale to the

Company, in the person of the Manager, who shall have exclusive

authority on behalf of the Company to accept or reject the offer,

and to negotiate terms.”    Pertaining to transfer of interests,

the document recited as follows:

          No Member shall be entitled to transfer, assign,
     convey, sell, encumber or in any way alienate all or
     any part of the Member’s Interest except with the prior
     written consent of the Manager, which consent may be
     given or withheld, conditioned or delayed as the
     Manager may determine in the Manager’s sole discretion.

If a transfer was permitted in accordance with this provision,

the transferee would have the right to be admitted as a

substitute member.   If a transfer was made in violation of the
                                - 8 -

foregoing procedure, the transferee would be afforded no

opportunity to participate in the business affairs of the entity

or to become a member; rather, he or she would only be entitled

to receive the share of profits or distributions which otherwise

would have inured to the transferor.

     Among the rights afforded to members by the Operating

Agreement were the following:    (1) Voting members had the right

to remove the manager and elect a successor by majority vote; (2)

voting members had the right to amend the Operating Agreement by

an 80-percent majority vote; (3) voting and nonvoting members had

the right to access the books and records of the company; (4)

voting and nonvoting members had the right jointly to decide

whether the company would be continued following an event of

dissolution; and (5) after the tenure of A.J. Hackl as manager,

voting members could dissolve the company by an 80-percent

majority vote.

     As set forth in the Operating Agreement, Treeco was to be

dissolved upon the first to occur of four enumerated

circumstances:

          (i) While A.J. Hackl is the Manager, by his
     written determination that the Company should be
     dissolved;

          (ii) Following    the tenure of A.J. Hackl as
     Manager by a written   determination by Voting Members
     owning not less than   eighty percent (80%) of the Voting
     Units of the Company   that the Company should be
     dissolved;
                                - 9 -

          (iii) The occurrence of a Dissolution Event
     [defined as “the resignation, expulsion, bankruptcy,
     death, insanity, retirement, or dissolution of the
     Manager”] if the Company is not continued * * * [by a
     majority vote of the members within 90 days of the
     event]; or

          (iv) At such earlier time as may be provided by
     applicable law.

Upon dissolution, distributions in liquidation were to be made

first to creditors, then to repay member loans, and finally to

members with positive capital account balances in proportion

thereto.

     Subsequent to completion of the foregoing formalities,

petitioners on December 22, 1995, made further contributions to

Treeco.    On that date petitioners contributed cash in the amount

of $5,000,000 and publicly traded securities valued at

$2,918,956.   The cash and securities were held by Treeco to serve

as working capital and to finance additional purchases of tree

farm property.

     Then, on December 29, 1995, petitioners commenced a program

of gifting interests in Treeco to family members.   Petitioners

transferred 500 voting and 700 nonvoting units in Treeco to each

of their eight children and to the spouse of each such child.     At

that time, each donee executed an acceptance of the Treeco

Operating Agreement.   Petitioners reported the 1995 gifts of

Treeco units on timely filed gift tax returns and elected on

those returns to treat the gifts as made one-half by each of the
                               - 10 -

petitioners pursuant to section 2513.    Petitioners also treated

the gifts as qualifying for the annual exclusion of section

2053(b).   Respondent did not issue notices of deficiency to

petitioners for 1995.

     On January 18, 1996, Treeco purchased a third property in

Flager County, Florida (Flager County Farm), using $5,750,436 of

the LLC’s cash and securities.   The Flager County Farm consisted

of 8,382 acres and contained merchantable timber valued at

$23,638 at the time of sale.

     Thereafter, on March 5, 1996, petitioners continued their

program of gifting Treeco units with the gifts that are at issue

in this litigation.   Petitioners once again each gave 500 voting

and 750 nonvoting units in Treeco to each of their eight children

and to the spouses of such children.    Also on that date, A.J.

Hackl created the Albert James Hackl Irrevocable Trust

(Grandchildren’s Trust), for the benefit of petitioners’ minor

grandchildren.   At that time, petitioners each transferred 31,250

nonvoting units in Treeco to the Grandchildren’s Trust,

representing 1,250 units for each of their 25 minor

grandchildren.   Three of petitioners’ children were named as

trustees of the Grandchildren’s Trust and in that capacity

executed an acceptance of the Treeco Operating Agreement.

