2004 WL 3396364 (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.

Opening Brief for Respondent

*i CONTENTS

PRELIMINARY STATEMENT ... 1

QUESTIONS PRESENTED ... 3

RESPONDENT'S REQUEST FOR FINDINGS OF FACT ... 5

ULTIMATE FINDINGS OF FACT ... 53

POINTS RELIED UPON ... 54

ARGUMENT ... 59

I. The fair market value of the stock the decedent's revocable trust contributed to Schutt I and Schutt II should be included in the gross estate under I.R.C. § 2036 ... 59

A. At the time of his death, the decedent held the right to possess or enjoy the stock his revocable trust contributed to Schutt I and Schutt II, including the right to receive the income therefrom ... 62

B. At the time of his death, the decedent, either alone or in conjunction with the WTC, held the power to designate the persons who would possess or enjoy the stock (or the income therefrom) his revocable trust contributed to Schutt I and Schutt II ... 66

II. The fair market value of the stock the decedent's revocable trust contributed to Schutt I and Schutt II should be included in the gross estate under I.R.C. § 2038 ... 79

III. The transfer of stock from the decedent's revocable trust to Schutt I and Schutt II were not bona fide sales for adequate and full consideration in money and money's worth ... 83

CONCLUSION ... 108

*ii CITATIONS

Cases

Alexander, Estate of v. Commissioner, 81 T.C. 757 (1983) ... 68

Bank of N.Y. v. United States, 526 F.2d 1012 (3d Cir. 1975) ... 84

Commissioner v. Estate of Church, 335 U.S. 632 (1949) ... 61

Commissioner v. Estate of Holmes, 326 U.S. 480 (1946) ... 68

Fidelity-Philadelphia Trust Co. v. Rothensies, 324 U.S. 108 (1945) ... 60

Goetchius, Estate of v. Commissioner, 17 T.C. 495 (1951) ... 83

Guynn v. United States, 437 F.2d 1148 (4th Cir. 1971) ... 60, 63

Harper, Estate of v. Commissioner, T.C. Memo. 2002-121, 83 T.C.M. (CCH) 1641 ... passim

Harrison, Estate of v. Commissioner, T.C. Memo. 1987-8, 52 T.C.M. (CCH) 1306 ... 86, 95, 103, 105

Helvering v. Helmholtz, 296 U.S. 93 (1935) ... 81

Hendry, Estate of v. Commissioner, 62 T.C. 861 (1974) ... 65

Industrial Trust Co. v. Commissioner, 165 F.2d 142 (1st Cir 1947) ... 68

Kimbell v. United States,

F.3d

, 2004 U.S. App. LEXIS 9911 (5th Cir. May 20, 2004), rev'g and remanding, 244 F. Supp. 2d (N.D. Tex. 2003) ... 91, 95

Mahoney v. United States, 831 F.2d 641 (6th Cir. 1987), cert. denied, 486 U.S. 1054 (1988) ... 60

Maxwell, Estate of v. Commissioner, 3 F.3d 591 (2d Cir. 1993), aff'g 98 T.C. 594 (1992) ... 63, 85

McNichol, Estate of v. Commissioner, 265 F.2d 667(3d Cir.), cert. denied, 361 U.S. 829 (1959); ... 63

*iii Michelson, Estate of v. Commissioner, T.C. Memo. 1978-371, 37 T.C.M. (CCK) 1534 ... passim

Mollenberg's Estate v. Commissioner, 173 F.2d 698 (2d Cir. 1949) ... 84

Morse, Estate of v. Commissioner, 69 T.C. 408 (1977), aff'd, 625 F.2d 133 (6th Cir. 1980) ... 84

Musgrove, Estate of v. United States, 33 Fed. Cl. 657 (1995 ... 84

Rapelje, Estate of v. Commissioner, 73 T.C. 82 (1979) ... 63

Ray v. United States, 762 F.2d 1361 (9th Cir. 1985) ... 60

Reichardt, Estate of v. Commissioner, 114 T.C. 144 (2000) ... 63, 85

Reinecke v. Northern Trust Co., 278 U.S. 339 (1929) ... 69

Spruill, Estate of v. Commissioner, 88 T.C. 1197 (1987) ... 63, 76, 78

Stone, Estate of v. Commissioner, T.C. Memo. 2003-309, 86 T.C.M. (CCH) 551 ... passim

Strangi, Estate of v. Commissioner (Strangi II), T.C. Memo. 2003-145, 85 T.C.M. (CCH) 1331, appeal docketed, No. 03-60992 (5th Cir. Nov. 21, 2003) ... passim

Struthers v. Kelm, 218 F.2d 810 (8th Cir.1955) ... 68

Thompson, Estate of v. Commissioner, T.C. Memo. 2002-246, 84 T.C.M. (CCH) 374, appeal docketed, No. 03-3173 (3d Cir. July 22, 2003) ... passim

United States v. Byrum, 408 U.S. 125 (1972) ... passim

United States v. Estate of Grace, 395 U.S. 316 (1969)) ... 60, 61

United States v. O'Malley, 383 U.S. 627 (1966) ... 68

Walton v. Commissioner, 115 T.C. 589 (2000) ... 93

*iv Statutes

I.R.C. § 721(b) ... 35

I.R.C. § 2001 ... 59

I.R.C. § 2031 ... 59

I.R.C. § 2032 ... 5

I.R.C. § 2036(a) ... passim

I.R.C. § 2036 ... passim

I.R.C. § 2038 ... passim

I.R.C. § 2051 ... 59

Other Authorities

12 Del. Code Ann. § 3806(b) (3) (2003) ... 82

12 Del. Code Ann. § 3808(a) (2003) ... 82

Rules

T.C. Rule 142 (a) ... 62

Regulations

Treas. Reg. § 20.2036-1(a) 62, ... 66, 83

Treas. Reg. § 20.2036-1(a) (ii) ... 67

Treas. Reg. § 20.2036-1(b)(3) ... 67

Treas. Reg. § 20.2038-1 ... 80

Treas. Reg. § 20.2043-1 ... 83

(b) Whether at the time of his death, the decedent, either alone or in conjunction with others, held the power to designate the person or persons who would possess or enjoy the stock, including the income therefrom, his revocable trust contributed to the Delaware business trusts.

Respondent requests that the Court find the following facts:

1. Petitioner is the estate of Charles Porter Schutt (hereinafter referred to as the "decedent"). The estate's co-executors are Charles P. Schutt, Jr. and Henry I. Brown, III, both of whom resided in Pennsylvania when the petition in this case was filed. (Stip. ¶ 1)

2. The decedent died on April 29, 1999. (Stip. ¶ 2)

3. On or about January 21, 2000, petitioner timely filed its United States Estate Tax Return (Form 706). (Stip. ¶ 4)\

4. On its estate tax return, petitioner elected to use the alternate valuation date established under I.R.C. § 2032, which was October 21, 1999. (Stip. ¶ 7; Ex. 1-J)

5. On its estate tax return, petitioner included as part of the gross estate the value of 307,520.3 units of Schutt Business Trust I (hereinafter referred to as "Schutt I") and 112,377.4 units of Schutt Business Trust II (hereinafter referred to as "Schutt II") held by the decedent's revocable trust at the time of his death. Petitioner reported that on October 21, 1999, the fair market value of the units of Schutt I was $15,837,295.45 and the fair market value of the units of Schutt II was $7,237,104.56. (Ex. 1-J)

6. On October 11, 2002, respondent issued a statutory notice of deficiency to petitioner in which he asserted a *6 deficiency in estate tax in the amount of $6,113,583.03. In that notice, respondent determined that the fair market values of the units of Schutt I and Schutt II were $25,500,000.00 and $11,544,677.60, respectively, at the time of the decedent's death. (Stip. ¶ 5; Ex. 2-J)

7. In his Answer, respondent asserted an increased deficiency in the amount of $1,409,884.65. The increased deficiency resulted from the correction of a computational error contained in the statutory notice. (Answer)

8. By Amendment to Answer, respondent asserted a further increase in the deficiency in the amount of $3,595,513.32. This increased deficiency is based on respondent's contention that under I.R.C. §§ 2036 and 2038, the gross estate includes the value of the stock the decedent's revocable trust contributed to Schutt I and Schutt II rather than the value of the trust units. (Amendment to Answer)

9. The decedent was born on XX/XX/1911. (Stip. ¶ 6

10. Sometime before 1940, the decedent married Phyllis du Pont. (Stip. ¶ 15; Tr. 27)

11. Phyllis du Pont Schutt predeceased the decedent. (Stip. ¶ 15; Tr. 27)

12. Phyllis du Pont Schutt was a daughter of Eugene E. du Pont. (Stip. ¶¶ 14, 15)

*7 13. Eugene E. du Pont was a direct descendant of the founders of the DuPont Company. (Respondent asks the Court to take judicial notice of this fact based on the entire record in this case.)

14. Eugene E. du Pont died on December 17, 1966. (Supp. Stip. ¶ 5)

15. The decedent was survived by three of his four children (Charles P. Schutt, Jr., Sarah Schutt Harrison, and Caroline Schutt Brown), who were in their late 50's or early 60's at the time of his death, and by 14 grandchildren, whose ages ranged from 24 years old to 40 years old at the time of his death. (Stip. ¶¶ 2, 3)

16. The decedent's fourth child (Katherine D. Schutt Streitweiser) died of leukemia on March 27, 1993. (Stip. ¶ 2; Tr. 113))

17. The decedent's three surviving children were in good health during 1997 and 1998. (Stip. ¶ 2)

18. Henry I. Brown, III, is married to Caroline Schutt Brown. ((Ex. 18-J, Art. 9, § C)

19. Stephen J. Dinneen, a certified public accountant, has been employed by the Carpenter/Schutt families since 1973 as the manager of a business office maintained by the two families. (Stip. ¶ 28; Tr. 99)

*8 20. The Carpenters are the family of Phyllis du Pont Schutt's sister. (Tr. 99)

21. Mr. Dinneen's duties include maintaining the books and records for the family members' various business and investment activities and preparing tax returns for family members. (Tr. 100-01)

22. Over the years, Mr. Dinneen has provided business and investment advice to the decedent and other members of the Schutt and Carpenter families. (Stip. ¶ 28)

23. Thomas P. Sweeney -- a member of the law firm of Richards, Layton & Finger, P.A. -- served as the decedent's attorney from 1967 until his death. (Stip. ¶29; Tr. 20-21, 23)

24. Mr. Sweeney specializes in the practice of law relating to taxes, trusts, and estates. (Tr. 21)

25. Over the years, Mr. Sweeney provided advice to the decedent on numerous occasions concerning tax and estate planning matters. (Stip. ¶ 29; Tr. 23-24)

26. Based on Mr. Sweeney's advice, the decedent and Phyllis du Pont Schutt formed several irrevocable and revocable trusts over the years, to which they transferred assets for the benefit of their children and grandchildren. (Exs. 3-J, 20-J, 25-J, 26-J, 27-J; Tr. 23)

27. Based on Mr. Sweeney's advice, the decedent formed a family limited partnership during 1994 with his son and one of *9 his daughters to which he transferred timberland located in Alabama, securities, and cash. (Stip. ¶ 27; Ex. 28-J; Tr. 23-24)

28. Thereafter, the decedent made annual gifts of portions of his limited partnership interest to his children, their spouses, and their children. (Exs. 108-J through 113-J; Tr. 24)

29. For purposes of valuing the gifts of his partnership interest in the family limited partnership, a minority interest discount of 20% was applied. (Exs. 108-J through 112-J)

30. Before January 1, 1997, both Mr. Dinneen and Mr. Sweeney had talked to the decedent about forming another vehicle through which he could make annual gifts to his children and grandchildren because he had given away most of his interest in the family limited partnership. (Tr. 51)

31. The Wilmington Trust Company (hereinafter referred to as the "WTC") was founded by the du Pont family. (Tr. 49)

32. The du Pont family and its members have had long-standing business relationships with the WTC. (Tr. 49)

33. Among other things, the WTC has, over the years, served as the trustee for a number of trusts established by members of the du Pont family. (Tr. 50)

34. The decedent and his family have had a long-standing business relationship with the WTC. (Tr. 49)

*10 35. During 1997 and 1998, the WTC was the trustee of a number of trusts established for the benefit of Phyllis du Pont Schutt and/or her issue. (Stip. ¶¶ 15, 16, 17, 22, 23; Tr. 50)

36. During 1997 and 1998, Mr. Sweeney was one of the WTC's directors and had served in that capacity since 1983. (Tr. 33)

37. During 1997 and 1998, Mr. Sweeney's firm -- Richards, Layton & Finger, P.A. -- served as the WTC's outside counsel, a position his firm had held for a number of years. (Tr. 48-49)

38. During 1997 and 1998, George W. Helme, IV, was a Senior Vice President of the WTC and head of its trust department. (Stip. ¶ 31; Tr. 32)

39. Mr. Sweeney has known Mr. Helme since he first joined the WTC's trust department. (Tr. 56)

40. During 1997 and 1998, Neal J. Howard was one of the WTC's vice presidents and served as the fiduciary counsel to its trust department. (Tr. 74)

41. As fiduciary counsel, Mr. Howard provided legal advice to members of the WTC's trust department concerning matters relating to the trusts being administered by the bank. (Tr. 75)

42. The decedent subscribed to the so-called "buy and hold" investment philosophy, which meant that he believed in buying stock in quality companies and holding that stock for the long-term. (Tr. 25, 105)

*11 43. The decedent basically continued the investment philosophy held by Eugene E. du Pont. (Tr. 105-06)

44. Historically, the WTC subscribed to the same investment philosophy as the decedent. (Tr. 85)

45. The Schutt family obtained most of its wealth from Eugene E. du Pont. (Tr. 25, 106)

46. Historically, a significant portion of the Schutt family wealth was comprised of DuPont and Phillips Petroleum stock obtained from Eugene E. du Pont. (Stip. ¶ 14; Tr. 28)

47. Eugene E. du Pont wanted his heirs to hold onto the DuPont stock because of the du Pont family's close association with that company, and he wanted his heirs to hold onto the Phillips Petroleum stock because he had been involved in the formation of that company. (Tr. 25-26)

48. During the mid-1980's, the decedent sold his Phillips Petroleum stock because he became dissatisfied with the management of that company. (Stip. ¶14; Tr. 25-26)

49. The decedent used the proceeds from the sale of the Phillips Petroleum stock to buy Exxon stock. (Stip. ¶ 14; Tr. 25-26, 28)

50. Over the years, the decedent indicated on a number of occasions to both Mr. Sweeney and Mr. Dinneen that he was concerned about family members, particularly his grandchildren *12 and their issue, selling the stock that comprised a substantial portion of the family's wealth. (Tr. 28-29, 108, 112)

51. During the early 1990's, some of the decedent's grandchildren sold some of the DuPont and/or Exxon stock they received upon the death of the decedent's daughter. (Tr. 29-30, 108, 113)

52. To address the decedent's fear that his children and their issue might sell the stock they inherited, Mr. Dinneen recommended to the decedent during the early 1970's that he combine his and wife's stock portfolios with the portfolios held in trust for the benefit of his children and their issue. (Tr. 112)

53. The decedent rejected Mr. Dinneen's recommendation at that time because he thought his children should have some control over their own financial affairs. (Tr. 112)

