-27-
of section 2036(a)(1), see, e.g., Estate of Barlow v.
Commissioner, 55 T.C. 666 (1971) (possession and enjoyment of
real property pursuant to a lease was not a retention of the
possession or enjoyment of the property for purposes of section
2036(a) where the tenant paid FRV), such is not true where, as
here, the tenant pays less than FRV as to the lease of the
property. Decedent’s rights under the lease agreements to the
exclusive possession and enjoyment of the residence triggers the
application of section 2036(a)(1) to the residence in that
decedent did not pay FRV for that possession and enjoyment.
As to the implied understanding and agreement between
decedent and Funny Hats as to her continued possession and
enjoyment of the residence following its transfer to Funny Hats,
we find such an understanding or agreement when we view the
conduct of the parties to the lease agreements, as well as the
lease agreements themselves. See Estate of Reichardt v.
Commissioner, supra at 151; Estate of Rapelje v. Commissioner,
supra at 86. We further find that the annual lease agreements
were a subterfuge to disguise the testamentary nature of the
transfer.
First, Funny Hats was not a business operated for profit but
was a testamentary device whose goal was to remove the residence
from decedent’s gross estate. During decedent’s life, Funny Hats
operated solely as a conduit for the payment of expenses related
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