Walter Forbes owned land in Georgia, which he used as farmland, timberland, and pecan orchards. In 1982, Walter formed a limited partnership with his son and daughter and transferred all his land to the partnership. The two children also transferred land to the partnership, for a total of 5,354 acres. Walter continued to operate his farming business and to supervise the growing of timber and pecans until December 20, 1983, when he formed a general partnership with his two children for management purposes.

Walter died in August of 1984, and his will created a QTIP trust to hold the remainder of his estate for Augusta's benefit. The remainder of his estate consisted of a 42% interest in the limited partnership and all the assets of his sole proprietorship. Walter's estate transferred the proprietorship assets, including "all growing crops and timber" on land held by the limited partnership, to the QTIP trustee, who then transferred them to the general partnership in exchange for promissory notes from the two children. In May of 1987, the estate transferred Walter's limited partnership interests to the QTIP trust.

The two children executed agreements to terminate the limited and general partnerships in October 1988, at which time the limited partnership quitclaimed its interests in the property to the QTIP and the children. This resulted in the QTIP trust holding interests in certain properties (which included timberland and pecan orchards) and promissory notes payable by the children.

When Augusta died in 1993, her estate included the value of the QTIP trust's property in her estate, but did not include any beneficial interests in the timber or the pecan trees themselves. The IRS issued a notice of deficiency, claiming that the QTIP trust's undivided interests in the land included beneficial interests in the timber and pecan trees.

The Tax Court disagreed. In its ruling, the Court reasoned that the nature of the QTIP trust's interests in the property depends upon the nature of the property interests held by the limited partnership before the limited partnership quitclaimed those interests to the QTIP trust in 1988. The Court noted that the beneficial interests in "all growing crops and timber" on the land owned by the limited partnership had been held by Walter's sole proprietorship before being conveyed to the QTIP trust and then immediately reconveyed to the children for full and adequate consideration (the promissory notes). The Court held that Augusta's estate properly excluded the value of the timber and pecan trees from the gross estate.