54. The decedent continued to reject similar recommendations until late 1996 or early 1997 when he authorized Mr. Dinneen to contact Mr. Sweeney to discuss the possible transfer of stock held by the decedent in a revocable trust to another entity. (Tr. 112-13, 119-20)

55. During 1996, 1997, and 1998, the decedent was being treated for a number of medical problems, including coronary artery disease and congestive heart failure. The decedent also had a history of hypertension and hyperlipidemia (elevated *13 cholesterol), and was considered a borderline diabetic. (Stip. ¶ 11; Exs. 99-J, 100-J)

56. On November 29, 1996, the decedent was admitted to the hospital after complaining of shortness of breath. He was released on December 5, 1996. (Ex. 99-J)

57. During the previous 20 years, the decedent had only been admitted to the hospital once, and that was for a routine checkup. (Tr. 132-33)

58. During 1940, Eugene E. du Pont established an irrevocable trust (WTC Trust # 3044) for the benefit of Phyllis du Pont Schutt and her issue. (Stip. ¶ 15; Ex. 17-J)

59. Over the years, Eugene E. du Pont transferred DuPont and Phillips Petroleum stock to WTC Trust # 3044. (Stip. ¶ 15; Ex. 17-J)

60. The WTC has been the trustee for WTC Trust # 3044 from its inception. (Stip. ¶ 15; Ex. 17-J)

61. The trust agreement provides that the trust income will be distributed quarterly to the issue of Phyllis du Pont Schutt per stirpes or to her if she has no issue. (Ex. 17-J, ¶ 1)

62. The trust agreement provides that upon Phyllis du Pont Schutt's death, the trust corpus will be divided into shares (per stirpes) for the benefit of her issue. (Ex. 17-J, ¶ 1)

*14 63. The trust agreement provides that any shares of the trust corpus allocated to Phyllis du Pont Schutt's children upon her death will be held in trust for their benefit, and that the trustee will continue to distribute the trust income allocable to those shares on a quarterly basis. (Ex. 17-J, ¶ 1)

64. The trust agreement provides that the principal and undistributed income attributable to any shares allocated to Phyllis du Pont Schutt's issue other than her children will, upon her death, be distributed to such issue, subject to the age restrictions set forth in the trust agreement. (Ex. 17-J, ¶ 1)

65. The trust agreement provides that upon the death of a child of Phyllis du Pont Schutt, the shares of the trust fund allocated to that child will, upon Phyllis du Pont Schutt's death, be distributed to the descendents of that child, subject to the age restrictions set forth in the trust agreement. (Ex. 17-J, ¶ 1)

66. The trust agreement provides that the beneficiaries may not transfer, encumber, or otherwise alienate their interests in the trust. (Ex. 17-J, ¶ 4)

67. The trust agreement provides that the trust will terminate when the entire trust fund is distributed pursuant to the terms of the agreement or 21 years after the later of the death of Phyllis du Pont Schutt or the death of the decedent. (Ex. 17-J, ¶ 18)

*15 68. Upon termination, any remaining trust property will be distributed to the remaining beneficiaries. (Ex. 17-J, ¶ 18)

69. The trust agreement grants the trustee broad powers to manage the trust assets as if it were the owner, subject to certain restrictions. (Ex. 17-J, ¶ 5)

70. Notwithstanding the broad powers conferred upon the trustee, the trustee is prohibited from taking the following actions unless it has the consent of the "advisor to the trust" (hereinafter referred to as the "consent advisor"): (i) sell or otherwise dispose of trust assets; (ii) purchase assets on behalf of trust; (iii) exercise the voting rights for any stock held by the trust; or (iv) participate in any plan or proceeding relating to the rights and obligations arising from the ownership of any stock. (Ex. 17-J, ¶ 7)

71. The trust agreement provides that if the consent advisor fails to respond within 20 days to the trustee's written request for permission to exercise a power subject to the consent advisor's approval, then the trustee is free to take the action set forth in its request. (Ex. 17-J, ¶ 7)

72. The trust agreement provides that if there is no consent advisor, then the trustee may take any action it deems appropriate. (Ex. 17-J, ¶ 7)

73. The trust agreement provides that during her lifetime, phyllis du Pont Schutt has the exclusive authority to select and *16 remove the consent advisor or advisors for the trust. (Ex. 17-J, ¶ 8)

74. The trust agreement provides that if after Phyllis du Pont Schutt's death, the consent advisor(s) she has selected is (are) not qualified to serve, then a majority of her adult issue may select the consent advisor or advisors. (Ex. 17-J, ¶ 8)

75. The trust agreement provides that the consent advisor(s), with or without cause, may remove the trustee and appoint another bank or trust company with capital and surplus of at least $5 million as the successor trustee. (Ex. 17-J, ¶ 9)

76. By letter, dated March 11, 1941, Phyllis du Pont Schutt appointed her father and the decedent as the consent advisors for WTC Trust # 3044. (Supp. Stip. ¶ 5; Ex. 118-J)

77. Upon Phyllis du Pont Schutt's death, WTC Trust # 3044 was divided into eight separate accounts (WTC Trusts 3044-1, 3044-2, 3044-3, 3044-4, 3044-5, 3044-6, 3044-7, and 3044-8) as required by the trust agreement. (Stip. ¶ 16)

78. When the decedent's daughter, Katherine D. Schutt Streitweiser, died, she was the current beneficiary of WTC Trusts 3044-3 and 3044-7. (Stip. ¶ 25)

79. Upon Katherine D. Schutt Streitweiser's death, the assets held in WTC Trusts 3044-3 and 3044-7 were distributed to her children as required by the trust agreement. (Stip. ¶ 26)

*17 80. The decedent was the consent advisor for WTC Trusts 3044-1, 3044- 2, 3044-5, 3044-6, and 3044-8 during 1997 and 1998. (Supp. Stip. ¶ 6)

81. On January 1, 1997, WTC Trust # 3044-1 held 19,098 shares of DuPont stock, WTC Trust # 3044-2 held 23,670 shares of DuPont stock, WTC Trusts 3044-5 and 3044-6 each held 132,962 shares of DuPont stock and 11,418 shares of Exxon stock, and WTC Trust # 3044-8 held 11,418 shares of Exxon stock.

82. On October 6, 1934, Eugene E. du Pont entered into a trust agreement with the WTC (WTC Trust # 2064) in which he gave a power of appointment to Phyllis du Pont Schutt. (Stip. ¶ 16)

83. In her will, Phyllis du Pont Schutt exercised her power of appointment by transferring the assets of WTC Trust # 2064 to the WTC to be held in trust for the benefit of her grandchildren. (The WTC continued to identify the trust so created as WTC Trust # 2064.) (Stip. ¶ 16; Exs. 18-J, 19-J)

84. The will provides that each of her grandchildren living at the time of her death will receive one share in the trust and that the issue (as a group) of any grandchild that predeceased her will receive one share in the trust. (Ex. 19-J)

85. The will provides that the portion of the trust assets allocated to the issue of any grandchild who predeceases her should be distributed to that grandchild's issue per stirpes, *18 subject to an age restriction set forth in her will. (Exs. 18-J, 19-J)

86. The will provides that the trust's net income will be distributed quarterly to Phyllis du Pont Schutt's grandchildren. (Ex. 19-J)

87. The will provides that the trust will terminate on the earlier of (i) the date upon which Phyllis du Pont Schutt's youngest grandchild living at the time of her death reaches age 40, or (ii) the date which is 21 years after the death of the last survivor of the issue of Phyllis du Pont Schutt's grandfather living on October 6, 1934. (Ex. 19-J)

88. The will provides that upon the termination of the trust, the trust property will be distributed to the remaining beneficiaries. (Ex. 19-J)

89. The will grants the trustee broad powers to manage the trust's assets, subject to the limitation on the exercise of certain powers set forth in the will. (Ex. 18-J, Art. 9, § A)

90. The will provides that the trustee's power to buy, sell, lease, exchange, mortgage, or pledge property held by the trust may only be exercised upon the written direction of the advisor to the trust (hereinafter referred to as the "direction advisor"). (Ex. 18-J, Art. 9, § C)

*19 91. In her will, Phyllis du Pont Schutt appoints the decedent as the direction advisor to the trust. (Ex. 18-J, Art. 9, § C)

92. The decedent was the direction advisor to the trust during 1997 and 1998. (Supp. Stip. ¶ 7)

93. The will provides that upon the decedent's death, the direction advisor will be a committee made up of Phyllis du Pont Schutt's daughter-in-law, Katherine Draper Schutt, and her son-in law, Henry I. Brown, III. (Ex. 18-J, Art. 9, § C)

94. The will provides that the two committee members may select a third member. (Ex. 18-J, Art. 9, § C)

95. The will provides that the trustee is free to take any action it deems appropriate if the direction advisor or committee, as the case may be, does not respond to a written request for direction within 15 days. (Ex. 18-J, Art. 9, § C)

96. The will provides that decisions for the committee will be made by majority vote, but if the committee members are evenly divided, then the deciding vote will be cast by the trustee. (Ex. 18-J, Art. 9, § C)

97. The will provides that the direction advisor or the committee, as the case may be, may, with or without cause, remove the trustee and appoint a bank or trust company having capital and surplus of at least $10 million as the successor trustee. (Ex. 18-J, Art. 9, § D)

*20 98. The WTC was the trustee for WTC Trust # 2064 during 1997 and 1998. (Exs. 15-J and 16-J; Tr. 27)

99. On January 1, 1997, WTC Trust # 2064 held 108,000 shares of DuPont stock and 186,000 shares of Exxon stock. (Stip. ¶ 16)

100. During 1976, Phyllis du Pont Schutt established a revocable trust (WTC Trust # 11258-3) for the benefit of the decedent and her issue. (Stip. ¶ 17; Ex. 20-J)

101. Phyllis du Pont Schutt modified the trust agreement several times over the years. (Stip. ¶ 17; Exs. 21-J through 24-J)

102. The trust agreement was restated in full in the last modification, dated December 1, 1988. (Ex. 24-J)

103. The trust agreement, as modified, provides that during her lifetime, Phyllis du Pont Schutt will receive the trust's net income and so much of the principal as she may request. (Ex. 24-J, § III (A)(1))

104. The trust agreement, as modified, provides that upon Phyllis du Pont Schutt's death, the trust corpus, after payment of certain cash bequests, will be divided into three trusts: a marital trust for the decedent's benefit; a GST trust for the benefit of her grandchildren and their issue; and a residuary trust for the benefit of her children. (Ex. 24-J, § III(B))

*21 105. The trust agreement, as modified, provides that the corpus of the marital trust will equal in value the "marital deduction amount." The term "marital deduction amount" is defined in the agreement as the amount qualifying for the marital deduction under the Internal Revenue Code which, after taking into account other deductions and exclusions provided in the Code, results in a taxable estate of $2.5 million. (Ex. 24-J, § III (B)(3))

106. The trust agreement, as modified, provides that during his lifetime, the decedent will receive the net income from the marital trust and so much of the principal as he may request. (Ex. 24-J, § III(B)(3))

107. The trust agreement, as modified, grants the decedent a power of appointment over the assets set aside in the marital trust. (Ex. 24-J, § III(B) (3))

108. The trust agreement, as modified, provides that if the decedent does not exercise his power of appointment, then an amount sufficient to cover the taxes and administrative expenses incurred by his estate will be distributed to his estate's executor, and the remaining marital trust assets will be added to the residuary trust. (Ex. 24-J, § III(B)(3))

109. The trust agreement, as modified, provides that the corpus of the GST trust formed upon Phyllis du Pont Schutt's death will equal in value the remaining portion of her *22 generation-skipping transfer tax exemption set forth in the Internal Revenue Code. (Ex. 24-J, § III(B)(4))

110. The trust agreement, as modified, provides that the trustee, in its discretion, may distribute the net income allocable to the GST trust and its principal to the beneficiaries for their support, maintenance, education, care, and welfare. (Ex. 24-J, § III(B)(4)

111. The trust agreement, as modified, provides that if not terminated sooner, the GST trust will terminate 110 years after it becomes irrevocable, at which time the assets will be distributed to Phyllis du Pont Schutt's then living issue. (Ex. 24-J, § III(B)(4)

112. The trust agreement, as modified, provides that the assets remaining after the marital and GST trusts are funded will be held in a residuary trust for the benefit of Phyllis du Pont Schutt's children. (Ex. 24-J, § III(B)(4))

113. The trust agreement, as modified, provides that Phyllis du Pont Schutt's son and one daughter will receive the net income allocable to their interests in the residuary trust. (EX. 24-J. § III(B)(4))

114. The trust agreement, as modified, provides that Phyllis du Pont Schutt's other two daughters will receive 50% of the net income allocable to their interests in the residuary trust, and that the remainder of the net income allocable to *23 their shares will be added to their allocable portions of the trust's principal. (Ex. 24-J. § III(B)(4))

115. The trust agreement, as modified, provides that Phyllis du Pont Schutt's son may withdraw up to one-third of the principal allocated to his interest in the residuary trust. (Ex. 24-J, § III(B)(4))

116. The trust agreement, as modified, provides each beneficiary of the residuary trust with a power of appointment over the trust corpus allocated to his/her interest in the trust. (Ex. 24-J, §III(B)(4))

117. The trust agreement, as modified, provides that if a beneficiary does not exercise his/her power of appointment, then the trust principal allocated to that beneficiary's interest in the trust will be distributed to his/her issue.

