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T.C. Memo. 2007-169

UNITED STATES TAX COURT

ESTATE OF SYLVIA GORE, DONOR, DECEASED, PAMELA POWELL,

PERSONAL REPRESENTATIVE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

ESTATE OF SYLVIA GORE, DECEASED, PAMELA POWELL,

PERSONAL REPRESENTATIVE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 467-02, 468-02.

Filed June 27, 2007.

Paul R. Hodgson and James E. Poe, for petitioner.

Elizabeth Downs, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge:

Respondent determined a deficiency of

$1,071,650 in the Federal estate tax of the Estate of Sylvia Gore

- 2 (the estate).1

By separate notice of deficiency, respondent

determined a Federal gift tax deficiency of $918,962 with respect

to Sylvia Gore’s 1997 taxable year.

The personal representative

of the estate filed separate petitions to redetermine the

deficiencies of the estate.

These cases were consolidated for

purposes of trial, briefing, and opinion pursuant to Rule 141(a)

because they present common questions of fact and law.

Hereinafter, we shall refer to these consolidated cases as this

case.

All section references are to the Internal Revenue Code

(Code) in effect for June 12, 1997, the date of Sylvia Gore’s

death, and for the taxable year 1997, and all Rule references are

to the Tax Court Rules of Practice and Procedure.

- 3 After concessions,2 the issues presented are:3

In the estate tax notice of deficiency, respondent

determined that the value of a $250,000 St. Francis Hospital,

Inc. bond was includable in Sylvia Gore’s (decedent’s) gross

estate under sec. 2038, or, alternatively, under either sec. 2031

or 2033. In the stipulation of facts, petitioner concedes that

the bond is includable in decedent’s gross estate.

In the estate tax notice of deficiency, respondent

disallowed a deduction of $19,084 for a note payable from

decedent. In the stipulation of facts, petitioner concedes that

the estate is not entitled to deduct $19,084 as a debt of

decedent.

In the explanation of adjustments section of the estate tax

notice of deficiency, respondent determined that the fair market

value of the Gore Family Limited Partnership (GFLP) was

$4,997,280. However, respondent used $4,997,290 as the value of

GFLP in computing the transfers during decedent’s life reflected

in the explanation of items. Although petitioner raised the

issue of this $10 discrepancy in the petition, petitioner

abandoned the issue in petitioner’s trial memorandum.

During the audit in this case, a $65,000 Grand River Dam

Authority bond that had not been reported as an asset of the

estate for estate tax purposes was discovered. The parties agree

that the Grand River Dam Authority bond was not transferred to

GFLP and is includable in decedent’s gross estate under sec.

2033.

Petitioner has raised two additional issues, but we need

not decide them in this opinion:

(1) Petitioner raised the issue of whether respondent

allowed the maximum credit for State death tax under sec. 2011.

The estate claimed a credit of $56,813 for State death taxes on

Form 706, United States Estate (and Generation-Skipping Transfer)

Tax Return, and respondent has not disallowed that credit.

Petitioner represents that Oklahoma has issued alternative orders

assessing additional death tax liabilities, and resolution of the

estate’s State death tax liability is pending before the Oklahoma

Tax Commission. Respondent correctly notes that the maximum

amount of credit allowed under sec. 2011 depends on the size of

the adjusted taxable estate for Federal estate tax purposes.

Respondent represents that he will allow an additional credit for

(continued...)

- 4 (1) Whether the values of the assets of the Sidney Gore

Marital Fund (Marital Fund assets) are includable in Sylvia

Gore’s (decedent’s) gross estate under section 2033 or section

2041;

(2) alternatively, if decedent completed a transfer of

Marital Fund assets to the Gore Family Limited Partnership (GFLP)

before her death, whether the values of those assets are

includable in decedent’s gross estate under sections 2041, 2036,

and/or 2038;

(3) alternatively, if the value of the property to be

included in decedent’s estate is that of a 32.667-percent limited

partnership interest in GFLP, whether the value of that interest

on June 12, 1997, was $1,260,472, as respondent contends, or

$740,036, the value reported on the estate’s Federal estate tax

return;

(4) if the values of the Marital Fund assets are includable

in decedent’s gross estate under sections 2033, 2036, 2038,

(...continued)

State death tax, if it is paid and claimed by the estate within

the period specified in sec. 2011(c)(1).

(2) Petitioner also raised the issue of whether respondent

erred in not applying a $192,800 Federal estate tax payment made

on July 14, 2000, to reduce the amount of the estate tax

deficiency respondent determined in the notice of deficiency

dated Sept. 26, 2001. Respondent represents that the estate’s

unassessed prepayment of estate tax has been credited to the

estate’s account and will be treated as a July 14, 2000, payment

in computing any outstanding estate tax liability as a result of

this opinion.

- 5 and/or 2041(a)(2), whether decedent’s gross estate should be

reduced by $46,664, the amount of a note payable to decedent from

GFLP;

(5) if decedent completed a transfer of the Marital Fund

assets to GFLP and made gifts of GFLP limited partnership

interests to the trusts for decedent’s children before her death,

whether the gifts to the trusts should be treated, for valuation

purposes, as indirect gifts of Marital Fund assets to GFLP’s

partners’ capital accounts or as direct gifts of limited

partnership interests;

(6) whether the value of a Smith Barney investment account

($102,139) is includable in decedent’s gross estate under section

2033;

(7) whether decedent’s estate is entitled to deduct

administration expenses in excess of those already claimed and

allowed under section 2053; and

(8) whether decedent’s estate is entitled to deduct ad

valorem tax of $3,367 under section 2053.

FINDINGS OF FACT

Background

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

The stipulation of facts and the supplemental stipulation of

facts are incorporated herein by this reference.

Decedent was

domiciled in Tulsa, Oklahoma, at the time of her death, and her

- 6 estate is administered there.

The estate’s personal

representative, Pamela Powell (Ms. Powell or petitioner), resided

in Tulsa, Oklahoma, when she petitioned the Court on behalf of

the estate.

Decedent died on June 12, 1997, and was the surviving spouse

of Sidney Gore, who died on January 25, 1995.

Decedent and

Sidney Gore were married for 49 years and had two children,

Michael Gore (Mr. Gore) and Ms. Powell, and one grandchild, AP,

the son of Ms. Powell.

During his lifetime Sidney Gore was involved in the oil

production business.

At the time of his death, the bulk of his

assets consisted of investments in oil companies and in

Government bonds.

Sidney Gore had lived a frugal life and had

accumulated considerable wealth, but he did not share the details

of his finances with his family members or discuss his financial

matters with them.

Decedent did not work outside of the home and did not

accumulate substantial assets of her own during her marriage.

Neither decedent nor her children participated in Sidney Gore’s

business activities or in the management of his investments, and

they had little knowledge of his financial affairs.

Estate Plans of Sidney Gore and Decedent

On October 20, 1988, Sidney Gore executed a Declaration of

Trust Creating the Sidney Gore Trust (Sidney Gore Trust

- 7 declaration), in which he appointed himself trustee and stated

his intention to fund the trust with $100 and “all of the

Properties, Assets and Securities described in ‘Schedule A’”.4

The Sidney Gore Trust declaration further provided that Sidney

Gore retained the power to revoke the Sidney Gore Trust and that

he was entitled to all trust income during his life.

The Sidney Gore Trust declaration also provided that, upon

Sidney Gore’s death, decedent would become the successor trustee

of the Sidney Gore Trust and that after debts, taxes, and

administration costs had been paid, the trust would be divided

into two shares or funds--the Sidney Gore Marital Fund (Marital

Fund) and a credit shelter fund to be known as the Sidney Gore

Family Fund (Family Fund).

The Family Fund was to contain

property in a dollar amount equal to that which could pass free

of the Federal estate tax by reason of the unified credit, and

the Marital Fund was to contain the balance of the Sidney Gore

Trust assets.

With regard to the principal and income of the Marital Fund,

the Sidney Gore Trust declaration provided, in pertinent part, as

follows:

(a) Commencing at my death and during the life of

my Wife, the Trustees shall pay the income to my Wife

in monthly or more frequent installments as may be

convenient to her.

Schedule A was not attached to the copy of the Sidney Gore

Trust declaration in the record.

- 8 (b) The Trustees also shall pay to my Wife such

amounts, without limitation, from the principal of the

Marital Fund, as she from time to time may direct by

writing filed with the Trustees, or if she is acting as

a Co-Trustee hereunder by writing filed with the Trust

Records, and copy thereof delivered to the Co-Trustee.

may from time to time pay to my Wife such amounts from

the principal of the Marital Fund, as they deem

necessary for her support, maintenance, health and

reasonable comfort, taking into consideration the

standard of living to which she is accustomed at my

death.

(e) My Wife shall have and is hereby granted the

power to appoint the principal and any undistributed

income, to any person exercisable only by a provision

in the Last Will and Testament of my Wife expressly

exercising said power under the right hereby granted.

(f) Upon the death of my Wife, the Trustees shall

distribute the then remaining principal and

undistributed income in the Marital Trust, to such

appointee or appointees (including the Estate of my

Wife), in such manner as my Wife may appoint by her

Last Will and Testament, and, to the extent that my

Wife shall fail validly to exercise said Power of

Appointment, the principal and any accrued or

undistributed income, shall be distributed to the

Trustees of the Family Fund, to be administered and

distributed as herein provided for the Family Fund.

All Payments made by the Trustees to my Surviving

Wife shall be made first out of the Sidney Gore Marital

Fund, both income and principal, until said Fund is

completely exhausted. Thereafter, if necessary,

payments may be made from the Family Fund.

With regard to the principal and income of the Family Fund,

the Sidney Gore Trust declaration provided that, during the life

of decedent:

- 9 (a) The Trustees may, if the Marital Fund is

exhausted, pay the income to my Wife, in monthly or

more frequent installments as may be convenient to her.

(b) In addition to the said payments, if the

marital fund is exhausted, the Trustees may from time

to time pay to my Wife such amounts from the principal

of the Family Fund, as they deem necessary for her

support, maintenance, health and reasonable comfort,

taking into consideration the standard of living to

which she is accustomed at my death.

The Sidney Gore Trust declaration further provided that after

decedent’s death, the lesser of $100,000 or one-fourth of the

assets remaining in the Family Fund would be distributed to each

of Mr. Gore and Ms. Powell, and the balance of the assets would

be divided equally into two separate funds--the Michael Gore Fund

and the Pamela M. Gore Fund.5

On October 20, 1988, Sidney Gore executed his Last Will and

Testament.

In his will, Sidney Gore appointed decedent as

executrix, and he bequeathed all personal property to her.

The

will devised the residue of his estate to decedent, as the

successor trustee of the Sidney Gore Trust, to be held and

distributed in accordance with the Sidney Gore Trust declaration.

Also on October 20, 1988, decedent executed a Declaration of

Trust Creating the Sylvia Gore Trust (Sylvia Gore Trust

declaration), which contained provisions substantially identical

to those of the Sidney Gore Trust declaration, and a Last Will

We refer to Pamela M. Gore as Pamela Powell or Ms. Powell

throughout this opinion.

- 10 and Testament, which contained provisions substantially identical

to those of Sidney Gore’s will.

The Sylvia Gore Trust

declaration named decedent as trustee of the Sylvia Gore Trust

and provided that the trust would be funded with $100 and “all of

the Properties, Assets and Securities described in ‘Schedule

A’”.6

The Sylvia Gore Trust declaration also provided that

decedent retained the power to revoke the Sylvia Gore Trust and

was entitled to all trust income during her life.

Several years later, on January 24, 1995, Sidney Gore met

with his accountant, Cecilia Bowers, in the hospital where he was

hospitalized.

On several previous occasions, Ms. Bowers had

discussed with Sidney Gore her belief that the Sidney Gore Trust

was not funded.7

At the January 24 meeting, Sidney Gore

expressed to Ms. Bowers his concerns about preserving the wealth

he had accumulated through his life’s work, protecting his assets

from waste, and conserving them for future generations.

Sidney

Gore also expressed to Ms. Bowers his concern about decedent’s

future needs.

He wanted to ensure that decedent would be

financially secure after his death and that his assets were made

available to her for that purpose.

Schedule A was not attached to the copy of the Sylvia Gore

Trust declaration in the record.

