2004 WL 3396397 (U.S.Tax Ct.)

For opinion see T.C. Memo. 2005-126

Estate of Charles Porter SCHUTT, Deceased, Charles P. Schutt, Jr., and Henry I.

Brown, III, Co-Executors, Petitioner,

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Petitioner's Amended Brief

*i TABLE OF CONTENTS

TABLE OF CONTENTS ... i

TABLE OF AUTHORITIES ... ii

STATEMENT OF THE CASE AND ISSUES ... 1

PROPOSED FINDINGS OF FACT ... 4

PROPOSED ULTIMATE FINDINGS OF FACT ... 32

POINTS ON WHICH PETITIONERS RELY ... 34

ARGUMENT ... 36

I. Burden of Proof ... 36

II. I.R.C. § 2036 Does Not Apply ... 37

A. General Rules and Purpose ...37

B. Elements 1 and 2 of § 2036 - No "Transfer" of Property to Schutt I or Schutt II Occurred, and the Contributions of Property by Mr. Schutt were Bona Fide Sales for Full and Adequate Consideration ... 42

C. Section 2036 (a) (1) - Mr. Schutt Did Not Retain the Possession or Enjoyment of, or the Right to the Income from, the Transferred Property ... 57

D. Section 2036(a)(2) - Mr. Schutt did not retain the right to designate the persons who would enjoy the property transferred to Schutt I and Schutt II ... 62

E. Section 2038 Does not Apply to Assets Contributed by Mr. Schutt to Schutt I and Schutt II ... 67

CONCLUSION ... 69

*ii TABLE OF AUTHORITIES

CASES

Church v. United States, 2000 WL 206374 (W.D. Tex. 2000), aff'd, 268 F.3d 1063 (5th Cir. 2001) ... 43, 44, 45, 55, 56

Comm'r v. Estate of Church, 335 U.S. 63 2 (1949) ... 38

Estate of Bischoff v. Comm'r, 69 T.C. 32 (1977) ... 55

Estate of Boykin v. Comm'r, 53 T.C.M. (CCH) 345 (1987) ... 61

Estate of Bright v. United States, 658 F.2d 999 (5th Cir. 1981) ... 37

Estate of Cohen v. Comm'r, 79 T.C. 1015 (1982) ... 64, 69

Estate of Harper v. Comm'r, 83 T.C.M. (CCH) 1641 (2002) ... 46-49, 57, 58

Estate of Harrison v. Comm'r, 52 T.C.M. (CCH) 1306 (1987) ... 43

Estate of Helvering v. Hallock, 309 U.S. 106 (1940) ... 38

Estate of Jones v. Comm'r, 116 T.C. 121 (2001) ... 44, 45

Estate of Michelson v. Comm'r, 37 T.C.M. (CCH) 1534 (1978) ... 43

Estate of Reichardt v. Comm'r, 114 T.C. 14 4 (2000) ... 57

Estate of Reynolds v. Comm'r, 55 T.C. 172 (1970) ... 55

Estate of Schauerhamer v. Comm'r, 73 T.C.M. (CCH) 2855 (1997) ... 57, 58

*iii Estate of Shafer v. Comm'r, 749 F.2d 1216 (6th Cir. 1984) ... 43

Estate of Stone v. Comm'r, 86 T.C.M. (CCH) 551 (2003) ... 42-47, 50, 51

Estate of Strangi v. Comm'r, 85 T.C.M. (CCH) 1331 (2003) ... 46, 48, 63-65

Estate of Thompson v. Comm'r, 84 T.C.M. (CCH) 374 (2002) ... 46, 47, 48, 57, 58

Guynn v. United States, 437 F.2d 1148 (4th Cir. 1971) ... 39

Helvering v. Helmholtz, 2 96 U.S. 93 (D.C. Cir. 1935) ... 62, 66

In re Estate of Tully, 528 F.2d 1401 (Ct. Cl. 1976) ... 62, 66

Jennings v. Smith, 161 F.2d 74 (2d Cir. 1947) ... 65

Kimbell v. United States, 2004 WL 1119598 (5th Cir. May 20, 2004) (No. 03- 10529) ... 49, 52, 54, 55, 56

Louis G. Hutchens Non-Marital Trust v. Comm'r, 66 T.C.M. (CCH) 1599 (1993) ... 61

Mahoney v. United States, 831 F.2d 641 (6th Cir. 1987) ... 39

McNeil v. McNeil, 798 A.2d 503 (Del.2002) ... 65

United States v. Byrum, 408 U.S. 125 (1972) ... 62, 63, 64

United States v. Estate of Grace, 395 U.S. 316 (1969) ... 39

Wheeler v. United States, 116 F.3d 749 (5th Cir. 1997) ... 42, 49

*iv FEDERAL STATUTES

I.R.C. § 721 ... 20, 21, 45

I.R.C. § 2001(a) ... 37

I.R.C. § 2031 (a) ...37

I.R.C. § 2033 ... 37

I.R.C. § 2036 ... Passim

I.R.C. § 2038 ... Passim

I.R.C. § 2512(b) ... 42

REGULATIONS

Treas. Reg. § 20.2038-1(a)(2) ... 69, 69

DELAWARE STATUTES

Del.C. § 3801 ... 15, 61, 69

MISCELLANEOUS

Howard M. Zaritsky, Tax Planning for Family Wealth Transfers ¶ 3.04 [2] [a] ... 38

This case arises from a notice of deficiency issued by Respondent on October 11, 2002, to the Estate of Charles Porter Schutt, Deceased (the "Estate"), and an Amendment to Answer filed by Respondent on November 11, 2003, with respect to Petitioner's Petition, asserting a total estate tax deficiency of $11,118,981.

The case was tried before the Honorable Robert A. Wherry, Jr. in Philadelphia, Pennsylvania, on February 11, 2004. The evidence consists of the Stipulations set forth in the Stipulation of Facts filed with the Court on February 9, 2004 ("Stip."), the Supplemental Stipulation of Facts filed with the Court on February 11, 2004 ("Supp. Stip.") and the exhibits thereto ("Exh."), and the testimony received at trial ("Tr."). The Court set April 26, 2004, as the initial date for filing simultaneous opening briefs, and June 10, 2004, as the initial date for filing simultaneous reply briefs. Subsequently, on April 7, 2004, the Court granted Respondent's motion to extend the filing of the simultaneous opening briefs until May 26, 2004, and to extend the filing of the simultaneous reply briefs until July 9, 2 004.

The primary issue in this case is whether Respondent can ignore two Delaware Business Trusts in which a revocable *2 trust established by C. Porter Schutt ("Mr. Schutt") owned a 45.2363% interest and a 47.3364% interest at the time of his death for purposes of determining the value of Mr. Schutt's estate for Federal estate tax purposes. Petitioners assert that Respondent erred in determining that certain assets transferred during the lifetime of Mr. Schutt from his revocable Agreement of Trust dated January 16, 1976, as amended (the "Revocable Trust"), to two Delaware business trusts, Schutt I, Business Trust ("Schutt I") and Schutt II, Business Trust ("Schutt II") in exchange for pro rata unit interests in each business trust, are included in Mr. Schutt's estate under § 2036 and § 2038. [FN1] [FN2] Because I.R.C. §§ 2036 and 2038 were raised by Respondent just three months before trial in its Amendment to Answer, under Tax Court Rule 142 (a)(1) Respondent has the burden of proof on all fact issues in this case.

FN1. Unless otherwise indicated, references to "§ " refer to the referenced section of the Internal Revenue Code of 1986, as amended.

FN2. In accordance with a Stipulation of Settled Issues filed by the Petitioner and Respondent on January 23, 2004, it was agreed that in the event it is determined that § 2036 and § 2038 do not apply to the interests of the Revocable Trust in Schutt I and Schutt II, then the value of these interests as of the alternate valuation date associated with Mr. Schutt's date of death is $19,930,937 and $9,107,818, respectively.

To reach a conclusion regarding the applicability of § 2036 to the assets of Schutt I and Schutt II contributed by the Revocable Trust, the Court will need to address the following *3 factual issues in each case: (i) whether Mr. Schutt made a "transfer" of property to Schutt I and Schutt II; (ii) whether any transfer was not a bona fide sale for full and adequate consideration; and (iii) whether (a) Mr. Schutt retained the possession or enjoyment of, or the right to the income from, any property transferred to Schutt I and Schutt II, or (b) Mr. Schutt retained the right alone, or in conjunction with any of other person, to designate the persons who shall possess or enjoy any property transferred to Schutt I or Schutt II. If any of these three elements is missing, § 2036 does not apply.

To reach a conclusion regarding the applicability of § 2038 to the assets of Schutt I and Schutt II contributed by the Revocable Trust, the Court will need to address the following fact issues in each case: (i) whether Mr. Schutt made a "transfer" of property to Schutt I and Schutt II; (ii) whether any transfer was not a bona fide sale for full and adequate consideration; and (iii) whether Mr. Schutt retained the power to alter, amend, revoke or terminate any transfer of assets to Schutt I and Schutt II. If any of these three elements is missing, § 2038 does not apply.

1. Petitioner the Estate of Charles Porter Schutt, Deceased (the "Estate"), Charles P. Schutt, Jr. and Henry I. Brown, III, Co-Executors, is an estate. Stip. 1.

2. Charles P. Schutt, Jr. was a resident of Pennsylvania when the Petition was filed in this case.

3. Henry I. Brown, III was a resident of Pennsylvania when the petition was filed in this case.

4. Charles P. Schutt ("Mr. Schutt") died on April 21, 1999. Stip. 2.

5. The alternate valuation date as mandated under § 2032 with respect to Mr. Schutt's date of death is October 21, 1999. Stip. 7.

6. On or about January 21, 2000, Petitioner timely filed its Form 706, United States Estate Tax Return (the "Estate Tax Return") Stip. 4; Exh. 1-J.

7. Respondent issued a Notice of Deficiency dated October 11, 2002 ("Notice of Deficiency") Stip. 5; Exh. 2-J.

8. Mr. Schutt was born on XX/XX/1911. Stip. 6.

9. Mr. Schutt was married to Phyllis duPont Schutt, who died on August 5, 1989.

10. Historically, and before Schutt I and Schutt II were created, the Schutt family's interest in Du Pont stock and *5 Phillips Petroleum stock comprised a significant portion of the family wealth and generated a significant and steady portion of the family income. Stip. 14; Tr. 27.

11. The Schutt family's Du Pont stock and Phillips Petroleum stock was obtained from Mr. Schutt's father-in-law, Eugene E. duPont. In the mid-1980's, due to dissatisfaction with the management of Phillips Petroleum, the Schutt family's holdings in Phillips Petroleum were sold, and replaced with Exxon stock. Stip 14.; Tr. 27, 107.

12. During 1940, Eugene E. duPont transferred a substantial portion of the Du Pont and Phillips Petroleum stock for the benefit of the issue of his daughter (Mr. Schutt's deceased spouse) Phyllis duPont Schutt, in accordance with a Trust Agreement between Eugene E. duPont, Trustor and Wilmington Trust Company, Trustee, dated December 30, 1940. This trust was known as Wilmington Trust Company Trust 3044. Stip. 15; Exh. 17-J.