118. Phyllis du Pont Schutt selected the decedent, her son, and her son-in-law to act as the initial trustees for the trust. (Exs. 20-J through 24-J)

119. Upon Phyllis du Pont Schutt's death, the WTC became the sole trustee for all three trusts created in the trust agreement. (Ex. 24-J, § VIII(J))

120. The trust agreement, as modified, grants the trustee broad power to manage the trust's assets, subject to certain restrictions. (Ex. 24-J, § VI)

*24 121. The trust agreement, as modified, provides that the trustee can only buy, sell, or encumber trust assets upon the written direction of the advisor to the trust (hereinafter referred to as the "direction advisor") unless there is no advisor or the advisor fails to timely respond to a request for direction submitted by the trustee. (Ex. 24-J, § VII(A)(1) and (4))

122. Phyllis du Pont Schutt was the initial direction advisor to the trust. (Ex. 24-J, § VII(A) (2))

123. Upon Phyllis du Pont Schutt's death, the decedent became the direction advisor to the trust, a position he continued to hold during 1997 and 1998. (Supp. Stip. ¶ 8; Ex. 24-J, § VII(A)(2))

124. The trust agreement, as modified, provides that upon the deaths of Phyllis du Pont Schutt and the decedent, the direction advisor will be a committee comprised initially of their daughter-in-law and their son-in-law. (Ex. 24-J, § VII(A)(3))

125. The trust agreement, as modified, provides that the committee will be comprised of at least two members but not more than three. (Ex. 24-J, § VII(A)(3))

126. The committee member or members are authorized to fill vacancies on the committee with the spouses of Phyllis du Pont Schutt's issue. (Ex. 24-J, § VII(A)(3))

*25 127. The trust agreement, as modified, provides that all decisions will be made by the majority vote of the committee members, but if there is a tie, then the trustee will cast the deciding vote. (Ex. 24-J, § VII(A)(6))

128. Under the trust agreement, as modified, the direction advisor has the power to remove the trustee and select a bank or trust company with capital and surplus of at least $10 million as the successor trustee. (Ex. 24-J, § VII(B)(2))

129. On January 1, 1997, WTC Trust # 11258-3 held 22,000 shares of DuPont stock and 8,000 shares of Exxon stock. (Stip. ¶ 17)

130. During 1976, the decedent established a revocable trust for the benefit of his children and their issue to which he transferred a substantial portion of his assets. (Stip. ¶ 8; Ex. 3 -J)

131. The decedent reserved the power to modify, alter, or terminate the trust agreement. (Ex. 11-J, § VII(B))

132. The decedent modified the trust agreement a number of times before his death. (Stip. ¶ 8; Exs. 4-J through 14-J)

133. The trust agreement was restatedin full in the supplemental trust agreement, dated May 4, 1994. (Ex. 11-J)

134. The trust agreement, as modified, provides that during his lifetime, the decedent will receive the trust's net income *26 and so much of the principal as he may request. (Ex. 11-J, § II (A))

135. The trust agreement, as modified, provides that upon the decedent's death, the trust corpus, after payment of certain cash bequests, will be divided into two trusts: (i) a charitable lead unitrust, and (ii) a residuary trust for the benefit of his children and their issue. (Ex. 11-J, § II(B))

136. The trust agreement, as modified, provides that the charitable lead unitrust will be funded with such assets so as to qualify for the maximum income and estate tax deductions allowed by I.R.C. §§ 170(f) (2) (B), 2055(e), and 2522(c). (Ex. 11-J, § II (B) (3))

137. The trust agreement, as modified, provides that the charitable unitrust will terminate 25 years after the decedent's death. (Ex. 11-J, § II(B) (3))

138. The trust agreement, as modified, provides that upon the termination of the charitable lead unitrust, specified amounts of the undistributed unitrust income (and unitrust principal, if necessary) will be made to any of the decedent's grandchildren born after Phyllis du Pont Schutt's death and to the issue of any grandchild who died before the termination date. The remainder of the unitrust assets, if any, will be held in trust for the benefit of the decedent's grandchildren and any *27 issue of a grandchild who died before the charitable lead terminated. (Ex. 11-J, § II(B) (3))

139. The trust agreement, as modified, provides that the trust formed upon the termination of the charitable lead unitrust will terminate upon the earlier of the death of the decedent's last surviving grandchild or 110 years after the decedent's death, at which time the trust principal will be distributed (per stirpes) to the decedent's then living great grandchildren and the issue of any great grandchild who died before the termination date. (Ex. 11-J, § II(B) (3))

140. The trust agreement, as modified, provides that the decedent's son and one daughter will receive the net income allocable to their interests in the residuary trust. (Ex. 11-J, § II (B) (4))

141. The trust agreement, as modified, provides that the decedent's other two daughters will receive 50% of the net income allocable to their interests in the residuary trust, and that the remainder will be added to their allocable shares of the trust principal. (Ex. 11-J, § II(B) (4))

142. The trust agreement, as modified, provides that the decedent's son may withdraw up to one-third of the principal allocated to his interest in the residuary trust. (Ex. 11-J, § II (B) (4))

*28 143. The trust agreement, as modified, provides each beneficiary of the residuary trust with a power of appointment over the trust corpus allocated to his/her interest in the trust. (Ex. 11-J, § II (B) (4))

144. The trust agreement provides, as modified, that if a beneficiary does not exercise his/her power of appointment, then the residuary trust principal allocated to that beneficiary's interest in the trust will be distributed to his/her issue. (Ex. 11-J, § II (B) (4))

145. The decedent selected himself, his son, and his son-in-law as the initial trustees for the trust, and they were the trustees during 1997 and 1998. (Exs. 11-J, 15-J, 16-J)

146. On or about October 29, 1997, the trust held 487,200 shares of DuPont stock and 178,200 shares of Exxon stock. (Ex. 52-J)

147. At the time of his death, the decedent's revocable trust held 307,520.4 units (a 45.2363% interest) in Schutt I and 112,377.4 units (a 47.3364% interest) in Schutt II. (Stip. ¶¶ 8, 10; Ex. 1-J)

148. On October 21, 1999 (the alternate valuation date), the underlying asset values of the interests the decedent's revocable trust held in Schutt I and Schutt II were $29,527,314 and $13,493,064, respectively. (Stip. ¶¶ 11, 12)

149. During late December 1996 or early January 1997, the decedent instructed Mr. Dinneen to contact Mr. Sweeney to begin discussions concerning the transfer of assets out of the decedent's revocable trust to another entity. (Tr. 50, 118)

150. Mr. Dinneen believes that the subject of valuation discounts may have been discussed during his first conversation with Mr. Sweeney. (Tr. 120)

151. At that time, both Mr. Dinneen and the decedent were familiar with use of minority interest discounts and lack of marketability discounts to value stock of closely-held corporations and ownership interests in other closely-held entities. (Exs. 108-J through 112-J; Tr. 52-53)

152. On January 27, 1997, Mr. Sweeney sent to Mr. Dinneen a memorandum prepared by attorneys in Mr. Sweeney's firm entitled "Considerations Relevant to Choosing Between a Family Limited Partnership, a Limited Liability Company, and a Delaware Business Trust." (Exs. 11S-J, 116-J)

153. Among other things, the memorandum contains a discussion of various tax issues, including a discussion of how to maximize valuation discounts for federal gift and estate tax purposes. (Ex. 116-J)

154. In the January 27, 1997 cover letter accompanying the memorandum, Mr. Sweeney recommends using a Delaware business *30 trust as the entity to which the decedent would transfer the assets from his revocable trust. (Ex. 115-J)

155. In his January 27, 1997 letter, Mr. Sweeney indicates that there would be no discount for a minority interest if the decedent died owning a majority interest in the trust. He further indicates that in such a case, there would be a discount for lack of marketability, but that the "discount would be on the lower end of the range [for those discounts]." Mr. Sweeney further states that "[t]he discount for gifts of minority interests would be greater because there would be a minority interest discount, as well as a discount for lack of marketability." (Ex. 115-J)

156. On February 3, 1997, Mr. Sweeney met with Mr. Dinneen and the decedent to further discuss the possibility of forming a Delaware business trust to which the decedent would transfer a substantial portion of the stock held at that time in his revocable trust. (Stip. ¶ 30; Exs. 29-J, 117-J)

157. During that meeting, they reviewed a computation prepared by Mr. Dinneen setting forth the reduction in estate taxes (and thus the increase in the net amount the decedent's heirs would receive) if the stock held by the decedent's revocable trust were transferred to another entity. For purposes of his computation, Mr. Dinneen assumed that the value of the decedent's interest in the new entity would be subject to *31 minority interest and lack of marketability discounts that would not be applicable if the stock remained in the decedent's revocable trust. (Ex. 29-J; Tr. 55)

158. During that meeting, the parties discussed the benefits and detriments of family limited partnerships, limited liability companies, and Delaware business trusts. The decedent and Mr. Dinneen agreed with Mr. Sweeney that a Delaware business trust would be the best vehicle to use. (Ex. 29-J, 117-J; Tr. 30-31)

159. During that meeting, Mr. Dinneen suggested that they approach the WTC to see if it, as trustee for the WTC Trusts, would agree to transfer stock held in those trusts to the proposed Delaware business trust in exchange for an interest in the business trust. (Ex. 117-J; Tr. 31, 113)

160. Mr. Dinneen proposed that the decedent would hold a minority interest in the business trust but would control its assets by serving as its trustee. (Ex. 117-J)

161. The parties contemplated that the business trust would be funded with $40 million of the decedent's stock and approximately $42 million of the stock held by the WTC Trusts. (Ex. 29-J, 117-J)

162. The parties concluded that under such a plan, the value of the business trust units included in the decedent's *32 gross estate would be subject to both lack of marketability and minority interest discounts. (Ex. 117-J)

163. The parties contemplated that once the business trust was formed, the decedent would begin gifting portions of his interest in the trust to his children. (Ex. 117-J)

164. The decedent authorized Mr. Sweeney to contact representatives of the WTC to determine whether it would participate in the proposed plan to form a Delaware business trust. (Tr. 32)

165. On February 5, 1997, Mr. Sweeney met with Mr. Helme and discussed in some detail the plan formulated during his February 3, 1997 meeting with Mr. Dinneen and the decedent. (Ex. 30-J; Tr. 32, 56)

166. As was agreed during the February 3, 1997 meeting, Mr. Sweeney proposed to Mr. Helme that the business trust would be funded with $40 million of the decedent's stock portfolio and $42 million of the stock portfolios held by WTC Trusts 2064, 3044-5, 3044-6, and 3044-8. (Ex. 117-J)

167. Several years earlier, the WTC had engaged in a transaction similar to Mr. Sweeney's proposal when it invested in a family limited partnership formed by the Carpenter family. (Ex. 117-J)

*33 168. Mr. Helme indicated that the WTC "was certainly willing to participate in the matter as trustees of WTC Trusts 2064 and 3444 [should be 3044]." (Ex. 30-J; Tr. 32)

169. Mr. Helme indicated that he would meet with the WTC's legal staff and would have the legal staff contact Mr. Sweeney to work out the details. (Ex. 30-J; Tr. 32, 57)

170. While Mr. Helme was receptive to Mr. Sweeney's proposal, he wanted to make sure that the WTC would not be violating any of its fiduciary duties by participating in the proposed plan. (Tr. 57)

171. Immediately after his meeting with Mr. Sweeney, Mr. Helme asked Mr. Howard to review the proposal and ensure that the transaction was structured in such a way to meet the bank's fiduciary responsibilities. (Tr. 77-78, 88)

172. Shortly after his meeting with Mr. Helme, Mr. Sweeney asked Kathleen M. Lee, an attorney in his firm, to research several tax issues relating to the proposal to form a business trust, including the question of what valuation discounts might be appropriate in valuing the decedent's interest in the proposed trust. (Stip. ¶ 33; Ex. 117-J)

173. On or about March 5, 1997, Ms. Lee provided her response to Mr. Sweeney indicating, among other things, that she believed the discount for a minority interest would fall in a *34 range of 10% to 35%, and the discount for lack of marketability would fall in a range of 20% to 60%. (Ex. 31-J)

174. During a March 4, 1997, telephone conference with Mr. Sweeney, Mr. Howard and his staff raised the following issues:

(a) they wanted to ensure that the WTC Trusts would not be subjected to any built-in capital gains tax attributable to the decedent's stock and that none of the WTC Trusts would be subject to built-in capital gains tax attributable to stock contributed by the other WTC trusts;

(b) they wanted the WTC to retain the same control over investment decisions that the bank then currently enjoyed under the trust agreements;

(c) they wanted consents from the current beneficiaries agreeing to the proposed plan; and

(d) they wanted the bank to act as custodian for the stock contributed to the business trust. (Stip. ¶ 34; Ex. 32-J)

175. On March 6, 1997, Mr. Sweeney asked Cynthia D. Kaiser, an attorney in his firm, for her views concerning the issues Mr. Howard and his staff had raised during the March 4, 1997 telephone conference. (Stip. ¶ 37; Ex. 33-J)

176. In a March 10, 1997 letter to Mr. Dinneen, Mr. Sweeney indicated that he believed that the issues raised by the WTC could be resolved. (Ex. 34-J)

*35 177. During the period beginning with the March 4, 1997 telephone conference and continuing through August 1997, Mr. Sweeney engaged in further discussions with Mr. Howard and his staff concerning the formation of the proposed business trust. These additional discussions took place in the form of letters, telephone conversations, and meetings. (Stip. ¶ 34)

178. One issue that concerned both Mr. Sweeney and Mr. Howard was whether the transfer of assets to the business trust would be considered a taxable event. In particular, they were concerned about whether the "investment company" provision set forth in I.R.C. § 721(b) would apply. (Ex. 38-J)

179. After receiving advice from another attorney in his firm, Mr. Sweeney concluded that if the business trust was structured properly, the transaction would not create a taxable event. (Exs. 39-J through 41-J)

180. On August 21, 1997, Mr. Sweeney met with Mr. Dinneen and the decedent to discuss the status of the discussions with the WTC's legal staff. (Stip. ¶ 46; Exs. 42-J, 43-J)

181. During that meeting, the decedent indicated that he was willing to proceed with the plan to form the business trust but expressed the following concerns:

(a) he stressed that the trust should be structured in such a way as to avoid the "investment company" problem;

*36 (b) he wanted to be the trustee, with his son and son-in-law and their wives as successor trustees;

(c) he wanted to make sure that the WTC's fees as trustee of the WTC trusts and as custodian of the stock held by the business trust would not exceed the fees it was currently receiving; and

(d) he wanted to retain the final say on any investment decision but was willing to allow the WTC some input.

182. During that meeting, they also determined that they needed to clarify the WTC's position concerning liability for any capital gains tax that might be realized both pre-contribution (i.e., built-in capital gains) and post- contribution. (Exs. 42-J, 43-J)

183. During that meeting, they decided that Mr. Dinneen should prepare an analysis of the WTC trust portfolios to see if each trust would be able to contribute a diversified portfolio and thereby avoid the "investment company" problem. (Exs. 42-J, 43 -J)

184. On September 4, 1997, Mr. Sweeney met with Mr. Howard and Mary B. Hickok, another member of the WTC's legal staff, to discuss the issues raised in their March 6, 1997 memorandum and the issues discussed during Mr. Sweeney's August 27, 1997 meeting *37 with Mr. Dinneen and the decedent. (Stip. ¶ 56; Exs. 44-J, 45-J, 51-J)

185. During that meeting, the following issues were discussed:

(a) Mr. Howard and Ms. Hickok indicated that they were only concerned about pre-contribution capital gains tax and agreed with Mr. Sweeney's conclusion that this should not be a problem under the partnership rules.

(b) Mr. Howard and Ms. Hickok indicated that they would not need consents from the beneficiaries of WTC Trust # 2064 but would need consents from the current beneficiaries of WTC Trust # 3044.

(c) The parties discussed the "investment company" issue. Mr. Sweeney indicated that Mr. Dinneen would prepare an analysis to address of the stock portfolios to see if that problem could be avoided. The parties discussed whether funding the business trust with just DuPont stock would eliminate the problem. Mr. Sweeney indicated that he would research that issue.

(d) The parties discussed how long the trust should be in existence. Mr. Sweeney suggested that the life of the trust should be 40 to 50 years.

*38 (e) Mr. Howard and Ms, Hickok agreed with Mr. Sweeney's proposal that the decedent have the final say in any investment decisions as long as the WTC had some input.

(f) Mr. Howard and Ms. Hickok agreed that the bank's fees would remain at current levels vis-a-vis the stock contributed by the WTC Trusts, but that "new fees" would be charged for the stock the decedent would contribute to the trust which would be held by the bank as custodian. Mr. Sweeney indicated that this issue would have to be negotiated.