Petitioners reported the gifts made in 1996 on timely filed gift

tax returns and elected on those returns to treat the gifts as
                               - 11 -

made one-half by each of them pursuant to section 2513.      As

previously, annual exclusions were claimed under section 2503(b)

with respect to the gifts.    Respondent disallowed the exclusions

by separate notices of deficiency dated April 14, 2000.

Operations of Treeco, LLC, and Successor Entities

     On December 19, 1996, A.J. Hackl organized Hacklco, LLC, a

Georgia limited liability company, and in 1997, Treeco was

dissolved and merged into Hacklco, LLC.    Similarly, on May 20,

1997, Treesource, LLLP, a Georgia limited liability limited

partnership, was organized, and Hacklco was merged into this

entity in 1998.    These changes appear to have wrought no

alteration in the nature and operation of the Treeco enterprise

and, while enumerated for clarity, do not affect our analysis of

the gifted units.    Petitioners continued making gifts of voting

and nonvoting units of Treeco’s successors in interest in 1997

and 1998, resulting in petitioners’ children and their spouses

owning, at all times subsequent to January 2, 1998, 51 percent of

the voting power of Treesource.

     Treeco and its successors have at all times actively engaged

in tree farming.    Since operations commenced in 1995, Treeco and

its successors have planted approximately 8 to 10 million trees

on their lands.    A.J. Hackl, as manager of Treeco and its

successors, devotes approximately 750 to 1000 hours per year to

the farming operations.    In addition, Georgia Pacific Corporation
                              - 12 -

and F & W Forestry Services, Inc., were retained by Treeco to

provide consulting and management services for the tree farms.

Contained in the record are a Five-Year Timber Operating Budget

for the McIntosh County Farm, prepared by F & W Forestry

Services, and detailed forest management plans for the Putnam and

Flager County Farms, prepared by Georgia Pacific.   These

documents discuss, among other things, plantation thinning,

reforestation, fertilization, and capital improvements.     The F &

W Forestry Services budget projects losses through 2000 but

characterizes the McIntosh tract as having “great future income

potential”.   The Georgia Pacific plan describing the Putnam

property similarly states:   “These recommendations, if followed,

will provide you with a healthy, fast growing forest which will

lead to a steady stream of income in the future.”   A.J. Hackl

meets on a regular basis with consultants from Georgia Pacific

and F & W Forestry Services regarding maintenance of the tree

farms.   The parties have stipulated that he has always managed

Treeco and its successors with such care as an ordinarily prudent

person in a like position would use under similar circumstances.

     The primary business purpose of all three of the above

entities has been to acquire and manage plantation pine forests

for long-term income and appreciation for petitioners and their

heirs and not to produce immediate income.   Petitioners

anticipated that all three entities would operate at a loss for a
                                - 13 -

number of years, and therefore, they did not expect that these

entities would be making distributions to members during such

years.     Treeco reported losses in the amounts of $42,912,

$121,350, and $23,663 during 1995, 1996, and 1997, respectively.

Hacklco reported losses of $52,292 during 1997.     Treesource

reported losses in the amounts of $75,179, $153,643, and $95,1561

in 1997, 1998, and 1999, respectively.     Neither Treeco nor its

successors had at any time through April 5, 2001, generated net

profits or made distributions of cash or other property to

members.

                              Discussion

I.   Settled and Disputed Issues

     The parties have previously filed a Stipulation of Partial

Settlement, and a Supplemental Stipulation of Partial Settlement,

in which they agreed that the fair market value of both the

voting and nonvoting units of Treeco, LLC, was $10.43 per unit on

the date of the 1996 gifts at issue in these cases.     Accordingly,

the sole issue for determination by the Court is whether

petitioners’ gifts of units in Treeco qualify for the annual

exclusion provided by section 2503(b), a dispute which turns on



     1
       Although the parties stipulated that Treesource reported a
loss of $99,156 for 1999, Treesource’s 1999 return in fact
reflects a loss of $95,156. See Cal-Maine Foods, Inc. v.
Commissioner, 

, 195 (1989) (holding that stipulations
are properly disregarded where clearly contrary to evidence
contained in the record).
                              - 14 -

whether the transfers constitute gifts of a present interest for

purposes of the statute.   In this connection, the parties have

also stipulated that the Grandchildren’s Trust satisfies the

requirements of section 2503(c) such that the annual exclusion

will be applicable for gifts thereto provided that the gifts are

otherwise determined to be of a present interest.

