Walton v. Comm'r of Internal Revenue, 3824–99.
| Decision Date | 22 December 2000 |
| Docket Number | No. 3824–99.,3824–99. |
| Citation | 115 T.C. 589,115 T.C. No. 41 |
| Parties | Audrey J. WALTON, Petitioner v. COMMISSIONER of INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayer petitioned for redetermination of gift tax deficiencies arising from valuation of grantor retained annuity trust (GRAT). The Tax Court, Nims, J., held that: (1) value of gift effected upon creation of GRAT was determined by valuing taxpayer's retained interest as annuity for specified term of years, and (2) example in regulation was invalid, as an unreasonable interpretation of statute providing valuation rules for transfers of interests in trust.
Decision for taxpayer.
26 C.F.R. §25.2702–3(e), Example ( 5 ).
Richard B. Covey and Jerome J. Caulfield, for petitioner.
Carmen M. Baerga and Marie E. Small, for respondent.
P established and funded with corporate stock two substantially identical grantor retained annuity trusts (GRAT's). Each GRAT had a 2–year term during which P retained the right to receive an annuity. In the event that P died prior to expiration of the 2–year term, the remaining scheduled annuity payments were to be made to her estate. The balance of the trust property would then be paid to the remainder beneficiaries.
Held: For purposes of determining the value under sec. 2702, I.R.C., of the gift effected upon creation of each GRAT, P's retained qualified interest is to be valued as an annuity for a specified term of years, rather than as an annuity for the shorter of a term certain or the period ending upon P's death.
Held, further, Sec. 25.2702–3(e), Example ( 5 ), Gift Tax Regs., is an invalid interpretation of sec. 2702, I.R.C.
Respondent determined a deficiency in Federal gift tax against petitioner for 1993 in the amount of $4,532,776.82. The sole issue for decision is the valuation under section 2702 of gifts resulting from petitioner's creation of two grantor retained annuity trusts (GRAT's).
Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
This case was submitted fully stipulated pursuant to Rule 122, and the facts are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference. At the time the petition was filed in this case, petitioner resided in Versailles, Missouri.
Prior to April 7, 1993, petitioner was the sole owner of, and held in her name, 7,223,478 shares of common stock of Wal–Mart Stores, Inc., a publicly traded entity. Then, on April 7, 1993, petitioner established two substantially identical GRAT's, each of which had a term of 2 years and was funded by a transfer of 3,611,739 shares of the above Wal–Mart stock. The fair market value of the Wal–Mart stock on that date was $27.6875 per share, and the consequent initial fair market value of each trust was $100,000,023.56.
According to the provisions of each GRAT, petitioner was to receive an annuity amount equal to 49.35 percent of the initial trust value for the first 12–month period of the trust term and 59.22 percent of such initial value for the second 12–month period of the trust term. In the event that petitioner's death intervened, the annuity amounts were to be paid to her estate. The sums were payable on December 31 of each taxable year but could be paid up through the date by which the Federal income tax return for the trust was required to be filed. The payments were to be made from income and, to the extent income was not sufficient, from principal. Any excess income was to be added to principal.
Upon completion of the 2–year trust term, the remaining balance was to be distributed to the designated remainder beneficiary. Petitioner's daughter Ann Walton Kroenke was the beneficiary so named under one trust instrument; petitioner's daughter Nancy Walton Laurie was named in the other.
Each trust was irrevocable, prohibited additional contributions, specified that the grantor's interest was not subject to commutation, and mandated that no payment be made during the trust term to any person other than the grantor or the grantor's estate. The two trustees for each respective trust were petitioner and the daughter for whose benefit the trust was created.
The following payments were made to petitioner from each of the GRAT's:
+-----------------------------------------------------------------------------+
¦Date of ¦Form of ¦Number of ¦Value per ¦Amount of ¦
¦Payment ¦Payment ¦Shares ¦Share ¦Payment ¦
+--------------+--------------+---------------+--------------+----------------¦
¦7/9/93 ¦Cash ¦ ¦ ¦$ 117,381.52 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦10/4/93 ¦Cash ¦ ¦ ¦117,381.52 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦7/15/94 ¦Stock ¦1,434,518 ¦$25.1900 ¦36,135,508.42 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦1/5/94 ¦Cash ¦ ¦ ¦117,381.52 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦4/14/94 ¦Cash ¦ ¦ ¦153,498.91 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦7/3/94 ¦Cash ¦ ¦ ¦153,498.91 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦10/3/94 ¦Cash ¦ ¦ ¦92,531.89 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦6/26/95 ¦Stock ¦2,142,517 ¦26.1875 ¦56,107,163.94 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦1/5/95 ¦Cash ¦ ¦ ¦92,531.89 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦4/14/95 ¦Cash ¦ ¦ ¦108,861.05 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦6/26/95 ¦Stock ¦34,704 ¦26.1875 ¦908,811.00 ¦
+--------------+--------------+---------------+--------------+----------------¦
¦ ¦ ¦3,611,739 ¦ ¦94,104,550.57 ¦
+-----------------------------------------------------------------------------+
The assets of each GRAT were exhausted upon the final payment of stock in June of 1995, as all income and principal had been distributed to petitioner pursuant to the scheduled annuity payments. Since the aggregate amount of annuity payments called for by each trust instrument was $108,570,025.58 (49.35 percent x $100,000,023 .56 + 59.22 percent x $100,000,023.56), each GRAT resulted in a $14,465,475.01 shortfall in annuity payments to the grantor and left no property to be delivered to the remainder beneficiary.