13. Upon the death of Phyllis duPont Schutt, and in accordance with the trust provisions, Trust 3044 was divided into separate trusts for the benefit of the children of Mr. Schutt and Phyllis duPont Schutt, who were Katherine D. Schutt Streitwieser ("Jerry"), Charles P. Schutt, Jr., Sarah Schutt Harrison and Caroline Schutt Brown. These trusts are known as *6 Wilmington Trust Company Trust 3044-1, 3044-2, 3044-3, 3044-4, 3044-5, 3044-6, 3044-7, and 3044-8. Stip. 15; Exh. 17-J.

14. Trust 3044-1, 3044-2, 3044-3, 3044-4, 3044-5, 3044-6, 3044-7, and 3044-8 provide that upon the death of any child of Phyllis duPont Schutt, the assets in the child's trust are to be distributed to the child's issue, outright. (Trust 3044-4 was held for the benefit of Charles P. Schutt, Jr. The provisions of this trust allowed him to withdraw the entire trust fund when he attained the age of 35.) Exh. 17-J; Tr. 28.

15. Mr. Schutt's grandchildren were also beneficiaries of a trust created by Phyllis duPont Schutt, by virtue of her exercise of a limited power of appointment conferred upon her in the Trust Agreement between Eugene E. duPont, Trustor, and Wilmington Trust Company, Trustee, dated October 6, 1934. This trust is known as Wilmington Trust Company Trust 2064. Stip. 16; Exhs. 18-J and 19-J; Tr. 28.

16. Trust 2064 will terminate when the youngest grandchild of Mr. Schutt attains age 40. At that time, the principal of Trust 2064 will be distributed to Mr. Schutt's grandchildren, in equal shares. Exhs. 18-J and 19-J, art. S; Tr. 28.

17. Mr. Schutt's grandchildren were also beneficiaries of a trust established under a revocable Trust Agreement between Phyllis duPont Schutt, as Trustor, and the *7 Wilmington Trust Company, Trustee, dated January 16, 1976, as amended by Supplemental Trust Agreements dated April 9, 1976, June 6, 1979, December 30, 1982, and September 1, 1998. After Mrs. Schutt's death, this trust became known as Wilmington Trust Company Trust 11258-3. Stip. 17; Exhs. 20-J and 24-J.

18. Beginning in the 1970s, Mr. Schutt often expressed his concern about the possible improvident disposition of Schutt family assets, particularly, the Du Pont stock and Exxon stock, which could jeopardized the continuation of the Schutt family wealth for future generations. Mr. Schutt discussed this concern with his attorney, Thomas P. Sweeney, Esquire ("Mr. Sweeney") and the office manager of the Schutt family office, Stephen J. Dinneen ("Mr. Dinneen"). Mr. Schutt desired to develop a plan which would permit him to duplicate the buy and hold investment policy adopted by his father-in-law, Eugene E. duPont. Tr. 29-30, 108-109, 113-114.

19. During 1971, and in furtherance of the preservation of the buy and hold investment philosophy, Mr. Schutt and his wife established the first of three long-term irrevocable trusts, which were funded (at least in part) with Christiana Securities Company common stock, for the benefit of their grandchildren and the issue of their grandchildren. Stip. 18.

*8 20. Christiana Securities Company was a holding company established by certain branches of the duPont family to hold Du Pont stock. This company was later merged into Du Pont. Stip. 19; Tr. 29.

21. On September 16, 1971, Mr. Schutt and Phyllis duPont Schutt, as Trustors, entered into an irrevocable Trust Agreement with Merchants National Bank of Mobile, Henry I. Brown, III and Charles P. Schutt, Jr., as Co-Trustees, for the benefit of the issue of three of their four children. This trust became known as the Vredenburgh Trust. Stip. 20; Exh. 25-J.

22. The Vredenburgh Trust was funded with 3,575 shares of Christiana Securities Company common stock, 333 1/3 shares of Wilmont Development Corporation, Inc. (a company which managed timberland operations in Alabama), and timberlands located in Wilcox County Alabama and Monroe County Alabama. Stip. 30; Exh. 25-J.

23. The Vredenburgh Trust was divided into separate shares, one share for the issue, per stirpes, of each child.The income and principal from each share was to be distributed among the beneficiaries of each share in the sole discretion of the Trustee. Upon the death of any beneficiary, any amounts that could have been distributed to that beneficiary were to be distributed to the issue, per stirpes, of the beneficiary. Exh. 25-J, § 2.

*9 24. The Vredenburgh Trust is to continue until 21 years from and after the death of the last survivor of Mr. and Mrs. Schutt, and the issue of their parents, the maximum period allowed under the then-applicable rule against perpetuities. Exh. 25-J, § 3.

25. On May 23, 1972, in furtherance of the buy and hold investment philosophy of Eugene E. duPont, Phyllis duPont, as Trustor, established a second irrevocable trust naming Mr. Schutt, Charles P. Schutt, Jr. and Wilmington Trust Company as Co-Trustees. This trust was established for the benefit of the issue of Mr. Schutt's daughter, Jerry Streitwieser, and became known as Wilmington Trust Company Trust 11738 ("Trust 11738"). Stip. 22; Exh. 26-J.

26. Upon Jerry's death, Trust 11738 was to be divided into separate shares, for her issue, per stirpes. The beneficiaries of each share were to receive the income on a quarterly basis, and no principal distributions were to made. Upon the death of any beneficiary, the deceased beneficiary's share was to be held in further trust for his or her issue, per stirpes. Exh. 27-J, § I.

27. Trust 11738 is to continue for the maximum period allowed by the applicable rule against perpetuities. Exh. 27-J, § I.

*10 28. In continued furtherance of the preservation of the buy and hold investment philosophy of Eugene E. duPont, on December 23, 1976, Phyllis duPont Schutt, as Trustor, established a third irrevocable trust for the benefit of the Streitwieser children, naming Wilmington Trust Company as Trustee. This trust became known as Wilmington Trust Company Trust 15032 ("Trust 15032"). Stip. 23; Exh. 27-J.

29. Trust 15032 contains dispositive provisions that are similar to those set forth in Trust 11738, except that upon the death of any grandchild who is a beneficiary of the trust, this beneficiary's share shall be distributed in accordance with the beneficiary's exercise of a general power of appointment, or in default of this exercise, to the beneficiary's issue, per stirpes. Exh. 27-J, § II.

30. Trust 15032 is to continue for the maximum period allowed by the applicable rule against perpetuities. Exh. 27-J, § IV.

31. Trust 11738 and Trust 15032, were funded with Christiana Securities Company common stock. Stip. 24; Exhs. 26-J and 27-J.

32. Jerry died on March 27, 1993. Stip. 2.

33. At her death, Jerry was the current beneficiary of Trusts 3044-3 and 3044- 7. Stip. 25.

*11 34. Upon Jerry's death, the assets of Trusts 3044-3 and 3044-7 were distributed outright to Jerry's children. Stip. 25-26; Exh. 17-J; Tr. 30-31.

35. After Jerry's death, Mr. Schutt continued to express his concern to Mr. Sweeney and Mr. Dinneen about the possibility that his grandchildren would circumvent the investment policy established by Eugene E. duPont through the improvident disposition of assets remaining in the Wilmington Trust Company Trusts 3044-1, 3044-2, 3044-5, 3044-6, 3044-8, Wilmington Trust Company Trust 2064 and Wilmington Trust Company Trust 11258-3. (All of the aforesaid Wilmington Trust Company Series 3044 Trusts, Wilmington Trust Company Trust 2064, and Wilmington Trust Company Trust 11258-3 collectively shall be referred to as the "Wilmington Trust Company Trusts.") Stip. 17; Exhs. 20-J through 24- J; Tr. 30-31.

36. Prior to the formation of Schutt I and Schutt II, several of Mr. Schutt's grandchildren sold Du Pont and/or Exxon stock. These sales added to Mr. Schutt's concern regarding the improvident disposition by his grandchildren of the assets in the Wilmington Trust Company Trusts. Supp. Stip. 1; Tr. 31, 109- 54. 114.

37. On April 14, 1997, Mr. Schutt's granddaughter, Phyllis E. Ballantine, sold 236 shares of Du Pont stock. Supp. Stip. 1; Exh. 114-J.

*12 38. On February 17, 1995, Mr. Schutt's grandson, Scott B. Harrison, sold 170 shares of Exxon stock. Supp. Stip. 1; Exh. 114-J.

39. On July 2, 1997, Mr. Schutt's granddaughter, Caroline Linter, sold 3600 shares of Exxon stock. Supp. Stip. 1; Exh. 114.

40. On September 26, 1994, Mr. Schutt's grandson, Charles E. Streitwieser, sold 500 shares of Exxon stock. Mr. Streitwieser also sold 200 shares of Exxon stock on September 23, 1996. Supp. Stip. 1; Exh. 114-J.

41. On February 16, 1988, Mr. Schutt's granddaughter, Clementina R. Brown, sold 1300 shares of Exxon stock. Supp. Stip. 1; Exh. 114-J.

42. On March 24, 1997, Mr. Schutt's granddaughter, Aimee P. Hutson, sold 236 shares of Du Pont stock. Also, on July 7, 1989, Ms. Hutson sold 290 shares of Exxon stock. Stip. 1; Exh. 114-J.

43. On June 12, 1997, Mr. Schutt's granddaughter, Renee duPont Harrison sold 236 shares of Du Pont stock. Ms. Harrison also sold Exxon stock, including, 100 shares on February 16, 1990, 250 shares on February 28, 1991, 76 shares on February 23, 1996 and 150 shares on October 28, 1997. Supp. Stip. 1; Exh. 114- J.

*13 44. In 1994, Mr. Schutt again became concerned about perpetuating the buy and hold investment philosophy with respect to Alabama timberlands which had become part of the Schutt family wealth. Stip. 27.

45. On December 23, 1994, Mr. Schutt and two of his children, Charles P. Schutt, Jr. and Caroline S. Brown, formed the Schutt Family Limited Partnership (the "Partnership"). Stip 27. Exh. 28-J.

46. The assets of the Partnership were Alabama timberlands, securities and cash. Stip. 27; Exh. 28-J.

47. After the Partnership was formed, Mr. Schutt began making annual exclusion gifts of his limited partnership interests in the Partnership to certain of his children, their spouses, and their children. Stip. 27; Exhs. 28-J, 108-J through 113-J.

48. Mr. Schutt was also concerned about the investment philosophy of his daughter, Sarah S. Harrison, and her children. As a result, in 1994, Mr. Schutt did not make annual exclusion gifts of limited partnership interests in the Partnership to Sarah S. Harrison and her children. Exh. 108-J.

49. Wilmington Trust Company repeatedly urged Mr. Schutt to diversify the Schutt Family's investments in DuPont and Exxon. Mr. Schutt, however, did not desire to diversify the Schutt family's investments in Du Pont or Exxon. Tr. 42, 108.