      Additionally, to further clarify the issues, the parties

have stipulated that if the aforesaid question is decided in

petitioners’ favor, then in computing gift tax liability for

1996, the amounts of prior period taxable gifts reported on

petitioners’ 1996 returns shall be accepted as filed.

Conversely, if the above question is decided in favor of

respondent, the amounts of prior period taxable gifts reported on

petitioners’ 1996 returns shall be increased to reflect the

annual exclusions claimed by petitioners for gifts of Treeco

units in 1995.

II.   Statutory and Regulatory Law

      Section 2501 imposes a tax for each calendar year “on the

transfer of property by gift” by any taxpayer, and section

2511(a) further clarifies that such tax “shall apply whether the

transfer is in trust or otherwise, whether the gift is direct or

indirect, and whether the property is real or personal, tangible

or intangible”.   The tax is computed based upon the statutorily

defined “taxable gifts”, which term is explicated in section
                               - 15 -

2503.    Section 2503(a) provides generally that taxable gifts

means the total amount of gifts made during the calendar year,

less specified deductions.    Section 2503(b), however, excludes

from taxable gifts the first $10,000 “of gifts (other than gifts

of future interests in property) made to any person by the donor

during the calendar year”.    In other words, the donor is entitled

to an annual exclusion of $10,000 per donee for present interest

gifts.

     Regulations promulgated under section 2503 further elucidate

this concept of present versus future interest gifts, as follows:

          Future interests in property.--(a) No part of the
     value of a gift of a future interest may be excluded in
     determining the total amount of gifts made during the
     “calendar period” * * *. “Future interest” is a legal
     term, and includes reversions, remainders, and other
     interests or estates, whether vested or contingent, and
     whether or not supported by a particular interest or
     estate, which are limited to commence in use,
     possession, or enjoyment at some future date or time.
     The term has no reference to such contractual rights as
     exist in a bond, note (though bearing no interest until
     maturity), or in a policy of life insurance, the
     obligations of which are to be discharged by payments
     in the future. But a future interest or interests in
     such contractual obligations may be created by the
     limitations contained in a trust or other instrument of
     transfer used in effecting a gift.

          (b) An unrestricted right to the immediate use,
     possession, or enjoyment of property or the income from
     property (such as a life estate or term certain) is a
     present interest in property. * * * [Sec. 25.2503-3,
     Gift Tax Regs.]
                                - 16 -

III.   Caselaw Development

       The foregoing statutory and regulatory pronouncements have

been the subject of repeated interpretation by the Federal

courts.    Much of the litigation has occurred in the factual

context of gifts in trust, including a series of seminal

decisions by the Supreme Court in the 1940s.    Commissioner v.

Disston, 

(1945); Fondren v. Commissioner, 

(1945); Ryerson v. United States, 

(1941); United

States v. Pelzer, 

(1941); Helvering v. Hutchings,

(1941); see also Calder v. Commissioner, 

(1985); Blasdel v. Commissioner, 

(1972), affd. 

(5th Cir. 1973).    Additionally, parallel to the

developments in the trust area and incorporating many of the same

principles, a line of cases has addressed the related situation

where transfers of property are made to an entity with

preexisting interest-holders.    See, e.g., Stinson Estate v.

United States, 

(7th Cir. 2000); Chanin v. United

States, 

, 

(1968).

       In both scenarios, the gift in question takes the form of an

indirect gift of the underlying property to the beneficiaries of

the trust or to those holding interests in the entity.       Helvering
                              - 17 -

v. Hutchings, supra at 398; Chanin v. United 

at

975; Blasdel v. 

at 1022.   Furthermore, it has

become well settled that to qualify as a present interest, such a

gift must confer on the donee not just vested rights but a

substantial present economic benefit by reason of use,

possession, or enjoyment of either the property itself or income

from the property.   Fondren v. 

at 20-21;

Estate of Holland v. Commissioner, T.C. Memo. 1997-302.