Petitioner timely filed a United States Gift (and Generation–Skipping Transfer) Tax Return, Form 709, for the taxable year 1993. Therein, petitioner valued at zero the gifts to her daughters of remainder interests in the GRAT's. Petitioner represented that the value of her retained interests in the GRAT's equaled 100 percent of the value of the Wal–Mart stock on the date of the transfer, thus eliminating any taxable gift to the remaindermen. Respondent subsequently issued a notice of deficiency determining that petitioner had understated the value of the gifts resulting from her establishment of the two GRAT's. Petitioner now concedes on brief that the gift occasioned by each GRAT should be valued at $6,195.10, while respondent asserts that the taxable value of each gift by petitioner is $3,821,522.12.
Section 2501 imposes a tax for each calendar year on the transfer of property by gift by any taxpayer. Pursuant to section 2512, the value of the transferred property as of the date of the gift “shall be considered the amount of the gift”. Generally, where property is transferred in trust but the donor retains an interest in such property, the value of the gift is the value of the property transferred, less the value of the donor's retained interest. See sec. 25.2512–5A(e), Gift Tax Regs.; sec. 25.2512–5T(d)(2), Temporary Gift Tax Regs., 64 Fed.Reg. 23224 (Apr. 30, 1999). However, if the gift in trust is to a family member (as defined in section 2704(c)(2)), the value of the gift is determined subject to the limitations of section 2702. See id.
As pertinent herein, section 2702 provides:
SEC. 2702. SPECIAL VALUATION RULES IN CASE OF TRANSFERS OF INTERESTS IN TRUSTS.
(1) In general.—Solely for purposes of determining whether a transfer of an interest in trust to (or for the benefit of) a member of the transferor's family is a gift (and the value of such transfer), the value of any interest in such trust retained by the transferor or any applicable family member * * * shall be determined as provided in paragraph (2).
(2) Valuation of retained interests.—
(A) In general.—The value of any retained interest which is not a qualified interest shall be treated as being zero.
(B) Valuation of qualified interest.—The value of any retained interest which is a qualified interest shall be determined under section 7520 [].
* * *
(1) any interest which consists of the right to receive fixed amounts payable not less frequently than annually,
(2) any interest which consists of the right to receive amounts which are payable not less frequently...
To continue reading
Request your trial
-
Abu-Awad v. U.S.
... ... States, on behalf of the Commissioner of the Internal Revenue Service ("IRS"), seeks summary judgment on the ... ...
-
Swallows Holding, Ltd. v. Comm'r of Internal Revenue
...1304, 59 L.Ed.2d 519 (1979). 15 see, e.g., robinson v. comMISSIONER, 119 T.C. 44, 70, 2002 wl 2027282 (2002); Walton v. Commissioner, 115 T.C. 589, 597–598, 2000 WL 1899315 (2000); UnionBancal Corp. v. Commissioner, 113 T.C. 309, 317, 1999 WL 962587 (1999). Under Natl. Muffler, which like t......
-
Cook v. Commissioner of the IRS, 01-1471
...in the regulation itself. Furthermore, in opposition to the "fixed and ascertainable" standard, the Cooks cite Walton v. Comm. of the I.R.S., 115 T.C. 589 2000 WL 1899315 (2000). In that case, a grantor created a trust that provided her fixed annual payments. Id. In the event of the grantor......
-
Schott v. C.I.R., 02-70007.
...reliance on Treas. Reg. § 25.2702-2(d) Example 7, which will be discussed below. The Tax Court distinguished Walton v. Commissioner, 115 T.C. 589, 596, 2000 WL 1899315 (2000), which treated as qualified an annuity to the taxpayer and, on her death, to her The Schotts petition this court for......
-
Split Interest Valuation: The Devil is in the Detail
...for a term of ten years.73If A _______________________________________________________ 68HENKEL, supra note 42, ¶ 22.05[3]. 69 Id. 70115 T.C. 589 (2000). 71I.R.S. Tech. Adv. Mem. 9707001 (Oct. 25, 1996). 72Id. 73Id. (citing Treas. Reg. § 25.2702-3(e) (as amended in 1995)) Page 943 2009] SPL......
-
Inclusion of certain trusts in a decedent's gross estate under Sec. 2036.
...Actuarial Values (Book Aleph) (1999), Table K, Adjustment Factors for Annuities Payable at the End of Each Interval. (13) See Walton, 115 T.C. 589 (14) See Gans and Blattmachr, "Treatment of GRATs Under the Section 2036 Proposed Regulations--Questions Remain," 107 J. Tax'n 143 (2007). (15) ......
-
When to use a "zeroed out" GRAT.
...trust provision would then increase the gift portion, because it decreases the amount of the grantor's retained value. In Audrey J. Walton, 115 TC 589 (2000), the grantor transferred approximately $100 million of Wal-Mart stock to each of two two-year GRATs and claimed no gift on the transa......
-
IRS acquiesces in Walton.
...to Notice 2003-72, the IRS has decided to follow the Tax Court's holding in Audrey J. Walton, 115 TC 589 (2000), that Regs. Sec. 25.2702-3(e), Example 5, is invalid. (For background, see Whitlock and McNamara. "Significant Recent Developments in Estate Planning (Part II)," TTA, Sept. 2001, ......