*14 50. Mr. Schutt did not desire to diversify the Schutt family investments in Du Pont and Exxon absent drastic ircumstances that were similar to the circumstances that lead to the replacement of the Schutt family investment in Phillips Petroleum stock with Exxon stock. Tr. 42, 108.

51. During 1997 and 1998, Stephen J. Dinneen served as the office manager for Mr. Schutt and other Schutt family members. Among other things, he advised them on investment and business matters. Mr. Dinneen had been employed by the Schutt family since February, 1973. Stip 28. Tr. 100-101.

52. During 1997 and 1998, Thomas P. Sweeney, Esquire, a member of the firm of Richards, Layton & Finger, P.A., served as Mr. Schutt's attorney advising him on tax and estate planning matters. Mr. Schutt had been Mr. Sweeney's client since 1967. Stip. 29; Tr. 23.

53. In January and February of 1997, Mr. Schutt had discussions with Mr. Dinneen and Mr. Sweeney regarding the creation of a vehicle to perpetuate the buy and hold investment policy and philosophy of Eugene E. duPont to preclude the improvident disposition of the assets held in the Wilmington Trust Company Trusts. One alternative suggested by Mr. Sweeney and Mr. Dinneen was the use of a Delaware Business Trust (hereinafter referred to as "DBT" or "DBTs") formed pursuant to *15 the Delaware Business Trust Act, 12 Del.C. § 3801, et. seq. Tr. 32-33.

54. Subsequent to meeting with Mr. Schutt and Mr. Dinneen, attorneys in Mr. Sweeney's firm undertook general research with respect to the use of a DBT. Tr. 32-33; Exhs. 115-57. J-117-J.

55. On February 3, 1997, Mr. Sweeney met again with Mr. Schutt and Mr. Dinneen to discuss the possibility of forming a DBT. Stip. 30; Exh. 29-J; Tr. 32-33.

56. In early February 1997, on behalf of Mr. Schutt, Mr. Sweeney met with representatives of the Wilmington Trust Company to determine if it would consider being involved with Mr. Schutt in forming a DBT, and if so, under what conditions. Specifically, on February 5, 1997, Mr. Sweeney met with George W. Helme, IV, Senior Vice President and head of the Trust Department of Wilmington Trust Company. Mr. Helme directed Mr. Sweeney to speak with the legal staff of the Trust Department of Wilmington Trust Company with respect to the DBT concept. Stip. 31; Tr. 33.

57. Subsequent to the meeting with Mr. Helme on February 5, 1997, Mr. Sweeney, on behalf of Mr. Schutt, began arms-length negotiations with members of the legal department of Wilmington Trust Company regarding the formation of a DBT to hold a combination of (i) certain assets of the Revocable Trust, *16 of which Mr. Schutt was the Trustee, and (ii) certain assets of the Wilmington Trust Company Trusts, of which Wilmington Trust Company was the Trustee. These negotiations continued and were ongoing for a period of thirteen (13) months, until Schutt I and Schutt II were formed in March of 1998. Tr. 33, 41, 80, 83, 115.

58. The negotiations with the legal staff of Wilmington Trust Company began with a meeting which took place on March 4, 1997 with Cynthia L. Corliss, Esquire, Mary B. Hickok, Esquire, and Neal J. Howard, Esquire ("Mr. Howard"), of the Trust Department Legal Staff of Wilmington Trust Company, and Mr. Sweeney. Stip. 34; Tr. 34, 89-90.

59. Subsequent to this meeting, Mr. Sweeney received a memorandum from Ms. Corliss, Ms. Hickok and Mr. Howard, dated March 6, 1997 regarding the initial concerns of Wilmington Trust Company regarding the use of a DBT. Stip. 34; Exh. 32-J.

60. Subsequent to the preparation of the March 6, 1997 memorandum, Mr. Howard took the lead in the negotiations on behalf of the Wilmington Trust Company. Stip. 34; Tr. 34, 78-79.

61. If Mr. Schutt had not been willing to contribute assets from the Revocable Trust to the DBT, Wilmington Trust Company would not have been willing to contribute assets from the Wilmington Trust Company Trusts to the DBT and participate in the formation of the DBT. Tr. 92-96.

*17 62. Since, 1983, and during the course of the negotiations regarding the DBT, Mr. Sweeney was a member of the Board of Directors of Wilmington Trust Company. As an attorney practicing for over 3 7 years in Wilmington, Delaware, Mr. Sweeney has often represented clients in connection with matters involving Wilmington Trust Company. Tr. 34-35, 79-80.

63. Mr. Sweeney's position as a director of Wilmington Trust Company, did not influence the actions and decisions of Mr. Howard or Wilmington Trust Company during the course of the negotiations, except to cause Wilmington Trust Company to become more circumspect in its review, analysis and consideration with respect to participating in the formation of the DBT on the terms desired by Mr. Schutt. Tr. 34-35, 79-80.

64. As set forth in the March 6, 1997 memorandum, prior to agreeing to participate in the formation a DBT, Wilmington Trust Company wanted confirmation that (a) the receipt by the Wilmington Trust Company Trusts of any units in a DBT in exchange for assets in the Wilmington Trust Company Trusts would not be an income taxable event, (b) with respect to the assets contributed to the DBT, no one of the Wilmington Trust Company Trusts would be subject to capital gains tax on the pre-contribution appreciation of the Revocable Trust or any other Wilmington Trust Company Trust, if the DBT sold assets contributed by the Revocable Trust or any other Wilmington Trust *18 Company Trust, and (c) funding a DBT with assets of a Wilmington Trust Company Trust would be exempt from the application of any securities laws. In addition, the Wilmington Trust Company required that all beneficiaries of the Wilmington Trust Company Trusts consent to the formation of the DBT, and that the assets of the DBT be held in a Wilmington Trust Company custody account. Exh. 32-J; Tr. 36-41, 89.

65. There were significant negotiations regarding who would be the Trustee of the DBTs. Tr. 59, 89-90.

66. During the period of March 1997 through August 1997, Mr. Sweeney and the attorneys in his firm undertook research to address the concerns of the Wilmington Trust Company, as set forth in the March 6, 1997 memorandum. Exhs. 33-J, 37-J, 39-J, 40-J.

67. Cynthia D. Kaiser, Esquire, an attorney in Mr. Sweeney's firm who specializes in business and securities law, researched the securities laws issues raised in the Wilmington Trust Company memorandum of March 6, 1997. Exhs. 33-J and 37-J.

68. Julian H. Baumann, Jr., Esquire, a transactional tax attorney in Mr. Sweeney's firm, researched the partnership and other income tax issues raised in the Wilmington Trust Company memorandum of March 6, 1997. Exhs. 39-J and 40- J.

*19 69. To assist with the research and negotiations, during the March 1997 through August 1997 time period, Mr. Dinneen prepared an analysis of the tax basis of the assets in the Revocable Trust and the Wilmington Trust Company Trusts. Exh. 35-J.

70. During March 1997 through August 1997, Mr. Sweeney regularly communicated with Mr. Schutt and Mr. Dinneen regarding the status of the negotiations with Wilmington Trust Company and the results of the research of the issues raised by Wilmington Company. Exh. 34-J, 36-J, 38-J, 41-J, 42-J, 43-J.

71. During September 1997, negotiations continued between Mr. Sweeney as Mr. Schutt's counsel, and the Wilmington Trust Company regarding the possible formation of a DBT. Exhs. 44-J and 51-J.

72. Also during September 1997, additional research was completed by the attorneys in Mr. Sweeney's firm with respect to the confirmation of the tax law and securities law effects on the formation of a DBT. Stip. 49; Exhs. 46-J through 50-J.

73. Also during September 1997, Mr. Dinneen continued the asset ownership analysis of the Revocable Trust and the Wilmington Trust Company Trusts, to determine which assets should be contributed to a DBT. Exh. 52-J.

*20 74. During September 1997, Mr. Sweeney continued to communicate with Mr. Schutt and Mr. Dinneen regarding the status of negotiations with Wilmington Trust Company and the results of the research undertaken with respect to the negotiations. Exhs. 45-J and 49-J.

75.During November 1997, discussions continued between Mr. Sweeney as Mr. Schutt's counsel, and Wilmington Trust Company with regard to the formation of a DBT. Stip. 58; Exh. 53-J.

76. In November 1997, Mr. Sweeney, on behalf of Mr. Schutt, made several proposals to address Wilmington Trust Company's concerns, which the bank accepted. Specifically, Mr. Sweeney proposed that in order to prevent a DBT from being characterized as an investment company for income tax purposes under Section 721(b) of the Code, not all of the assets of the Wilmington Trust Company Trusts should be transferred to one DBT. Instead, only the Du Pont stock and Exxon stock owned by each trust should be transferred. Further, to avoid this characterization for income tax purposes under Section 721(b) of the Code, Mr. Sweeney proposed that two DBTs should be formed. One DBT would be formed to hold the Du Pont stock (Schutt I). The other DBT would be formed to hold the Exxon stock (Schutt II). The bank accepted Mr. Sweeney's position that if the DBT was not characterized as investment company for income taxes *21 under Section 721(b) of the Code, then the receipt by the Wilmington Trust Company Trusts of DBT units in exchange for the Du Pont stock and the Exxon stock was not an income taxable event. Stip. 58; Exh. 53-J.

77. Also during November, 1997, Mr. Sweeney, on behalf of Mr. Schutt, negotiated with Wilmington Trust Company with respect to (i) the nature of the consents to be obtained from the beneficiaries of the Wilmington Trust Company Trusts, (ii) the distributions to be made from the DBTs, (iii) the use of a custody account at Wilmington Trust Company to hold the assets of the DBTs, (iv) the fees to be charged by Wilmington Trust Company in connection with the custody accounts, and (v) the term of the DBTs. Exhs. 54-J through 58-J; Tr. 37-41, 89-90.

78.The drafting of the trust agreements for Schutt I and Schutt II began in November, 1997. Exh. 55-J.

79. In December 1997, the discussions with Wilmington Trust Company and Mr. Schutt continued with respect to the formation of Schutt I and Schutt II (hereinafter, Schutt I and Schutt II sometimes shall be referred to collectively as the "Business Trusts"). These discussions pertained to the provisions of the Business Trust documents, along with the fees to be charged by Wilmington Trust Company with respect to holding the assets of the Business Trusts in Wilmington Trust *22 Company custody accounts. Stip. 65; Exhs. 59- J and 60-J; Tr. 36-41.

80. Drafts of the Business Trust documents were prepared and circulated for comment in December 1997. Stip. 68; Exhs. 61-J through 63-J.

81.Wilmington Trust Company required that the initial drafts of the Business Trust documents be revised to provides that distributions as set forth in Section 8.1 of the Business Trust documents were mandatory and made on a quarterly basis, and not left to the discretion of the Trustee. Exhs. 64-J and 65-J; Tr. 40, 81-82.

82.In January 1998, the discussions between Mr. Schutt and Wilmington Trust Company regarding the formation of the Business Trusts came to a conclusion. This resulted in an agreement as to the form of the Business Trust documents. Stip 71, 74; Exhs. 64-J through 66-J, and 70-J.