     The cases have also established through oft-repeated

directives that where the use, possession, or enjoyment is

postponed to the happening of a contingent or uncertain future

event, such as where distributions of property or income will

occur only at the discretion of a trustee or upon joint action of

entity interest holders, or where there is otherwise no showing

from facts and circumstances of a steady flow of funds from the

trust or entity, the gift will fail to qualify for the section

2503(b) exclusion.   Commissioner v. Disston, supra at 449;

Ryerson v. United 

at 406-408; United States v.

at 403-404; Chanin v. United 

at 976;

Calder v. 

at 727-730.
                               - 18 -

      The taxpayer bears the burden of showing that the gift at

issue is other than of a future interest.2   Rule 142(a);

Commissioner v. Disston, supra at 449; Stinson Estate v. United

at 848.

IV.   Contentions of the Parties

      Against the foregoing background, we turn to the contentions

of the parties before us.    Petitioners contend their transfers of

units in Treeco are properly characterized as present interest

gifts.    Petitioners emphasize that they made direct, outright

transfers of the Treeco units, which are personal property

separate and distinct under Indiana law from Treeco’s assets.

Petitioners further maintain that the units had a substantial and

stipulated value; that petitioners’ transfers placed no

restrictions on the donees’ interests in the units; and that the

donees upon transfer acquired all rights in and to the gifted

units, which rights were identical to those petitioners had in

the units they retained.    Hence, according to petitioners, their

transfers involved no postponement of rights, powers, or

privileges that would cause the gifts to constitute future

interests.


      2
       Cf. sec. 7491, which is effective for court proceedings
that arise in connection with examinations commencing after July
22, 1998, and which can operate to place the burden on the
Commissioner in enumerated circumstances. Petitioners here have
not contended, nor is there evidence, that their examinations
commenced after July 22, 1998, or that sec. 7491 applies in these
cases.
                             - 19 -

     Petitioners also argue that the cases involving indirect

transfers through trusts and corporations are inapplicable to the

direct transfers at issue here.   Petitioners allege:

          When an equity interest in a business (or any
     property) is transferred outright, the donee receives
     all rights in and to the equity interest (or other
     property) upon transfer, whatever those rights may be.
     The lack of any “postponement” of the donee’s rights to
     enjoyment of the equity interest (or other property) is
     manifestly clear. * * *


From the foregoing premise, petitioners maintain that the

standards referenced to analyze whether rights are postponed when

interests in the subject property are held only indirectly

through the conduit of a trust or corporate entity have no place

in the present situation.

     Conversely, respondent argues that petitioners’ transfers of

Treeco units fail to qualify as gifts of present interests.

Respondent avers that because of the restrictions contained in

the Treeco Operating Agreement, the transfers fell short of

conferring on the donees the requisite immediate and

unconditional rights to the use, possession, or enjoyment of

property or the income from property.   Unlike petitioners,

respondent finds the body of law regarding indirect transfers to

constitute “substantial analogous authority” and the principles

espoused therein to control the outcome of these cases.

Specifically, respondent emphasizes the requirement of present

economic benefit and contends that the inability of the donees to
                                    - 20 -

freely transfer the units or to compel distributions from the

entity prevented them from receiving any such benefit on account

of the transfers.     Thus, in respondent’s view, the gifts

postponed any economic benefit and therefore were of future

interests.

V.   Analysis

      A.     Applicable Standards

      As framed by the parties’ contentions, a threshold issue we

must address is the extent to which the standards expressed in

the decided cases interpreting section 2503(b) are pertinent

here.      As petitioners correctly note, the property with which we

are concerned in this matter is an ownership interest in an

entity itself, rather than an indirect gift in property

contributed to the entity.      Treeco was duly organized and

operating as an LLC, units of which under Indiana law are

personal property separate and distinct from the LLC’s assets.

See Ind. Code Ann. secs. 23-18-1-10, 23-18-6-2 (West 1994).

Nonetheless, while State law defines property rights, it is

Federal law which determines the appropriate tax treatment of

those rights.      United States v. Natl. Bank of Commerce, 

, 722 (1985); Knight v. Commissioner, 

, 513

(2000).      It thus is Federal law which controls whether the

property rights granted to the donees as LLC owners under State
                               - 21 -

law were sufficient to render the gifts of present interests

within the meaning of section 2503(b).    See United States v.