Neither party contends that the Sidney Gore Trust was not

funded, and both parties assume, for purposes of this case, that

the Sidney Gore Trust was funded at the time of his death.

- 11 After Sidney Gore’s death on January 25, 1995, and in

response to his concerns, Ms. Bowers first proposed the idea of a

limited partnership to Ms. Powell and Mr. Gore and later

discussed it with decedent.

Ms. Bowers had little experience

with family limited partnerships and had never recommended one to

a client before she made the proposal to the Gore children, so

she recommended that Ms. Powell, Mr. Gore, and decedent retain an

attorney to further advise them about a limited partnership.

Ms.

Powell and Mr. Gore ultimately engaged the services of attorneys

John L. Boyd and Jim Bishop.

On December 11, 1996, the Estate of Sidney Gore filed a

General Inventory and Appraisement in the District Court for

Tulsa County, State of Oklahoma (district court).

The inventory

reported the total value of Sidney Gore’s estate as $4,568,204.

Formation of GFLP

On December 19, 1996, Ms. Powell and Mr. Gore executed a

Certificate of Limited Partnership for GFLP (certificate), which

they filed with the secretary of state of the State of Oklahoma.

The certificate set forth the name of the partnership, designated

John L. Boyd as its service agent, named Ms. Powell and Mr. Gore

as the general partners, and provided that the partnership was to

exist for 49 years and 12 days commencing on December 19, 1996.8

Stipulation 22 erroneously states that the commencement

date specified in the certificate is Dec. 26, 1996.

- 12 Although Ms. Bowers had consulted decedent about forming GFLP,

decedent did not participate in its formation.

On December 26,

1996, the secretary of state for the State of Oklahoma issued a

formal certificate.9

On December 26, 1996, Ms. Powell and Mr. Gore executed the

GFLP Partnership Agreement (partnership agreement).

The

partnership agreement provided that GFLP was formed for

investment purposes and that profits and losses would be

allocated in proportion to the capital accounts of the partners.

With regard to initial capital contributions to GFLP, the

partnership agreement provided, in part, the following:

Each Partner shall make an initial contribution to the

capital of the Partnership, simultaneously with the

execution of this Agreement, in the amount shown on

Schedule A. In consideration, each Partner shall be

issued such number of units of Partnership interest

(“Partnership Units”) as is indicated on Schedule A,

consisting of the number of units of General

Partnership interest (each a “General Partnership

Unit”) and units of Limited Partnership interest (each

a “Limited Partnership Unit”) shown on Schedule A.

Each Partnership Unit shall represent equivalent

economic interests in the Partnership.

Schedule A to the partnership agreement named only Mr. Gore and

Ms. Powell as general partners and did not list the names of any

limited partners.

Schedule A showed that Mr. Gore and Ms. Powell

had contributed $500 each for a general partnership unit.

Respondent does not dispute that GFLP is a valid entity

under Oklahoma law.

- 13 fact, neither Mr. Gore nor Ms. Powell made any capital

contributions when the partnership agreement was executed.

Distributions From Sidney Gore’s Estate

On December 30, 1996, the district court entered an Order

for Partial Distribution in the Estate of Sidney Gore that

provided for distribution of the following property to the Sidney

Gore Trust:

Schedule A--Real Estate

(1)

Mineral interest in

Henry Hill gas well

(Henry Hill lease)

Schedule B--Stocks and Bonds

(2)

2,500 common shares of

Tenneco, Inc.

(3) 3,000 common shares of

Mobil Corp.

(4) 6,000 common shares of

Chevron Corp.

(5) 15,000 common shares of

Exxon Corp.

(6) 3,600 common shares of

Amoco Corp.

(7) 200 common shares of

Texaco, Inc.

(8) 10,200 common shares of

Phillips Petroleum

(9) 12-year and 15-year State

of Israel savings bonds

(10) Grand River Dam Authority

Oklahoma bond; 5.25-percent

interest, maturing on June 1,

2002, and held in a Paine

Webber account

(11) Grand River Dam Authority

Oklahoma bond; 6.8-percent

interest, maturing on June 1,

1997, and held in a Smith

Barney account

(Tenneco)

(Mobil)

(Chevron)

(Exxon)

(Amoco)

(Texaco)

(Phillips)

(State of Israel bonds)

(GRDA bond No. 1)

(GRDA bond No. 2)

- 14 (12) 50 Grand River Dam Authority

Oklahoma bonds; 5.2-percent

interest, maturing on June 1,

2000, and held by U.S. Trust

Co.

(13) 10 U.S. Government savings

bonds, series E

(14) St. Francis Hospital bond

(15) Colonial tax-exempt

mutual fund

(GRDA bond No. 3)

(savings bonds)

(St. Francis bond)

(Colonial Fund)

Schedule C--Cash and Certificates of Deposit (CDs)

(16) 17 $100 bills

(17) Boatmen’s Bank checking

account No. xx-xxxx-xx6478

(18) Two Treasury notes

(19) Commercial Federal CD No.

xxxxx10-2

(20) Valley National CD

No. xxx48

(21) Valley National CD

No. xxx09

(22) Bank of Oklahoma CD

No. xxx-xxxxx36

(23) State Bank CD No. xxxxx11

(24) State Bank CD No. xxx51

(Sidney Gore account

No. 6478)

(Treasury notes)

(Commercial Federal CD)

(Valley National CD

No. 1)

(Valley National CD

No. 2)

(Bank of Okla. CD)

(State Bank CD No. 1)

(State Bank CD No. 2)

Schedule D--Tangible Personal Property

(25) Household furnishings

(26) Personal clothing

(27) Wedding band and watch

The Order for Partial Distribution did not specify how the

property distributed to the Sidney Gore Trust was to be allocated

as between the Marital Fund and the Family Fund.

However, the

Sidney Gore estate’s Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, dated October 22, 1996,

reported that the estate’s assets were to be distributed as

follows:

(1) Decedent was to receive the marital home, Bank of

- 15 Oklahoma checking account No. xxxxxx6672 (joint account No.

6672), Social Security death benefit, household furnishings,

personal items, car, and two individual retirement accounts, the

cumulative value of which was in excess of $500,000; (2) the

Family Fund was to receive cash of $542,000; and (3) the Marital

Fund was to receive specific assets listed on pages 17-20 of the

estate tax return, which included the assets referenced in

schedules A, B, and C of the Order for Partial Distribution,10 a

Grand River Dam Authority Oklahoma bond bearing a 5.5-percent

interest rate that matures on June 1, 2009, and allegedly was

held in a Paine Webber account (GRDA bond

No. 4),11 a Grand

River Dam Authority Oklahoma bond bearing a 5.0-percent interest

rate that matured on June 1, 2001, and was held in the same Paine

Webber account as GRDA bond No. 1 (GRDA bond No. 5), a Grand

River Dam Authority Oklahoma bond bearing a 5.0-percent interest

rate that matured on June 1, 2001, and was held in a Merrill

Lynch account (GRDA bond No. 6), an individual retirement

A Valley National CD No. xxx24 was listed on Schedule M,

Bequests, etc., to Surviving Spouse, of the Sidney Gore estate’s

Form 706. However, two Valley National CDs with different

numbers and different maturity dates were included on the Order

for Partial Distribution.

It is unclear from the record whether this bond actually

exists or whether Sidney Gore’s estate confused it with another

bond in reporting it on Form 706. The only mention of this bond

is in the Sidney Gore estate’s Form 706; it was not referred to

in any other documents in the record, including the Paine Webber

account statement and the parties’ valuation experts’ reports.

- 16 account, and various dividends and accrued interest payments with

respect to the assets mentioned in (3) above, the cumulative net

value of which was in excess of $3,800,000.

Sidney Gore’s estate

claimed a marital deduction of $4,411,359 on Form 706 for the

property distributed to decedent and the Marital Fund.

The Form

706 reported a taxable estate of $642,411.12

On October 8, 1997, the district court issued an Order

Allowing Final Account, Determination of Heirship and Final

Decree of Distribution in the Estate of Sidney Gore.

This order

authorized the distribution of GRDA bond No. 1, GRDA bond No. 5,

and any other property not otherwise mentioned or distributed to

Ms. Powell as successor trustee of the Sidney Gore Trust.13

Modification of Decedent’s Estate Plan

On December 23, 1996, decedent executed a Uniform Durable

Power of Attorney in which she designated Ms. Powell her

The Form 706 for the Estate of Sidney Gore is the only

documentary evidence in the record as to whether the assets

enumerated in the Order of Partial Distribution dated Dec. 30,

1996, were distributed to the Sidney Gore Trust, or that the

Marital Fund, in fact, was funded.

The record does not disclose why both the Dec. 30, 1996,

order and the final order of Oct. 8, 1997, authorized the

distribution of GRDA bond No. 1 and why neither order

specifically authorized the distribution of GRDA bond No. 4, if

it existed, and GRDA bond No. 6. We shall assume, for purposes

of this opinion, that the reference to “any other real or

personal property not inventoried and appraised in this estate

and not referred to herein” in the final order of Oct. 8, 1997,

operated to authorize the distribution of GRDA bonds Nos. 4 and

- 17 attorney-in-fact.

On January 3, 1997, decedent resigned as

trustee of the Sylvia Gore Trust, and Ms. Powell became the

successor trustee.

On January 8, 1997, decedent executed the

following five documents in the presence of her attorneys and Ms.

Powell:

First Amendment Restating the Declaration Creating the

Sylvia Gore Trust (amendment); Last Will and Testament of Sylvia

Gore;

Declaration Creating the Pamela M. Powell Irrevocable

Trust (Pamela Powell Trust); Declaration Creating the Michael

Gore Irrevocable Trust (Michael Gore Trust); and Exercise of

Power and Irrevocable Assignment (assignment).

The Amendment

The amendment provided that “all the property in which I

have an interest is from this date forward subject to the trust

which I now restate whether such property is set forth in an

attached schedule or is unscheduled, whether real or personal,

tangible or intangible”.14

The amendment also provided that

decedent retained the power to revoke the Sylvia Gore Trust at

any time, that decedent was entitled during her life to any

amount of income or principal from the Sylvia Gore Trust she

requested, and that, upon decedent’s death, the remaining

undistributed income and principal would be distributed equally

to the Pamela Powell Trust and the Michael Gore Trust.

No schedule or other description of property was attached

to the copy of the amendment in the record.

- 18 addition, the amendment contained a clause entitled “SPECIFIC

INVESTMENT”, which provided that “I have or shall invest or

direct investments of the assets subject to this trust in the

Gore Family Limited Partnership.”

The amendment appointed Ms.

Powell trustee.

The Pamela Powell and Michael Gore Trust Declarations

The Pamela Powell and Michael Gore Trust declarations

contained substantially identical provisions.

Under their

respective trust declarations, Ms. Powell and Mr. Gore were

entitled during their lives to receive income from their trusts

and such amounts of principal as they requested.

The

declarations named the Trust Company of Oklahoma (TCO) trustee of

the trusts.

The declarations directed TCO to distribute trust

principal as necessary for the health, education, and maintenance

of Ms. Powell, Mr. Gore, and any of their descendants but limited

the total principal distributions that could be made from each

trust to $100,000 in any year.

In addition, the declarations

contained a clause entitled “SPECIFIC INVESTMENT”, which provided

as follows:

Subject to the approval of the general partners, the

Trustee is directed to invest the initial investment of

$500 as a limited partner in the Gore Family Limited

Partnership * * * It is my intention to make further

gifts to the Trustee of this trust as a limited partner

of the aforesaid partnership.

- 19 Decedent’s Last Will and Testament

Decedent’s January 8, 1997, will revoked her last will and

testament of October 20, 1988, and appointed Ms. Powell personal

representative.

Decedent’s will provided that after her estate’s

expenses and taxes were paid, the residue of her estate,

including all property over which she held a power of appointment

at death, would be distributed to the trustee of the Sylvia Gore

Trust.

The Assignment

The assignment provided, in pertinent part, as follows:

The Sidney Gore Marital Trust provides, inter

alia, that I, Sylvia Gore, the undersigned surviving

spouse of Sidney Gore, am empowered to withdraw all or

any portion of the assets of the Marital Trust. I,

therefore, on this 8th day of January, 1997, exercise

the aforesaid power by withdrawing all those assets

received or to be received by the Marital Trust. Such

withdrawals shall be effected as follows:

I hereby assign assets having a fair market

value of $100,000 to the Trust Company of Oklahoma,

Trustee of the Pamela M. Powell Irrevocable Trust and

assets having a fair market value of $100,000 to the

Trust Company of Oklahoma, Trustee of the Michael Gore

Irrevocable Trust. The aforesaid assets are to be

administered and distributed pursuant to the terms of

each respective trust.