186. During that meeting, Mr. Sweeney indicated that one of the reasons for forming the business trust was to provide "[c]ontinuity of [the decedent's] investment philosophy after [his] death." (Ex. 51-J)

187. During that meeting, both Mr. Howard and Ms. Hickok indicated that "they were favorably inclined to recommend to the Wilmington Trust Company Trust Department management that this matter [the proposed plan to form the business trust] proceed once the answers to the various questions can be obtained and assurances can be given that entering into the business trust will not give rise to a taxable transaction." (Ex. 45-J)

188. On September 5, 1997, Mr. Sweeney asked Ms. Lee to research the "investment company" issue and whether the *39 provisions of I.R.C. §§ 2703 and 2704 would apply. (Stip. ¶ 51; Ex. 46-J)

189. Subsequently, Mr. Sweeney asked Ms. Lee to consider whether funding the business trust with only DuPont stock would avoid the "investment company" problem. (Ex. 47-J)

190. On or about September 17, 1997, Ms. Lee gave Mr. Sweeney a memorandum she had prepared in which she concluded that (i) funding the business trust with only DuPont stock would not make the business trust an "investment company" under I.R.C. § 721(b), and (ii) I.R.C. §§ 2703 and 2704 would not apply if the business trust were structured properly. (Stip. ¶ 53, Ex. 48-J)

191. By letter, dated September 22, 1997, Mr. Sweeney informed the decedent that it was his opinion that the parties could avoid the "investment company" problem by funding the business trust with only DuPont stock. (Stip. ¶ 54; Ex. 49-J)

192. At some point before October 29, 1997, the focus of the plan changed from the proposal to form one business trust funded with the DuPont stock to a plan whereby two business trusts would be formed, one to be funded with DuPont stock and the other to be funded with Exxon stock. (Stip. ¶ 57; Ex. 52-J; Tr. 38)

193. During November 1997, discussions continued between Mr. Sweeney and Mr. Howard regarding the formation of the proposed business trusts. (Stip. ¶ 58)

*40 194. During that period, Mr. Howard agreed to Mr. Sweeney's proposal that two business trusts be formed, one to hold Dupont stock and the other to hold Exxon stock. (Stip. ¶ 58; Ex. 53-J)

195. On or about November 14, 1997, Mr. Sweeney received the go ahead from the decedent and the WTC to prepare the documents needed to form the two proposed business trusts. (Ex. 55 -J)

196. By letter, dated November 25, 1997, Jo A. Collins, one of WTC's assistant vice presidents, informed the decedent that the WTC agreed that its fees should remain "neutral" (i.e., the custody fees would not exceed the amount of the trustee fees the bank would lose by investing in the business trusts). (Stip. ¶ 62, Ex. 56-J)

197. By letter, dated November 26, 1997, Mr. Howard informed Mr. Sweeney that the WTC would invest in the two business trusts as proposed subject to the following conditions:

(a) that the WTC be provided with the opportunity to review the trust documents to ensure that they are acceptable;

(b) that all the WTC Trust beneficiaries of legal age sign consent forms indicating that they agree to allow the WTC to invest in the business trusts and recognize that the business trusts may last beyond the termination dates of the WTC trusts of which they are beneficiaries; and

*41 (c) that the WTC serve as custodian of the stock contributed to the business trusts and receive the fees outlined in Ms. Collins' November 25, 1997 letter.

198. By letter, dated December 12, 1997, Mr. Sweeney informed Mr. Howard that the decedent wanted to clarify two issues concerning the fee schedule set forth in Ms. Collins' November 25, 1997 letter: (i) the decedent wanted the fee agreement to clearly provide that the commissions the WTC would earn as custodian of the stock held by the business trusts would not exceed the amount of the trustee's fees the bank would lose by investing in the business trusts; and (ii) the decedent wanted to retain the ability to name a new custodian if the WTC were acquired by another bank. (Stip. ¶ 66; Ex. 59-J)

199. As the decedent requested, the WTC revised the custodial agreement to cover the issues raised in Mr. Sweeney's December 12, 1997 letter. (Stip. ¶ 67; Ex. 60-J)

200. On December 26, 1997, Mr. Sweeney sent the first draft of a proposed business trust agreement to the decedent and to Mr. Howard for their review and comments. (Stip. ¶ 68; Ex. 61-J)

201. On December 30, 1997, Mr. Sweeney sent revised draft trust agreements for both Schutt I and Schutt II to both the decedent and Mr. Howard for their review and comments. (Stip. ¶ 70; Ex. 63-J)

*42 202. During a telephone conversation with Mr. Sweeney on January 6, 1998, Mr. Howard pointed out several minor changes that should be made to the trust documents. He also requested that the agreements be revised to require the trustee to distribute each trust's "net cash flow" at least on an annual basis. (Stip. ¶ 72; Ex. 64-J; Tr. 80-81)

203. Regarding the issue of how often the business trusts' net income should be distributed to the beneficiaries, the decedent always intended to make quarterly distributions. (Ex. 65-J)

204. On January 8, 1998, Hr. Sweeney sent revised draft trust agreements to both the decedent and Mr. Howard that incorporated the changes Mr. Howard had requested during his January 6, 1998 telephone conversation with Mr. Sweeney. (Stip. ¶ 73; 65-J)

205. On January 12, 1998, Mr. Sweeney received a letter from Mr. Howard confirming that the WTC had "no further questions or comments about the content or form of the proposed Schutt, I, Business Trust and the Schutt, II, Business Trust." (Stip. ¶ 74; Ex. 66-J)

206. Mr. Sweeney then prepared a consent form for the WTC Trust beneficiaries to sign, which he sent to the decedent and Mr. Howard on January 23, 1998 for their review and comments. (Stip. ¶ 76; Ex. 68-J)

*43 207. Mr. Howard suggested to Mr. Sweeney that the consent agreements indicate the percentage of the trust assets being invested in the business trusts so that the beneficiaries would have a better understanding of the impact the investment would have on their beneficial interests. The decedent agreed to this revision. (Exs. 69-J through 71-J)

208. On February 5, 1998, Mr. Sweeney sent a revised proposed consent form to both the decedent and Mr. Howard for their review and comments. (Stip. ¶ 81; Ex. 72-J)

209. On February 12, 1998, Mr. Sweeney sent consent and release forms to all of the beneficiaries of the WTC trusts that would be contributing stock to the business trusts. (Stip. ¶ 82; Ex. 73-J)

210. The consent and release form provides that the beneficiaries consent to the contribution of stock to the business trusts and release the WTC and the decedent from "any and all actions, suits, claims, accounts, and demands which the [beneficiaries] have or ever might have against the Advisor or the Trustees for or on account of any matter or thing made, done, or permitted by the Advisor or the Trustees in connection with the contribution of securities to the Business Trusts." (Exs. 74-J through 76-J)

*44 211. All of the beneficiaries of WTC Trusts 2064, 3044-1, 3044-2, 3044-5, 3044-6, 3044-8, and 11258-3 signed the consent and release forms. (Exs. 74-J through 76-J)

212. The trust agreements for Schutt I and Schutt II were signed on March 11, 1998 by the WTC as trustee for WTC Trust 2064, 3044-1, 3044-2, 3044-5, 3044- 6, 3044-8, and 11258-3, and signed on March 17, 1998 by the decedent, Charles Porter Schutt, Jr., and Henry I. Brown, III, as trustees of the decedent's revocable trust. (Exs. 15-J, 16-J)

213. Soon thereafter, the decedent, as trustee, registered Schutt I and Schutt II as business trusts with the Secretary of State of the State of Delaware and applied for Employer Identification Numbers from the Service. (Exs. 88-J through 91-J)

214. Immediately before Schutt I and Schutt II were formed, the decedent's revocable trust held 482,200 shares of DuPont stock and 178,200 shares of Exxon stock. (Stip. ¶ 94)

215. Soon after Schutt I and Schutt II were formed, the decedent's revocable trust, as required by the business trust agreements, transferred 472,200 shares of DuPont stock to Schutt I and 178,200 of Exxon stock to Schutt II. (Stip. ¶¶ 15-J and 16-J)

216. As of the effective date (March 17, 1998) of the trust agreements, the value of the contributions of DuPont and Exxon *45 stock the decedent's revocable trust made to Schutt I and Schutt II were $30,752,025 and $11,237,737.50, respectively. (Stip. ¶¶ 96, 97; Exs. 15-J, 16-J, 82-J, 83-J)

217. Immediately before Schutt I and Schutt II were formed, the WTC Trusts held the following number of shares of DuPont and Exxon stock:

218. Soon after Schutt I was formed, WTC Trusts 2064, 3044-1, 3044-2, 3044- 5, 3044-6, 3044-8, and 11258-3 contributed all of their DuPont stock to that trust. (Stip. ¶ 15; Ex. 82-J)

219. As of the effective date (March 17, 1998) of the trust agreement, the total value of the contributions of DuPont stock the WTC Trusts made to Schutt I was $37,228,836.50. (Stip. ¶ 96; Ex. 15-J, 82-J, 83-J)

220. Soon after Schutt II was formed, WTC Trusts 2064, 3044-5, 3044-6, 3044- 8, and 11258-3 contributed all of their Exxon stock to that trust. (Stip. ¶ 15; Ex. 82-J)

*46 221. As of the effective date (March 17, 1998) of the trust agreement, the value of the contributions of Exxon stock the WTC Trusts made to Schutt II was $12,502,392.89. (Stip. ¶ 97; Exs. 16-J, 82-J, 83-J)

222. The percentage ownership interests of the decedent's revocable trust and each of the WTC Trusts in Schutt I and Schutt II are identical to the proportionate value of the stock transferred by each of those trusts to the business trust. (Stip. ¶¶ 92, 93; Exs. 15-J, 16-J)

223. Schutt I and Schutt II elected to be taxed as a partnership and filed partnership returns for the taxable years 1998 and 1999. (Exs. 104-J, 105-J)

224. On April 1, 1998, the decedent and the WTC signed custody agreements for the stock contributed to Schutt I and Schutt II, which provided that the WTC would receive custodian fees as set forth in Ms. Collins December 22, 1997 letter. (Stip. ¶¶ 100 through 102; Exs. 85-J through 87-J)

225. Since the formation of Schutt I and Schutt II, all of the trusts' "net cash flow" has been distributed to the unit holders on a quarterly basis as required by the trust agreements. (stip. ¶ 109)

226. At the time of the decedent's death, the assets of Schutt I consisted of 1,043,854 shares of DuPont stock, which had *47 a value on October 21, 1999 (the alternate valuation date) of $65,273,495. (Stip. ¶ i1)

227. At the time of the decedent's death, the assets of Schutt II consisted of 376,454 shares of Exxon stock, which had a value on October 21, 1999 (the alternate valuation date) of $28,504,626. (Stip. ¶ 11)

228. The stock held by Schutt I and Schutt II at the time of the decedent's death was the same stock contributed to those trusts upon their formation. (Stip. ¶ 13)

229. Schutt I and Schutt II did not acquire any other assets from the time of their formation until the decedent's death. (Stip. ¶ 13)

230. Each trust agreement provides that it is the intent of the unit holders that the trusts be taxed as partnerships for federal tax purposes. (Exs. 15-J, Art. II, § 2.1 and 16-J, Art. II, § 2.1)

231. Each trust agreement provides that the decedent will be the initial trustee and that he will serve as such until his death or resignation, or until there is adjudication by a Delaware Court of competent jurisdiction that he is incapable of managing his personal or financial affairs. (Exs. 15-J, Art. II, § 2.5 and 16-J, Art. II, § 2.5)

*48 232. Each trust agreement lists Charles Porter Schutt, Jr., Henry I. Brown, III, and Caroline S. Brown, in that order, as the successor trustees. (Exs. 15-J, Art. II, § 2.5 and 16-J, Art. II, § 2.5)

233. Bach trust agreement provides that the trustee "shall have full, exclusive, and absolute power, control, and authority over the Property and over the business of the Trust. The Trustee may take any actions as in his sole judgment and discretion are necessary or desirable to conduct the business of the Trust." (Exs. 15-J, Art. III, § 3.1 and 16-J, Art. III, § 3.1)

234. Among other things, each trust agreement grants the trustee broad powers to manage the trust's assets, including the power to buy, sell, encumber, or otherwise exercise the rights normally associated with the ownership of property. (Exs. 15-J, Art. III, § 3.2 and 16-J, Art. III, § 3.2)195.

235. Each trust agreement grants the trustee absolute authority to formulate and to change the investment policies for the trusts. (Exs. 15-J, Art. IV and 16-J, Art. IV)

236. Neither the WTC nor the beneficiaries of the WTC Trusts have a right to provide input or otherwise participate in the investment decisions for the trusts. (Exs. 15-J, 16-J; Tr. 58, 82)

*49 237. Each trust agreement provides:

No Indemnified Person [includes the trustee] shall be liable, responsible or accountable in damages or otherwise to the Trust, to any Unit Holder or to any Assignee for any loss or damage incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith, either on behalf of the Trust or in furtherance of the interests of the Trust, provided that such Indemnified Person was not guilty of fraud, bad faith, willful misconduct or gross negligence with respect to any such act or omission.

238. Each trust agreement provides:

To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to the Unit Holders, a Unit Holder acting under this Agreement and any other Indemnified Person acting in connection with the Trust's business or affairs shall not be liable to the Trust, to any Unit Holder or to any Assignee for such Unit Holder's or other Indemnified Person's good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity, are hereby agreed by the Unit Holders to replace such other duties and liabilities of such Indemnified Person.