.

       Moreover, we conclude that the relevant body of Federal

authority encompasses the general interpretive principles

developed through the extensive litigation involving indirect

gifts.    To disregard longstanding directives that a present

interest gift exists only where a donee receives noncontingent,

independently exercisable rights of substantial economic benefit

cannot be justified in the face of either the language used by

the Supreme Court or the subsequent application of such language.

See Fondren v. 

; Ryerson v. United

; United States v. 

at 403-

404.

       For example, in Fondren v. 

at 20-21, the

Court explains the meaning of future versus present interest in

general terms, stating:

       it is not enough to bring the exclusion into force that
       the donee has vested rights. In addition he must have
       the right presently to use, possess or enjoy the
       property. These terms are not words of art, like “fee”
       in the law of seizin * * *, but connote the right to
       substantial present economic benefit. The question is
       of time, not when title vests, but when enjoyment
       begins. Whatever puts the barrier of a substantial
       period between the will of the beneficiary or donee now
       to enjoy what has been given him and that enjoyment
       makes the gift one of a future interest within the
       meaning of the regulation.
                                - 22 -

     The Court thus says that the terms “use, possess or enjoy”

connote the right to substantial present economic benefit.    This

phraseology is broad and is in no way limited to the factual

context presented.    It defines the root words of the regulatory

standard which no party disputes is a generally applicable and

valid interpretation of section 2503(b).    See sec. 25.2503-3,

Gift Tax Regs.    We therefore would be hard pressed to construe

“use, possession, or enjoyment” as meaning something different or

less than substantial present economic benefit simply because of

a shift in the factual scenario or form of gift to which the test

is being applied.    Accordingly, we are satisfied that section

2503(b), regardless of whether a gift is direct or indirect, is

concerned with and requires meaningful economic, rather than

merely paper, rights.

     Furthermore, this idea is buttressed by recognition that in

an earlier case we quoted the very language from Fondren v.

, set forth above in a context that involved

outright gifts.     In Estate of Holland v. Commissioner, T.C. Memo.

1997-302, we quoted the Fondren text en route to concluding that

outright gifts in the form of $10,000 checks, which had been

properly endorsed and deposited, were gifts of a present

interest.

     In a similar vein, previous caselaw from this Court reveals

that the principles established in United States v. 

                              - 23 -

at 403-404, and Ryerson v. United 

at 408, regarding

contingency and joint action are not restricted in their

applicability to indirect gift situations.   In Skouras v.

Commissioner, 

, 524-525 (1950), affd. 

(2d

Cir. 1951), the taxpayer assigned outright all incidents of

ownership in several insurance policies on his life to his five

children jointly and continued to pay the premiums thereon.

Given these facts, we, citing United States v. 

,

stated broadly that “where the use, possession, or enjoyment of

the donee is postponed to the happening of future uncertain

events the interest of the donee is a future interest within the

meaning of the statute.”   

  Then, relying on Ryerson

v. United 

, and in spite of the taxpayer’s argument

that “there was not a grant to trust as in the Ryerson case”, we

ruled that the taxpayer, by “making the assignments to his five

children jointly, had postponed the possession and enjoyment of

the rights and interests in and to the policies or the proceeds

thereof until his death or until such time as the children,

acting jointly, might change or negative the action he had thus

taken.”   

     In sum, we reject petitioners’ contention that when a gift

takes the form of an outright transfer of an equity interest in a

business or property, “No further analysis is needed or

justified.”   To do so would be to sanction exclusions for gifts
                               - 24 -

based purely on conveyancing form without probing whether the

donees in fact received rights differing in any meaningful way

from those that would have flowed from a traditional trust

arrangement.

     Petitioners’ advocated approach could also lead to

situations where gift tax consequences turned entirely upon

distinctions in the ordering of transactions, rather than in

their substance.   For example, while petitioners contributed

property to an LLC and then gifted ownership units to their

children and grandchildren, a similar result could have been

achieved by first transferring ownership units and then making

contributions to the entity.   Yet petitioners would apparently

have us decide that the latter scenario falls within the rubric

of established precedent while the former is independent thereof.

We decline to take such an artificial view.

