Cook v. Comm'r of Internal Revenue

• Decision Date: 25 July 2000
• Docket Number: No. 257–99.,257–99.
• Citation: 115 T.C. No. 2,115 T.C. 15
• Parties: William A. and Gayle T. COOK, Donors, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

115 T.C. 15

115 T.C. No. 2

William A. and Gayle T. COOK, Donors, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 257–99.

United States Tax Court.

July 25, 2000.

Taxpayers petitioned for redetermination of gift tax deficiencies arising from amount of gift determined to be made by grantor retained annuity trust (GRAT). IRS moved for summary judgment. The Tax Court, Nims, J., held that retained interests, donor's and contingent spousal interest, in GRATs were valued as single-life annuities.

Motion granted.

Judgment affirmed, 269 F.3d 854. George N. Harris, Jr. and Juan D. Keller, for petitioners.

Stewart Todd Hittinger, for respondent.

OPINION

NIMS, J.

H and W, husband and wife, each created two trusts intended to qualify as grantor retained annuity trusts (GRAT's) under sec. 2702, I.R.C. The grantor in each trust retained an annuity for a stated number of years. If the grantor dies before the expiration of the stated term of years and is survived by a spouse, the annuity continues for the spouse until the earlier of his or her death or the expiration of an additional specified term. If the grantor dies before the expiration of the stated term of years and is not survived by a spouse, the term of the annuity ends upon the death of the grantor.

In each trust, the grantor has reserved the power to revoke the interest of the spouse.

Ps contend that the value of the remainder interest in each GRAT, of which the grantor made a taxable gift, is the value of the transfer in trust, reduced by the actuarially determined value of a dual-life annuity under sec. 7520, I.R.C. R contends that the remainder value is to be calculated by deducting the actuarially determined value of a single-life annuity.

Held: Because the spousal interests in each GRAT are not fixed and ascertainable at the inception of the GRAT and are therefore contingent, and because the retained interests in each GRAT may extend beyond the shorter of a term of years or the period ending upon the death of the grantor, the retained interests in the GRAT's are to be valued as single-life annuities. See secs. 25.2702–3(d)(3) and 25.2702–2(a)(5), Gift Tax Regs.

This matter is before the Court on the parties' cross-motions for partial summary judgment, filed pursuant to Rule 121. The parties seek a summary adjudication regarding the same matter; i.e., the proper application of section 2702 to four grantor retained annuity trusts (GRAT's). There is no genuine issue of material fact to preclude a decision on such matter. We therefore proceed to decide the legal issues that the parties' motions present.

Unless otherwise indicated, all section references are to sections of the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Background

Petitioners resided in Bloomington, Indiana, at the time their petition was filed with the Court.

The following is a summary of the relevant facts. They are stated solely for the purpose of deciding the pending cross-motions for partial summary judgment, and they are not findings of fact for this case. See Fed.R.Civ.P. 52(a); Rule 1(a).

The Creation of the Trusts

On June 7, 1993, petitioner William A. Cook (Mr. Cook) created the William A. Cook 1993 grantor retained annuity trust and transferred 12,600 shares of Class A common stock of Cook Group, Inc ., to such trust. On the same day, petitioner Gayle T. Cook (Mrs. Cook) created the Gayle T. Cook 1993 grantor retained annuity trust and transferred 12,600 shares of Class A common stock of Cook Group, Inc., to such trust.

On August 30, 1995, Mr. Cook created the William A. Cook 1995 grantor retained annuity trust and transferred 14, 360 shares of Class A common stock of Cook Group, Inc., effective August 31, 1995, to such trust. On the same day, Mrs. Cook created the Gayle T. Cook 1995 grantor retained annuity trust and transferred 11,300 shares of Class A common stock of Cook Group, Inc., effective August 31, 1995, to such trust.

Petitioners were named as cotrustees for each of the GRAT's. Each GRAT also provides that it is intended to be a grantor retained annuity trust, paying a qualified annuity interest under section 2702(b)(1), and that the trust instrument should be interpreted accordingly. Further, each GRAT specifies that the trustee shall amend the trust if necessary to satisfy the requirements of the law in order to ensure that the annuity interest qualifies as a qualified annuity interest under section 2702(b).

The 1993 GRAT's

Each of the 1993 GRAT's provides for annual payments equal to 23.999 percent of the initial value of the trust corpus, referred to in each GRAT as the Annuity Amount. The Annuity Amount is to be paid to the grantor for a term of 5 years or until the grantor's earlier death. During that time, no distribution of trust income or principal may be made to any other person.

