cent limited partnership interest. Decedent used a document entitled "Gift Assignment of Limited Partnership Interest" to carry out the transfer. The document stated that decedent intended that A.C. Jones receive the gift as a limited partnership interest.

Federal income tax returns for 1995, 1996, 1997, and 1998 were filed for JBLP and signed by A.C. Jones as tax matters partner. Attached to each return were separate Schedules K1 for each general partnership interest and each limited partnership interest. The Schedules K-1 for the limited partnership interest of A.C. Jones included the interest in the partnership received by gift from decedent.

Also effective January 1, 1995, decedent and his four daughters formed AVLP under Texas law. Decedent contributed the surface estate of the Jones Alta Vista Ranch in exchange for an 88.178-percent limited partnership interest. The contribution was reflected in decedent's capital account. Susan Jones Miller and Elizabeth Jones each contributed their one-fifth interests in the Jones El Norte Ranch in exchange for 1-percent general partnership interests and 1.9555-percent limited partnership interests, and Kathleen Jones Avery and Lorine Jones Booth each contributed their one-fifth interest in the Jones El Norte Ranch in exchange for 2.9555-percent limited partnership interests. The following chart summarizes the ownership structure of AVLP immediately after formation:

On January 1, 1995, the same day that the partnership was effectively formed, decedent gave to each of his four daughters a 16.915-percent interest in AVLP, leaving decedent with a 20.518-percent limited partnership interest. Decedent used four separate documents, one for each daughter, entitled "Gift Assignment of Limited Partnership Interest" to carry out the transfers. Each document stated that decedent

intended for his daughters to receive the gifts as limited partnership interests.

Federal income tax returns for 1995, 1996, 1997, and 1998 were filed for AVLP and signed by Elizabeth Jones as tax matters partner. Attached to each return were separate Schedules K-1 for each general partnership interest and each limited partnership interest. The Schedules K-1 for each daughter's limited partnership interest included the partnership interest received by gift from decedent.

Decedent's attorney drafted the partnership agreements of both JBLP and AVLP with the intention of creating substantial discounts for the partnership interests that were transferred by gift. Both partnership agreements set forth conditions for when an interest that is transferred by gift or by other methods may convert to a limited partnership interest. Section 8.3 of the JBLP agreement provides that the general partner and 100 percent of the limited partners must approve the conversion to a limited partnership interest in writing, and section 8.3 of the AVLP agreement provides that the general partners and 75 percent of the remaining limited partners must approve the conversion in writing. Both agreements also require that an assignee execute a writing that gives assurances to the other partners that the assignee has acquired such interest without the intention to distribute such interest, and the assignee must execute a counterpart to the partnership agreement adopting the conditions therein.

Sections 8.4 and 8.5 of the partnership agreements provide that, before a partner may transfer an interest in the partnerships to anyone other than decedent or any lineal descendant of decedent, the partnership or remaining partners shall have the option to purchase the partnership interest for the lesser of the agreed-upon sales price or appraisal value. The partnership may elect to pay the purchase price in 10 annual installments with interest set at the minimum rate allowed by the rules and regulations of the Internal Revenue Service.

Section 9.2 of the agreements provides that the partnerships will continue for a period of 35 years. Section 9.3 provides that a limited partner will not be permitted to withdraw from the partnership, receive a return of contribution to capital, or receive distributions in liquidation or redemp

tion of interest except upon dissolution, winding up, termination of the partnership.

and

Section 9.4 of the partnership agreements provides for the removal of a general partner and the dissolution of the partnership. The AVLP agreement provides that a general partner may be removed at any time by the act of partners owning an aggregated 75-percent interest in the partnership. The JBLP agreement provides that a general partner may be removed at any time by the act of the partners owning an aggregated 51-percent interest in the partnership. After removal, if there is no remaining general partner, the remaining limited partners shall designate a successor general partner. If the limited partners fail to designate a successor general partner within 90 days, the partnership will dissolve, affairs will be wound up, and the partnership will terminate. Except upon dissolution, windup, and termination, both partnership agreements prohibit a limited partner from withdrawing and receiving a return of capital contribution, distribution in liquidation, or a redemption of interest.

Section 5.4 of the AVLP agreement originally provided that the general partners could not sell any real property interest that was owned by the partnership without first obtaining the consent of partners owning a majority interest in the partnership. This section was later amended so that partners owning 85 percent of the partnership must consent to a sale of real property.