     We are equally unconvinced by petitioners’ attempts to avoid

the principles discussed above with the assertion that

     the postponement question deals with rights to present
     use, possession or enjoyment of the transferred
     property, not the likelihood of the actual use,
     possession, or enjoyment of the property. See, Estate
     of Cristofani v. Comm’r, 

(1991); Crummey v.
     Comm’r, 

(9th Cir. 1968); Kieckhefer v.
     Comm’r, 

(7th Cir. 1951); Gilmore v.
     Comm’r, 

, 522 (6th Cir. 1954) * * *

     Each of the above-cited cases involved trusts in which

beneficiaries were given an absolute right to demand

distributions and have not been interpreted to establish a rule
                                - 25 -

inconsistent with those enunciated by the Supreme Court.    See

Rassas v. Commissioner, 

, 613 (7th Cir. 1952)

(distinguishing Kieckhefer v. 

), affg. 

(1951).   Thus, instead of adopting an approach which would

undermine the purpose and integrity of the section 2503(b)

exclusion, we for the reasons explained above conclude that

petitioners are not by virtue of making outright gifts relieved

of showing that such gifts in actuality involved rights

consistent with the standards for a present interest set forth in

regulations and existing caselaw.

     To recapitulate then, the referenced authorities require a

taxpayer claiming an annual exclusion to establish that the

transfer in dispute conferred on the donee an unrestricted and

noncontingent right to the immediate use, possession, or

enjoyment (1) of property or (2) of income from property, both of

which alternatives in turn demand that such immediate use,

possession, or enjoyment be of a nature that substantial economic

benefit is derived therefrom.    In other words, petitioners must

prove from all the facts and circumstances that in receiving the

Treeco units, the donees thereby obtained use, possession, or

enjoyment of the units or income from the units within the above-

described meaning of section 2503(b).
                                - 26 -

     B.    Application to the Gifted Property

     Beginning with the property itself, we reiterate that the

donees in these cases did receive, at least in the sense of

title, outright possession of the Treeco units.      Nonetheless, as

previously explained, the simple expedient of paper title does

not in and of itself create a present interest for purposes of

section 2503(b) unless all the facts and circumstances establish

that such possession renders an economic benefit presently

reachable by the donees.     It therefore is incumbent upon

petitioners to show the present (not postponed) economic benefit

imparted to the donees as a consequence of their receipt of the

Treeco units.

     In considering this issue, we first address the role of the

Treeco Operating Agreement in our analysis.      Petitioners state

that each gifted Treeco unit “represented a significant bundle of

legal rights in the venture, rights which are defined by the

Operating Agreement, Treeco’s Articles of Organization, and

Indiana statutory and common law”.       At the same time, petitioners

aver:     “The postponement question is not concerned with

contractual rights inherent in the transferred property, but

rather in whether, in the transfer of the property, the

transferor imposed limitations or restrictions on the present

enjoyment of the property.”     They then go on to quote the

language from section 25.2503-3(a), Gift Tax Regs., which
                              - 27 -

references contractual rights in a bond, note, or insurance

policy that do not result in a future interest characterization.

Hence, while petitioners seem to acknowledge that the Operating

Agreement in large part defines the nature of the property

received by the donees, they also apparently would have us ignore

any provisions of the Agreement which limited the ability of the

donees to presently recognize economic value as akin to the

contractual rights mentioned in the regulation.

     However, petitioners’ reliance on section 25.2503-3(a), Gift

Tax Regs., is misplaced.   This Court has previously taken a much

narrower view of the cited regulatory language.   In Estate of

Vose v. Commissioner, T.C. Memo. 1959-175, vacated and remanded

on another issue 

(1st Cir. 1960), we opined that the

regulations were “designed to cover notes and bonds which,

although perhaps not containing all of the attributes of

negotiable instruments, are at least definitely enforceable legal

obligations payable on a day certain and immediately disposable

by the obligee.”   LLC units hardly fall within these parameters,

and we observe that the quoted reasoning is consistent with our

focus on requiring some presently reachable economic benefit.