83.Also during January 1998, consents with respect to the beneficiaries of the Wilmington Trust Company Trusts were prepared and circulated. Stip. 75; Exhs. 68-J through 71-J.

84. In February 1998, the consents and releases of the beneficiaries were finalized and circulated for signature by the beneficiaries of the Wilmington Trust Company Trusts. Stip. 80.; Exhs. 72-J through 76-J.

*23 85. Also in February, 1998, the Business Trust documents, consents and releases were finalized and circulated for signature by Mr. Schutt, Wilmington Trust Company and the beneficiaries of the Wilmington Trust Company Trusts. Stip. 80; Exhs. 77-J through 79-J.

86. The Business Trusts were funded in March, 1998. Exhs. 80-J, 82-J, and 83- J.

87. In March, 1998 the custody agreements with respect to the Business Trusts were finalized. Exhs. 85-J, 86-J, and 87-J.

88. The Certificate of Business Trust Registration for Schutt I was filed on April 1, 1998. Exh. 88-J.

89.The Certificate of Business Trust Registration for Schutt II was filed on April 1, 1998. Exh. 89-J.

90. The Form SS-4 for Schutt I was filed on March 30, 1998. Exh. 90-J.

91.The Form SS-4 for Schutt II was filed on March 30, 1998. Exh. 91-J.

92. Immediately before the Business Trusts were formed, the Revocable Trust held 482,200 shares of Du Pont stock and 178,200 shares of Exxon stock. Stip. 94.

93. Immediately before the Business Trusts were formed, Trust 3044-1 held 19,098 shares of Du Pont stock, Trust 3044-2 held 23,670 shares of Du Pont stock, Trusts 3044-5 and *24 3044-6 each held 132,962 shares of Du Pont stock and 11,418 shares of Exxon stock, and Trust 3044-8 held 132,960 shares of Du Pont stock, and 11,418 shares of Exxon stock; Trust 2064 held 108,000 shares of Du Pont stock and 156,000 shares of Exxon stock; and Trust 11258-3 held 22,000 shares of Du Pont stock and 8,000 shares of Exxon stock. Stip. 95.

94. When Schutt I was formed, the percentage ownership interest received by the Revocable Trust and each of the Wilmington Trust Company Trusts was identical to the proportionate value of Du Pont stock transferred from each of these trusts to Schutt I. Stip. 92.

95. The value of the contributions of DuPont stock and the interests received by each of the unit holders in Schutt I were as follows:

96. The value of the contributions made by the Revocable Trust and each of the Wilmington Trust Company Trusts to Schutt I was credited to each contributor's capital account. Exh. 15-J at Sch. B.

97. When Schutt II was formed, the percentage ownership interest received by the Revocable Trust and each of the Wilmington Trust Company Trusts was identical to the proportionate value of Exxon stock transferred by each of these trusts to Schutt II. Stip. 93.

*26 98. The value of the contributions of Exxon stock and the interests received by each of the unitholders in Schutt II were as follows:

99. The value of the contributions made by the Revocable Trust and each of the Wilmington Trust Company Trusts to Schutt II was credited to each contributor's capital account. Exh. 16-J at Sch. B.

100. The Revocable Trust transferred the aforesaid amounts of Du Pont stock to Schutt I and Exxon stock to Schutt II, and participated in the formation of Schutt I and Schutt II, for the business purpose of providing for the centralized management of these assets for future generations of the Schutt family by preserving the buy and hold investment policy and *27 philosophy adopted with respect to these assets by his father-in-law, Eugene E. duPont. Tr. 27, 32, 42, 78, 83, 86-87, 116.

101. At the time Schutt I and Schutt II were formed, Mr. Schutt owned assets not contributed to Schutt I and Schutt II, with a fair market value of approximately Thirty Million Dollars ($30,000,000). These assets included, without limitation, marketable securities, Alabama timberland, cattle, investments in partnerships, a one-third (1/3) undivided interest in South Carolina real estate, residential real estate located in Delaware and Alabama, and tangible personal property. Stip. 94; Exh. 1. Mr. Schutt did not have the right to amend the agreements creating Schutt I and Schutt II. Schutt I and Schutt II could only be amended by unitholders holding, in the aggregate, sixty-six percent or more of the interests in each entity. Exhs. 15-J at § 13.3, 16-J at § 13.3.

102. Mr. Schutt did not have the right to terminate or liquidate Schutt I or Schutt II. Schutt I and Schutt II could only be dissolved prior to December 31, 2048 with the written approval of both the trustee and the unanimous consent of the unitholders. Exhs. 15-J at § 2.6, 16-J at § 2.6.

103. After the formation of Schutt I and Schutt II, the Wilmington Trust Company would not have been willing to terminate these entities, or otherwise undo their formation, *28 absent compelling reasons that were in the best interests of the Wilmington Trust Company Trusts. Tr. 96-98.

104. Mr. Schutt and Wilmington Trust Company had no agreement that would allow Mr. Schutt access to the assets of Schutt I or Schutt II in any manner that was contrary to the terms of the Business Trust documents. Tr. 46-47, 84-85.

105. Wilmington Trust Company expected Mr. Schutt to fulfill his fiduciary obligations as Trustee of Schutt I and Schutt II, and administer Schutt I and Schutt II in accordance with those obligations. Tr. 84-85.

106. Mr. Schutt was aware of, and did perform, his fiduciary obligations as Trustee of Schutt I and Schutt II. Tr. 47, 84-85.

107. At Mr. Schutt's date of death, the Revocable Trust owned 45.2363% interest in Schutt, I, Business Trust ("Schutt I") Stip. 8, 9; Exhs. 3-J through 15-J.

108. At Mr. Schutt's death, the Revocable Trust also owned a 47.3364% interest in Schutt II, Business Trust ("Schutt II") Stip. 10; Exh. 16-J.

109. At the time of Mr. Schutt's death, the assets of Schutt I consisted of 1,043,854 shares of Du Pont common stock. Stip. 11; Exh. 15-J.

110. On October 21, 1999 (the alternate valuation date applicable to Mr. Schutt's date of death), the net asset value *29 of Schutt I was $65,273,495. The proportionate net asset value which is attributable to the interest of the Revocable Trust in Schutt I was $29,527,314 ($65,273,495 x 45.2363%). Stip. 11; Exh. 15-J.

111. At the time of Mr. Schutt's death, the assets of Schutt II consisted of 376,454 shares of Exxon common stock. Stip. 12; Exh. 16-J.

112. On October 21, 1999, the net asset value of Schutt II was $28,504,626. The proportionate net asset value which is attributable to the 47.3364% interest of the Revocable Trust in Schutt II was $13,493,064 ($28,504,626 x 47.3364%). Stip. 12; Exh. 16-J.

113. At Mr. Schutt's date of death, the value of the interests of the Revocable Trust in Schutt I and Schutt II, as reported on the Estate Tax Return, represented 37.47% of Mr. Schutt's total net worth. Stip. 112. Exh. 1- J.

114. Subsequent to the formation and funding of the Business Trusts, the net cash flow of each Business Trust has been distributed on a quarterly basis, as required by the trust documents. Stip. 109. Exhs. 94-J and 95-J, 104-J through 107-J; Tr. 116-117.

115. All distributions from Schutt I and Schutt II have been on a pro-rata basis and in accordance with the trust *30 documents. Stip 109. Exhs. 94-J and 95-J; 104-J through 107-J; Tr. 116-117.

116. Mr. Schutt received substantial amounts of income from his timber operations in Alabama, and other investments that he owned. Exhs. 96-J through 98-J, 101-J through 103-J.

117. The assets of Schutt I and Schutt II were never commingled with Mr. Schutt's personal assets. Tr. 118.

118. In accordance with Section 2.6 of the Business Trust documents for Schutt I and Schutt II, these entities are to continue until 2048. Exhs. 15-J and 16- J.

119. Schutt I and Schutt II are still in existence. None of the Du Pont stock used to fund Schutt I, and none of the Exxon stock used to fund Schutt II, has been sold. Tr. 117.

120. During the period of 1995 through 1998, Mr. Schutt was in good health. Exhs. 99-J and 100-J; Tr. 25, 106, 125.

121. During the period of 1995 through 1998, Mr. Schutt was not suffering from a life-threatening illness. Tr. 25, 106.

122. During the period of 1995 through 1998, Mr. Schutt lead an active lifestyle. He traveled extensively, and was only at his Wilmington residence about fifty-percent of the time. Mr. Schutt traveled to Ireland, Africa, London, Scotland, China and Russia. He also regularly took cruises on *31 his yacht, the Egret, and was a member of a cruising club. Exh. 92-J; Tr. 25, 103, 105, 124-129.

123. During the period of 1995 through 1998, Mr. Schutt made regular visits to Vredenburgh, Alabama to oversee his farm and the Schutt family timber operations located in Vredenburgh, Alabama. Mr. Schutt also hunted at his farm in Vredenburgh, where he participated in an annual dove hunt, and in Scotland, where he participated in an annual grouse hunt. Exh. 93-J; Tr. 103, 105, 126, 131, 132.

124. During the period of 1995 through 1998, when Mr. Schutt was at his residence in Wilmington, Delaware, his typical day during the work week consisted of going to the Schutt Family Office each morning and reviewing investment literature, followed by lunch at the Wilmington Club (a social club), followed by a return to the Schutt Family Office for more investment research. Tr. 124-125.

125. Also during the period of 1995 through 1998, Mr. Schutt attended a variety of social events. Exh. 92-J; Tr. 129.

126. Mr. Schutt's health had no bearing on his participation in the formation of Schutt I and Schutt II. Tr. 25, 106.

127. Mr. Schutt was survived by three of his children, Charles P. Schutt, Jr. (age 56); Sarah Schutt Harrison (age 61); and Caroline Schutt Brown (age 60). Stip. 2.

*32 128. Mr. Schutt's fourth child, Katherine D. Schutt Streitwieser, died of leukemia on March 27, 1993. Stip. 2.

129. Mr. Schutt was also survived by fourteen grandchildren, Phyllis E. Ballantine (age 40); Renee duPont Harrison (age 38), Aimee P. Hutson (age 36), Scott Preston Harrison (age 31), Clementina R. Brown (age 36), Eliza B. Hurlbut (age 35); Caroline B. Linter (age 33); Charles P. Schutt, III (age 29); Jacob F. Schutt (age 27); Katherine D. Schutt (age 24); Erik F. E. Streitwieser (age 34), Charles E. Streitwieser (age 32), Bernhard T. Streitwieser (age 29) and Christiane C. Streitwieser (age 26). Stip. 3.

130. A portion of the federal estate taxes for Mr. Schutt's estate was paid from the proceeds of a loan from Wilmington Trust Company. The loan was secured by the 4 5.2363% interest of the Revocable Trust in Schutt I. Tr. 48-49.

131. The value of the interest of the Revocable Trust in Schutt I that was used to determine the value of the security for the loan from Wilmington Trust Company was the appraised value of this interest as reported on the Estate Tax Return. Tr. 48-49.