239. Each trust agreement provides that the trust's "net cash flow" shall be distributed quarterly to the unit holders. (Exs. 15-J, Art. VII, § 8.1 and 16- J, Art. VIII, § 8.1)

*50 240. The term "net cash flow" is defined in each trust agreement as the trust's gross receipts less expenses and "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." (Exs. 15-J, Art. I, § 1.1(n) and 16-J, Art. I, § 1.1(n))

241. Each trust agreement provides that the unit holders are entitled to one vote for each unit held. (Exs. 15-J, Art. V, § 5.1 and 16-J, Art. V, § 5.1)

242. Each trust agreement provides that a unit holder may only obtain the return of its capital contribution to the trust if all of the trust's unit holders agree. (Exs. 15-J, Art. VI, § 6.3 and 16-J, Art. VI, § 6.3)

243. Each trust agreement provides that a unit holder may not assign his interest in the trust or withdraw from the trust unless all of the trust's unit holders agree. (Exs. 15-J, Art. XI, § 11.1 and 16-J, Art. XI, § 11.1)

244. Each trust agreement provides that unit holders holding in the aggregate at least 25% of the units may propose amendments to the agreement, and that the trust agreement may be amended by a two-thirds vote of the unit holders. (Exs. 1B-J, Art. XIII, § 13.3 and 16-J, Art. XIII, § 13.3)

*51 245. Each trust agreement provides that the trustee may amend the trust agreement without the unit holders' consent to: (i) correct a patent error, omission, or ambiguity; or (ii) add or delete any provision necessary to maintain the trust's partnership status for federal tax purposes or to comply with any federal or state securities law, regulation or other requirement. (Exs. 15-J, Art. XIII, § 13.3 and 16-J, Art. XIII, § 13.3)

246. Each trust agreement provides that it may not be amended to convert the trust to a general partnership or change the liability of or reduce the interests of the unit holders in the trust's capital, profits and losses, unless all unit holders agree. (Exs. 15-J, Art. XIII, § 13.3 and 16-J, Art. XIII, § 13.3)

247. Each trust agreement provides that the trustee must agree to any amendment that affects his duties or liabilities under the agreement. (Exs. 15- J, Art. XIII, § 13.3 and 16-J, Art. XIII, § 13.31)

248. Each trust agreement provides that if two-thirds of the unit holders agree, the assets of the trust may be transferred to another business trust, partnership, or corporation for an ownership interest in the transferee. (Exs. 15-J, Art. XIII, § 13.4 and 16-J, Art. XIII, § 13.4)

249. Each trust agreement provides that the trust may be merged or consolidated with another Delaware business trust if *52 two-thirds of the unit holders agree. (Exs. 15-J, Art. XIII, § 13.5 and 16-J, Art. XIII, § 13.5)

250. Each trust agreement provides that it will expire on December 31, 2048 unless the trustee and a majority of the unit holders agree to extend it. (Exs. 15-J, Art. II, § 2.6 and 16-J, Art. II, § 2.6)

251. Each trust agreement provides that the trust may be dissolved before December 31, 2048 upon the consent of all of the unit holders. (Exs. 15-J, Art. II, § 2.6 and 16-J, Art. II, § 2.6)

252. Each trust agreement provides that upon dissolution, the trustee will liquidate the trust's assets and, after payment of any outstanding expenses of the trust, distribute the remaining proceeds to the unit holders pro rata. (Exs. 15-J, Art. XII, § 12.1 and 16-J, Art. XII, § 12.1)

253. Each trust agreement provides that upon dissolution, the trustee may distribute an asset of the trust rather than cash if the trustee determines that the sale of that asset is impractical or would result in undue loss. (Exs. 15-J, Art. XII, 12.2 and 16-J, Art. XII, § 12.2)

254. At the time of his death, the decedent held the right to receive the trust income allocable to the stock he contributed to Schutt I and Schutt II. (entire record)

255. At the time of his death, the decedent had the power to exercise all of the rights incident to the ownership of the stock he contributed to Schutt I and Schutt II. (entire record)

256. At the time of his death, the decedent, in conjunction with the WTC, had the power to designate the person or persons who would possess and enjoy the stock he contributed to Schutt I and Schutt II. (entire record)

257. At the time of his death, the decedent, in conjunction with the WTC, had the power to alter, amend, revoke, or terminate the trust agreements for Schutt I and Schutt II. (entire record)

258. The transfers of stock from the decedent's revocable trust to Schutt I and Schutt II were not bona fide sales for adequate consideration. (entire record)

259. The decedent's dominant motive for transferring stock from his revocable trust to Schutt I and Schutt II was to advance his testamentary objectives. (entire record)

The issue in this case is whether the value of stock the decedent contributed to two Delaware business trusts should be included in his gross estate under I.R.C. §§ 2036 and/or 2038. Under § 2036, the value of property transferred during a decedent's lifetime is included in the gross estate if the decedent retained: (i) the right to possess or enjoy the property or the income therefrom; or (ii) the power, whether exercisable alone or in conjunction with others, to designate the person or persons who would possess or enjoy the property or the income therefrom. Similarly, § 2038 requires that the value of property transferred during a decedent's lifetime be included in the gross estate if the decedent retained the power, whether exercisable alone or in conjunction with others, to alter, amend, revoke, or terminate the transfer. Neither § 2036 nor § 2038 apply to transfers qualifying as bona fide sales for adequate consideration.

The real issue in this case is whether the transfers of stock at issue were bona fide sales for adequate consideration. Petitioner contends that they were bona fide sales because the business trust agreements were the product of arm's-length bargaining between the WTC, as trustee of the WTC Trusts, and the decedent. Petitioner further contends that the trust units the *55 decedent received in exchange for his stock qualify as "adequate consideration." The record establishes that the trust units do not constitute adequate consideration, but rather the decedent merely "recycled" the value of his interest in the stock. This is evident from the fact that the decedent's relationship to the stock did not change after the transfer. He simply retained the same economic interest and ownership rights he enjoyed before the transfer; all that changed was title to the stock. Moreover, the business trusts served no business purpose. This is not a case where the transfers were made to provide for better management of the decedent's assets. Nor is this a case where the parties pooled assets for investment purposes, as it is clear they never intended to trade the stock initially contributed to the trusts. In fact, according to petitioner, the whole purpose for transferring the stock from the WTC Trusts to the business trusts was to prevent the stock from being sold.

The record leaves little doubt that the decedent's dominant motive for establishing the business trusts was to achieve his testamentary goals. The record reflects that the business trusts were formed, at least in part, to be used as a vehicle for making annual exclusion gifts to the decedent's children and grandchildren. Moreover, the transactions were structured to provide significant valuation discounts, a topic that received a *56 great deal of attention during the early discussions between the decedent and his advisors. Given the decedent's age and health at that time, and the lack of any apparent business purpose for the trusts, it is clear that the business trusts were formed as part of the decedent's estate plan.

Petitioner's contention notwithstanding, the record establishes that the WTC was not truly an independent party, nor were there any arm's-length negotiations over the essential terms of the trust agreements. The WTC simply represented the interests of the decedent's children and grandchildren, the beneficiaries of the WTC Trusts, who all agreed to the transfer of stock from the WTC Trusts to the business trusts. Thus, in effect, these were intrafamily transactions. In addition, had the WTC refused to cooperate, the decedent had the power to remove the bank as trustee of the WTC Trusts.

It is clear that the WTC had no role in the development of the plan to form the business trusts. The decedent unilaterally decided how the business trusts would be structured and operated, what property would be contributed, and what interests (i.e., majority interest versus a minority interest) the WTC Trusts and his revocable trust would hold. To the extent that there were "negotiations," they were prompted by the WTC's concern about fiduciary liability and its desire to maintain its fees. The WTC *57 simply agreed to participate in the plan to accommodate the wishes of an important customer.

There is no doubt in this case that the decedent retained an interest in the stock he transferred to the business trusts. Under the trust agreements, he, through his revocable trust, received the portion of the business trusts' net cash flow allocable to the stock he contributed. In addition, the decedent, as trustee, had the absolute right to sell the stock and exercise all of the other rights of ownership. Thus, in effect, he retained during his lifetime all of the economic benefits and ownership rights attributable to that stock.

The decedent, as trustee, also held powers that allowed him to designate who would possess or enjoy the property and the income therefrom. For instance, he could hold back so much of the trusts' income as he deemed necessary to cover their working capital needs and contingencies, he could sell trust assets and either reinvest the proceeds or distribute them to the unit holders, and he, together with the WTC, could alter or terminate the business trust agreements and thereby cause a distribution of the trusts' assets. Finally, he could also affect the enjoyment of the property through his investment policies (i.e., choosing between income-producing investments versus those with lower earnings but higher growth potential).

*58 Just as there is no doubt that the transfers in question fall under the scope of § 2036, it is equally clear that § 2038 applies. The business trust agreements provide that they can be amended by a two-thirds vote of the unit holders and can be terminated by a unanimous vote. Since the decedent controlled the business trust units held by his revocable trust, he, along with the WTC, had the power to either amend or terminate the business trust agreements.

The fair market value of the stock the decedent's revocable trust contributed to Schutt I and Schutt II should be included in the gross estate under I.R.C. § 2036.

The estate tax is imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. I.R.C. § 2001. The taxable estate is defined as the value of the gross estate less applicable deductions. I.R.C. § 2051. The value of the gross estate includes to the extent provided in I.R.C. §§ 2033-2044 the value of all the decedent's property -- real or personal, tangible or intangible -- wherever situated at the time of death. I.R.C. § 2031.

I.R.C. § 2036(a) provides:

The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer {except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death -

(1) the possession or enjoyment of, or the right to 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.

*60 It has long been recognized that § 2036 was enacted "to include in a decedent's gross estate transfers that are essentially testamentary in nature." Ray v. United States, 762 F.2d 1361, 1362 (9th Cir. 1985) (quoting United States v. Estate of Grace, 395 U.S. 316, 320 (1969)). Accordingly, the courts have emphasized that the statute "describes a broad scheme of inclusion in the gross estate, not limited by the form of the transaction, but concerned with all inter vivos transfers 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). As stated in Mahoney v. United States, 831 F.2d 641, 646-647 (6th Cir. 1987), cert. denied, 486 U.S. 1054 (1988):

The applicability of section 2036(a), therefore, is not controlled by the 'various niceties of the art of conveyancing,' [citations omitted] but is instead dependent upon 'the nature and operative effect of the transfer.' [citations omitted] As such, the statute operates to tax transfers of property 'that are too much akin to testamentary dispositions not to be subjected to the same excise.' [citation omitted]

Section 2036(a) includes in the gross estate the full fair market value, at the date of death, of all property transferred in which the decedent has retained an interest, rather than only the value of the retained interest. *61Fidelity-Philadelphia Trust Co. v. Rothensies, 324 U.S. 108 (1945). This furthers the legislative policy 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." United States v. Estate of Grace, 395 U.S. 316, 320 (1969). Thus, an asset transferred by a decedent while he was alive cannot be excluded from his gross estate unless he "absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred property." Commissioner v. Estate of Church, 335 U.S. 632, 645 (1949)

In his Amendment to Answer, respondent first raised the issue of whether the value of the stock the decedent's revocable trust contributed to Schutt I and Schutt II should be included in the gross estate under §§ 2036 and/or 2038. Consequently, since this issue is a "new matter," the burden is on respondent to establish by a preponderance of the evidence that his position on this issue is correct. Estate of Strangi v. Commissioner (Strangi II), T.C. Memo. 2003- 145, 85 T.C.M. (CCH) 1331, 1337, appeal docketed, No. 03-60992 (5th Cir. Nov. 21, 2003); *62Estate of Thompson v. Commissioner, T.C. Memo. 2002-246, 84 T.C.M. (CCH) 374, 384-85, appeal docketed, No. 03-3173 (3d Cir. July 22, 2003); Estate of Harper v. Commissioner, T.C. Memo. 2002-121, 83 T.C.M. (CCH) 1641, 1648. T.C. Rule 142(a).

A. At the time of his death, the decedent held the right to possess or enjoy the stock his revocable trust contributed to Schutt I and Schutt II, including the right to receive the income therefrom.

Treas. Reg. § 20.2036-1(a) provides, in part, that the gross estate includes the value of any interest in property transferred by the decedent, if the decedent retained or reserved the use, possession, right to the income, or other enjoyment of the transferred property, "an interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding, express or implied, that the interest or right would later be conferred." Treas. Reg. § 20.2036-1(a) (ii).

Treas. Reg. § 20.2036-1(b) (2) provides that the "use, possession, right to the income, or other enjoyment of the transferred property" is considered as having been retained by or reserved to the decedent to the extent that the use, possession, right to the income, or other enjoyment is to be applied toward the discharge of a legal obligation of the decedent, or otherwise for his pecuniary benefit.

As used in § 2036(a) (1), the term "enjoyment" has been described as "synonymous with substantial present economic *63 benefit." Estate of McNichol v. Commissioner, 265 F.2d 667,671(3d Cir.), cert. denied, 361 U.S. 829 1959); see also Estate of Reichardt v. Commissioner, 114 T.C. 144, 151 (2000). Moreover, possession or enjoyment of transferred property is retained for purposes of § 2036(a) (1) where there is an express or implied understanding to that effect among the parties at the time of the transfer, even if the retained interest is not legally enforceable. Estate of Maxwell v. Commissioner, 3 F.3d 591, 593 (2d Cir. 1993), aff'g 98 T.C. 594 (1992); Estate of McNichol, 265 F.2d at 671; Guynn, 437 F.2d at 1150; Estate of Reichardt, 114 T.C. at 151; Estate of Rapelle v. Commissioner, 73 T.C. 82, 86 (1979). The existence of an implied agreement or understanding can be inferred from the facts and circumstances surrounding both the transfer itself and the subsequent use of the property. Estate of Reichardt, 11% T.C. at 151; Estate of Spruill v. Commissioner, 88 T.C. 1197, 1225 (1987); Estate of Rapelje, 73 T.C. at 86.

In this case, there is no question that under the express terms of the trust agreements for Schutt I and Schutt II and his revocable trust, the decedent retained during his lifetime the right to receive the income from the stock his revocable trust contributed to Schutt I and Schutt II. Under the business trust agreements, the decedent, as trustee, was required to distribute each trust's "net cash flow" at least quarterly to the unit *64 holders according to their proportionate interests in the trusts. [FN1] The term "net cash flow" is defined in each agreement as the "gross cash receipts of the Trust from all sources (including sales and dispositions in the ordinary course of the Trust's business)" less amounts needed to pay the trust expenses and maintain a "reasonable reserve for working capital needs or providm funds for any other contingencies of the Trust." [FN2] Since the decedent's revocable trust held the trust units issued in exchange for the stock the decedent contributed to the business trusts, it received the portion of each trust's "net cash flow" allocable to those units.

FN1. Each unit holder's proportionate interest in the trust was based on the value of stock that unit holder contributed to the trust to the total value of the stock contributed to the trust.

FN2. The decedent, as trustee, had the discretion to determine how much of each trust's cash receipts should be retained for working capital needs and contingencies.

The agreement for the decedent's revocable trust provides that the "[t]rustee shall pay to [the decedent] during the remainder of [his] life all of the net income of the trust plus so much of the principal as [he] requests in writing at any time." Therefore, the decedent, at the time of his death, held the right to receive the portion of the income (less trust expenses) generated by the stock he, through his revocable trust, contributed to the business trusts. This retention of an income interest is "very clear evidence that the decedent did indeed *65 retain possession and enjoyment" of that stock. Estate of Hendry v. Commissioner, 62 T.C. 861, 873 (1974).

Not only did the decedent retain the right to the income from the stock he transferred to the business trusts, but he also retained all of the other incidents of ownership he enjoyed before the transfer. For instance, he retained the power, as trustee, to sell the stock and either invest the proceeds in new assets or distribute them to the unit holders as part of the trust's "net cash flow." Moreover, after the transfer, he continued to exercise total control over the investment policies of the trusts; neither the WTC, as trustee of the trusts holding the majority of the business trust units, nor the beneficiaries of the WTC Trusts had any say in the decedent's investment decisions for the business trusts. Finally, the decedent retained the authority:

[t]o exercise all the rights, powers, options and privileges pertaining to the ownership of any Property [i.e., the stock] to the same extent that an individual owner might, including, without limitation, to assess charges for the management of the Property, to vote or give consent, request or notice, or waive any notice, either in person or by proxy or power of attorney, which proxies and power of attorney may be for any general or special meetings or actions, and may include the exercise of discretionary powers.

In sum, the transfer of the stock from the decedent's revocable trust to the business trusts did not cause any *66 meaningful change in his relationship to those assets. Thus, for all practical purposes, the decedent continued to possess and enjoy the property at the time of his death. See Strangi II, 85 T.C.M. (CCH) at 1338 ("Fundamentally, the preponderance of the evidence shows that the decedent as a practical matter retained the same relationship to his assets that he had before formation of [the partnership] and [the corporation]."); Estate of Thompson, 84 T.C.M. (CCH) at 387 ("While we acknowledge that, as a result of the creation of the partnerships, prior to the decedent's death some change ensued in the formal relationship of the decedent to the assets he contributed to the partnerships, we are satisfied that the practical effect of these changes during the decedent's life was minimal.")

B. At the time of his death, the decedent, either alone or in conjunction with the WTC, held the power to designate the persons who would possess or enjoy the stock (or the income therefrom) his revocable trust contributed to Schutt I and Schutt II.