On January 1, 1995, the Jones Alta Vista Ranch had a fair market value of $10,254,860, and the Jones Borregos Ranch, livestock, and personal property that were contributed by decedent to JBLP had a fair market value of $7,360,997. Neither partnership ever made a section 754 election. At the time that decedent transferred interests in the partnerships by gift to his children, the net asset values (NAV) of the underlying partnership assets that were held by AVLP and JBLP were $11,629,728 and $7,704,714, respectively. JBLP and AVLP had bases in their assets of $562,840 and $1,818,708, respectively.

Attached to his 1995 Federal gift tax return, decedent included a valuation report prepared by Charles L. Elliott, Jr. (Elliott), who also testified as the estate's expert at trial. The partnerships were valued on the return and by Elliott at

trial using the NAV method on a "minority interest, nonmarketable" basis. Nowhere in his report did Elliott purport to be valuing assignee interests in the partnership. The valuation report arrived at an NAV for the partnerships and then applied secondary market, lack-of-marketability, and built-in capital gains discounts. The expert report concluded that a 66-percent discount from NAV is applicable to the interest in JBLP and that a 58-percent discount is applicable to the interest in AVLP. On the return, decedent reported gifts of "an 83.08 percent limited partnership interest" in JBLP valued at $2,176,864 and a "16.915 percent limited partnership interest" in AVLP to each of his four daughters, valued at $821,413 per interest.

In an affidavit executed on January 12, 1999, A.C. Jones stated that the gifts that he and his sisters received from decedent were "limited partnership interests". The sole activity of AVLP is the rental of its real property. AVLP produces an average annual yield of 3.3 percent of NAV.

OPINION

Gift at the Inception of the Partnerships

In an amendment to the answer, respondent contends that decedent made taxable gifts upon contributing his property to the partnerships. Using the value reported by decedent on his gift tax return, respondent argues that, if decedent gave up property worth $17,615,857 and received back limited partnership interests worth only $6,675,156, decedent made taxable gifts upon the formation of the partnerships equal to the difference in value.

In Estate of Strangi v. Commissioner, 115 T.C. 478, 489490 (2000), a decedent formed a family limited partnership with his children and transferred assets to the partnership in return for a 99-percent limited partnership interest. After his death, his estate claimed that, due to lack-of-control and lack-of-marketability discounts, the value of the limited partnership interest was substantially lower than the value of the property that was contributed by the decedent. The Commissioner argued that the decedent had made a gift when he transferred property to the partnership and received in return a limited partnership interest of lesser value. The Court held that, because the taxpayer received a continuing

interest in the family limited partnership and his contribution was allocated to his own capital account, the taxpayer had not made a gift at the time of contribution.

In Shepherd v. Commissioner, 115 T.C. 376, 379-381 (2000), the taxpayer transferred real property and stock to a newly formed family partnership in which he was a 50-percent owner and his two sons were each 25-percent owners. Rather than allocating contributions to the capital account of the contributing partner, the partnership agreement provided that any contributions would be allocated pro rata to the capital accounts of each partner according to ownership. Because the contributions were reflected partially in the capital accounts of the noncontributing partners, the value of the noncontributing partners' interests was enhanced by the contributions of the taxpayer. Therefore, the Court held that the transfers to the partnership were indirect gifts by the taxpayer to his sons of undivided 25-percent interests in the real property and stock. See id. at 389.

The contributions of property in the case at hand are similar to the contributions in Estate of Strangi and are distinguishable from the gifts in Shepherd. Decedent contributed property to the partnerships and received continuing limited partnership interests in return. All of the contributions of property were properly reflected in the capital accounts of decedent, and the value of the other partners' interests was not enhanced by the contributions of decedent. Therefore, the contributions do not reflect taxable gifts.

Because the contributions do not reflect taxable gifts, we need not decide whether the period of limitations for assessment of a deficiency due to a gift on formation has expired. Section 2704(b)

Respondent determined in the statutory notice, and argues in the alternative, that provisions in the partnership agreements constitute applicable restrictions under section 2704(b) and must be disregarded when determining the value of the partnership interests that were transferred by gift.

Section 2704(b) generally states that, where a transferor and his family control a partnership, a restriction on the right to liquidate the partnership shall be disregarded when determining the value of the partnership interest that has