132. The contribution of Du Pont stock by the Revocable Trust to Schutt I, and the transfer of Exxon stock by the Revocable Trust to Schutt II, in exchange for proportionate *33 interests in each Business Trust, constituted bona fide sales for full and adequate consideration under § 2036 (a). Entire Record.

133. Mr. Schutt did not retain at his death the right to possess or enjoy property contributed by the Revocable Trust to Schutt I and Schutt II, or the right to income from the contributed property, under § 2036(a)(1). Entire Record.

134. Mr. Schutt did not retain at his death the right to designate, alone or in conjunction with any other person, the persons who would possess or enjoy the property contributed by the Revocable Trust to Schutt I or Schutt II, or the income from such property. Entire record.

135. I.R.C. § 2036 does not apply to the assets of Schutt I and Schutt II contributed from the Revocable Trust. Entire Record.

136. The contribution of DuPont stock by the Revocable Trust to Schutt I, and the contribution of Exxon stock by the Revocable Trust to Schutt II, in exchange for proportionate interests in each of these entities, constituted bona fide sales for full and adequate consideration under § 2038. Entire Record.

137. Mr. Schutt did not retain at his death the power to alter, amend, revoke, or terminate any contribution of property by the Revocable Trust to Schutt I and Schutt II under § 2038. Entire Record.

*34 138. I.R.C. § 2038 does not apply to assets of Schutt I and Schutt II contributed from the Revocable Trust. Entire Record.

139. The fair market value of the interests of the Revocable Trust in Schutt I and Schutt II as of the alternate valuation date applicable to Mr. Schutt's date of death are $19,930,937 and $9,107,818, respectively. Entire Record.

In this case, Respondent seeks to apply § 2036 and § 2038 to include the assets transferred by Mr. Schutt's Revocable Trust to Schutt I and Schutt II as though these Business Trusts never existed.

Respondent's position with respect to § 2036 requires the Court to address three factual issues, namely: (i) whether Mr. Schutt made a "transfer" of property to Schutt I and Schutt II; (ii) whether any transfer was not a bona fide sale for full and adequate consideration; and (iii) whether (a) Mr. Schutt retained the possession or enjoyment of, or the right to the income from, any property transferred to Schutt I and Schutt II, or (b) Mr. Schutt retained the right alone, or in conjunction with any of other person, to designate the persons who shall possess or enjoy any property transferred to Schutt I or Schutt II. Because Respondent did not raise § 2036 until it filed its Amendment to Answer, Respondent bears the burden of proof under *35 Tax Court Rule 142(a)(1) with respect to each such factual issue.

Section 2036(a)(1) does not apply to the assets transferred by Mr. Schutt's Revocable Trust to Schutt I and Schutt II. Section 2036(a)(1) does not apply because the transfers by the Revocable Trust to Schutt I and Schutt II constituted bona fide sales for full and adequate consideration, as the Revocable Trust received pro rata interests in Schutt I and Schutt II in exchange for the assets it contributed to each of these Business Trusts, and the creation of Schutt I and Schutt II was motivated by legitimate business concerns. Additionally, § 2036(a)(1) does not apply because Mr. Schutt did not retain the possession or enjoyment of, or the right to the income from, any property transferred by the Revocable Trust to Schutt I or Schutt II. Further, § 2036(a)(2) does not apply because Mr. Schutt did not retain the right to designate the persons who would enjoy the assets transferred to Schutt I and Schutt II.

Respondent's position with respect to § 2038 requires the Court to address three factual issues, namely: (i) whether Mr. Schutt made a "transfer" of property to Schutt I and Schutt II; (ii) whether any transfer was not a bona fide sale for full and adequate consideration; and (iii) whether Mr. Schutt retained the power to alter, amend, revoke or terminate any *36 transfer of assets to Schutt I and Schutt II. As with the application of § 2036, since Respondent did not raise § 2038 until it filed its Amendment to Answer, Respondent bears the burden of proof under Tax Court Rule 142(a)(1) with respect to each such factual issue.

Section 2 038 does not apply to the assets transferred by Mr. Schutt's Revocable Trust to Schutt I and Schutt II because (i) the transfers by the Revocable Trust to Schutt I and Schutt II constituted bona fide sales for full and adequate consideration, as the Revocable Trust received pro rata interests in Schutt I and Schutt II in exchange for the assets it contributed to each of these Business Trusts, (ii) Mr. Schutt did not retain a right at his death to alter, amend or revoke the transfers of assets from the Revocable Trust to Schutt I and Schutt II.

Respondent bears the burden of proof under Tax Court Rule 142(a)(1) with respect to all of the factual issues necessary to determine the applicability of § 2036 and § 2038. Under Tax Court Rule 142 (a) (1) the burden of proof falls on Respondent because none of the issues regarding § 2036 or § 2038 were raised by Respondent until it filed its Amendment to Answer approximately three months before trial. In addition, at trial *37 Respondent conceded that it has the burden of proof with respect to these factual matters. Tr. 10. Consequently, Respondent's burden of proof must be met in order to apply § 2036 and § 2038 to the assets transferred by Mr. Schutt's Revocable Trust to Schutt I and Schutt II.

Section 2001(a) imposes a federal tax on the transfer of the taxable estate of a decedent. I.R.C. § 2001(a). The estate tax is imposed on property that a decedent transfers at death without regard to the nature of the property interest before or after death. I.R.C. § 2033; Estate of Bright v. United States, 658 F.2d 999, 1001 (5th Cir. 1981). The gross estate includes the fair market value of all of a decedent's property to the extent provided in Sections 2033 through 2044. I.R.C. § 2031(a). Among the provisions referred to in § 2031 is § 2036.

Section 2036 states, in pertinent part:

SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.

(a) GENERAL RULE. - The value of the gross estate shall include the value of all property ... 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 *38 ascertainable without reference to his death or for any period which does not in fact end before his death -

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

Whether each of the elements of § 2036(a) (1) and (a)(2) is met is a factual determination. Only if all three elements of § 2036(a)(1) and (a)(2) are met do these sections operate to include the DuPont and Exxon stock transferred by Mr. Schutt to Schutt I and Schutt II in Mr. Schutt's gross estate.

Section 2036 includes in the gross estate the date-of-death fair market value of all property transferred in which a decedent has retained a prohibited interest or right. HOWARD M. ZARITSKY, TAX PLANNING FOR FAMILY WEALTH TRANSFERS SI 3.04 [2] [a] at 3-40 (4th ed. 2002 & Supp. 2003). But an asset transferred by a decedent while the decedent is alive is excluded from his estate if the decedent absolutely, unequivocally, irrevocably, and without reservations, parted with all of his title and enjoyment of the transferred property. E.g., Comm'r v. Estate of Church, 335 U.S. 632, 645 (1949), citing *39Helvering v. Hallock, 309 U.S. 106 (1940). Stated otherwise, § 2036 is concerned with "intervivos transitions where outright disposition of the property is delayed until the transferor's death." Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir. 1971). In short, § 2036 only applies to people who give away property with strings attached.

"The general purpose of [§ 2036] was 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." Mahoney v. United States, 831 F.2d 641, 646-47 (6th Cir. 1987) (emphasis added); United States v. Estate of Grace, 395 U.S. 316, 320 (1969). As Mahoney demonstrates, testamentary purpose must be the significant aim, while leaving the transferor with significant control over the transferred assets. Schutt I and Schutt II were validly created and existing Delaware Business Trusts, formed primarily to put into place an entity to perpetuate Mr. Schutt's buy and hold investment philosophy with respect to the DuPont and Exxon stock belonging both to Mr. Schutt and to the Wilmington Trust Company Trusts. (Tr. 28-32, 77). While Respondent has conceded that the perpetuation of Mr. Schutt's investment philosophy provided a motivating business purpose for Mr. Schutt to participate in the *40 formation of Schutt I and Schutt II (Tr. 18), Respondent's position ignores the significance of this purpose.

Historically, prior to the formation of Schutt I and Schutt II, Du Pont stock and Exxon stock (which replaced a long-standing Schutt family investment in Phillips Petroleum stock) comprised a significant portion of the Schutt family wealth and generated a steady portion of the family income. (Stip. 14; Tr. 27, 107). As the leader of his branch of the family, Mr. Schutt adopted the buy and hold investment philosophy, which originated with his father-in-law, Eugene E. duPont, with respect to Du Pont and Exxon stock. Mr. Schutt adopted the buy and hold investment philosophy, in order to preserve the Schutt family holdings in Du Pont stock and Exxon stock for future generations of the Schutt family. (Tr. 29-30, 108-109, 113-114).

In furtherance of the buy and hold investment philosophy, beginning in the 1970s, Mr. Schutt and his wife implemented the Vredenburgh Trust, Trust 1173 8, and Trust 15032, all of which were (i)irrevocable, (ii) funded, at least in part, with Du Pont stock, and (iii) were intended to benefit future generations of the Schutt family for the maximum period allowed by the applicable rule against perpetuities. (Stip. 18, 20, 22, 23; Exhs. 25-J, 26-J, 27-J).

Subsequently, a major concern of Mr. Schutt's was that his children and grandchildren would improvidently dispose of *41 the Du Pont stock and Exxon stock held in (i) the Wilmington Trust Company Trusts when these trusts terminated, and (ii) his Revocable Trust upon his death. (Tr. 109-114). This concern reflected Mr. Schutt's dissatisfaction with some of the investment decisions made by his children and grandchildren during his lifetime, including the sale by some of his grandchildren of Du Pont stock and Exxon stock, which they already owned outright. (Supp. Stip 1; Ex. 114-J; Tr. 109-114). Further, this concern was exacerbated when Mr. Schutt's daughter Jerry died, triggering the outright distribution of the assets of one of the original Wilmington Trust Company Trusts to some of his grandchildren. (Stip. 25-25; Tr. 30-31). This concern ultimately became the dominant motivating factor for Mr. Schutt's desire to form Schutt I and Schutt II for the business purpose of providing for the centralized management of the Schutt family holdings in Du Pont stock and Exxon stock. (Tr.32-33).

Since the formation of Schutt I and Schutt II, none of the Du Pont stock held in Schutt I has been sold, and none of the Exxon stock in Schutt II has been sold. (Tr. 117). As a result, the business purpose of each of these entities continues to be fulfilled. This business purpose is not testamentary in nature and was not inspired by tax planning concerns. As such, *42 this legitimate business purpose is sufficient to render § 2036 inapplicable to this matter.

The first two elements of § 2036 must be met in order for § 2036 to apply to the assets transferred by Mr. Schutt's Revocable Trust to Schutt I and Schutt II. Those two elements require (1) a "transfer" of property by the decedent, (2) that is other than "a bona fide sale for full and adequate consideration."

Section 2036 does not apply to "transfers" that constitute "a bona fide sale for an adequate and full consideration." See Estate of Stone v. Comm'r, 86 T.C.M. (CCH) 551, 581 (2003) (finding that transfer of assets to partnerships in exchange for proportionate interests was bona fide sale for adequate and full consideration). Similarly, § 2512(b) exempts from the gift tax a transfer of property to the extent that it is made for "adequate and full consideration." I.R.C. § 2512(b). Because the estate and gift taxes are considered in pari materia, see Wheeler v. United States, 116 F.3d 749, 761 (5th Cir. 1997), the word "transfer" and the phrase "a bona fide sale for adequate and full consideration" should be *43 given the same meaning in construing § 2036 as when determining whether a taxable gift has been made under § 2512.