I hereby assign the remainder of those assets

received or to be received by the Marital Trust to the

Gore Family Limited Partnership, the beneficial

interest to be allocated as follows:

(a) An undivided one-third interest shall be

credited to the capital account of Pamela M.

Powell, Trustee of the Sylvia Gore Revocable Trust

dated October 20, 1988, as amended;

- 20 (b) An undivided one-third interest shall be

credited to the capital account of the Trust

Company of Oklahoma, Trustee of the Michael Gore

Irrevocable Trust; and

credited to the capital account of the Trust

Company of Oklahoma, Trustee of the Pamela M.

Powell Irrevocable Trust.

I hereby authorized [sic] and empower Pamela M.

Powell as my attorney-in-fact with all those powers

granted to her by that certain Durable Power of

Attorney dated December 23, 1996, to act in my behalf

for the purpose of executing this Exercise of Power and

Irrevocable Assignment.

The assignment did not identify or describe any specific assets

to which it was to apply, and it is unlikely that decedent knew

when she signed the assignment the specific assets that Sidney

Gore and/or the Sidney Gore Trust owned.

Before her death, decedent did not transfer title to any

assets in the Marital Fund to TCO to fund the gifts of $100,000

to each of the Michael Gore and Pamela Powell Trusts.15

After

January 8, 1997, decedent did not execute any other documents

confirming any transfer of assets pursuant to the assignment,

reflecting any gifts of GFLP partnership interests, or

documenting any sale or transfer of assets to GFLP.

In the estate tax notice of deficiency, respondent

determined that the fair market value of GFLP was $4,997,280.

This figure does not include the two $100,000 amounts assigned to

the children’s trusts that were reported as gifts on decedent’s

gift tax return. However, respondent has not asserted an

increased estate tax deficiency to reflect the estate tax on the

$200,000.

- 21 Management of GFLP During Decedent’s Life

From its formation in December 1996 through and including

June 12, 1997, the date of decedent’s death, GFLP did not operate

a business or engage in any business or investment activity.

During that same period, GFLP did not hold legal title to any

Marital Fund assets other than a bank account opened in February

1997.

On January 30, 1997, Ms. Powell delivered 40 certificates,

representing all of the Tenneco, Mobil, Chevron, Exxon, Amoco,

and Texaco shares, 9,300 of the 10,200 shares of Phillips stock

in the Marital Fund,16 and 500 shares of Newport News

Shipbuilding, Inc. stock (Newport News stock)17 to TCO.

Each of

the 40 certificates delivered to TCO was registered to Sidney

Gore, except the certificates for 8,000 shares of Exxon stock

registered in the names of Sidney Gore and decedent as joint

tenants.

When she delivered the certificates to TCO, Ms. Powell

Stipulation 100 states that certificates representing all

of the shares of Phillips stock in the Marital Fund were

delivered to TCO. However, Mr. Gore’s estate tax return lists

10,200 shares of Phillips stock as a distribution to the Marital

Fund. The record does not disclose what happened to the

remaining 900 shares.

The 500 shares of Newport News Shipbuilding, Inc. stock

were omitted from both the Dec. 30, 1996, Order for Partial

Distribution in the Estate of Sidney Gore and the retained Form

706 for Sidney Gore’s estate. The parties have stipulated that

the Newport News stock was distributed to the Sidney Gore Trust.

- 22 did not instruct TCO to reregister the shares in the name of

GFLP.

On February 20, 1997, Ms. Powell and Mr. Gore, in their

capacity as general partners of GFLP, entered into an Investment

Management Agency Agreement (agency agreement) with TCO.

agency agreement stated in part the following:

The

“[GFLP] hereby

delivers to * * * [TCO] the assets described in ‘Exhibit A’,

attached hereto and made a part hereof.

Any additional assets

deposited by * * * [GFLP] will also be held pursuant to this

Agreement when accepted by * * * [TCO].”18

further provided that TCO:

The agency agreement

(1) Shall safekeep, collect and

receive income from, and invest or dispose of the assets

deposited as directed by GFLP; (2) shall have the authority and

discretion to sell or exchange any assets deposited by GFLP; (3)

shall distribute income or principal upon the request of GFLP;

and (4) shall periodically analyze the assets held.

On February 24, 1997, Mr. Gore contributed $500 to GFLP for

his 1-percent general partnership interest, and on March 1, 1997,

Ms. Powell contributed $500 for her 1-percent general partnership

No “Exhibit A” was attached to the copy of the agency

agreement in the record.

- 23 interest.19

The funds to make the contributions came from

decedent.

On February 25, 1997, decedent signed a $1,000 check made

payable to TCO, which was delivered to TCO with instructions to

treat the payment as a $500 contribution to GFLP on behalf of

each of the Pamela Powell and Michael Gore Trusts.

On February

27, 1997, in response to decedent’s request, TCO issued two $500

checks, representing the initial capital contributions by the

Pamela Powell and Michael Gore Trusts for their 1-percent limited

partnership interests, to GFLP.

On February 25, 1997, Ms. Powell opened a checking account

for GFLP, account No. xx-xxxx-xx7045 (GFLP account No. 7045),

with an initial deposit of $24,168.10.20

On March 3, 1997, Ms.

Powell deposited $2,000, representing the capital contributions

of Ms. Powell, Mr. Gore, the Pamela Powell Trust, and the Michael

Gore Trust, into GFLP account No. 7045.

Additional deposits of

$226,456.76 were made to GFLP account No. 7045 between February

25 and March 7, 1997.21

The terms of the partnership agreement had required Ms.

Powell and Mr. Gore to pay such amounts when they executed the

partnership agreement on Dec. 26, 1996.

This was the only GFLP bank account in existence during

decedent’s life.

Ms. Bowers testified that decedent deposited a portion of

the distributions from Sidney Gore’s individual retirement

accounts, on which decedent was a designated beneficiary, into

(continued...)

- 24 The funds deposited in GFLP account No. 7045 as of March 7,

1997, were expended as follows.

On March 7, 1997, a wire

transfer of $134,500 from GFLP account No. 7045 was made to Mr.

Gore to enable him to purchase his home in Temecula,

California.22

On April 14 and 15, 1997, Ms. Powell wrote checks

for $35,000 and $60,000, drawn on GFLP account No. 7045 and made

payable to Sylvia Gore, which were then deposited into an account

titled “Sylvia Gore, Trustee of Sidney Gore Trust”, account No.

xxxxxx0825 (trust account No. 0825).

TCO concluded that, as of April 25, 1997, GFLP was “not

funded”.

TCO’s records also show that TCO never received, on

GFLP’s behalf, any of the dividends paid with respect to the

Marital Fund stocks for the first quarter of 1997.

On May 21, 1997, the Amoco, Tenneco, and Newport News stocks

were reregistered from “Sidney Gore” to “Sylvia Gore, Trustee of

the Sidney Gore Trust”, and on June 5, 1997, the Chevron stock

was similarly reregistered.23

The Exxon, Mobil, Phillips, and

(...continued)

GFLP account No. 7045.

Mr. Gore executed a deed that transferred the home to GFLP

on Mar. 10, 1997, but made no cash payments of rent to GFLP.

Although Ms. Bowers testified that rent payments were deducted

from Mr. Gore’s partnership distributions, the only documentary

evidence of any rent payments is the reference to rent payments

contained in Ms. Bowers’s accounting records.

Although the record is not entirely clear, Ms. Powell

apparently signed stock powers on a date not disclosed by the

(continued...)

- 25 Texaco stocks were titled in Sidney Gore’s name throughout

decedent’s life, except for 8,000 shares of Exxon stock which

were registered in the names of Sidney Gore and decedent as joint

tenants.24

During 1997, Ms. Powell deposited some but not all of the

dividends paid on Marital Fund stocks for the first 6 months of

1997, into GFLP account No. 7045.

None of the dividend checks

issued with respect to Marital Fund stocks for the first 6 months

of 1997 was made payable to GFLP.

On June 6, 1997, Ms. Powell also deposited into GFLP account

No. 7045 $3,400 of interest paid on the Smith Barney investment

account and $6,250 of interest paid on the Merrill Lynch account.

On the deposit date, the Smith Barney and Merrill Lynch accounts

were still titled in decedent’s name, not GFLP’s.

Management of Decedent’s Finances After GFLP Was Formed

Decedent suffered from Parkinson’s disease and had been

admitted to the hospital for disorientation and decreased levels

of consciousness on several occasions after Sidney Gore’s death.

From December 1996 until her death, decedent had to have private

(...continued)

record but after she delivered the Marital Fund stocks to TCO’s

vault.

In a letter from TCO to John Boyd dated Sept. 15, 1997,

TCO implied that the matter of transferring stocks has “lied

dormant within TCO”, and in a letter to the Oklahoma Tax

Commission dated Jan. 8, 2002, TCO stated that it “was remiss in

its timely transfer of the assets to GFLP”.

- 26 home health care providers.

During 1997, Ms. Powell shopped for

decedent’s groceries and medications and paid decedent’s bills.

From January 8, 1997, until decedent’s death, Ms. Powell

withdrew funds for decedent’s personal living expenses from

several bank accounts titled in decedent’s name or in the name of

one of the trusts.

Throughout that same period, Ms. Powell

deposited into those bank accounts dividends and interest paid

with respect to stocks, bonds, and other assets held in the

Marital Fund, which allegedly had been assigned to GFLP.

For

example, decedent maintained a trust checking account for the

Sidney Gore Trust, trust account No. 0825, in the name of “Sylvia

Gore, Trustee of the Sidney Gore Trust, Pamela Powell”, into

which Ms. Powell25 deposited some but not all of the dividends

paid on Marital Fund stocks and distributions from GFLP as

follows:26

Decedent remained the trustee of the Sidney Gore Trust

from the time she executed the assignment until she died.

Ms. Powell also deposited $2,472.13, which appears to be

interest paid on the Commercial Federal CD, into trust account

No. 0825. However, the only evidence of this is the word

“Commercial” that is handwritten on the check line of the deposit

slip, and there are no other documents on record to corroborate

that interest was paid on this CD in 1997.

- 27 Date of deposit

Payor

Amount

Mar. 14, 1997

Apr. 14, 1997

Apr. 15, 1997

Total

Exxon

Mobil

Tenneco

Texaco

GFLP

$6,320

5,530

3,180

750

170

35,000

60,000

110,950

From December 23, 1996, through June 12, 1997, Ms. Powell used

trust account No. 0825 to pay decedent’s personal expenses in the

following amounts:

Description of expense

Decedent’s home health care providers

Decedent’s medicine, doctor’s bills, and

other medical expenses

Decedent’s groceries

Decedent’s utilities, phone, and home

maintenance and insurance

Entertainment and gifts on behalf of

decedent

Decedent’s estimated State and Federal

individual income taxes

Total

Amount

$28,610.00

2,145.95

4,187.08

7,614.70

32,337.73

100,000.00

174,895.46

Neither Ms. Powell nor decedent wrote any checks to GFLP from

trust account No. 0825.

Decedent and Sidney Gore had maintained a joint checking

account, joint account No. 6672, in the name of “Sidney Gore or

Sylvia Gore”, which remained open throughout 1997.

On January

21, 1997, Ms. Powell deposited $5,481.03, representing the

proceeds from the redemption of Colonial Fund shares, into joint

account No. 6672.

From January 13 through June 12, 1997, Ms.

Powell wrote a check for $6,500 payable to decedent and another

- 28 for $1,000 payable to herself from joint account No. 6672.

Neither Ms. Powell nor decedent wrote any checks to GFLP from

joint account No. 6672 from January 13 through June 12, 1997.

Decedent and Pamela Powell also maintained a joint checking

account, account No. xxx4495 (decedent’s account No. 4495), in

the name of “Sylvia Gore or Pamela Powell”, which remained open

throughout 1997.

From January through June 12, 1997, Ms. Powell

deposited decedent’s Social Security payments totaling $8,022

into account No. 4495.