Each of the 1993 GRAT's also provides that if the grantor survives the 5–year term, then the remaining trust property shall be used to establish a separate trust for the grantor's son. However, if the trust ends by reason of the grantor's death before the expiration of the 5–year term, all remaining trust property shall be disposed of under a Contingent Marital Annuity Trust (CMAT) intended to qualify for the Federal estate tax marital deduction for the grantor's estate. Under the CMAT, the grantor's spouse will receive any Annuity Amount that would have been paid to the grantor if the grantor had survived the remainder of the 5–year term of the GRAT. Upon the earlier of the expiration of the 5–year term or the death of the grantor's spouse, the remaining trust assets will be used to establish a separate trust for the grantor's son.

Mr. Cook's 1993 GRAT provides that Mrs. Cook would have certain powers to appoint income and principal of the GRAT to and among the grantor's son, Carl, members of his family, “and Charities”, but that any exercise of such powers would not take effect unless Mr. Cook survived the term of the GRAT. Mr. Cook's 1993 GRAT also provides that Mrs. Cook would have certain powers of appointment with respect to the income and principal of the CMAT, but the GRAT mandates that no distributions may be made from the CMAT to any other person during the life of Mrs. Cook.

Mrs. Cook's 1993 GRAT provides that Mr. Cook would have certain powers of appointment with respect to the income and principal of the CMAT, but the GRAT also states that no distributions may be made from the CMAT to any other person during the life of Mr. Cook.

Each of the 1993 GRAT's is irrevocable in all respects except that the grantor retains the right to revoke the designation of his or her spouse as the successor annuitant. If the grantor should revoke the spouse's designation as the successor annuitant, then the terms of the trust agreement are to be applied as if the spouse had predeceased the grantor.

The 1995 GRAT's

Each of the 1995 GRAT's provides for annual payments, referred to as the Annuity Amount, to be paid to the grantor during the Annuity Term. The Annuity Term for Mr. Cook's 1995 GRAT is 3 years, and the Annuity Term for Mrs. Cook's 1995 GRAT is 5 years. In the case of Mr. Cook's 1995 GRAT, the Annuity Amount is the fair market value of the initial assets of such trust as of the date of transfer, as finally determined for Federal tax purposes, multiplied by .3175, .3810, and .4572, for year 1 through year 3, respectively. In the case of Mrs. Cook's 1995 GRAT, the Annuity Amount is the fair market value of the initial assets of such trust as of the date of transfer, as finally determined for Federal tax purposes, multiplied by .168940, .202728, .2432736, .2919283, and .3503139, for year 1 through year 5, respectively.

Each of the 1995 GRAT's provides that during the Annuity Term of the trust no distribution of trust income or principal may be made to any person other than the grantor.

If the grantor of each 1995 GRAT survives the Annuity Term, then any remaining trust property, after payment of the Annuity Amount, shall be used to establish a separate trust for the grantor's son. If, however, either of the 1995 GRAT's ends by reason of the death of the grantor and the grantor is survived by his or her spouse, then the remaining trust property shall be disposed of under a CMAT.

Each of the 1995 GRAT's provides for annuity payments under the CMAT to the grantor's spouse, referred to as Spousal Annuity Amounts, for the shorter of a term of years (3 years under Mr. Cook's 1995 GRAT and 5 years under Mrs. Cook's 1995 GRAT) after the grantor's death or until the spouse's earlier death. The Spousal Annuity Amount that would be payable to the grantor's spouse under the CMAT during the initial 3 years under Mr. Cook's 1995 GRAT and during the initial 5 years under Mrs. Cook's 1995 GRAT is the same “Annuity Amount that would have been determined with respect to * * * [the grantor] if * * * [the grantor] had survived.” Under the CMAT provisions, no distributions may be made from the CMAT to any other person during the spouse's life. The spouse has a testamentary power of appointment with respect to any remaining trust property, including any remaining payments of the Spousal Annuity Amount or of income.

Each 1995 GRAT is irrevocable except that the grantor retains the right to revoke the designation of his or her spouse as the successor annuitant. If the grantor revokes the spouse's designation as the successor annuitant, then the terms of the trust agreement are to be applied as if the spouse had predeceased the grantor.

Petitioners' Gift Tax Returns

Each petitioner timely filed a Federal gift tax return for the taxable years 1993 and 1995. Each petitioner reported the value of the transfers to their respective GRAT's by subtracting from the value of the transferred property the value of an annuity based on two lives successively; i.e., the value of a stream of fixed annual payments for the shorter...