Thus, for § 2036 to apply, a "donative transfer" of the property Respondent seeks to bring back into the Estate must have occurred. See, e.g., Stone, 86 T.C.M. (CCH) at 580-81 (holding that decedents' transfers to various partnerships were not subject to § 2036(a), as transfers in exchange for pro rata partnership interests were bona fide sales for adequate and full consideration); Estate of Shafer v. Comm'r, 749 F.2d 1216, 1221 (6th Cir. 1984); Estate of Harrison v. Comm'r, 52 T.C.M. (CCH) 1306, 1309-10 (1987) (holding that § 2036 did not apply because the "decedent's transfer to the partnership was for a full and adequate consideration ... [and] there was no gratuitous transfer by the decedent"); Estate of Michelson v. Comm'r, 37 T.C.M. (CCH) 1534, 1538 (1978) (holding that "[t]here being no gratuitous transfer involved in the creation of the ... Trust, there is no basis for the application of either section 2036(a) or section 2038(a) (1)"); Church v. United States, 2000 WL 206374 (W.D. Tex. 2000), aff'd, 268 F.3d 1063 (5th Cir. 2001) (reasoning that there must be a gratuitous donative transfer in order for § 2036 to apply, and holding that the creation of a pro rata partnership for a valid business purpose where the interests of each partner are based on the value of the assets contributed to the entity is an arm's-length *44 transaction and free of donative intent). Because Mr. Schutt's Revocable Trust received pro rata interests in Schutt I and Schutt II in return for his contributions to those entities (Stip. 92-93), and because each of the unit holder's contributions to the Schutt I and Schutt II, respectively were properly credited to their respective capital accounts (Exh. 15-J at Sch. B; Exh. 16-J at Sch. B), there was no donative transfer made in connection with the creation of Schutt I and Schutt II. See Stone, 86 T.C.M. (CCH) at 580- 81; Estate of Jones v. Comm'r, 116 T.C. 121, 128 (2001). Because no donative transfer occurred when the entities were formed, § 2036 does not apply. Church, 2000 WL 206374, at *8.

Respondent's position ignores the fact that the Revocable Trust's interests and the Wilmington Trust Company Trusts' interests in Schutt I and Schutt II were received on a pro rata basis, in proportion to their respective asset contributions. Stip. 92-93. The value of the interests of the Revocable Trust in the two entities "was directly proportionate to the contributions and partnership interests of the other partners." See Church, 2000 WL 206374, at *5; see also Stone, 86 T.C.M. (CCH) at 581. The creation of Schutt I and Schutt II did not confer a financial benefit on, or increase the wealth of, any interest owner. No gift occurred, and such a gift never could occur in the formation of a business entity in which each *45 interest received is proportionate to the capital contributed and each interest owner's capital account is credited with the contribution. See Stone, 86 T.C.M. (CCH) at 580-81; Jones, 116 T.C. at 128; Church, 2000 WL 206374, at *7-8.

Stated otherwise, because each unit holder of Schutt I and Schutt II, respectively, received a pro rata interest in the entity in return for its transfer of assets, Mr. Schutt's Revocable Trust received full and adequate consideration in exchange for its transfers to Schutt I and Schutt II. See Stone, 86 T.C.M. (CCH) at 580-81.

In fact, in the absence of § 721, [FN3] Mr. Schutt's contributions to Schutt I and Schutt II would have been taxed as sales under §§ 1001 and 61, as the transfers of assets in return for units would have been taxable events, causing gain or loss, as applicable, to be recognized on the assets transferred. The transfers themselves can be considered nothing other than sales; and those sales were not taxed because of § 721. The only question remaining, then, is whether the consideration received in exchange for the assets transferred was full and adequate. For reasons discussed above, the receipt by the Revocable Trust of pro rata interests in return for its contributions constitutes full and adequate consideration.

FN3. I.R.C. § 721 provides that, with enumerated exceptions, a partner's transfer to a partnership in exchange for partnership units shall not cause that partner to recognize gain or loss.

*46 In recent memorandum decisions, this Court has considered various factors when analyzing the bona fide sale for full and adequate consideration exception to § 2036(a) in the context of the creation of a limited partnership. See Stone, 86 T.C.M. (CCH) at 552-78; Estate of Strangi v. Comm'r, 85 T.C.M. (CCH) 1331 (2003); Estate of Harper v. Comm'r, 83 T.C.M. (CCH) 1641 (2002); Estate of Thompson v. Comm'r, 84 T.C.M. (CCH) 374 (2002). The facts of this case are substantially different from those that the Court faced in Strangi, Harper, and Thompson, and quite similar to those found in Stone.

At the outset of the trial in this matter, this Court noted that the ultimate disposition of this case turns on whether the facts in this matter create a case that fits under (i) Strangi, Thompson and Harper, or (ii) the Stone decision. Tr. 20. Notwithstanding any reservations that Petitioner might have with respect to the holdings in Strangi, Thompson or Harper, Petitioner submits that in accordance with the analysis of all of these cases as set forth throughout this Brief, that the matter currently before this Court fits squarely within the factual parameters of the Stone decision. Specifically, as in Stone, (i) Schutt I and Schutt II were formed for a legitimate business purpose, (ii) the interests received by the Revocable Trust in Schutt I and Schutt II were the result of transfers made for full and adequate consideration and were completed *47 after protracted arms-length negotiations, (iii) the assets contributed by each unit holder were credited to the unit holder's capital account, and (iv) as of the date of formation of Schutt I and Schutt II and until the date of Mr. Schutt's death, Mr. Schutt and his Revocable Trust owned a substantial amount of assets (worth approximately $30 million) in addition to the interests of the Revocable Trust in Schutt I and Schutt II. Thus, the holding in Stone should be extended to this matter to preclude the application of § 2036 (and § 2038) to the assets transferred by Mr. Schutt's Revocable Trust to Schutt I and Schutt II.

In Harper, the Court's finding of no bona fide sale for adequate and full consideration was based on the conclusion that the creation of the partnership constituted only "unilateral" value recycling. Harper, 83 T.C.M. (CCH) at 1654. Judge Nims held that the Harper partnership's formation fell short of meeting the "bona fide sale" exception because formation of the Harper partnership did not result from a bargained-for exchange, the partners other than the decedent gave nothing of value to the partnership in the form of "property or services," and the underlying pool of assets remained essentially the same after formation. Id. at 1653.

In Thompson, the Court based its finding on the conclusion that "the transactions were not motivated by the type *48 of legitimate business concerns that furnished 'adequate consideration' as described in Estate of Harrison v. Commissioner and Estate of Michelson v. Commissioner." Thompson, 84 T.C.M. (CCH) at 388 (citations omitted). Judge Jacobs in Thompson noted considerations similar to those considered in Harper. In addition, Judge Jacobs reasoned that the partners arranged matters so that any income from the partnerships' activities passed to the partners directly, rather than to the partnerships. Id. Judge Jacobs noted that in the final analysis, "neither decedent nor his family conducted the partnerships in a businesslike manner." Id.

In Strangi, Judge Cohen found that there was no bona fide sale for an adequate and full consideration, given that Mr. Strangi's attorney-in-fact prepared the entity documents in the absence of any meaningful negotiation with other anticipated interest holders, Mr. Strangi's children opted to join the limited liability company after the substantive decisions had been made, and creation of the partnership constituted a mere "recycling" of value. Strangi, 85 T.C.M. (CCH) at 1344.

In this case, however, the creation and operation of both Schutt I and Schutt II were vastly different than the factual scenarios of Harper, Thompson, and Strangi. The formation of both entities was motivated by substantial business purposes, and their creation and funding resulted from arm's-*49 length transactions discussed and negotiated for almost a year. [FN4] All interested parties were involved with the formation of both entities. Mr. Schutt did not unilaterally determine how Schutt I and Schutt II would be structured or funded. The terms of the agreements were determined only after substantial and long negotiations and discussions between Mr. Schutt's representatives and Wilmington Trust Company's counsel. Each of the future unit holders participated in negotiating the terms of and reviewing the governing agreements, and each made substantial contributions of property to the entities. (Stip. 31-38, 42, 46, 49-50, 58, 60, 63-67, 71-75; Exhs. 30-J through 34-J, 38-J, 42-J, 45-J, 54-J, 57-J through 60-J, 63-J, 72-J; Tr. 34-41, 79-82, 87-91, 113-115).

FN4. In determining whether a sale is "bona fide," this Court has looked to whether the parties negotiated at arm's-length in entering into the partnership agreement. See, e.g., Harper, 83 T.C.M. (CCH) at 1653. The

issue should not be whether the parties negotiated at arm's length, but instead whether the transferor actually parted with the property supposedly transferred and actually received the consideration he or she was entitled to receive by reason of the sale (that is, whether the transfer or the consideration received was a sham). See Kimbell v. United States, 371 F.3d 257, 2004 WL 1119598 (5th Cir. May 20, 2004) (No. 03-10529) ("the absence of negotiations between family members over price or terms is not a compelling factor in the determination as to whether a sale is bona fide, particularly when the exchange value is set by objective factors.") See also, Wheeler, 116 F.3d at 764. Regardless, the record shows substantial arm's-length negotiations in the creation of the Business Trusts.

With respect to the creation of Schutt I and Schutt II, a genuine pooling of assets occurred. Mr. Schutt (through the Revocable Trust) transferred assets having a fair market *50 value of over $30 million to Schutt I and over $11 million to Schutt II. (Stip. 96-97). Likewise, the seven Wilmington Trust Company Trusts collectively transferred assets having a fair market value of over $36 million to Schutt I and $12.5 million to Schutt II. (Stip. 96-97). The creation of Schutt I and Schutt II allowed Mr. Schutt and the Wilmington Trust Company Trusts to pool their shares to form two joint enterprises, which were geared toward consolidating the Schutt family Du Pont and Exxon stock and to extend the family management of these assets beyond the term of the trusts. This is precisely the type of pooling of property and services that the Court found to meet the bona fide sale for an adequate and full consideration test in Estate of Stone v. Comm'r, T.C. Memo. 2003-309 (Nov. 7, 2003).

In addition, the creation of Schutt I and Schutt II did not constitute "unilateral value recycling," as the Tax Court has defined that term, because Mr. Schutt did not transfer substantially all of his assets to Schutt I and Schutt II, as did the decedents in Harper, Thompson, and Strangi. (Exh. 74- J; Tr. 122-23, 133). To the contrary, Mr. Schutt held assets worth approximately $30 million outside of these entities, including marketable securities, timberland, cattle, investments in partnerships, real estate, tangible personal property, and other assets. (Stip. 99; Exh. 84-J). Further, the entities' assets were not commingled with Mr. Schutt's assets. (Tr. 117). *51 Distributions were pro rata. (Stip. 109; Exh. 94-J, 95-J). The creation of Schutt I and Schutt II allowed the members and partners to pool their property and services in a joint enterprise.