After decedent died, Ms. Powell continued to handle

decedent’s finances and to pay her remaining expenses.

Ms.

Powell deposited the following Marital Fund assets into

decedent’s account No. 4495:27

Date

Source of Funds

June 16, 1997

Proceeds of Smith Barney

investment account

Proceeds of Valley National

CD No. 1

Interest accrued on Valley

National CD No. 1

Proceeds of Valley National

CD No. 2

Interest accrued on Valley

National CD No. 2

July 7, 1997

July 28, 1997

Total

Amount

$102,139.01

20,612.90

1,185.24

24,907.99

1,457.12

150,302.26

After June 12, 1997, Ms. Powell did not write any checks

on, or deposit any funds into either joint account No. 6672 or

trust account No. 0825. Ms. Powell closed trust account No. 0825

on Aug. 24, 1997.

- 29 From June 12 through December 1997, Ms. Powell paid more than

$100,000 toward decedent’s taxes, utilities, funeral expenses,

administrative expenses, and other expenses related to decedent’s

home from decedent’s account No. 4495.

In addition, Ms. Powell

made $36,000 in “loans from the estate” to herself and Mr. Gore

from decedent’s account No. 4495.

Ms. Powell did not

write any checks from decedent’s account No. 4495 to GFLP during

1997.

On or about September 4, 1997, Ms. Powell opened account No.

xxx3408 in the name of “The Estate of Sidney Gore, Pamela Powell,

Personal Representative” (Sidney Gore estate account No. 3408).

Ms. Powell made the following deposits to Sidney Gore estate

account No. 3408:

Date of deposit

Description

Amount

Sept. 4, 1997

Phillips dividend

Proceeds of Bank of

Okla. CD

Mobil dividend

$3,468

Sept. 11, 1997

Total

100,000

3,180

106,648

On September 11, 1997, Ms. Powell wrote checks from Sidney Gore

estate account No. 3408 totaling $3,900 for Mr. Gore’s28 1997

estimated local and Federal income taxes.

Ms. Powell did not

write any checks from Sidney Gore estate account No. 3408 to GFLP

through January 6, 1998.

Mr. Gore refers to Michael Gore.

- 30 Management of GFLP After Decedent’s Death

As of June 12, 1997, GFLP did not hold title to any of the

Marital Fund assets.

The Mobil, Exxon, Texaco, and Phillips

stocks were registered to Sidney Gore, except for 8,000 shares of

Exxon, which were registered to Sidney Gore and decedent as joint

tenants; the Amoco, Tenneco, Newport News, and Chevron stocks

were registered to “Sylvia Gore, Trustee of the Sidney Gore

Trust”; decedent’s name remained on the Smith Barney account,

Merrill Lynch account, Valley National CDs No. 1 and No. 2, and

State Bank CD No. 2; Sidney Gore’s name remained on the Paine

Webber investment account, Colonial Fund, State Bank CD No. 1,

Bank of Okla. CD, GRDA bond No. 3, and the Henry Hill lease.29

Title to the other Marital Fund assets remained unchanged

throughout 1997.

On September 18, 1997, GFLP finally delivered to TCO stock

certificates for those Marital Fund stocks that had been

reregistered in the name of GFLP.

In December 1997, TCO finally

began to receive dividend checks for dividends on Marital Fund

stocks that had been reregistered to GFLP.

A TCO report dated as

of April 25, 1998, listed only those stocks that had been

The record does not disclose the owner’s name, as of June

12, 1997, of the State of Israel bonds, the savings bonds, GRDA

bond No. 4 (if it exists), the Treasury notes, and the Commercial

Federal CD. TCO records clearly indicate that TCO never held

title to these assets on behalf of GFLP, and there is no other

credible evidence on record that GFLP held title to these assets.

- 31 reregistered to GFLP and 90,600 shares of Dreyfus Treasury Prime

(purchased on November 10, 1997) as GFLP assets under management.

The process of transferring title to Marital Fund assets to

GFLP continued through at least 2000.30

GFLP Accounting Records

In October 1997, more than 9 months after GFLP was formed

and 4 months after decedent died, Ms. Bowers created partnership

accounting records that purported to show (1) transfers of assets

from decedent to GFLP; (2) sales of decedent’s assets to GFLP,

Ms. Powell, Mr. Gore, and the Pamela Powell and Michael Gore

Trusts; (3) deposits made to GFLP account No. 7045, trust account

No. 0825, and joint account No. 6672; and (4) amounts paid for

decedent’s expenses out of GFLP’s assets offset by amounts

allegedly owed to decedent by GFLP.

However, Ms. Bowers did not

date any of the individual transactions she recorded as journal

entries.

Instead, she set up the records to correspond to

transactions that should have occurred upon the formation of GFLP

and the execution of the assignment.

More recent account statements show that, as of June 30,

1999, the Colonial Fund was still titled to “Sidney Gore”, and as

of June 2000, the Paine Webber investment account had been

retitled to “Pamela Powell, Successor Trustee of the Sidney Gore

Family Fund Trust”. As recently as May 2000, TCO had written a

letter to Ms. Powell requesting that she sign documents to

transfer the Merrill Lynch account to GFLP, and on Aug. 27, 2000,

Ms. Powell finally transferred the Henry Hill lease to GFLP.

- 32 The GFLP accounting records prepared by Ms. Bowers purport

to show that decedent transferred the following Marital Fund

assets to GFLP:

Amoco, Chevron, Exxon, Mobil, Texaco, Tenneco,

Phillips, and Newport News stocks; Henry Hill lease; Merrill

Lynch account; Paine Webber account; Colonial Fund; Smith Barney

account; US Trust account; one of the two Treasury notes; Sidney

Gore account No. 6478; State Bank CDs No. 1 and No. 2; and Bank

of Okla. CD.

In addition, Ms. Bowers listed Sidney Gore estate

account No. 3408, joint account No. 6672, and trust account No.

0825 as GFLP assets.

The accounting records also purport to show that after

decedent executed the assignment, decedent allegedly sold the

Commercial Federal CD, the savings bonds, a Valley National CD,

and one of the Treasury notes to GFLP in exchange for a note

payable to her from GFLP.

Ms. Bowers then made adjusting journal

entries purporting to record the use of GFLP assets to pay

decedent’s personal expenses and a corresponding reduction of the

note payable owed to decedent.

However, GFLP did not execute any

promissory notes payable to decedent from December 1996 through

December 1997.

The accounting records also purport to document the

existence of various notes payable to GFLP from the Sylvia Gore,

Pamela Powell, and Michael Gore Trusts.

However, neither

- 33 decedent nor any of the GFLP partners executed any notes payable

to GFLP from December 1996 through December 1997.

After decedent died, Ms. Powell continued to use GFLP

account No. 7045 to pay some of decedent’s and Mr. Gore’s

personal expenses.

In October 1997, checks in excess of $700

drawn on GFLP account No. 7045 and signed by Mr. Gore were issued

to pay property taxes on Mr. Gore’s California home.

In December

1997, Ms. Powell wrote additional checks from GFLP account No.

7045 to pay expenses related to decedent’s home.

On December 8, 1997, Ms. Powell opened a money market

savings account on behalf of GFLP at Nations Bank, account No.

xx-xxxx-xx6020 (GFLP account No. 6020), with an initial deposit

of $5,000 from GFLP account No. 7045.

On July 11, 2000, Ms.

Powell wrote a check for $192,800 from GFLP account No. 6020,

payable to the U.S. Treasury, for decedent’s Federal estate

taxes.31

The Estate and Gift Tax Returns

On March 15, 1998, decedent’s estate filed Form 709, U.S.

Gift (and Generation–Skipping Transfer) Tax Return (gift tax

return).

Ms. Bowers prepared the gift tax return.

The gift tax

return reported that decedent had made the following gifts on

January 8, 1997:

(1) $102,500 cash to the Pamela Powell Trust;

The record does not indicate the source of the funds on

deposit in GFLP account No. 6020, except for the $5,000

transferred from GFLP account No. 7045.

- 34 (2) $110,500 cash to the Michael Gore Trust; (3) a 1-percent

general partnership interest in GFLP to the Pamela Powell Trust,

valued at $34,627; (4) a 1-percent general partnership interest

in GFLP to the Michael Gore Trust, valued at $34,628; (5) a 32percent limited partnership interest in GFLP to the Michael Gore

Trust, valued at $503,834; and (6) a 32-percent limited

partnership interest in GFLP to the Pamela Powell Trust, valued

at $503,834.

Ms. Bowers relied solely on the assignment to

conclude that decedent had made completed gifts on January 8,

1997.

Ms. Bowers relied on a valuation opinion letter dated

February 17, 1997, from K. Scott Sallee of Baird, Kurtz & Dobson

to calculate the value of the gifts reported on Form 709.32

the opinion letter, Mr. Sallee concluded that, after subtracting

the $200,000 that was supposed to have been transferred to the

Pamela Powell and Michael Gore Trusts, the total value of GFLP

was $4,266,627.33

Mr. Sallee then applied a combined discount

for lack of control and marketability of 55 percent to compute an

“adjusted aggregate nonmarketable and noncontrolling” value for

Each page of the valuation opinion attached to Form 709

was stamped with the following: “Preliminary Draft For

Discussion Purposes Only”.

Although the funds to complete the gifts of $100,000 to

each of the Pamela Powell and Michael Gore Trusts were never

transferred from the Marital Fund to TCO, respondent has not

argued that these gifts were incomplete.

- 35 GFLP of $1,919,982.34

Ms. Bowers then applied an additional

discount in calculating the value of decedent’s alleged gifts of

limited partnership interests to her children reported on Form

709.

On October 19, 1998, the estate filed Form 706.

Ms. Bowers

prepared the Form 706, which reported a gross estate of

$1,776,893, deductions of $395,446, and a taxable estate of

$1,381,447.

The Form 706 reported that decedent owned a “one-

third interest” in GFLP, that the partnership interest had a book

value of $1,424,908,35 and that the partnership interest had a

fair market value, of $740,036.36

On Schedule C, Mortgages,

Notes, and Cash, of Form 706, the estate listed a $46,664 note

payable to decedent from GFLP as an asset of the estate.

Schedule K, Debts of the Decedent, and Mortgages and Liens, of

Mr. Sallee stated in his opinion letter that interests in

GFLP were held as follows: Ms. Powell and Mr. Gore each held a

1-percent general partnership interest, decedent held a 34percent limited partnership interest, and the Pamela Powell and

Michael Gore Trusts each held a 32-percent limited partnership

interest. However, Mr. Sallee’s description of decedent’s

limited partnership interest was incorrect; decedent held a

32.667-percent limited partnership interest.

In preparing the tax return, Ms. Bowers described

decedent’s limited partnership interest as a “one-third

interest”, rather than a 32.667-percent interest.

In calculating the value of decedent’s limited partnership

interest in GFLP, Ms. Bowers adjusted the total fair market value

of GFLP stated in the valuation opinion because Mr. Sallee had

based his opinion on the asset values reported on Sidney Gore’s

estate tax return.

- 36 Form 706, the estate deducted $1,543 for real estate taxes owed

on decedent’s home.

Respondent’s Determinations

On September 26, 2001, respondent issued a notice of

deficiency with respect to the gift tax return, in which he

advanced two alternative positions.

Respondent determined that

the transfer of the Marital Fund assets was an indirect gift of

one-third of the assets to Ms. Powell and one-third of the assets

to Mr. Gore.

Respondent valued each indirect gift at $1,479,514,

the fair market value of one-third of the Marital Fund assets.

Alternatively, respondent disallowed the discount that was

applied in valuing the partnership interests transferred to the

Pamela Powell and Michael Gore Trusts and valued each gift at its

fair market value, which respondent determined to be $1,479,514,

rather than $503,834 as shown on the gift tax return.

Respondent

also included a gift of $1,700 cash to Ms. Powell and a gift of

$870 cash to Mr. Gore.37

On September 26, 2001, respondent issued a separate notice

of deficiency with respect to the estate tax return, in which he

advanced two alternative positions.

Respondent included the fair

market value of GFLP ($4,977,280) in decedent’s taxable estate

under sections 2036 and/or 2038 and reduced the taxable estate by

Petitioner has not contested respondent’s determination to

increase decedent’s taxable gifts by $1,700 and $870, and these

amounts are not at issue in this case.