Treas. Reg. § 20.2036-1(a) provides, in part, that the gross estate includes the value of any interest in property transferred by the decedent to a trust, if the decedent retained or reserved "[t]he right, either alone or in conjunction with any other person or persons, to designate the person or persons who shall possess or enjoy the transferred property or its income. ...' The 'right' must be 'an ascertainable and legally enforceable power." *67United States v. Byrum, 408 U.S. 125, 136 (1972) Section 20.2036-1(a) (ii) further provides that "[a] right is treated as having been retained or reserved if at the time of the transfer there was an understanding, express, or implied, that the interest or right would later be conferred."

Treas. Reg. § 20.2036-1(b) (3) provides that the phrase "right...to designate the person or persons who shall possess or enjoy the transferred property or the income therefrom" includes a reserved power to designate the person or persons to receive the income from the transferred property, or to possess or enjoy nonincome-producing property, during the decedent's life. With respect to such a power, it is immaterial whether the power was exercisable alone or only in conjunction with another person or persons, whether or not having an adverse interest, or in what capacity the power was exercisable by the decedent or by another person or persons in conjunction with the decedent.

As used in I.R.C. § 2036(a) (2), the right "to designate the persons who shall possess or enjoy the property or the income therefrom" includes the discretionary power to distribute income to income beneficiaries or to accumulate such income and add it to principal. The power to deny to the income beneficiaries the privilege of immediate enjoyment and to condition their enjoyment upon their surviving the termination of the trust has been considered to be of sufficient substance to qualify as a power to *68 designate for purposes of section 2036(a) (2). United States v. O'Malley, 383 U.S. 627 (1966); Industrial Trust Co. v. Commissioner, 165 F.2d 142 (1st Cir 1947); Estate of Alexander v. Commissioner, 81 T.C. 757 (1983).

For example, in Struthers v. Kelm, 218 F.2d 810 (8th Cir. 1955), the decedent created a inter vivos trust granting the trustees the right to distribute or accumulate income as the trustees in their judgment determined. The decedent was one of the three trustees. The court found that the beneficiary was not granted the present right to immediate enjoyment of the income or principal without the decedent's permission, acting in conjunction with the other trustees. Accordingly the decedent retained the right to designate the person who shall possess or enjoy the property or its income.

The right to designate also includes the right to terminate a trust, make distribution decisions, and receive a liquidating distribution of the trust's assets and thereby designate the recipients of those assets at a time selected by the decedent. Strangi II, 85 T.C.M. (CCH) at 1341 (citing Commissioner v. Estate of Holmes, 326 U.S. 480 (1946), for the proposition that a "power to terminate the trust and thereby designate the beneficiaries at a time selected by the settlor" would implicate § 2036(a) (2)).

*69 It is well established that the retention of broad powers by a settlor/trustee to manage the trust's assets does not necessarily mean that the settlor/trustee has retained the ability to designate the person or persons who will enjoy the trust property. Byrum, 408 U.S. at 132-34 (citing Reinecke v. Northern Trust Co., 278 U.S. 339 (1929)). Here, there is no question that the business trust agreements gave the decedent, as trustee, broad powers to manage the trusts' assets. Thus, the question is whether those powers exceeded the standard set forth in Byrum and the cases cited therein.

The decedent retained several legally enforceable rights under the business trust agreements that gave him the power to affect the possession and enjoyment of the trust property and the income therefrom. For instance, under § 1.1(n) of the business trust agreements, the trustee has the authority to withhold so much of the trust's income as he deems necessary to provide working capital and funds for any contingencies. There is no limitation contained in the trust agreements on that authority. Thus, the decedent had the ability to affect the timing of the unit holders' income interests.

The business trust agreements also gave the decedent the ability to affect the present economic interests of the unit holders by his decision to either reinvest the proceeds from the *70 sale of trust assets or distribute them as part of the trust's 'net cash flow. Although the trust agreements do not contain a provision specifically authorizing the trustee to distribute trust principal to the unit holders, there is also no provision requiring the trustee to reinvest the proceeds from the sale of trust assets. Under § 1.1(n) of the trust agreements, the proceeds from the sale of trust assets must be distributed to the unit holders if they are not reinvested in new assets. Therefore, this provision, in effect, gave the decedent, as trustee, the power to distribute the trust corpus by simply not investing the proceeds from the sale of trust assets.

The decedent, as trustee, could also affect the interests of the unit holders through his investment policies. The business trust agreements not only gave the decedent the absolute power to buy and sell trust assets, but Art. IV of those agreements specifically grants him the authority to "establish or change from time to time policies to govern the investment of monies and other property held by the Trust as the Trustee may determine to be in best interests of the Trust, including prohibitions and restrictions upon certain types of investments." Thus, through his decisions about what type of assets to purchase (i.e., income producing assets versus those held for long-term growth), the decedent was able to affect the interests of the various unit holders of the trust.

*71 Finally, as indicated above, the courts have determined that the settlor's power to amend or terminate a trust agreement, whether exercised alone or in conjunction with others, gives the settlor the ability to affect the possession and enjoyment of the trust property. Here, § 13.3(a) of the business trust agreements provides that they may be amended by a two-thirds vote of the unit holders. Similarly, § 2.6 of those agreements provides that the unit holders by unanimous consent can dissolve the business trusts before their December 31, 2048 termination date. Moreover, not only did the decedent, by exercising the rights conferred upon the units held by his revocable trust, have the power along with the WTC to dissolve the trusts, but upon dissolution he, as trustee, also had the authority under § 12.2 of the trust agreements to either liquidate the trust assets and distribute the cash proceeds or distribute the trust assets themselves.

In Byrum, the Supreme Court considered whether the powers reserved by the decedent (Byrum) allowed him, in effect, to designate who would possess and enjoy the trust property and the income therefrom. Byrum, a majority shareholder in a closely-held corporation, established an irrevocable trust for the benefit of his children, which he funded with a portion of his stock in that corporation. He appointed a bank as trustee but *72 reserved the right to: (i) vote the shares held by the trust; (ii) disapprove of the sale Or transfer of the trust assets; (iii) approve investments and reinvestments; and (iv) remove the trustee and appoint another corporate trustee as its successor. Byrum did not retain any personal interest in the trust income or its assets.

The government argued, among other things, that the rights Byrum reserved were sufficient to require the trust assets to be included in his gross estate under § 2036(a) (2). The government's principal argument was that Byrum, through his power to vote the corporate shares, could have controlled the flow of dividends to the trust and, thus, could have affected the income interests of the trust's beneficiaries.

The Supreme Court rejected the government's argument, holding that Byrum not only had no right to control the payment of the trust's income to the beneficiaries, but he also did not have the unconstrained power to regulate the flow of dividends to the trust. In reaching that conclusion, the Court first noted, as a general proposition, that rights retained by a decedent to participate, either directly as a trustee or indirectly through control of the trust's investment policies, in the management of the trust's assets do not require that their value be included in the gross estate under § 2036(a) (2). The Court then determined that there was no ascertainable and legally enforceable right *73 conferred upon Byrum in the trust agreement that would allow him to designate who would possess or enjoy the trust property or the income therefrom. The Court further held that the voting rights retained by Byrum did not give him a sufficient power to designate because he did not even have the unconstrained right to determine the flow of dividends for the following reasons: (i) as a majority shareholder, he had a fiduciary duty to consider the interests of the unrelated, minority shareholders when determining how the corporation's earnings should be used (i.e., distributed as dividends or retained as working capital); (ii) although as majority shareholder he might have been able to influence the board of director's decision concerning the issuance of a dividend, he could not have mandated a particular decision; (iii) the board of directors also had a fiduciary duty to the unrelated, minority shareholders when determining whether to issue a dividend or retain earnings as working capital; and (iv) the decision to issue a dividend would have been influenced by business needs and economic factors as well as by the personal desires of the shareholders. Byrum is often cited for the proposition that powers limited by a fiduciary duty are outside the scope of § 2036(a) (2). Respondent does not believe that this contention accurately reflects the Court's holding. Rather, the test under Byrum is *74 whether those fiduciary duties sufficiently restrict the decedent's exercise of a power so as to effectively eliminate the decedent's ability to designate the person or persons who will possess or enjoy the property. As this Court stated in Strangi II, 85 T.C.M. (CCH) at 1342:

Given the emphasis that the Supreme Court laid on these factual realities, Byrum simply does not require blind application of it holding to scenarios where the purported fiduciary duties have no compar-able substance. We therefore analyze the situation before us to determine whether the fiduciary duties relied upon by the estate would genuinely circumscribe use of powers to designate.

Specifically, Byrum is distinguishable for the following reasons. First, Byrum created an irrevocable trust with an independent trustee. The decedent and the WTC created revocable trusts and selected the decedent as trustee. As discussed above, the decedent, as trustee, had broad powers that, in effect, enabled him to affect the beneficial enjoyment of the business trust assets and the income therefrom. Second, in Byrum, the independent trustee had the sole authority over distribution decisions. As discussed above, *75 although the decedent, as trustee, was required to distribute each trust's "net cash flow" at least quarterly, he had discretion to hold back some of that income for working capital and to cover contingencies. Moreover, unlike Byrum, the decedent had the power to distribute trust corpus simply by not reinvesting the proceeds from the sale of trust assets.

Third, although he retained the voting rights for the stock held by the trust and controlled its disposition, Byrum reserved no beneficial interest in the trust. In contrast, by holding the trust units in his revocable trust, the decedent reserved for his lifetime the economic benefits attributable to the stock he contributed to the business trusts.

Fourth, although the Court in Byrum did not regard Byrum's control over the purchase and sale of trust assets as sufficient to bring § 2036(a) (2) into play, the decedent's investment powers were much broader than those involved in Byrum. The Court noted in Byrum that "[w]hile the trustee could not acquire or dispose of an investment without Byrum's approval, he was not subject to Byrum's orders." Byrum, 408 U.S. at 143, n.24. Here, the decedent completely controlled the investment decisions for the business trusts.

*76 Fifth, unlike the operating company involved in Byrum, the business trusts are passive entities established for the sole purpose of holding the DuPont and Exxon stock contributed to them upon formation. Consequently, there were no business needs or economic realities of the type discussed in Byrum that would have constrained the decedent's exercise of the powers granted to him, as trustee, under the trust agreements. See Strangi II, 85 T.C.M. (CCH) at 1342.

Finally, the Court found that under state law, Byrum had a fiduciary duty not to misuse his power by promoting his personal interest at the expense of the corporate interests. Byrum, 408 U.S. at 138. According to the Court, this duty served as an impediment to Byrum's persuasive powers over the declaration of dividends by the corporation's board of directors. Respondent submits that the decedent's actions as trustee of the business trusts were not similarly restricted by any fiduciary obligations he may have had.

As a general proposition, a trustee has a duty to act in the best interests of the trust and the trust beneficiaries. However, under Delaware's business trust statutes, "[t]he trustee's duties (including fiduciary duties) may be expanded or *77 restricted by provisions in a governing instrument." 12 DEL. CODE ANN. § 3806(c)(2)(2003). In addition, those statutes provide that "[t]he rule that statutes in derogation of the common law are to be strictly construed shall have no application to this subchapter." 12 DEL. CODE ANN. § 3823(a)(2003). They further provide that "[i]t is the policy of this subchapter to give maximum effect to the principle of freedom of contract and to the enforceability of the governing instrument." 12 DEL. CODE ANN. § 3823(b)(2003). Therefore, it is clear that under Delaware law, parties to a business trust agreement are given great latitude when granting powers to a trustee and/or limiting his fiduciary duties.

The business trust agreements essentially granted the decedent the power to administer the trust property as if he were the owner. Regarding the trust's assets, § 3.1 of the trust agreements provide generally that the trustee "shall have full, exclusive and absolute control and authority over the Property and over the business of the Trust. The Trustee may take any actions as in his or her sole judgment and discretion are necessary and desirable to conduct the business of the Trust." Specifically, § 3.2 of the agreements authorized the decedent, as trustee: (i) to sell the trusts' assets, including sales to the unit holders, on whatever terms he deemed appropriate; (ii) to reinvest or hold the proceeds of the sale of trust assets as he *78 saw fit; (ii) to loan money, including loans to the unit holders; and (iv) to vote the shares of stock held by the trusts and exercise any other rights of ownership attributable to those shares. He also had the absolute authority to establish the investment policies for the trusts.

Not only did the trust agreements grant the decedent broad powers, but they also essentially eliminated any possibility that his actions as trustee could be challenged by the unit holders. Section 10.1(g) of the trust agreements provides that the trustee will be held harmless for all acts performed in good faith. Similarly, § 10.1(h) of the agreements holds the trustee harmless for any actions taken in good faith reliance on the provisions of the agreements. That section also provides that to the extent the trustee would be subject to a higher standard at law or in equity than the standards set forth in the agreements, the provisions of the agreements will control. Given the broad powers granted to the decedent as trustee and the hold harmless provisions contained in the trust agreements, it is inconceivable that any of his decisions as trustee would have been overturned by a court absent fraud or gross negligence. See State Street Trust Co. v. United States, 263 F.2d 635 (1st Cir. 1959) ("But we believe that the powers conferred on the trustees, considered as a whole, are so broad and all inclusive that within the limits a Massachusetts court of equity could rationally impose, the *79 trustees, within the scope of their discretionary powers, could very substantially shift the economic benefits of the trusts between the life tenants and the remaindermen.")

Unlike the situation in Byrum, there are no truly independent third-parties (e.g., the unrelated, minority shareholders in Byrum) to which the decedent owed a fiduciary duty. Certainly, he owed no special duty to himself or to his revocable trust. Moreover, although it might appear that the decedent owed some fiduciary duty to the WTC and the WTC trusts, in reality the true beneficiaries of the business trusts during his lifetime were, other than himself, his children and grandchildren. As stated in Strangi II, 85 T.C.M. (CCH) at 1343, "[i]ntrafamily fiduciary duties within an investment vehicle simply are not equivalent in nature to the obligations created by the United States v. Byrum, supra, scenario."

The fair market value of the stock the decedent's revocable trust contributed to Schutt I and Schutt II should be included in the gross estate under I.R.C. § 2038.

I.R.C. § 2038(a) provides:

The value of the gross estate shall include the value of all property-

(1) To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the *80 enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power) to alter, amend revoke, or terminate, or where any such power is relinquished during the 3-year period ending on the date of the decedent's death.

****

In this case, there is no question that at the time of his death, the decedent, in conjunction with the WTC, held the power to alter, amend, revoke, and terminate the trust agreements for Schutt I and Schutt II. Section 13.3 of the trust agreements provides that they may be amended by a two-thirds vote of the unit holders. [FN4] Under § 2.6 of the trust agreements, the trusts can be dissolved by the unanimous consent of the unit holders. Since the decedent controlled the trust units held by his revocable trust, he, in conjunction with the WTC, could have amended or terminated the business trust agreements.

FN4. While the decedent was only one of three trustees of his revocable trust, there is no doubt that he made the decisions for the trust. Not only were his son and son-in-law the other trustees, but also he had the power to remove them as trustees if they disagreed with his decisions.