The facts of this case are very similar to those that compelled the Court in Stone, 86 T.C.M. (CCH) at 551, to hold that the bona fide sale for an adequate and full consideration test had been met in the formation of five partnerships. Stone, 86. T.C.M. (CCH) at 579. In Stone, the Court noted that the partnerships were created as a result of arm's-length negotiations in which each member of the Stone family was represented by independent counsel. The Court found that the transfers to the partnerships "were motivated primarily by investment and business concerns relating to the management of certain of the respective assets of Mr. and Mrs. Stone during their lives and thereafter and the resolution of the litigation among the children." Id. at 580. The Court noted further that the partnership interests received were proportionate to the assets contributed, and the assets transferred by each partner were properly credited to the partner's capital accounts. The Court opined that each of the partnerships had economic substance and operated as joint enterprises for profit through which the children actively participated in the management. The Court thus held that the bona fide sale for full and adequate *52 consideration test had been met, and the transfers of assets to the partnerships by Mr. and Mrs. Stone did not constitute a circuitous "recycling of value." Id.

Likewise, the Fifth Circuit's recent decision in Kimbell v. United States, 371 F.3d 257, 2004 WL 1119598 (5th Cir. May 20, 2004) (No. 03-10529), rev'g 244 F.Supp. 700 (N.D. Tex. 2003) demonstrates that the bona fide sale for an adequate and full consideration test has been met in connection with the formation of Schutt I and Schutt II. In Kimbell, Mrs. Kimbell's assets were being managed in a revocable living trust administered by Mrs. Kimbell and her son as co-trustees. In January 1998, the trust, David (her son) and his wife formed a limited liability company. Later in January, the trust and the limited liability company formed a limited partnership under Texas law. The trust and the LLC received interests in the partnership proportionate to the assets contributed.

The Fifth Circuit reversed the district court's conclusion that § 2036 applied to the assets transferred by Mrs. Kimbell's trust to the partnership, holding that the bona fide sale for adequate and full consideration exception precluded the application of § 2036. In its opinion, the Fifth Circuit set forth an excellent analysis of both the "bona fide sale" and the "adequate and full consideration" language of § 2036.

*53 As to what constitutes a "bona fide sale" in the context of the creation of an entity, the court held that "what is required for the transfer by Mrs. Kimbell to the Partnership to qualify as a bona fide sale is that it be a sale where the decedent/transferor actually parted with her interest in the assets transferred and the partnership/transferee actually parted with the partnership interest in exchange." Id. at *6. The Fifth Circuit noted several "objective facts" that supported the taxpayer's position that the transfer to the partnership was a bona fide sale. Those facts included:

(1) Mrs. Kimbell retained sufficient assets outside the partnership for her support and there was no commingling of Partnership and her personal assets;

(2) Partnership formalities were satisfied and the assets contributed to the partnership were actually assigned to the partnership;

(3) The assets contributed to the partnership included working interests in oil and gas properties which require active management;

(4) Other credible non-tax reasons for the formation of the partnership that could not be accomplished via Mrs. Kimbell's trust, which included protection from creditors, centralized management, keeping the assets in an entity that would preserve the property as separate property for descendents, establishing a vehicle to manage the assets if something should happen to Mrs. Kimbell's son, and providing a dispute resolution mechanism.

*54 As discussed in detail above, many of these factors are present in this case. As in Kimbell, Mr. Schutt retained sufficient assets outside Schutt I and Schutt II for his own support and there was no commingling of the assets of those entities with his personal assets. Entity formalities were satisfied and assets contributed to Schutt I and Schutt II were actually transferred to those entities. The dominant reason behind Mr. Schutt's desire to form Schutt I and Schutt II was the business purpose of providing centralized long-term management of the Schutt family holdings in Du Pont and Exxon stock to preserve Mr. Schutt's buy and hold investment philosophy with respect to those holdings. (Tr. 32-33). This could not be accomplished without the creation of Schutt I and Schutt II, as the Wilmington Trust Company Trusts were scheduled to terminate at various intervals and the assets of those trusts would be distributed, free of trust, to their respective beneficiaries. (Tr. 44).

Despite acknowledging the existence of this business purpose, Respondent alleges that § 2036 should apply because of Respondent's assertion that the "dominant motive" behind the creation of Schutt I and Schutt II was perpetuating his investment philosophy after his death, and that "tax considerations were high on the list of priorities when they were planning this particular transaction." (Tr. 17). Even if *55 Respondent's assertion were true, the existence of substantial non-tax motives and the very real exchange of stock for business trust units renders the creation of these entities "bona fide". In Kimbell, post-death control and management of Mrs. Kimbell's oil and gas interests and other assets was a primary non-tax business purpose cited by the court in support of its conclusion that the creation of the partnership was a bona fide sale. Id. at *8. See also Estate of Bischoff v. Comm'r, 69 T.C. 32, 39-41 (1977); Estate of Reynolds v. Comm'r, 55 T.C. 172, 194 (1970) ("We are, however, satisfied that the Reynolds-Bixby family entered into the voting trust agreement in 1946 with the principal purpose of assuring the continuity of the company's management and policies"); Church, 2000 WL 206374, at *3 (holding that "preserving the family ranching business for themselves and their descendents" was a valid motivating reason to form the partnership). The Fifth Circuit also rejected Respondent's position regarding tax motives, stating that "tax planning motives do not prevent a sale from being 'bona fide' if the transaction is otherwise real, actual or genuine." Id. at *5, citing Wheeler, 116 F.3d 769-70.

As to what constitutes full and adequate consideration in connection with the creation of an entity, the court held that the proper focus is:

*56 (1) Whether the interests credited to each of the partners was proportionate to the fair market value of the assets partner contributed to the partnership;

(2) Whether the assets contributed by each partner to the partnership were properly credited to the respective capital accounts of the partners; and

(3) Whether on termination or dissolution of the partnership the partners were entitled to distributions from the partnership in amounts equal to their respective capital accounts.

The answer to each of these questions in this case is yes. First, Mr. Schutt (through the Revocable Trust) received units in Schutt I and Schutt II that were proportionate to the fair market value of the assets he contributed to those entities. (Stip. 92). Second, the Revocable Trust's capital account was properly credited with the assets contributed. (Exh. 15-J at Sch. B; Exh 16-J at Sch. B). Third, on termination and liquidation of Schutt I and Schutt II, the unit holders are entitled to distributions according to their respective capital account balances. (Exh. 15-J at § 12.1; Exh 16-J at § 12.1). As held by the Fifth Circuit in Kimbell, these facts demonstrate that Mr. Schutt's transfer (through the Revocable Trust) of Du Pont and Exxon stock in exchange for interests in Schutt I and Schutt II were transfers for adequate and full consideration.

The application of § 2036(a)(1) requires the Court to find that Mr. Schutt retained "the possession or enjoyment of, or the right to the income from, the [transferred] property." As used in § 2036(a)(1), the term "enjoyment" has been described as "synonymous with substantial present economic benefit." Harper, 83 T.C.M. (CCH) at 1648.

Judge Jacobs acknowledged in Thompson that typically, § 2036(a) has been used to bring the value of assets contributed to a partnership back into a decedent's estate only where a taxpayer failed to respect the integrity of the entity. See Thompson, 84 T.C.M. (CCH) at 387, citing Estate of Reichardt v. Comm'r, 114 T.C. 144, 148-49 (2000); Harper, 83 T.C.M. (CCH) at 1641; and Estate of Schauerhamer v. Comm'r, 73 T.C.M. (CCH) 2855 (1997). In each of these cases, the Tax Court found, based on the facts unique to that case, an implied agreement that the decedent could continue to possess or enjoy the property transferred to the entity. See, e.g., Estate of Reichardt v. Comm'r, 114 T.C. 144, 154-55 (2000) (finding implied agreement based on conclusion that decedent was solely responsible for partnership's business activities, where taxpayer commingled partnership and personal funds, and where decedent enjoyed use of residence contributed to partnership without paying rent); *58 Schauerhamer, 73 T.C.M. (CCH) at 2857-58 (finding implied agreement based on fact that decedent deposited income produced by partnership assets in personal checking account and did not maintain separate records for partnership and non-partnership funds); Harper, 83 T.C.M. (CCH) at 1648-52 (finding implied agreement based on conclusions that partnership had history of disproportionate distributions, partnership funds were commingled with decedent's assets, and delay between partnership formation and date assets were transferred to partnership went unexplained); Thompson, 84 T.C.M. (CCH) at 386-87 (finding implied agreement based on conclusion that decedent transferred bulk of his assets to partnerships, depriving himself of assets needed for his own support; agreement was implied that assets transferred to partnerships would be available to decedent upon request; and practical effect of creation of partnerships was minimal).

In the present case, Schutt I and Schutt II have been respected as entities separate and apart from Mr. Schutt. Assets more than sufficient to support Mr. Schutt for his lifetime remained outside of Schutt I and Schutt II. (Stip. 99); Only pro-rata distributions in accordance with the governing agreements were made from Schutt I and Schutt II during Mr. Schutt's lifetime. (Exhs. 94-J, 95- J). No assets of Schutt I *59 and Schutt II were commingled with the assets of its unit holders. (Tr. 117).

There simply was no express or implied agreement that Mr. Schutt would have access to the assets contributed to the Schutt I and Schutt II. (Tr. 83). Mr. Schutt did not treat the entities' assets as his own. Mr. Schutt understood that upon the creation of Schutt I and Schutt II, the transferred assets would belong to those entities and would not be available for his use. (Tr. 46-47).

Respondent argues that the provisions in the agreements creating Schutt I and Schutt II mandating the distribution of "net cash flow" to the unit holders provided Mr. Schutt with a retained right to the income from the property that he transferred to Schutt I and Schutt II. With respect to distributions, the agreements provide as follows:

Section 8.1. Net Cash Flow. Except as otherwise provided in Article XII hereof (relating to the dissolution of the Trust), Net Cash Flow shall be distributed by the Trustee on or before the last day of each calendar quarter; provided, however, that the Trustee shall use his best efforts to cause the Trust to distribute to the unit Holders an amount of Net Cash Flow as shall be sufficient to enable the Unit Holders to fund their federal and state income-tax liabilities attributable to their respective distributive shares of the taxable income of the Trust.

*60 But a unit holder's right to receive distributions of the trust's "net cash flow" does not equate to the right to receive the "income" from the DuPont and Exxon stock contributed by that unit holder to the trust. Net cash flow is defined in the business trust agreements as

[T]he gross cash receipts of the Trust from all sources (including sales and dispositions in the ordinary course of the Trust's business), but excluding any amounts, such as sales or gross receipts taxes, that are held by the Trust, as a collection agent or in trust for others or that are otherwise not unconditionally available to the Trust, less all amounts paid by or for the account of the Trust during the same Fiscal year (including, without limitation, payments of principal and interest on any Trust indebtedness and expenses reimbursed to the Trustee under Section 9.2 hereof), and less any amounts determined by the Trustee, in his discretion, to be necessary to provide a reasonable reserve for working-capital needs or to provide funds for any other contingencies of the Trust. Net Cash Flow shall be determined in accordance with the cash receipts and disbursements method of accounting, but otherwise in accordance with generally accepted accounting principles, consistently applied. Net Cash Flow shall not be reduced by depreciation, amortization, cost recovery deductions, depletion, similar allowances, or other non-cash items, but shall be increased by any reduction of reserves previously established pursuant to this Subsection (n).