- 37 $740,036, the discounted value of decedent’s limited partnership

interest in GFLP reported on the estate tax return.

Alternatively, respondent disallowed the discount for lack of

control and marketability that was applied in valuing decedent’s

limited partnership interest for estate tax purposes and

increased the taxable estate by the difference between the

undiscounted fair market value of that partnership interest

($1,665,760) and the discounted value reported on the estate tax

return ($740,036).

In conjunction with respondent’s alternative position and

the gift tax deficiency determined separately, respondent

increased the value of the gross estate by the amount of

additional gift tax due on the undiscounted fair market values of

the limited partnership interests decedent allegedly gave to the

Pamela Powell and Michael Gore Trusts and allowed those amounts

as deductions.

Under either alternative, respondent included

$102,139, representing the value of the Smith Barney account, in

the gross estate under section 2033 and disallowed the estate’s

deduction of $1,543 for ad valorem tax on decedent’s home.38

Respondent’s computation of the estate tax deficiency

erroneously omits the additional tax owed as a result of the

disallowed deduction of $1,543 for real estate taxes.

- 38 Tax Court Pleadings

Petitioner timely petitioned this Court for redetermination

of respondent’s estate tax and gift tax determinations.

Respondent subsequently moved for leave to file an amendment to

his answer in the estate tax case (docket No. 468-02).

In the

motion, respondent asserted as an alternative to the primary and

alternative positions taken in the estate tax notice of

deficiency that the purported transfers of Marital Fund assets by

decedent “did not actually occur or were incomplete for gift tax

purposes at the time of decedent’s death” (the incomplete

transfer argument).

Respondent also asserted that petitioner is

not prejudiced by his incomplete transfer argument because

respondent bears the burden of proof as to the incomplete

transfer argument, and the same facts relevant to respondent’s

other arguments are relevant to the incomplete transfer argument.

Petitioner did not object to respondent’s motion, and we granted

the motion.

Respondent’s amendment to answer, alleging that the

transfers of Marital Fund assets to GFLP were not made or were

incomplete for gift tax purposes as of decedent’s death, was

filed on September 5, 2002.

OPINION

Burden of Proof

Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving them

- 39 incorrect.

Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).

However, the Commissioner bears the burden of proof with respect

to any new matter pleaded in the answer.

See Rule 142(a)(1).

Respondent concedes that he has the burden of proof on the issue

of whether decedent’s alleged transfer of Marital Fund assets to

GFLP was an incomplete transfer, because respondent asserted this

alternative theory in an amendment to his answer.

With respect to the remaining issues, petitioner has not

argued that section 7491 applies, nor has petitioner established

that the requirements of section 7491(a) have been met.39

Consequently, we conclude that section 7491(a) does not shift the

burden of proof to respondent on the remaining issues.

We note,

however, that our conclusions are based upon the preponderance of

the evidence and do not depend upon any allocation of the burden

of proof.

Before trial, petitioner filed a motion to shift burden of

proof to respondent but did not assert that sec. 7491 applies.

Rather, petitioner argued that respondent’s determinations were

arbitrary and excessive, on the basis of alleged errors in the

notices of deficiency and respondent’s reliance on several

alternative theories in the case. At the beginning of the trial,

we denied the motion without prejudice to petitioner’s right to

raise burden of proof issues in the posttrial briefs. Petitioner

did not raise any burden of proof issues in the briefs, and

consequently, we deem petitioner to have abandoned the arguments

regarding the burden of proof.

- 40 II.

Whether Respondent Has Raised a New Issue on Brief

Respondent asserts for the first time on brief in

conjunction with his incomplete transfer argument that the values

of the Marital Fund assets are includable in decedent’s gross

estate under section 2033 or section 2041(a)(2).

Petitioner

contends that respondent’s section 2041(a)(2) argument is a new

issue that we should decline to decide.

A party may not raise an issue for the first time on brief

if the new issue surprises and prejudices the opposing party.

Smalley v. Commissioner, 116 T.C. 450, 456 (2001) (citing

Seligman v. Commissioner, 84 T.C. 191, 198-199 (1985), affd. 796

F.2d 116 (5th Cir. 1986)).

In evaluating whether the opposing

party will suffer prejudice, we must consider the degree to which

the opposing party is surprised by the new issue and the opposing

party’s need for additional evidence to respond to the new issue.

Pagel, Inc. v. Commissioner, 91 T.C. 200, 212 (1988), affd. 905

F.2d 1190 (8th Cir. 1980).

Furthermore, a party may not rely

upon a new theory unless the opposing party has been provided

with fair warning of the intention to base an argument upon that

theory.

Id. at 211-212. “Fair warning” means that the taxpayer’s

ability to prepare its case was not prejudiced by the

Commissioner’s failure to give notice, in the notice of

deficiency or in the pleadings, of his intention to rely on a

particular theory.

Id.

- 41 Although respondent did not refer to section 2041(a)(2) in

the notices of deficiency, pleadings, or trial memoranda, or at

trial, we disagree that respondent has raised a new issue.

Regardless of which Code section respondent relies upon to

include the values of the property in decedent’s gross estate,

the issue before us remains whether the values of the assets

decedent allegedly transferred before her death are includable in

her gross estate.

Both section 2033 and section 2041(a)(2)

operate to include property in a decedent’s gross estate.

The

sections differ in that they apply to, and operate on, different

property interests of a decedent.

Our conclusion as to which

section applies will depend upon, and flow from, our conclusion

regarding the types of property interests decedent held on the

date of her death.

Even if we were to conclude that respondent’s reliance on

section 2041(a)(2) is a new issue, however, we would still allow

respondent to rely on that Code section.

Because the Sidney Gore

Trust declaration allegedly granted decedent a general power of

appointment over the Marital Fund assets, respondent’s current

reliance on both sections 2033 and 2041(a)(2) should not cause

surprise or prejudice to petitioner.40

Moreover, petitioner is

Although respondent argues on brief that the Sidney Gore

Trust did not grant decedent a general power of appointment over

Marital Fund assets within the meaning of sec. 2041(a), it

appears that decedent did have such a power. See, e.g., Estate

(continued...)

- 42 not required to introduce any additional or different evidence

than petitioner already has introduced to prove that the values

of the Marital Fund assets should not be included in decedent’s

gross estate under section 2041(a)(2).

The record already

contains the necessary evidence for us to decide whether decedent

transferred her interest in Marital Fund assets to GFLP or to its

partners before her death and, if she did not, whether decedent

held a general power of appointment over Marital Fund assets on

the date of her death.

As a result, we will consider

respondent’s argument regarding the application of section

2041(a)(2) as necessary.

III. Whether Decedent Completed Transfers of Marital Fund Assets

Before Her Death

The Alleged Withdrawal and Transfers

On January 8, 1997, decedent executed an assignment that

provided for the withdrawal of all of the assets from the Marital

Fund and for the following transfers of Marital Fund assets:

The transfer of Marital Fund assets having a value of

$100,000 to the Pamela Powell Trust for no consideration;

(...continued)

of Kurz v. Commissioner, 101 T.C. 44 (1993), supplemented T.C.

Memo. 1994-221, affd. 68 F.3d 1027 (7th Cir. 1995). In addition,

respondent’s position on brief conflicts with the admission made

in his answer in docket No. 467-02 that “the Sidney Gore

revocable trust provided for a marital trust, as to the principal

of which decedent, Sylvia Gore, had a general power of

appointment.”

- 43 2.

the transfer of Marital Fund assets having a value of

$100,000 to the Michael Gore Trust for no consideration;

the transfer of the balance of the Marital Fund assets

to GFLP to be allocated equally to the capital accounts of GFLP’s

three limited partners:

the Sylvia Gore Revocable Trust, the

Michael Gore Trust, and the Pamela Powell Trust.41

Because the parties disagree regarding whether the alleged

transfer to GFLP was completed before decedent died on June 12,

1997,42 we must first decide whether decedent effectively

withdrew the Marital Fund assets from the Marital Fund and, if

she did, whether decedent completed any transfers of Marital Fund

assets during her lifetime.

The Parties’ Arguments

Petitioner argues that decedent’s execution of the

assignment on January 8, 1997, was sufficient under Oklahoma law

to withdraw all of the Marital Fund assets from the Marital Fund

Petitioner argues in petitioner’s posttrial briefs that,

contrary to the wording of the assignment, the assignment

resulted in decedent’s transferring all of the Marital Fund

assets to GFLP in exchange for a 98-percent limited partnership

interest. Petitioner contends that decedent then made gifts of

GFLP limited partnership interests to decedent’s children’s

trusts. We find no credible evidence in the record to support

petitioner’s construction of the assignment and petitioner’s

description of the transfer the assignment allegedly effected,

and we do not discuss this aspect of petitioner’s arguments

further.

Respondent does not challenge the status of the alleged

transfers to the children’s trusts as completed gifts.

- 44 and to complete the above-described transfers.

Respondent

contends that decedent’s execution of the assignment did not

effect a withdrawal of Marital Fund assets from the Marital Fund

pursuant to her power of withdrawal under the Sidney Gore Trust.

Alternatively, respondent contends that, even if the assignment

qualified as a valid exercise of decedent’s power to withdraw,

the simple act of executing the assignment, without more, was not

sufficient under Oklahoma law to complete the transfers described

in the assignment.

Respondent further contends that decedent did

not transfer title to, or signature authority over, any of the

Marital Fund assets before her death on June 12, 1997, that

decedent never delivered the Marital Fund assets to GFLP, and

that decedent never released dominion and control over the

Marital Fund assets during her lifetime.

Respondent alleges that

decedent continued to treat the Marital Fund assets (and the

income therefrom) as her property during her lifetime.

C. Decedent’s Alleged Withdrawal of Marital Fund Assets on

January 8, 1997

In order to apply the appropriate Federal tax laws, we must

first determine what property interests decedent owned on the

date of her death.

Because State law determines whether a

taxpayer has a property interest or right, we must examine the

law of the State of Oklahoma to ascertain whether decedent had a

property interest in the Marital Fund assets on the date of her

death and, if so, the nature of that interest.

See Morgan v.

- 45 Commissioner, 309 U.S. 78, 80 (1940) (State law creates legal

interests and rights, and Federal tax law determines the proper

tax treatment of those interests or rights); Estate of Davenport

v. Commissioner, 184 F.3d 1176, 1182 (10th Cir. 1999) (quoting

United States v. Irvine, 511 U.S. 224, 238 (1994)), affg. T.C.

Memo. 1997-390.

We begin our analysis with the assignment,43 the document

that petitioner contends accomplished the withdrawal of the

Marital Fund assets and the transfer of those assets to the

trusts of decedent’s children and to GFLP.

We examine Oklahoma

law to ascertain the effect of the assignment.

See Morgan v.

Commissioner, supra at 80.

Under Oklahoma law, an assignment is “‘an expression of

intention by one that his rights shall pass to and be owned by

another.’”

Johnson v. Schick, 882 P.2d 1059, 1061 (Okla. 1994)

(quoting Hoffman v. Barnett, 178 P.2d 89, 90 (Okla. 1946)).

assignment may be a legal assignment that relates to a “thing in

being”, or it may be an equitable assignment that relates to

contingent interests, expectancies, and things potential.

Hoffman v. Barnett, supra at 91.

A valid assignment is

Although the same disturbing informality characterized

transactions involving Sidney Gore, respondent concedes that

“certain stock was distributed to the Sidney Gore Trust as a

marital bequest to decedent.” In other words, respondent does

not contest that there was a qualifying transfer into the Sidney

Gore Trust and that the Marital Fund was in existence.

- 46 enforceable under Oklahoma law.44

Union Life Ins. Co. v. Priest,

694 F.2d 1252, 1255-1256 (10th Cir. 1982).

Respondent acknowledges the enforceability of an assignment

under Oklahoma law.

Respondent argues, however, that the

relevant issue is not the assignment’s enforceability but whether

the assignment effected a withdrawal of Marital Fund assets from

the Sidney Gore Trust.

The estate planning on behalf of both Sidney Gore and

decedent reflects a remarkable and persistent pattern of

informality and inaction that makes any decision regarding what

actually took place a difficult one.

Both Sidney Gore and

decedent executed wills and trust agreements before they died,

but they never actually transferred any assets into their trusts

before their deaths.