Treas. Reg. § 20.2038-1 provides that § 2038 does not apply "(1) [t]o the extent that the transfer was for an adequate and full consideration in money or money's worth; (2) [i]f the decedent's power could be exercised only with the consent of all *81 parties having an interest (vested or contingent) in the transferred property, and if the power adds nothing to the rights of the parties under local law; or (3) [t]o a power held solely by a person other than a decedent." We will discuss the adequacy of the consideration the decedent received in the next section of this brief. The third exception is not applicable since the decedent, personally, had the power to exercise the right to amend or revoke the trust agreements by virtue of his control over the trust units held by his revocable trust.

As the regulation indicates, if a retained power to amend or revoke a trust agreement is no greater than that provided under local law, then such power does not cause the trust corpus to be included in the decedent's gross estate under § 2038. The regulation simply reflects the Supreme Court's holding in Helvering v. Helmholtz, 296 U.S. 93 (1935). In other words, § 2038 does not apply if the parties would have had the same power to amend or revoke the trust agreement under local law had they not reserved such a power in the trust agreement.

Respondent submits that the power to amend or revoke set forth in the trust agreements exceeds the rights established under Delaware law. [FN5] The agreements provide that they can be amended by a two-thirds vote of the unit holders. There is no *82 provision under state law that would permit amendment of a trust agreement absent a specific provision in the trust agreement permitting such action. In fact, the business trust statutes do not address the issue of whether business trust agreements may be amended other than to state that a business trust agreement "[m]ay provide for the taking of any action [to carry out the business of the trust], including the amendment of the governing instrument, ..." 12 DEL. CODE ANN. § 3806(b)(3)(2003).

FN5. Section 13.12 of the trust agreements provides that Delaware law will control.

Regarding the provision that allows the unit holders to terminate the trust agreements by unanimous consent, local law provides that "[e]xcept to the extent otherwise provided in the governing instrument of the statutory trust, a statutory trust will have perpetual existence, and a statutory trust may not be terminated or revoked by a beneficial owner or other person except in accordance with the terms of its governing instrument." 12 DEL. CODE ANN. § 3808(a)(2003). Thus, local law would not permit the revocation of the business trust agreements absent the power to revoke contained in the trust agreements.

The fact that local law allows parties to a business trust agreement to provide for its amendment and revocation does not mean that the power to amend and revoke contained in each the trust agreement "adds nothing to the rights of the parties under local law" As indicated above, the issue is not whether local law permits such provisions in trust agreements, but rather *83 whether the parties to the agreement would have those rights even if they did not reserve the power to amend or revoke in the agreement.

The transfer of stock from the decedent's revocable trust to Schutt I and Schutt II were not bona fide sales for an adequate and full consideration in money and money's worth.

As noted above, §§ 2036 and 2038 do not apply to any transaction qualifying as "a bona fide sale for an adequate and full consideration in money or money's worth." Treas. Reg. §§ 20.2036-1(a) and 20.2038-1(a) contain cross-references to Treas. Reg. § 20.2043-1, which provides generally that transfers described in §§ 2036 and 2038 are not subject to the estate tax if made in a transaction which constitutes a bona fide sale for an adequate and full consideration in money or money's worth. A bona fide sale for an adequate and full consideration in money or money's worth is one made in good faith, for a price that is an adequate and full equivalent reducible to a money value.

The exemption from tax is limited to those transfers of property where the transferor has received benefit in full consideration in a genuine arm's-length transaction; the exemption does not apply in cases where there is only contractual consideration but not "adequate and full consideration in money or money's worth." Estate of Goetchius v. Commissioner, 17 T.C. 495, 503 (1951). In construing the bona fide sale terminology, *84 "[t]he word 'sale' means an exchange resulting from a bargain." Mollenberg's Estate v. Commissioner, 173 F.2d 698, 701 (2d Cir. 1949). See also Bank of N.Y. v. United States, 526 F.2d 1012, 1016-17, n.6 (3d Cir. 1975) (noting that "the statutory basis for requiring an arm's length bargain would seem to be the requirement of a 'bona fide' contract"); Estate of Morse v. Commissioner, 69 T.C. 408, 418 (1977 (observing that judicial decisions refer to a bona fide contract "as an arm's-length transaction or a bargained-for exchange"), aff'd, 625 F.2d 133 (6th Cir. 1980); Estate of Musgrove v. United States, 33 Fed. Cl. 657, 663-64 (1995). Accordingly, the applicability of the §§ 2036 and 2038 exception rests on two requirements: (1) a bona fide sale, meaning an arm's-length transaction; and (2) adequate and full consideration. Strangi II, 85 T.C.M. (CCH) at 1343; Estate of Harper, 83 T.C.M. (CCH) at 1653.

Where a transaction is merely a vehicle for changing the form in which the decedent held his or her property, a mere "recycling of value," the decedent's receipt of an interest in that transaction in exchange for his testamentary assets is not a bona fide sale for full and adequate consideration within the meaning of §§ 2036 and 2038. Strangi II, 85 T.C.M. (CCH) at 1344; Estate of Thompson, 84 T.C.M. (CCH) at 388; Estate of Harper, 83 T.C.M. (CCH) at 1653. Where a transaction does not appear to be motivated primarily by legitimate business concerns, *85 no transfer for consideration within the meaning of?? taken place. Estate of Reichardt, 114 T.C. at 155-56; Es?? Maxwell, 98 T.C. at 603-06, aff'd, 3 F.3d at 595-98; Estate of?? Thompson, 84 T.C.M. (CCH) at 387-89; Estate of Harper, 83 T.C.M. (CCH) 1652- 54. As the Court explained in Estate of Harper:

[T]o call what occurred here a transfer for consideration within the meaning of section 2036(a), much less a transfer for an adequate and full consideration, would stretch the exception far beyond its intended scope. In actuality, all decedent did was to change the form in which he held his beneficial interest in the contributed property. We see little practical difference in whether the Trust held the property directly or as a 99-percent partner (and entitled to a commensurate 99-percent share of profits) in a partnership holding the property. Essentially, the value of the partnership interest the Trust received derived solely from the assets the Trust had just contributed. Without any change whatsoever in the underlying pool of assets or prospect for profit, as, for example, where others make contributions of property or services in the interest of true joint ownership or enterprise, there exists nothing but a circuitous "recycling" of value. We are satisfied that such instances of pure recycling do not rise to the level of a payment of consideration. To hold otherwise would open section 2036 to a myriad of abuses engendered by unilateral paper transformations.

In contrast to those situations involving alternative ??vehicles, this court has distinguised cases ??had transferred his or her assets into a valid ?? enterprise. In those cases, the transfer *86 has been found to be bona fide sale for full and adequate consideration. As such, the decedent's receipt of income from the enterprise did not cause the value of the property he contributed to the enterprise to be returned to his estate. See, e.g., Estate of Stone v. Commissioner, T.C. Memo. 2003-309, 86 T.C.M. (CCH) 551; Estate of Harrison v. Commissioner, T.C. Memo. 1987-8, 52 T.C.M. (CCH) 1306; Estate of Michelson v. Commissioner, T.C. Memo. 1978-371, 37 T.C.M. (CCH) 1534.

In several cases involving family limited partnerships, this Court has held that no "sale" occurred as that term is used in §§ 2036 and 2038 when the decedent transferred assets to a family limited partnership. Strangi II, 85 T.C.M. (CCH) at 1343-44; Estate of Harper, 83 T.C.M. (CCH) at 1653. The court in each of those cases based its determination on the fact that the parties to the transaction were closely related and that the decedent essentially dictated the terms of the transaction. As the court noted in Estate of Harper:

He [the decedent] essentially stood on both sides of the transaction and conducted the partnership's formation in the absence of any bargaining or negotiating whatsoever. It would be an oxymoron to say that one can engage in an arm's-length transaction with oneself, and we simply are unable to find any other independent party involved in the creation of [the partnership].

*87 Although the transactions in this case ostensibly involved a third party (i.e., the WTC representing the interests of the WTC Trust beneficiaries), the record reveals that there were no negotiations over the essential elements of the plan. [FN6] (There is also no evidence that there were any negotiations whatsoever between the decedent and his children or grandchildren concerning the plan.) The decedent decided how the trusts would be structured and operated, what property would be contributed to the trusts, and what interests the unit holders would have. See Strangi II, 85 T.C.M. (CCH) at 1343. It appears that the only issues raised by the WTC's representatives concerning the structure or operation of the trusts were (1) they suggested early on that the bank act as trustee, [FN7] (2) they expressed a desire for the bank to have some input in the investment decisions, and (3) they requested that the trusts' "net cash flow" be distributed quarterly rather than at the discretion of the trustee.

FN6. While it may appear that the WTC is an independent third party, it must be remembered that in reality it simply represented the interests of the decedent's children and grandchildren. Thus, the relationship between the parties who held the beneficial interests in the business trusts during the decedent's lifetime was not all that different from the intrafamily relationships involved in the family limited partnership cases considered by this Court.

FN7. It appears that they raised this issue to protect their fees rather than out of a desire to control the trusts' operations.

*88 Regarding the issue of who would be trustee, the record establishes that the decedent unilaterally rejected the suggestion that the bank act in that capacity. There is no evidence in the record that the bank sought to "negotiate" that issue.

Similarly, there is no evidence of any negotiations concerning the bank's involvement in the investment decisions for the business trusts. In fact, while the decedent was willing to allow the bank some input as long as he had the final say, the trust agreements grant him total authority to make investment decisions for the trusts. The fact that the agreements do not even contain a mechanism for allowing the bank some input in the investment decisions suggests that this was not a very important issue to the bank.

It is also clear that there were no "negotiations" concerning the frequency of the distributions of the trusts' "net cash flow." Mr. Howard raised this issue late in the process after he noticed that there was no such provision in the draft agreements. Moreover, the record indicates that the decedent always intended to make the distributions quarterly and, thus, had no problem with Mr. Howard's request.

The record indicates that all of the other issues raised by the bank's representatives related to their concern that the bank be protected from a fiduciary standpoint or to their desire to *89 protect the bank's fees. For instance, the bank's representatives wanted to ensure that the WTC Trusts would not be taxed on built-in capital gains attributable to the decedent's stock or that one WTC Trust would not be taxed on the gains attributable to stock held by another WTC Trust. There were no "negotiations" concerning this issue as the decedent also desired to structure the transactions to avoid any tax upon formation.

To avoid fiduciary liability, the bank requested that the decedent's children and grandchildren sign agreements consenting to the transfer of stock from the WTC Trusts to the business trusts. There is no evidence in the record that the decedent opposed that request or that his agreement to obtain the consents was the product of any arm's-length bargaining.

Finally, the bank requested that it act as custodian for the stock transferred to the business trusts. The record suggests that this request was motivated more by the bank's desire to maintain its fees rather than any particular desire to control the stock. [FN8] In any event, the record indicates that the decedent did not object to that request as long as the bank's fees *90 remained at the same level they were at before the transfer of the stock, while the bank's representatives initially indicated that its fees might be higher because it would also be collecting fees for serving as the custodian for the stock the decedent would be contributing to the business trusts, the record establishes that the bank readily agreed to the decedent's demand that the transactions be "fee neutral."

FN8. It appears that the bank's fees for serving as trustee were based on the fair market value of the assets being administered. The bank determined that due to the valuation discounts involved, the value of the trust units would be less than the value of the stock transferred to the business trusts. Thus, the bank stood to lose a portion of the fees allocable to the stock transferred to the business trusts.

In sum, as the record clearly demonstrates, the business trust agreements were not the product of arm's-length negotiations between two independent parties, but rather the WTC simply agreed to participate in the plan to accommodate the desires of an important customer and his family. [FN9] In fact, it would be a stretch to even call the WTC an independent party in these transactions considering that the decedent had the power to remove the bank as trustee of the WTC Trusts if it rejected his proposal.

FN9. These transactions served no other business purpose for the bank as there was no potential to increase the income of the WTC Trusts or the income it received as trustee/custodian fees.

The decedent did not receive "adequate consideration" for the transfer of his stock to the business trusts when he received trust units of proportionate value in the exchange. As discussed above, this Court has held in cases involving family limited partnerships that the partnership interest received in exchange *91 for property contributed to the partnership is not "adequate consideration" for purposes of § 2036 where there is no meaningful change in the transferor/decedent's relationship to that property resulting from the transfer. Strangi II, supra; Estate of Thompson, supra; Estate of Harper, supra. In such cases, the Court has determined that the transferor/decedent merely "recycled" the value of his interest in the assets transferred.

In Kimbell v. United States,

F.3d

, 2004 U.S. App. LEXIS 9911 (5th Cir. May 20, 2004), rev'g and remanding, 244 F. Supp. 2d (N.D. Tex. 2003), the decedent transferred oil and gas working interests, royalty interests, and marketable securities in exchange for a 99 percent limited partnership interest and a 50 percent interest in the corporate general partner. Decedent's son and his spouse received the remaining corporate interests. Decedent's son, an experienced oil and gas operator, was the manager of the general partner. Each party received proportionate entity interests, and the parties respected the form of the transaction. The decedent retained sufficient assets outside the partnership transaction to maintain her lifestyle.

In Kimbell, the Fifth Circuit, stating that section 2036 excepts from its coverage a "bona fide sale for an adequate and full consideration in money or money's worth," held that the *92 decedent's transfer came within the exception. The court construed a bona fide sale as one that is genuine and compelled by substantial business and other non-tax reasons. The court then construed adequate consideration as the receipt of a proportionate partnership interest, a proportionate capital account, and the right to receive an amount equal to that capital account on dissolution.

Contrary to the Fifth Circuit's interpretation of what constitutes adequate consideration for purposes of section 2036, respondent believes that the appropriate inquiry is not limited to the legal characteristics or economic value of the partnership interest received, but also must address whether that interest constitutes the retention of a beneficial interest in the property transferred. The partnership interest is not consideration for the transfer of the decedent's assets where the partnership interest is merely a retained interest in the transferred assets. Stated another way, where the partnership interest is a mere change in the form of the decedent's interest in the property, it cannot constitute consideration regardless of its character as a partnership interest or its value as such. For example, assume a grantor transfers property to a trust and retains an income interest in the property. The retained income interest is not consideration received by the grantor for the transfer that would exempt the transfer from the purview of *93 section 2036, despite the fact that the value of the income interest is equal to the value of the property transferred, [FN10] Similarly, the court must look beyond the form or value of the partnership interest received and determine whether it is merely the retention of the beneficial ownership of the property transferred into the partnership.

FN10. Similarly, in a situation where a grantor establishes a "grantor retained annuity trust" described in section 2702(b)(1), a common estate planning technique is to match the actuarial value of the retained annuity as closely as possible with the value of the property transferred to the trust so that no gift tax results from the transfer. See,e.g., Walton v. Commissioner, 115 T.C. 589 (2000). Nonetheless, if the decedent dies during the term of the trust, the trust corpus is includible in the gross estate under section 2036. The retained annuity, although equal to the value of the transferred property, is not consideration for the transfer that would exempt the transfer from the purview of section 2036.