Respondent's argument fails to recognize that Schutt I and Schutt II were the owners of the DuPont and Exxon stock and *61 the dividends from that stock, not the unit holders. (Exh. 15-J at § 2.8; Exh. 16-J at § 2.8) ("Legal title to all Property shall be vested in the Trust ..."); 12 Del. C. § 3805(c)). Unit holders have no specific rights to trust property and are entitled to receive distributions from the trust only after expenses of the trust are paid and the trustee determines the appropriate working capital and other reserves to be retained in the business trusts, consistent with his fiduciary duty to both the trust and to the unit holders. (See Exh. 15-J, §§ 1(n), 8.1.) Mr. Schutt, therefore, did not retain rights to the DuPont or the Exxon stock or the dividends from the stock after Schutt I and Schutt II were formed -- the only rights received by Mr. Schutt's Revocable Trust in exchange for his shares of the DuPont and Exxon stock were rights as a unit holder. Because Mr. Schutt did not retain the right to the income from the DuPont and Exxon shares contributed to Schutt I and Schutt II by the Revocable Trust, the DuPont and Exxon shares owned by Schutt I and Schutt II are not included in his estate under § 2036(a) (1). See e.g. Estate of Boykin v. Comm'r, 53 T.C.M. (CCH) 345 (1987) ( "By its terms, this portion of Section 2036(a)(1) applies only if a decedent (1) transferred property, and (2) retained the enjoyment of, or the right to the income from, the TRANSFERRED property") (emphasis in original); Louis G. Hutchens Non-Marital Trust v. Comm'r, 66 T.C.M. (CCH) 1599 (1993) (Court held that *62§ 2036 did not apply to preferred stock received by the decedent in exchange for common stock transferred in a corporate reorganization because "decedent retained no interest in the stocks surrendered in the recapitalization. Instead, his post-recapitalization control and dividend rights came from new and different forms of preferred stock.")

Respondent also alleges that the property contributed to Schutt I and Schutt II should be included in Mr. Schutt's Estate under § 2036(a) (2). Section 2036(a) (2) requires a decedent to have retained "the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom." I.R.C. § 2036(a)(2) (emphasis added). For inclusion to occur under § 2036(a) (2), the retained right must be an "ascertainable and legally enforceable right" to designate the persons who shall possess or enjoy the property. United States v. Byrum, 408 U.S. 125, 136 (1972). Moreover, the "in conjunction with" language in § 2036 (a) (2) does not apply to mere powers to persuade others holding a similar power to act jointly. See, e.g., Helvering v. Helmholtz, 296 U.S. 93, 97 (1935), aff'd 75 F.2d 245 (D.C. Cir. 1935); In re Estate of Tully, 528 F.2d 1401 (Ct. Cl. 1976) (addressing "in conjunction with" language under § 2038).

*63 The most recent case to date to directly address § 2036 (a) (2) in the entity context is Judge Cohen's memorandum decision in Estate of Strangi. In that case, the Court stated, in dicta, that Mr. Strangi retained the legal right to designate who would receive income related to partnership assets where Mr. Strangi, through his attorney-in-fact, had effective control of the corporate general partner of the partnership. The Court determined that § 2036(a)(2) was applicable because (1) Mr. Strangi's attorney-in-fact had sole discretion to make partnership distribution decisions and (2) Mr. Strangi could act together with others to dissolve the partnership and bring about the present enjoyment of partnership assets. Estate of Strangi, 85 T.C.M. (CCH) at 1341.

As an initial matter, Mr. Schutt's management powers as the trustee of Schutt I and Schutt II do not cause inclusion under § 2036. See Byrum, 408 U.S. at 132-33 ("At the outset we observe that this Court has never held that trust property must be included in a settlor's gross estate solely because the settlor retained the power to manage trust assets.")

In this case, Mr. Schutt did not retain the discretion to direct distributions from Schutt I and Schutt II. Rather, the agreements creating Schutt I and Schutt II mandated that the "net cash flow" be distributed to the unit holders. (Exh. 15-J at § 8.1; Exh. 16-J at § 8.1). See p. 60, infra. This mandated *64 distribution of net cash flow is far different from the "sole discretion" distribution provisions in the Strangi partnership agreement. Mr. Schutt's lack of a "legally enforceable right" to control the flow of distributions from Schutt I and Schutt II renders § 2036(a)(2) inapplicable. See U.S. v. Byrum, 408 U.S. at 139, n. 14 ("The use of the term 'right' implies that restraints on the exercise of power are to be recognized and that such restraints deprive the person exercising the power of a 'right' to do so."); Estate of Cohen v. Comm'r, 79 T.C. 1015, 1025 (1982) (Holding that decedent's role as trustee of a Massachusetts Business Trust did not result in § 2036(a)(2) inclusion, the Tax Court stated that "[I]n view of the perceived limitations on the dividend power in the trust agreement in question, and the apparent willingness of the Massachusetts courts to hold business trustees to a fair standard of conduct, we conclude that the decedent and his sons did not have the power to withhold dividends arbitrarily. Thus, they did not have an 'ascertainable and legally enforceable' right to shift income between classes of shareholders, and the dividend power does not require inclusion of either the common or preferred shares in *65 the decedent's estate under section 2036 (a) (2)); [FN5] Jennings v. Smith, 161 F.2d 74, 75 (2d Cir. 1947) (The Court held that § 2036 (a) (2) did not apply to grantor/co-trustee of a trust where co-trustees could distribute trust income under an ascertainable standard, stating that 'we think that the decedent effectively put that 'right' beyond his own control or retention by imposing conditions upon the exercise of it.').

FN5. The trustee's fiduciary obligation to make distributions of net cash flow would also be enforceable by the Delaware courts. See McNeil v. McNeil, 798 A.2d 503 (Del. 2002), in which Trustees were surcharged for failing to make distributions as required by the trust document.

In addition, the ability of a unit holder of a Delaware Business Trust to vote with others to dissolve Schutt I and Schutt II does not equate to the right to 'designate the persons who shall possess or enjoy the property or the income therefrom' under § 2036(a)(2). As noted above, the power to vote with others and perhaps 'persuade' them to dissolve the partnership, which is essentially the right that a member has under the articles of Schutt I and Schutt II, is not the type of power the 'in conjunction with' language of § 2036(a)(2) was enacted to address.

Although Judge Cohen's dicta in Estate of Strangi was the first to address the 'in conjunction with' language in the partnership context, other cases addressing almost identical 'in *66 conjunction with' language under § 2038 have limited the application of this provision in determining whether a decedent held a joint power to terminate a trust. For example, a power to revoke or terminate a trust with the consent of all beneficiaries was held not to be taxable by the Supreme Court in Helmholtz, 296 U.S. at 97 (reasoning that this power exists under state law in almost all situations, and to hold otherwise would cause all trusts to be taxable); see also Estate of Tully, 528 F.2d at 1404 (holding that a power to 'alter, amend, revoke or terminate' expressly exercisable in conjunction with others falls within Section 2038(a)(1), but 'power' as used in this section does not extend to powers of persuasion"). Thus, the mere possibility that Mr. Schutt could attempt to convince the other unit holders of Schutt I and Schutt II to vote to liquidate the entity does not amount to a right to designate, in conjunction with any other person, persons who should possess or enjoy the property or the income from those entities under § 2036(a)(2). Notwithstanding the foregoing, in the event that Mr. Schutt would ever have attempted to obtain the consent of Wilmington Trust Company to dissolve Schutt I and Schutt II, it is clear that this consent would not have been readily forthcoming. (Tr. 96-98).

And even if Schutt I and Schutt II were dissolved, unit holders of Schutt I and Schutt II did not have the right to *67 designate the persons who would possess or enjoy the property or income of those entities. The rights to receive the property of Schutt I and Schutt II upon dissolution are vested in the owners of the interests in those entities. After the payment of debts, the remaining assets would have been paid to the owners in proportion to their respective interests. (See e.g., Exh. 15-J, §§ 6.1-6.3, 12.1-12.2). The determination of who would enjoy the property on dissolution was made at the time of formation of Schutt I and Schutt II in the governing agreements; it was not a right "retained" by Mr. Schutt.

Respondent also seeks to include the assets contributed by Mr. Schutt to Schutt I and Schutt II in his gross estate under § 2038. Under § 2038 (a) (1), if a decedent has made a transfer of property (other than a bona fide sale for a full and adequate consideration) but retained a right to alter, amend, or revoke that transfer, or has relinquished such a right in the three years prior to his death, the assets transferred are included in his estate. However, § 2038 does not apply "if the decedent's power could be exercised only with the consent of all parties having an interest (vested or contingent) in the transferred property, and if the power adds to nothing to the *68 rights of the parties under local law." Treas. Reg. § 20.2038- 1(a) (2).

As noted above, the Revocable Trust's transfer of assets to Schutt I and Schutt II were not donative transfers. Likewise, his contributions satisfied the bona fide sale for full and adequate consideration exception. In addition, Mr. Schutt did not retain a right at his death to alter, amend, or revoke his contributions of Du Pont and Exxon stock to Schutt I and Schutt II, nor did he relinquish any such right in the three years prior to his death. Mr. Schutt absolutely, unequivocally, and without reservation contributed property to Schutt I and Schutt II in exchange for his pro-rata interest in those entities. Because Mr. Schutt retained no right to rescind these contributions, § 2038 does not apply.

As with Respondent's § 2036(a)(2) argument, Respondent argues that the right to vote with others to dissolve Schutt I and Schutt II constitute a § 2038 retained right to revoke the contribution of DuPont and Exxon stocks. All of the unit holders in Schutt I and Schutt II possess the right to vote to dissolve those entities. Schutt I and Schutt II can only be dissolved prior to December 31, 2048 with the written approval of both the trustee and the unanimous consent of the unit holders. Exh. 15-J at Sec. 2.6; Exh. 16-J at Sec. 2.6. Under Delaware law, if a business trust does not have perpetual existence, the business *69 trust is dissolved and its affairs shall be wound up "at the time or the happening of events specified by the governing instrument." 12 Del. C. § 3808. Thus, Mr. Schutt's right to vote on liquidation of Schutt I and Schutt II does not equate to a retained § 2038 right because it could only be exercised with the consent of all parties having an interest in those entities and the power adds nothing to the rights of the party under Delaware law. Treas. Reg. § 20.2038-1(a) (2); Estate of Cohen, 79 T.C. at 1027-29.

For the reasons set forth above, it is respectfully submitted by Petitioner that (i) Respondent has not met its burden of proof with respect to any factual matters, and (ii) § 2 03 6 and § 2038 do not apply to the Du Pont stock and Exxon stock transferred to Schutt I and Schutt II, respectively, by Mr. Schutt's Revocable Trust.