Respondent has apparently accepted for

purposes of this proceeding that, by reason of Sidney Gore’s

death and the distribution order, Sidney Gore’s trust was funded,

that his trust included a Marital Fund, and that decedent had a

power to withdraw Marital Fund assets during her lifetime.

Respondent argues, however, that decedent’s execution of the

assignment without more was insufficient to withdraw the Marital

Fund assets from the Sidney Gore Trust.

In order for an equitable assignment to be enforceable

under Oklahoma law, the equitable assignee must have furnished

consideration to the assignor. See Johnson v. Schick, 882 P.2d

1059, 1061 (Okla. 1994).

- 47 Although we can certainly understand why respondent makes

this argument, we shall reject it.

Decedent’s execution of the

assignment combined with her exercise of dominion and control

over the Marital Fund assets after January 8, 1997, and her use

of Marital Fund assets after she executed the assignment

convinces us that decedent intended to withdraw the Marital Fund

assets on January 8, 1997, and that she actually did so before

she died on June 12, 1997.

Decedent’s Alleged Transfers of Marital Fund Assets

Petitioner argues that decedent’s execution of the

assignment on January 8, 1997, also effected transfers of Marital

Fund Assets to GFLP.

Respondent argues that the assignment did

not result in a completed transfer to GFLP that satisfies the

requirements for valid inter vivos gifts under Oklahoma law.

All of the alleged transfers described in the assignment,

except perhaps one, are transfers for no consideration; i.e,

gifts.

The only alleged transfer that may not be a gift is the

alleged transfer of Marital Fund assets to GFLP.

With respect to

this alleged transfer, petitioner argues that the transfer was a

bona fide sale for an adequate and full consideration in money or

money’s worth within the meaning of section 2036(a), and

respondent argues that it was not.

For purposes of this part of

our analysis, we focus only on whether decedent’s execution of

the assignment resulted in a completed transfer of property to

- 48 GFLP and not on whether there was consideration for the alleged

transfer to GFLP.

The requirements for a valid inter vivos gift under Oklahoma

law are:

(1) Donative intent; (2) actual delivery of the subject

matter of the gift; (3) the relinquishment by the donor of all

ownership, dominion, and control over the subject matter of the

gift; and (4) acceptance of the gift by the donee.

Estate of

Davenport v. Commissioner, supra at 1183, 1186; Stinchcomb v.

Stinchcomb, 674 P.2d 26, 30 (Okla. 1983); Frazier v. Okla. Gas &

Elec. Co., 63 P.2d 11, 13 (Okla. 1936).

The transfer by gift

must be “gratuitous and irrevocable and go into immediate and

absolute effect”.

Fox v. Kramer (In re Estate of Estes), 983

P.2d 438, 445 (Okla. 1999); Courtney v. First Natl. Bank, 569

P.2d 458, 460 (Okla. 1977); Davis v. Natl. Bank of Tulsa, 353

P.2d 482, 486 (Okla. 1960).

In order to establish an inter vivos

transfer by gift after the death of the alleged donor, the

proponent of the gift must introduce evidence that is “clear,

explicit, and convincing as to every element.”

Fox v. Cramer (In

re Estate of Estes), supra at 445; see also Stinchcomb v.

Stinchcomb, supra at 30; Shepherd v. Wood (In re Estate of

Griffin), 599 P.2d 402, 404 (Okla. 1979); Davis v. Natl. Bank of

Tulsa, supra at 486; Barry v. Phillips, 329 P.2d 1042, 1043

(Okla. 1958); Ratcliff v. Lee, 192 P.2d 843, 845 (Okla. 1948).

- 49 We begin our analysis of the alleged property transfers by

examining whether decedent relinquished all incidents of

ownership, dominion, and control over the Marital Fund assets

when she executed the assignment on January 8, 1997.

The Marital Fund assets consisted primarily of stocks,

bonds, and bank and investment accounts.

Under Oklahoma law, the

owner of stock is presumed to be the person in whose name shares

of stock are registered or to whom stock certificates are issued.

Davis v. Natl. Bank of Tulsa, supra at 483; Frazier v. Okla. Gas

& Elec. Co., supra at 14; Okla. State Bank of Ada v. Cole, 38

P.2d 914, 916 (Okla. 1934).

If a financial institution holds

funds in an account registered to a customer, a presumption

arises under Oklahoma law that the funds are owned by the

customer whose name appears on the account.

Barry v. Phillips,

supra at 1045; Taliaferro v. Reirdon, 99 P.2d 500, 503 (Okla.

1940); Hastings v. Hugo Natl. Bank, 197 P. 457 (Okla. 1921).

As of June 12, 1997, either decedent’s name or Sidney Gore’s

name appeared on the stock certificates of all stocks included in

the Marital Fund and on most, if not all, of the other assets in

the Marital Fund.45

The record is devoid of any credible

We cannot unequivocally state that “all” assets of the

Marital Fund property were titled to decedent or Sidney Gore

because the record does not establish in whose name, if any, the

State of Israel bonds, savings bonds, Treasury notes, Commercial

Federal CD, and GRDA bond No. 4 were titled or registered during

1997.

- 50 evidence that GFLP held legal title to any assets of the Marital

Fund when decedent died.

Petitioner argues, however, that decedent’s failure to

transfer legal title to Marital Fund assets pursuant to the

assignment was immaterial because legal title is only prima facie

evidence of ownership.

Although the transfer of legal title is

not an essential element of an inter vivos gift under Oklahoma

law, the presumption under Oklahoma law that ownership lies with

the person holding legal title to an asset can be overcome only

by evidence that the donor delivered, or otherwise parted with

dominion and control over, the subject matter of the gift.

Estate of Davenport v. Commissioner, supra at 1185-1186; Davis v.

Natl. Bank of Tulsa, supra at 486; Barry v. Phillips, supra at

1045; Frazier v. Okla. Gas & Elec. Co., supra at 14; see also

sec. 25.2511-2(b), Gift Tax Regs. (a gift is complete only when

the donor “has so parted with dominion and control as to leave in

him no power to change its disposition, whether for his own

benefit or for the benefit of another”).

Whether the donor has

parted with dominion and control and is powerless to change the

disposition of the property is governed by State law.

Estate of

Dillingham v. Commissioner, 88 T.C. 1569, 1575-1576 (1987), affd.

903 F.2d 760 (10th Cir. 1990); Estate of Cummins v. Commissioner,

T.C. Memo. 1993-518.

- 51 Under Oklahoma caselaw, a donor retains the incidents of

ownership, dominion, and control over stocks and other financial

instruments, even where the donor intends to make a gift and/or

delivers the subject matter of the gift, in the following

instances:

(1) The donor continues to receive and expend

dividends paid on stock; (2) the donor retains the sale proceeds

from stock; (3) the donor continues to collect payments on a

promissory note; or (4) the donor maintains the ability to cash a

certificate of deposit for himself, to change the payee, or to

pledge it as collateral.

Estate of Davenport v. Commissioner,

supra at 1188 (fact that donor did not receive any dividends

demonstrated that donor did not exercise any control over the

stock); Courtney v. First Natl. Bank, supra at 460 (donor failed

to relinquish dominion and control, and alleged transfer of

property was not irrevocable); Davis v. Natl. Bank of Tulsa,

supra; Barry v. Phillips, supra; Frazier v. Oklahoma Gas & Elec.,

supra.

Respondent argues that decedent retained dominion and

control over Marital Fund assets after January 8, 1997, by

collecting dividends and interest on Marital Fund assets, by

retaining proceeds from the sale or liquidation of Marital Fund

assets, by depositing income generated by Marital Fund assets

into bank accounts she owned and/or controlled, and by using

income from Marital Fund assets for her personal expenses.

- 52 agree.

From December of 1996 until decedent’s death on June 12,

1997, Ms. Powell, in her capacity as decedent’s attorney-in-fact,

deposited nearly $19,000 of dividends paid on Marital Fund stocks

into trust account No. 0825 and more than $5,000 from the

redemption of Colonial Fund shares into decedent’s joint account

No. 6672.

After January 8, 1997, Ms. Powell used income from

Marital Fund assets that decedent had allegedly transferred to

GFLP to pay for decedent’s medical and household expenses, inhome health care, gifts, entertainment, and State and Federal

income taxes.

Even after decedent’s death, Ms. Powell continued to collect

dividends, interest, and proceeds from Marital Fund assets, and

she deposited the amounts into accounts that decedent’s estate

controlled.

The deposits were used for the benefit of the

estate, Ms. Powell, and Mr. Gore.

Between June 16 and July 28,

1997, Ms. Powell deposited into decedent’s account No. 4495 more

than $150,000, consisting of proceeds from the sale of Marital

Fund assets and interest paid on Marital Fund assets that were

still titled in decedent’s or Sidney Gore’s name.

Ms. Powell

spent approximately $100,000 of funds attributable to or derived

from Marital Fund assets that had been deposited into decedent’s

account No. 4495 to pay for decedent’s funeral expenses and her

remaining personal and household expenses.

In addition, Ms.

Powell and Mr. Gore “borrowed” $36,000 of income attributable to

- 53 Marital Fund assets that was deposited into decedent’s account

No. 4495 after decedent died.

The record overwhelmingly establishes that decedent and/or

her estate retained dominion and control over Marital Fund assets

after January 8, 1997.

Before her death on June 12, 1997,

decedent did not surrender any voting rights in Marital Fund

stocks, nor did decedent attempt to relinquish dominion or

control over Marital Fund stocks.

Neither decedent nor Ms.

Powell changed the name on any of the investment and bank

accounts in the Marital Fund before decedent died.

Most

significantly, decedent and/or Ms. Powell continued to control

and use Marital Fund assets for decedent’s benefit after January

8, 1997.

Petitioner argues that decedent relinquished all dominion

and control over Marital Fund stocks to TCO when the agency

agreement between TCO and GFLP was executed.

With regard to the

remaining assets of the Marital Fund, petitioner contends that

TCO controlled the assets as trustee of the Pamela Powell and

Michael Gore Trusts, that Ms. Powell controlled the assets as

trustee of decedent’s revocable trust, and that Ms. Powell and

Mr. Gore controlled the assets as general partners of GFLP.

This

argument is not supported by credible evidence in the record.

The record shows that TCO did not exert any meaningful management

authority over Marital Fund assets until months after decedent’s

- 54 death.

If decedent had actually relinquished dominion and

control of the Marital Fund assets to TCO, under the terms of the

agency agreement TCO would have collected all income from the

property, and TCO would have distributed to decedent only such

amounts as GFLP directed.

The reality established by the record

is that Ms. Powell, acting on behalf of decedent or her estate,

controlled the receipt and disposition of the income from Marital

Fund assets without having to request any distributions from TCO

or GFLP to pay decedent’s expenses.

Petitioner attempts to explain why the dividends, interest,

and proceeds of the Marital Fund property were deposited into

various bank accounts belonging to or controlled by decedent by

arguing that “other bank account names were used because of the

problems with getting banks to accept checks not made payable to

GFLP”.

Petitioner insists, however, that all of decedent’s bank

accounts were treated as GFLP accounts.

Petitioner’s explanation

is too facile, and it fails to explain why some dividend and

interest checks were deposited directly into GFLP account No.

7045 while others were not.

None of the Marital Fund assets were

registered or titled in the name of GFLP, and none of the

dividend and interest checks were issued in GFLP’s name.46

Petitioner’s explanation also does not explain why $22,415 of the

Regardless of the payees’ identities, once the checks were

deposited, decedent could have transferred the funds to GFLP.

Decedent did not do so.

- 55 $41,777 of dividends paid during the first 6 months of 1997 was

never deposited into GFLP account No. 7045 or why dividend and

interest income generated by Marital Fund assets allegedly

transferred to GFLP was not transferred to the GFLP account after

it was deposited into non-GFLP accounts.

Petitioner relies on the GFLP accounting records prepared by

Ms. Bowers after decedent’s death to support petitioner’s

arguments that decedent released all ownership, dominion, and

control over Marital Fund assets when she executed the assignment

on January 8, 1997.

However, the accounting records were created

months after the various transactions occurred and are not

credible.

We view the GFLP accounting records as just one more

argument regarding how the Marital Fund assets should have been

handled after the January 8, 1997, assignment.