     Furthermore, petitioners’ attempts to find in these

regulations support for a distinction between limitations

contractually inherent in the transferred property and

restrictions imposed upon transfer are not well taken.   All facts
                              - 28 -

and circumstances must be examined to determine whether a gift is

of a present interest within the meaning of section 2503(b), and

this will be true only where all involved rights and

restrictions, wherever contained, reveal a presently reachable

economic benefit.   Since here the primary source of such rights

and restrictions is the Treeco Operating Agreement, its

provisions, in their cumulative entirety, must largely dictate

whether the units at issue conferred the requisite benefit.

Accordingly, we now turn to the Operating Agreement to flesh out

the nature of the property rights transferred to the donees at

the time of their receipt of the Treeco units and whether such

rights rose to the level of a present interest on account of

either the units themselves (considered in this section) or the

income therefrom (considered in section IV.C., infra).

     Petitioners offer the following summary of the rights

inuring to the donees upon their receipt of the LLC units:

          Upon transfer the Donees acquired membership
     rights and obligations in the gifted Treeco units which
     were identical to those which Petitioners had in the
     Treeco units they retained, including the rights under
     the Treeco Operating Agreement to have all net income
     or capital gains allocated, all cash distributions
     made, and net loss allocated (subject to an allocation
     of losses to A.J. Hackl for a period which was designed
     to ensure the current deductibility of Treeco losses
     for federal income tax purposes) based on the number of
     units held in relation to the total number of units,
     the right to have capital accounts established and
     maintained on behalf of each member in the manner
     provided by Treas. Reg. § 1.704-1(b)(2)(iv), the right
     to offer units for sale to Treeco, or to sell their
     units to third parties (subject to manager approval),
                              - 29 -

     the rights (voting members) to remove the manager,
     amend Treeco’s organizational documents, dissolve
     Treeco, approve salaries or bonuses paid to any
     manager, etc., all of which rights are entitled to
     court enforcement. * * *

     At the outset, we note that petitioners’ repeated assertions

that the rights conferred on the donees were identical to those

retained by the donors have little bearing on our analysis.     A

similar fact did not dissuade us from finding only a future

interest in Blasdel v. Commissioner, 

(1972), and we

are satisfied that it should be given no more weight here.

     The taxpayers in Blasdel v. 

at 1015-

1016, 1018, created a trust, named themselves as 2 of the trust’s

beneficiaries, and conveyed beneficial interests to 18 other

family members.   Although we explicitly observed that “the donees

acquired their fractional beneficial interests subject to the

same terms and limitations as petitioners held theirs”, we

nonetheless based our decision on the nature of those terms,

without regard to any identity of rights between donors and

donees.   

see also Hamilton v. United States,

, 1218 (9th Cir. 1977).   In addition, given the

authority granted here to A.J. Hackl as manager, we observe that

the alleged equality, when viewed from a practical standpoint, is

less than petitioners would have us believe.

     Concerning the specific rights granted in the Operating

Agreement, we are unable to conclude that these afforded a
                              - 30 -

substantial economic benefit of the type necessary to qualify for

the annual exclusion.   While we are aware of petitioners’

contentions and the parties’ rather conclusory stipulations that

Treeco was a legitimate operating business entity and that

restrictive provisions in the Agreement are common in closely

held enterprises and in the timber industry, such circumstances

(whether or not true) do not alter the criteria for a present

interest or excuse the failure here to meet those criteria.

     As we consider potential benefits inuring to the donees from

their receipt of the Treeco units themselves, we find that the

terms of the Treeco Operating Agreement foreclosed the ability of

the donees presently to access any substantial economic or

financial benefit that might be represented by the ownership

units.   For instance, while an ability on the part of a donee

unilaterally to withdraw his or her capital account might weigh

in favor of finding a present interest, here no such right

existed.   According to the Agreement, capital contributions could

not be demanded or received by a member without the manager’s

consent.   Similarly, a member desiring to withdraw could only

offer his or her units for sale to the company; the manager was

then given exclusive authority to accept or reject the offer and

to negotiate terms.   Hence some contingency stood between any

individual member and his or her receipt from the company of

economic value for units held, either in the form of approval
                             - 31 -

from the current manager or perhaps in the form of removal of

that manager by joint majority action, followed by the

appointment of and approval from a more compliant manager.

Likewise, while a dissolution could entitle members to

liquidating distributions in proportion to positive capital

account balances, no donee acting alone could effectuate a

dissolution.