Respondent submits that the business trusts involved in this case -- as the family limited partnerships involved in the Stranqi II, Estate of Thompson, and Estate of Harper cases -- simply served as a vehicle for recycling the value of the decedent's interest in the stock he contributed to the trusts. The record establishes that the transfer of the stock to the business trusts did not cause any meaningful change in the decedent's relationship to those assets. Before the transfer, the decedent enjoyed all of the incidents of ownership, including the right to the income generated by the stock, the right to sell the stock and reinvest the proceeds as he saw fit, and the right *94 to vote the shares and otherwise assert the rights of ownership. Nothing changed after the transfer to the business trusts except that title to those shares was then held by the business trusts instead of by the decedent's revocable trust. The decedent continued to receive the income attributable to those shares, he had the power, as trustee, to sell the shares and reinvest the proceeds as he saw fit, and he, as trustee, could vote the shares and otherwise exercise the rights incident to the ownership of the stock.

The only change in the decedent's relationship to the stock after the transfer was that he could no longer unilaterally dissolve the trusts and thereby reacquire title to the stock. However, the fact that the decedent had held the stock in his revocable trust for a number of years before transferring the shares to the business trusts suggests that he never intended to reacquire ownership. Moreover, had the decedent wished to dissolve the business trusts and reacquire title to the stock he contributed, it is inconceivable that the bank would have objected, [FN11] Dissolution would have simply put the parties back in the positions they enjoyed vis-Ã -vis the ownership of the stock before the business trusts were formed.

FN11. Although Mr. Howard testified during cross-examination that he would have recommended that the bank reject such a request, he could provide no reason why the bank would object.

As discussed above, §§ 2036 and 2038 were enacted to ensure that the value of property transferred during a decedent's lifetime is included in the gross estate if the transfer was essentially testamentary in nature. Conversely, the value of property transferred primarily for business or other non-testamentary reasons is not included in the gross estate even if the decedent retained an economic interest in the property after the transfer. See, e.g., Kimbell v. United States, supra; Estate of Stone, supra; Estate of Harrison, supra; Estate of Michelson, supra. See also Kimbell, supra.

Respondent submits that the preponderance of the evidence establishes that the decedent's dominant motivation for forming the business trusts was to advance his testamentary goals. This is evidenced by the fact that his relationship to the property did not change after the transfer as he retained for his lifetime the economic interest in the stock as well as all of the other incidents of ownership he enjoyed when the stock was held by his revocable trust. See Stranqi II, 85 T.C.M. (CCH) at 1339; Estate of Thompson, 84 T.C.M. (CCH) at 387; Estate of Harper, 83 T.C.M. (CCH) at 1652. Also, the fact that the plan to form the business trusts was devised by the decedent with little input from the WTC and the fact that the business trusts' portfolios did not change before his death support respondent's contention that the trusts *96 were formed to serve testamentary objectives rather than for business reasons. See Strangi II, 85 T.C.M. (CCH) at 1339; Estate of Thompson, 84 T.C.M. (CCH) at 387; Estate of Harper, 83 T.C.M. (CCH) at 1652. Finally, the decedent's advanced age and the serious health problems he was experiencing at the time of the formation of the business trusts strongly suggest that he was motivated by testamentary concerns. See Strangi II, 85 T.C.M. (CCH) at 1339; Estate of Harper, 83 T.C.M. (CCH) at 1652.

This Court has noted that § 2036 does not apply in cases where the decedent and others pool assets in a joint venture for investment purposes. Cf. Strangi II, 85 T.C.M. (CCH) at 1344; Estate of Thompson, 84 T.C.M. (CCH) at 388; Estate of Harper, 83 T.C.M. (CCH) at 1653-54. Petitioner contends that the decedent and the WTC, as trustee for the WTC Trusts, pooled assets for investment purposes and, thus, a business purpose existed for the trusts. However, while there may have been a "pooling of assets" in form, in substance no genuine pooling of assets for investment purposes occurred for the following reasons. First, since each business trust was funded with the same stock (i.e., one trust was funded solely with DuPont stock and the other was funded solely with Exxon stock), no diversification of assets resulted that changed the nature of each unit holder's investment. As the business trusts were structured, the uni5 holders simply retained *97 the economic interests in the stock they contributed to the trusts.

Second, it is clear that the parties never intended to "churn" the trusts' stock portfolios and thereby produce profits by trading. In fact, according to petitioner, the business trusts were formed to perpetuate the decedent's "buy and hold" investment philosophy and prevent his grandchildren from disposing of the stock they would ultimately inherit upon the dissolution of the WTC Trusts. The decedent, as trustee, adhered to that philosophy as, at the time of his death, the business trusts only held the stock contributed upon their formation. Thus, there is no question that the business trusts were formed as passive entities to hold the DuPont and Exxon stock.

As indicated above, petitioner contends that the decedent's dominant motive for forming the business trusts was not to obtain valuation discounts for estate tax purposes, a clearly testamentary purpose, but rather to perpetuate the decedent's "buy and hold" investment philosophy and thereby prevent his grandchildren and their issue from dissipating the family's wealth. [FN12] Petitioner overlooks the fact that the alleged motive for involving the WTC Trusts in the transactions (i.e., to create *98 a structure to prevent the sale of the DuPont and Exxon stock held by those trusts upon their dissolution) is itself a testamentary purpose. Indeed, the record establishes that the decedent's dominant motive for forming the business trusts was to achieve his testamentary goals. [FN13]

FN12. Under the terms of the trust agreements for the WTC Trusts, the trust assets, upon the death of any of the decedent's children, would be distributed to the deceased child's issue.

FN13. Mr. Sweeney was unable to provide a plausible explanation for why it was necessary to transfer the stock out of the decedent's revocable trust to the business trusts to perpetuate the decedent's "buy and hold" investment philosophy. (Tr. 60-66, 70-71) Upon the decedent's death, the bulk of the assets in his revocable trust would be used to fund several trusts to be administered by his son and son-in-law as trustees. They are also two of the three successor trustees named in the business trust agreements. Therefore, it was not necessary for the decedent to transfer assets out of his revocable trust to perpetuate his investment philosophy. This suggests that the real purpose for the transfer of assets out of the decedent's revocable trust was to create valuation discounts for gift and estate tax purposes.

The record indicates that the decedent was primarily concerned about what would happen with the stock held by the WTC Trusts after his death, a clearly testamentary concern. See Estate of Harper, 83 T.C.M. (CCH) at 16S2 (finding that petitioner's contention that the assets were transferred from the decedent's revocable trust to the family limited partnership to protect those assets from his daughter's creditors reflected a testamentary purpose). While he was alive, the decedent, as the consent or direction advisor to the WTC Trusts, controlled the sale of their assets. Thus, those assets could not have been sold during his lifetime without his approval unless one of his *99 children predeceased him, thereby causing a distribution of a portion of the trusts' principal to that child's issue. It was unlikely, however, that any of his remaining three children would have predeceased him since they were, at the time of the formation of the business trusts, in their late 50's or early 60's and in good health. In contrast, the decedent was in his mid 80's at that time and was suffering from several life-threatening illness, including coronary artery disease and congestive heart failure.

The timing of the decedent's decision to form the business trusts also indicates that he was focused on post mortem objectives. Mr. Dinneen testified that to address the decedent's concern over the possible dissipation of the family wealth by his heirs, he had recommended to the decedent on several occasions over a twenty-year period that he combine his and his wife's portfolios and the WTC Trust portfolios into a single trust. The decedent had rejected that recommendation until late 1996 or early 1997 when he authorized Mr. Dinneen to speak to Mr. Sweeney about it. It is significant that the decedent did not have this change of heart until after he had been hospitalized for six days in early December of 1996. [FN14]

FN14. The decedent was hospitalized after complaining of shortness of breath. It is reasonable to infer that this was a traumatic event for the decedent given his age, his health, and the fact that this was the first time in 20 years he had been admitted to the hospital for other than a routine checkup.

*100 It is also significant that the decedent took no action to protect the stock held in the WTC Trusts when one of his daughters died during 1993. As required by the trust agreements, trust corpus was distributed to her children, who then sold some of the stock they inherited. If the decedent was truly concerned about preventing the sale of the stock held by the WTC Trusts during his lifetime, as opposed to after his death, you would think that he would not have waited almost four years before taking any action to address his concerns about the dissipation of that stock.

The evidence demonstrates that the decedent's dominant motive for forming the business trusts was to create a vehicle he could use for making testamentary gifts to his heirs at discounted values. Mr. Sweeney testified that before the business trusts were formed, both he and Mr. Dinneen had recommended to the decedent that he create a new entity, such as a family limited partnership or trust, to be used as a vehicle to make annual gifts to his heirs. [FN15] (Tr. 51) Mr. Sweeney further testified that he and Mr. Dinneen made that recommendation *101 because the decedent had transferred most of his ownership interest in the family limited partnership he had established during 1994. Thus, Mr. Sweeney's testimony establishes the business trusts were formed, at least in part, to serve that testamentary purpose.

FN15. During 1994, the decedent established a family limited partnership to which he transferred a significant portion of his wealth. He then made annual gifts of his interest in the partnership to his children and grandchildren at discounted values.

Moreover, the record establishes that the issue of valuation discounts dominated the early discussions concerning the formation of a new entity. Both the decedent and Mr. Dinneen were familiar with the concept of valuation discounts when Mr. Dinneen first contacted Mr. Sweeney, and Mr. Dinneen believes that he and Mr. Sweeney may have discussed the discount issue during their first conversation. (Tr. 20, 52-53) Before Mr. Sweeney first met with the decedent and Mr. Dinneen on February 3, 1997, he gave Mr. Dinneen a memorandum prepared by attorneys in his firm discussing the use of family limited partnerships, limited liability companies, and Delaware business trusts for gift and estate tax purposes. (Ex. l16-J) That memorandum discusses, among other things, how to maximize valuation discounts through the use of those entities. In the letter accompanying that memorandum, Mr. Sweeney suggests using a Delaware business trust and explains that there would be no minority interest discount if the decedent held a majority interest in the trust at the time of his death. (Ex. 115-J).

*102 During their February 3, 1997 meeting, Mr. Sweeney, the decedent, and Mr. Dinneen continued to focus on the issue of valuation discounts. In particular, they reviewed a schedule prepared by Mr. Dinneen in which he calculated the net amount the decedent's heirs would receive under the current estate plan versus the net amount they would receive if a substantial portion of the assets held in the decedent's revocable trust was transferred to a new entity. (Ex. 29-J) For purposes of his analysis, Mr. Dinneen assumed that the value of the decedent's interest in the new entity would be computed taking into account the lack of marketability and minority interest discounts. During that meeting, Mr. Dinneen suggested that they approach the WTC to see if it would participate in the plan. [FN16] Soon after the February 3, 1997 meeting, Mr. Sweeney had an attorney in his firm research the discount issue. In her response to Mr. Sweeney, she opined that under the proposed plan, the value of the property transferred to the business trust would be discounted by 10% to 35% to reflect the decedent's minority interest and by an additional 20% to 60% to reflect the lack of marketability of his interest.

FN16. This proposal accomplished two objectives: (1) it addressed the decedent's concern about the dissipation of the assets held by the WTC Trusts; and (2) it provided a mechanism for creating a minority discount for the decedent's interest in the business trusts. It is not clear which objective was the dominant factor in this decision.

*103 The facts in this case are distinguishable from those in the Estate of Stone, Estate of Harrison, and Estate of Michelson cases. In Estate of Stone, this Court held that § 2036 did not apply to assets the decedents had transferred to several family limited partnerships before their deaths. The Court based its holding on its determination that the partnership interests received by the decedents in the exchange constituted full and adequate consideration for the property transferred. Rejecting respondent's contention that the decedents had merely "recycled value," the Court found that unlike the situation in the Estate of Harper, the partnerships were not the product of unilateral decisions by the decedents, but rather there were active negotiations between the decedents and their children concerning the structure of the partnerships, their operation, and the property that would be contributed. The Court also found that the partnerships served non-testamentary purposes in that they were utilized to resolve litigation among the decedents' children and provide a mechanism for managing the assets involved. The Court determined that unlike the situation in Estate of Harper, there was a meaningful change in the decedents' relationship to the assets transferred to the partnerships as the decedents' children were actively involved in their management. Based on these facts, the Court held that the partnerships were formed primarily for business and investment purposes.

*104 None of the factors relied upon by the Court in Estate of Stone are present here. As discussed above, there were no meaningful negotiations between the decedent and the WTC concerning the structure and operation of the business trusts or the property to be contributed. For all practical purposes, the decedent dictated the terms of the trust agreements; the WTC was only concerned about protecting itself as a fiduciary and maintaining its fees.

Similarly, no business or other non-testamentary purpose was served by transferring the stock from the decedent's revocable trust to the business trusts. [FN17] Unlike the situation in Estate of Stone, the trusts were not formed to resolve disputes between the decedent's heirs. Nor were they formed to engage in investment activities or serve as a vehicle to manage the decedent's assets. Rather, according to petitioner, the decedent formed the business trusts to prevent the sale of the DuPont and Exxon stock.

FN17. To the extent that the business trusts served an investment purpose (i.e., to perpetuate the decedent's "buy and hold" investment philosophy), it is clear, for the reasons discussed earlier in this brief, that they were intended to achieve that objective post-mortem.

Finally, in contrast to Estate of Stone, there was no change in the decedent's relationship to the stock after it was transferred to the business trusts. The decedent's heirs were not involved in the management of the trust assets as was the *105 case in Estate of Stone, but rather the decedent continued to exercise complete control over the stock after the transfer. He also retained for his lifetime all of the economic benefits of the stock.

The Estate of Harrison and Estate of Michelson cases are also distinguishable. In Estate of Harrison, the decedent, whose health was declining, and his two sons formed a partnership to which the decedent transferred real estate, oil and gas interests, and marketable securities. His sons, who were the general partners, also transferred property to the partnership. Under the partnership agreement, the general partners had absolute control over the management of the partnership. Based on these facts, the Court determined that the partnership was formed for a valid business purpose; namely, to consolidate and manage the decedent's assets during his lifetime. Consequently, the Court held that §§ 2036 and 2038 did not apply since the partnerships were formed primarily for business, rather than testamentary, purposes.

In this case, petitioner has not argued that the business trusts were formed to manage the decedent's assets during his lifetime. Moreover, any such argument would fail since the decedent retained complete control over the management of the stock until his death.

*106 In Estate of Michelson, the decedent and his son had engaged in the cattle business as partners for a number of years before his death. The business was later incorporated, with each party holding a 50% interest at the time of the decedent's death. They also had formed a realty trust to which they had transferred real property used in their cattle business. At the 5ime of his death, the decedent held a 51% interest in the trust, and his son held a 49% interest.

Respondent argued that the value of son's 49% interest in the realty trust should be included in the decedent's gross estate under §§ 2036 and 2038. The Court rejected that argument, holding that the son provided adequate consideration for his 49% interest in the trust in that he had simply exchanged his 50% interest in the real property for his interest in the trust.

Clearly, the Court's holding in Estate of Michelson has no bearing on this case as it simply involved the question of whether the son, not the decedent, provided adequate consideration for the interest he received in the realty trust. Consequently, the "recycling" issue discussed in the Strangi II, Estate of Thompson, and Estate of Harper cases was not present in that case.

In sum, when all of the facts are considered, it is clear that the decedent formed 5he business trusts as part of his *107 estate plan rather than for a business or other non-testamentary purpose.

It follows that the determination of the Commissioner of Internal Revenue should be sustained.

Estate of Charles Porter SCHUTT, Deceased, Charles P. Schutt, Jr. and Henry I. Brown, III, Co-Executors, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.