The GFLP

accounting records represent nothing more than a self-serving and

belated attempt to create the appearance that decedent

transferred property to GFLP, that GFLP treated all of the bank

accounts held in decedent’s and Sidney Gore’s names as its own

property, and that GFLP received all income from Marital Fund

assets after January 8, 1997.

As an additional explanation for decedent’s treatment of the

income generated by Marital Fund assets, petitioner argues that

the income decedent retained was actually owed to her by GFLP as

payment for assets that decedent sold to GFLP.

According to

- 56 petitioner, Ms. Bowers set up an account payable in the GFLP

accounting records reflecting a debt of GFLP owed to decedent,

deductions from that amount for GFLP funds Ms. Powell used to pay

decedent’s personal living expenses, and interest allegedly paid

by GFLP on the debt.

Petitioner also relies upon decedent’s and

GFLP’s retained Federal income tax returns for the taxable year

1997 to establish the existence of the debt and to show that GFLP

paid interest on the debt.

Respondent argues that petitioner has not explained which

transactions gave rise to the debt GFLP allegedly owed to

decedent and that the account payable in the GFLP accounting

records represents nothing more than “adjusting journal entries,

intended, in part, to account for Decedent’s at-will expenditure

of funds attributed to GFLP”.

We agree.

Neither decedent nor

GFLP executed a promissory note or any other documents to

evidence GFLP’s alleged debt to decedent.

The assignment makes

no reference to the sale of any of decedent’s own property to

GFLP.

Neither the GFLP accounting records nor the tax returns,

which were prepared nearly 2 years after GFLP’s debt to decedent

allegedly arose, are sufficient to prove that a valid debt

existed.

Finally, petitioner argues that decedent parted with

dominion and control but that TCO delayed transferring to GFLP

legal title to Marital Fund assets.

Although TCO apparently has

- 57 assumed some responsibility for the delay, the documents upon

which petitioner relies are extremely vague regarding TCO’s

alleged inaction.

Petitioner did not present any testimony from

TCO employees to prove when and for how long the delay occurred

or to show exactly how TCO was at fault.

It is entirely possible that any delay on the part of TCO

occurred well after decedent’s death or that the delay was also

attributable to decedent’s or Ms. Powell’s deliberate inattention

to the technicalities of title.

TCO had clearly outlined what

steps needed to be taken to transfer Marital Fund stocks to GFLP

months before decedent’s death.

Nevertheless, Ms. Powell did not

sign the necessary stock powers when she delivered the stock

certificates to TCO, and her only explanation for the failure-that she thought TCO would assume all responsibility to transfer

title to the stock--is not credible.47

The record overwhelmingly establishes that decedent or Ms.

Powell on decedent’s behalf continued to exercise ownership,

dominion, and control over Marital Fund assets from January 8,

1997, when decedent withdrew the Marital Fund assets from the

TCO had not yet entered into the agency agreement with

GFLP when Ms. Powell delivered the stock certificates to TCO.

And, although the record shows that Ms. Powell eventually signed

stock powers on behalf of decedent to transfer the stocks to

GFLP, the record does not reveal when she did so. TCO was still

asking Ms. Powell to sign documents to transfer Marital Fund

assets to GFLP as recently as May 2000, and Ms. Powell was still

completing the transfer of other property to GFLP in August 2000.

- 58 Sidney Gore Trust, to June 12, 1997, the date of her death.48

Consequently, we conclude that decedent did not complete any

transfer of Marital Fund assets to GFLP before her death on June

12, 1997.

We consider, therefore, whether the estate was

obligated to include the value of Marital Fund assets allegedly

transferred to GFLP in decedent’s gross estate, either because

she owned them outright on the date of her death or,

alternatively, because she held a general power of appointment

over the Marital Fund assets on the date of her death.

IV.

Inclusion of Marital Fund Assets in Decedent’s Estate

Sections 2033 and 2041

Section 2001 imposes a tax on the transfer of the taxable

estate of every decedent who is a citizen or resident of the

United States.

Section 2051 provides that, for purposes of the

tax imposed by section 2001, the value of the taxable estate is

determined by deducting from the value of the gross estate

allowable deductions.

The gross estate of a decedent who is a citizen or resident

of the United States is determined in accordance with chapter 11,

subchapter A, part III, of the Code (part III).

Part III

includes sections 2031 through 2046, which describe different

The absence of any one element of an inter vivos transfer

of property is sufficient for us to find that no completed

transfer was made. See Fox v. Kramer (In re Estate of Estes),

983 P.2d 438, 445 (Okla. 1999).

- 59 types of property interests whose values must be included in the

calculation of a decedent’s gross estate.

Section 2031(a)

provides that “The value of the gross estate of the decedent

shall be determined by including to the extent provided for in

this part, the value at the time of his death of all property,

real or personal, tangible or intangible, wherever situated.”

Section 2033 provides that “The value of the gross estate shall

include the value of all property to the extent of the interest

therein of the decedent at the time of his death.”

Section

2041(a)(2) requires that property with respect to which the

decedent had a general power of appointment49 created after

October 21, 1942, also be included in the decedent’s gross

estate.

We have concluded that decedent, by executing the assignment

on January 8, 1997, and exercising dominion and control over the

Marital Fund assets from that date to the date of her death,

effectively exercised the withdrawal power granted to her by the

Sidney Gore Trust declaration.

We have also concluded, however,

that the assignment was not sufficient to effect a transfer of

Sec. 2041(b)(1) defines “general power of appointment” to

mean “a power which is exercisable in favor of the decedent, his

estate, his creditors, or the creditors of his estate”. However,

sec. 2041(b)(1)(A) provides that “A power to consume, invade, or

appropriate property for the benefit of the decedent which is

limited by an ascertainable standard relating to the health,

education, support, or maintenance of the decedent” is not a

general power of appointment.

- 60 Marital Fund assets to GFLP.

Because decedent, on the date of

her death, continued to own, control, and use Marital Fund

assets, the value of the Marital Fund assets allegedly

transferred to GFLP, including income therefrom as of the

appropriate valuation date, must be included in decedent’s gross

estate under sections 2031(a) and 2033.

We recognize, of course, that our holding under section 2033

depends for its accuracy on our conclusion that decedent

effectively withdrew the Marital Fund assets from the Sidney Gore

Trust.

Even if our conclusion is wrong, however, the value of

the Marital Fund assets would still be includable in decedent’s

gross estate because decedent, on the date of her death, had a

general power of appointment within the meaning of section

2041(a)(2) with respect to any Marital Fund assets still subject

to the Sidney Gore Trust.

Section 2041(b)(1) defines a general power of appointment as

a power exercisable in favor of the decedent, her estate, her

creditors, or the creditors of her estate.

A general power of

appointment over the corpus of a trust exists where the lifetime

income beneficiary has the unrestricted power to distribute the

corpus of the trust to herself.

Estate Tax Regs.

Sec. 20.2041-3(f), Example (3),

In that situation, the entire corpus of the

trust as of the time of death is includable in the decedent’s

gross estate under section 2041.

Secs. 20.2041-1(b)(1), 20.2041-

- 61 3(f), Example (3), Estate Tax Regs.

Decedent had an unrestricted

power to distribute the corpus of the Marital Fund to herself by

reason of her power of withdrawal.

In addition, the Sidney Gore Trust declaration gave decedent

“the power to appoint the principal and any undistributed income,

to any person” by a provision in her will and authorized the

trustees, upon decedent’s death, to “distribute the then

remaining principal and undistributed income in the Marital

Trust, to such appointee or appointees (including the Estate of

my Wife), in such manner as my Wife may appoint by her Last Will

and Testament.”

Such language is sufficient to create a general

power of appointment, sec. 20.2041-1(c)(1), Estate Tax Regs., and

respondent conceded as much in his answer in docket No. 468-02.

If any assets remained in the Marital Trust at decedent’s death,

section 2041(a)(2) requires that the value of those assets be

included in decedent’s gross estate.

Section 2036

A decedent’s gross estate includes the value of property

interests transferred by the decedent during his or her lifetime

if the decedent retained for life the possession or enjoyment of,

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

2036(a)(1).

Sec.

Petitioner maintains that section 2036(a) is

inapplicable because decedent completed a transfer of the Marital

Fund assets to GFLP before her death and did not retain enjoyment

- 62 of the transferred property.

We have already rejected

petitioner’s argument that decedent completed a transfer of

Marital Fund assets to GFLP during her lifetime.

Nevertheless,

even if we were to assume that decedent successfully transferred

Marital Fund assets to GFLP before her death, we would still

conclude that the values of the assets are includable in

decedent’s gross estate under section 2036(a).50

The relevant portion of section 2036(a) provides:

SEC. 2036.

TRANSFERS WITH RETAINED LIFE ESTATE.

(a) General Rule.--The value of the gross estate

shall include the value of all property to the extent

of any interest therein of which the decedent has at

any time made a transfer (except in case of a bona fide

sale for an adequate and full consideration in money or

money’s worth), by trust or otherwise, under which he

has retained for his life or for any period not

ascertainable without reference to his death or for any

period which does not in fact end before his death-(1) the possession or enjoyment of, or the

right to income from, the property * * *

Before her death, decedent transferred $2,000 to GFLP to

pay the required capital contributions of each of her children

and their trusts. In addition, on Jan. 8, 1997, decedent

executed the amendment to her trust agreement expressing her

intention that “all the property in which I have an interest is

from this date forward subject to the trust” and that the trust

assets either had been or would be invested in GFLP. Various

deposits were made into GFLP’s account between Jan. 8 and June

12, 1997, and respondent has stipulated that GFLP was validly

formed under Oklahoma law. We shall assume, therefore, that GFLP

was in existence and that it had some assets on the date of

decedent’s death, and we shall consider the parties’ arguments

regarding the applicability of sec. 2036.

- 63 Section 2036(a) is designed to include in a decedent’s gross

estate “‘transfers that are essentially testamentary--i.e.,

transfers which leave the transferor a significant interest in or

control over the property transferred during his lifetime.’”

Estate of Abraham v. Commissioner, 408 F.3d 26, 37 (1st Cir.

2005) (quoting United States v. Estate of Grace, 395 U.S. 316,

320 (1969)), affg. T.C. Memo. 2004-39, amended 429 F.2d 294 (1st

Cir. 2005).

A decedent retains an interest described in section

2036(a) unless he “absolutely, unequivocally, irrevocably, and

without possible reservations” parts with possession and

enjoyment of the transferred property.

Church, 335 U.S. 632, 645 (1949).

Commissioner v. Estate of

Possession or enjoyment of

transferred property is retained for purposes of section

2036(a)(1) where there is an express or implied understanding to

that effect among the parties at the time of the transfer, even

if the retained interest is not legally enforceable.

Sec.

20.2036-1(a), Estate Tax Regs.; see also Estate of Reichardt v.

Commissioner, 114 T.C. 144, 151 (2000); Estate of Harper v.

Commissioner, T.C. Memo. 2002-121.

All of the facts and

circumstances surrounding the transfer and subsequent use of the

property are considered in deciding whether there was an implied

agreement or understanding.

supra at 151.

Estate of Reichardt v. Commissioner,

The taxpayer bears the burden of disproving the

- 64 existence of an agreement regarding retained enjoyment, a burden

especially onerous in intrafamily situations.

Id. at 151-152.

This Court has applied section 2036(a)(1) to assets

transferred to a family partnership in which the decedent

retained the possession of, enjoyment of, or the right to the

income from the transferred assets.

See, e.g., id. at 150-155;

Estate of Harper v. Commissioner, supra.

In each case, we found

inclusion in the gross estate appropriate because the decedent

failed to curtail his or her enjoyment of the property following

the transfer to the family partnership.

Factors indicating an

implicitly retained interest under section 2036(a)(1) include

transfer of the majority of the decedent’s assets, continued use

of transferred property, commingling of personal and partnership

assets, disproportionate distributions to the decedent, use of

entity funds for personal expenses, and testamentary

characteristics of the arrangement.

See Estate of Reichardt v.

Commissioner, supra (decedent commingled partnership and personal

funds, used partnership’s checking account as his personal

account, and continued to use assets in same manner as before

they were transferred); Estate of Strangi v. Commissioner, T.C.

Memo. 2003-145 (decedent maintained same relationship to his

assets as he had before formation of family partnership), affd.