     Moreover, in addition to preventing a donee from

unilaterally obtaining the value of his or her units from the

LLC, the Operating Agreement also foreclosed the avenue of

transfer or sale to third parties.    The Agreement specified that

“No Member shall be entitled to transfer, assign, convey, sell,

encumber or in any way alienate all or any part of the Member’s

Interest except with the prior written consent of the Manager,

which consent may be given or withheld, conditioned or delayed as

the Manager may determine in the Manager’s sole discretion.”

Hence, to the extent that marketability might be relevant in

these circumstances, as potentially distinguishable on this point

from those in indirect gift cases such as Chanin v. United

, and Blasdel v. 

at

1021-1022 (both dismissing marketability as insufficient to

create a present interest where the allegedly marketable

property, an entity or trust interest, differed from the

underlying gifted property), the Agreement, for all practical
                               - 32 -

purposes, bars alienation as a means for presently reaching

economic value.    Transfers subject to the contingency of manager

approval cannot support a present interest characterization, and

the possibility of making sales in violation thereof, to a

transferee who would then have no right to become a member or to

participate in the business, can hardly be seen as a sufficient

source of substantial economic benefit.    We therefore conclude

that receipt of the property itself, the Treeco units, did not

confer upon the donees use, possession, or enjoyment of property

within the meaning of section 2503(b).

     C.    Application to Income From the Gifted Property

     Turning then to whether the gifts of Treeco units afforded

to the donees the right to use, possession, or enjoyment of

income therefrom, we again answer this question in the negative.

As before, broadly applicable standards and reasoning derived

from both the trust cases and the cases involving gifts to a

partnership or corporate entity call for this result.

     In particular, this Court has distilled caselaw in these

areas into a three-part test for ascertaining whether rights to

income satisfy the criteria for a present interest under section

2503(b).    Calder v. Commissioner, 

.     The

taxpayer must prove, based on surrounding circumstances and the

trust agreement:    “(1) That the trust will receive income, (2)

that some portion of that income will flow steadily to the
                                - 33 -

beneficiary, and (3) that the portion of income flowing out to

the beneficiary can be ascertained.”     Id.; see also Md. Natl.

Bank v. United States, 

, 1080-1081 (4th Cir. 1979).

     Here, the parties stipulated that the primary business

purpose of Treeco and its successors was to acquire and manage

timberland for long-term income and appreciation, “and not to

produce immediate income.”    The parties further stipulated:

“Petitioners anticipated that all three entities would operate at

a loss for a number of years, and therefore, they did not expect

that these entities would be making distributions to members

during such years.”   The record then validates these assumptions

by stipulating to losses, negative cashflows, and an absence of

distributions from 1995 to April of 2001.    Hence, even the first

receipt of income prong has not been established on the facts

before us.

     Furthermore, even if petitioners had shown that Treeco would

generate income at or near the time of the gifts, the record

fails to establish that any ascertainable portion of such income

would flow out to the donees.    Members would receive income from

Treeco only in the event of a distribution.    However, the

Operating Agreement states that distributions were to be made in

the manager’s discretion.    This makes the timing and amount of

distributions a matter of pure speculation and also raises again

the specter of some form of joint action to oust a manager whose
                                - 34 -

distribution policy failed to satisfy members.     As a result, the

facts in this case convince us that any economic benefit the

donees may ultimately obtain from their receipt of the Treeco

units is future, not present.     In other words, the economic

benefit has been postponed in a manner contrary to the regulatory

and judicial pronouncements establishing the meaning of a present

interest gift for purposes of section 2503(b).

      Additionally, we note that the fact the parties have

stipulated a value for the Treeco units does not affect the

foregoing analysis.   Although petitioners mention this fact

repeatedly, it has long been established that “the crucial thing

is postponement of enjoyment, not the fact that the beneficiary

is specified and in esse or that the amount of the gift is

definite and certain.”   Fondren v. 

-

27.   Entity interest values can be based, as the facts and

circumstances indicate is the case here, on the worth of

underlying assets and the future income potential they represent,

neither of which may be presently reachable.     We therefore hold

that petitioners are not entitled to exclusions under section

2503(b) for their gifts of Treeco units.

      To reflect the foregoing,



                                           Decisions will be entered

                                      under Rule 155.