417 F.3d 468 (5th Cir. 2005); Estate of Thompson v. Commissioner,

T.C. Memo. 2002-246 (decedent transferred most of his assets to

- 65 partnership and was able to withdraw these assets from

partnership at any time), affd. 382 F.3d 367 (3d Cir. 2004);

Estate of Harper v. Commissioner, supra (decedent commingled

funds, distributions were made disproportionately to decedent,

and arrangement possessed testamentary characteristics); Estate

of Schauerhamer v. Commissioner, T.C. Memo. 1997-242 (decedent

transferred a substantial amount of her assets to a partnership

and deposited income from partnership in a personal account that

she used to pay personal and partnership expenses).

Section 2036(a), however, provides for an exception to its

general inclusion rule.

Under the exception, where assets are

transferred through a “bona fide sale for an adequate and full

consideration in money or money’s worth”, the value of those

assets is not subject to inclusion under section 2036(a).

Availability of the exception rests on two requirements:

(1) An

arm’s-length transaction, and (2) adequate and full

consideration.

Estate of Harper v. Commissioner, supra.

The

decedent’s receipt of a partnership interest is not a bona fide

sale for full and adequate consideration where an intrafamily

transaction merely attempts to change the form in which the

decedent holds property.

supra.

Estate of Thompson v. Commissioner,

In addition, the transfer must be motivated by a

legitimate nontax business purpose.

See Estate of Bongard v.

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

- 66 Commissioner, T.C. Memo. 2005-65; Estate of Stone v.

Commissioner, T.C. Memo. 2003-309.

Petitioner asserts that decedent’s only interest in the

transferred assets was as a beneficiary of the Sylvia Gore

Revocable Trust, which held a 32.667-percent limited partnership

interest in GFLP.

Because GFLP is a separate legal entity formed

in compliance with Oklahoma law, petitioner argues that decedent

relinquished all control, possession, enjoyment, or right to

income upon the alleged transfer of the Marital Fund assets to

GFLP.

Petitioner argues that decedent retained no benefit or

control over the assets and that TCO controlled or managed the

GFLP assets during decedent’s life.

Additionally, petitioner

argues that decedent did not execute or contemplate an agreement

reserving any control of the transferred assets.

Decedent, however, did not part with possession or enjoyment

of the property purportedly transferred to GFLP.

At the time of

decedent’s death, GFLP did not hold title to any of the Marital

Fund assets.

From its formation until the date of decedent’s

death, GFLP did not engage in any business or investment

activity.

Only after decedent’s death and long after GFLP’s

formation were accounting records created purporting to show that

decedent transferred a series of Marital Fund assets to GFLP.51

Accounting manipulations occurring after decedent’s death

cannot refute the existence of an implied agreement permitting

(continued...)

- 67 Decedent individually or through Ms. Powell as attorney-in-fact

continued to receive all of the income from the property

transferred to GFLP, directed its deposit, and benefited from its

use without restriction.

Ms. Powell continued using Marital Fund

assets allegedly transferred to GFLP for decedent’s benefit.

Decedent’s access to the assets was without restriction, allowing

decedent to maintain the same relationship to her assets as

existed before the alleged transfer to GFLP.

The circumstances surrounding the alleged transfer and

subsequent use of the Marital Fund assets demonstrate an implied

agreement between decedent and her children.

Accordingly,

because decedent continued to control and to use Marital Fund

assets after the alleged transfer to GFLP on January 8, 1997, the

assets transferred to GFLP are includable in decedent’s gross

estate under section 2036.

Decedent’s transfer of Marital Fund assets to GFLP also does

not qualify for the bona fide sale exception contained in section

2036(a).

Decedent’s transfer did not occur through an arm’s-

length transaction because decedent essentially acquired her

interest from herself.

T.C. Memo. 2002-121.

See Estate of Harper v. Commissioner,

Decedent stood on both sides of the

transaction, and the partnership was formed without any

(...continued)

the continued use of transferred assets.

Commissioner, T.C. Memo. 2002-121.

See Estate of Harper v.

- 68 bargaining or negotiating because the seller and the purchaser

were the same person.

Cf. Estate of Stone v. Commissioner, supra

(transfers to family partnerships were arm’s-length transactions

because each member of family was represented by independent

counsel and transfers were motivated primarily by investment and

business concerns).

Decedent’s transfer also was not made for full and adequate

consideration.

Decedent’s receipt of a partnership interest is

not full and adequate consideration within the meaning of section

2036 because decedent used GFLP merely as a vehicle for changing

the form in which she held her interest in the Marital Fund

assets.

246.

See Estate of Thompson v. Commissioner, T.C. Memo. 2002-

Decedent’s transfer represents a circuitous “recycling of

value” because no change was made to the underlying pool of

assets; no one other than decedent made contributions of property

or services in the interest of true joint ownership or

enterprise.

See Estate of Harper v. Commissioner, supra.

The

value of decedent’s interest in GFLP is derived exclusively from

the assets that decedent allegedly contributed to GFLP.

Under

these facts, decedent did not engage in any bona fide transaction

for consideration upon the creation and funding of GFLP.

Accordingly, petitioner is not entitled to rely on the exception

under section 2036(a).

- 69 We hold that, even if Marital Fund assets were transferred

to GFLP, the full date-of-death values of those assets are

includable in decedent’s gross estate under section 2036(a).

Whether the Gross Estate Should Be Reduced by the Amount of

GFLP’s Alleged Debt to Decedent

The estate listed as an asset of the estate a note

receivable from GFLP to decedent.

Petitioner argues that if we

include all of the Marital Fund assets allegedly transferred to

GFLP in decedent’s gross estate under sections 2033 and

2041(a)(2), “it is factually impossible for * * * [decedent] to

owe to herself $46,664”.

Respondent argues that although the

estate has never explained or substantiated the transactions

generating the alleged debt GFLP owes to decedent, the gross

estate should not be reduced by that amount because the expert

witnesses testified at trial that the $46,664 amount was already

taken into account in both petitioner’s and respondent’s

determinations of the net asset value of the gross estate.

We concluded earlier in this opinion that petitioner has not

proven that decedent contributed or sold any of her own assets to

GFLP with the expectation that GFLP would repay her.

conclusion that the amount of GFLP’s alleged debt to decedent is

includable in the gross estate would be inconsistent with our

findings of fact in this case.

The existence of the alleged debt

depends, in the first instance, upon a finding that the Marital

Fund assets had been transferred to GFLP.

Our primary finding is

- 70 that no such transfer took place.

Moreover, the record

adequately demonstrates that no bona fide debt owed by GFLP to

decedent existed on the date of decedent’s death.

Accordingly,

the value of the gross estate must be reduced by $46,664.

VI.

Whether the Value of the Smith Barney Investment Account Is

Includable in Decedent’s Gross Estate

Petitioner argues that including the proceeds of the Smith

Barney account in decedent’s gross estate would result in taxing

the same funds twice because that amount was deducted from the

alleged debt GFLP owed to decedent, which increased the overall

value of GFLP.

Petitioner relies solely on the GFLP accounting

records to support petitioner’s position.

Respondent argues that petitioner has not provided any

detail regarding the items giving rise to the alleged debts

between GFLP and its partners.

Respondent contends further that

the amount is includable in the gross estate under section 2033

because the value of the Smith Barney account was not reported on

decedent’s estate tax return or included as an asset of GFLP in

valuing GFLP or its partnership interests.

The estate did not report the value of the Smith Barney

account as part of decedent’s gross estate on Form 706.

Therefore, we sustain respondent’s determination that $102,139,

the value of the Smith Barney account, is includable in the gross

estate under section 2033.

- 71 VII. Whether the Estate Is Entitled To Deduct Administration

Expenses in Excess of Those Allowed

Petitioner contends that the executor’s fee, appraisal fees,

legal fees, and interest accrued on the Oklahoma death tax and

the Federal estate and gift tax liabilities, incurred after

filing the estate tax return and in excess of the amounts already

allowed, are deductible from decedent’s gross estate.

Respondent contends that petitioner has not presented any

documentation to substantiate the estate’s expenses but

acknowledges that petitioner may submit the appropriate forms,

along with supporting documentation, to respondent for a

determination of reasonableness of the amounts claimed.

Alternatively, respondent asserts that petitioner may request

additional administration expense deductions in the Rule 155

proceeding, or we may determine the allowable administration

expense deductions in a Rule 156 proceeding.

Section 2053(a)(2) provides that the value of the taxable

estate shall be determined by deducting from the value of the

gross estate such amounts for administration expenses as are

allowable by the laws of the jurisdiction under which the estate

is being administered.

Administration expenses include

executor’s commissions; attorney’s fees, including those fees

associated with contesting an asserted deficiency; and

miscellaneous expenses such as appraiser’s fees, accountant’s

fees, and court costs.

Sec. 20.2053-3, Estate Tax Regs.

- 72 addition, interest attributable to a State death tax or Federal

estate tax deficiency may be deductible as an administration

expense under section 2053.

Estate of Bahr v. Commissioner, 68

T.C. 74 (1977).

At the trial, petitioner did not substantiate any additional

administration expenses the estate had paid or incurred since

filing its estate tax return.

However, we do not doubt that the

estate has paid or incurred additional administration expenses

that are allowable as deductions if substantiated.

Petitioner

should promptly submit documentation of any additional

administration expenses to respondent, and the parties should

attempt to reach an agreement regarding this issue.

If the

parties are unable to do so, we shall decide the issue as

appropriate in a Rule 155 or 156 proceeding.

VIII.

Whether the Estate Is Entitled To Deduct ad Valorem Tax

The estate claimed a deduction of $1,543 for ad valorem tax

on Schedule K of Form 706, which respondent disallowed.

Petitioner now maintains that the estate is entitled to deduct

$3,367, the full amount of ad valorem tax owed for 1997, under

section 2053(a)(3).

Respondent argues the estate is not allowed

to deduct any of decedent’s ad valorem tax because petitioner has

not established that the tax was a personal obligation of

decedent on the date of her death that met the requirements for

deductibility under section 2053.

- 73 Ad valorem tax may be deducted from the value of the gross

estate if the tax is an enforceable obligation of the decedent on

the date of the decedent’s death and is allowable under State

law.

Sec. 2053(a)(3), (c)(1)(B); sec. 20.2053-6(b), Estate Tax

Regs.

Under Oklahoma law, only ad valorem tax that is a lien on

a decedent’s property on the date of the decedent’s death is an

enforceable obligation of the decedent on that date.

Ann. tit. 68, sec. 808(a) (West 2001).

Okla. Stat.

Ad valorem tax becomes a

lien on property on the date the tax becomes due and payable.

Okla. Stat. Ann. tit. 68, sec. 3101 (West 2001).

Ad valorem tax

for each fiscal year becomes due and payable on the first day of

November.

Okla. Stat. Ann. tit. 68, secs. 2804, 2913 (West

2001).

On June 12, 1997, no enforceable obligation existed with

respect to decedent’s 1997 ad valorem tax.

The 1997 ad valorem

tax did not become due and payable and a lien against decedent’s

real property until November 1, 1997.

Ms. Powell paid the 1997

ad valorem tax on decedent’s home on November 24, 1997.

Petitioner has not offered any evidence to substantiate the

amount of any allowable deduction.

Moreover, the Oklahoma

statute cited by the estate is inapplicable here because there

was no conveyance of decedent’s property in 1997.

Ann. tit. 68, sec. 2912 (West 2001).

Okla. Stat.

The Oklahoma cases cited by

petitioner are equally inapplicable, as they relate to whether a

- 74 purchaser or seller is liable for ad valorem taxes when real

property is sold and do not address the issue of when the State

ad valorem tax liability actually becomes due and payable.

Allen

v. Henshaw, 168 P.2d 625 (Okla. 1946); Bd. of Commrs. v. Cent.

Baptist Church, 276 P. 726 (Okla. 1929).

Accordingly, petitioner

has not established that the estate is entitled to any deduction

for decedent’s 1997 ad valorem tax.

We sustain respondent’s

determination disallowing the $1,543 ad valorem tax deduction

claimed by the estate.

IX.

Conclusion

We have considered the remaining arguments of both parties

for results contrary to those expressed herein and, to the extent

not discussed above, find those arguments to be irrelevant, moot,

or without merit.

To reflect the foregoing,

Decisions will be entered

under Rule 155.

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