Cook v. Commissioner of the IRS, 01-1471
| Decision Date | 22 October 2001 |
| Docket Number | No. 01-1471,01-1471 |
| Citation | 269 F.3d 854 |
| Parties | (7th Cir. 2001) William A. Cook and Gayle T. Cook, Petitioners-Appellants, v. Commissioner of the Internal Revenue Service, Respondent-Appellee |
| Court | U.S. Court of Appeals — Seventh Circuit |
Appeal from the United States Tax Court. No. 257-99--Arthur L. Nims, III, Judge.
Before Flaum, Chief Judge, and Manion, and Williams, Circuit Judges.
William A. Cook and Gayle T. Cook challenge a determination by the Tax Court that the spousal interests created in their respective Grantor Retained Annuity Trusts are not "qualified interests" within the meaning of 26 U.S.C. § 2702, and are therefore not entitled to exemptions from gift tax liability. For the reasons stated herein, we affirm the decision of the Tax Court.
In 1963, William and Gayle Cook established a business in their home to market and manufacture medical devices used during minimally invasive surgical procedures. That business, now called Cook Group Incorporated ("CGI"), grew considerably over time and is now a multi-million dollar corporation.
In 1993, William and Gayle Cook separately established two Grantor Retained Annuity Trusts ("GRATs").1 In 1995, William and Gayle Cook again established two separate GRATs.
The 1993 GRATs established by the Cooks are very similar. On June 7, 1993, William Cook transferred 12,600 shares of Class A common stock of CGI into his GRAT. Gayle Cook transferred the same amount of Class A stock of CGI into her GRAT on the same day. Both GRATs provided for annual payments of 23.999% of the initial fair market value of the trust corpus, for a period of five years, to the respective grantors. Each GRAT also provided that, in the event that a grantor survived the five year term of his or her annuity, the remaining trust property would be used to establish a separate trust for the Cooks' son, Carl.
If, however, the grantor of a trust died before the expiration of the five-year term, the remaining trust property would be disposed of under a Contingent Marital Annuity Trust ("CMAT"). Under the CMAT, the surviving spouse would receive the same annual payments for the remainder of the deceased grantor's five-year annuity term. If the surviving spouse died before the expiration of that term, the remaining CMAT assets would be used to form a separate trust for Carl Cook.
The 1993 GRATs were irrevocable except that, in each, the grantor retained the right to revoke the surviving spouse's designation as a successor annuitant. In addition, the 1993 GRATs provided that the spousal interests contained in each GRAT were contingent upon the grantor and spouse remaining married.
The 1995 GRATs were similarly structured. On August 30, 1995, William Cook transferred 14,360 shares of CGI stock into his GRAT and Gayle Cook transferred 11,300 shares of CGI stock into hers. William Cook's 1995 GRAT provided that he would receive an annual payment for a period of three years. The annuity amount for each year was to be determined by multiplying the initial fair market value of the trust corpus by .3175 for year one and by .3810 and .4572, for years two and three respectively. If he survived the three year term, the remaining trust property would be used to fund a separate trust for Carl Cook.
Gayle Cook's 1995 GRAT provided that she would receive annual payments for a term of five years. The annual annuity amount was determined by multiplying the initial fair market value of the trust by .168940 for year one and by .202728, .242736, .2919283, and .3503139, for years two through five respectively. If she survived the five year term, the remaining trust property would be used to fund a separate trust for Carl Cook.
The 1995 GRATs also made provisions in the event a grantor died before the expiration of his or her annuity term. If a grantor died before the expiration of his or her annuity term, the remaining trust property would be disposed through a CMAT, with the surviving spouse receiving the remaining payments from the grantor's annuity term. Like the 1993 GRATs, the 1995 GRATs provided that spou sal interests were contingent upon the Cooks remaining married. Similarly, each grantor reserved the right to revoke his or her spouse's designation as a surviving annuitant.
Both William and Gayle Cook filed gift tax returns for 1993 and 1995. In reporting the taxable value of their respective GRATs, both of the Cooks determined that the value of the dual- life annuities that they had created were exempt from gift tax liability.2 The Commissioner of the Internal Revenue Service disagreed. According to the Commissioner, the spousal interests contained in each GRAT did not meet the requirements of 26 U.S.C. § 2702 and, accordingly, were not "qualified interests" exempted from gift tax liability. Instead, the Commissioner concluded that only the grantors' individual interests could be considered "qualified interests."
The Cooks contested the Commissioner's determinations in the Tax Court. After initial proceedings, the Cooks eventually filed a motion for partial summary judgment, claiming that the spousal annuities contained in their GRATs were "qualified interests" and should therefore not be subject to gift tax liability. The Commissioner filed a cross motion for summary judgment, arguing that the spousal interests should not be exempted from an imposition of the gift tax.
The Tax Court entered judgment against the Cooks. According to the court, the spousal interests contained were not "qualified interests" and, therefore, should be subject to the gift tax.
William and Gayle Cook now appeal the Tax Court's decision to this court.
For gift tax purposes, when a donor makes a gift in trust to a family member, the value of the gift, and whether that gift contains exemptions for "qualified interests," is determined by section 2702 of the Internal Revenue Code. A donor can avoid gift tax liability only on those portions of the transfer that are deemed to be "qualified interests." Under section 2702, a "qualified interest" is:
(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 than annually and are a fixed percentage of the fair market value of the trust (determined annually), and
(3) any non-contingent remainder interest if all of the other interests in the trust consist of interests described in paragraphs (1) or (2).
26 U.S.C. § 2702(b) (emphasis added).
The lower court found that the spousal interests contained the Cooks' respective GRATs were not "qualified interests" because: (1) the terms of the spousal interests were contingent, not fixed, and not ascertainable at the trusts' inceptions and; (2) they failed to adhere to proper durational requirements.
We review the lower court's grant of summary judgment in favor of the Commissioner de novo. See e.g., Warsco v. Preferred Technical Group, 258 F.3d 557, 563 (7th Cir. 2001).
In determining that the spousal interests contained in the Cooks' GRATs were contingent, the Tax Court relied upon regulations promulgated under section 2702. These regulations state that "[t]he governing instrument [of a GRAT] must fix the term of the annuity or the unitrust interest." Treas. Regs. § 25.2702-3(d)(3), Gift Tax Regs. Specifically, the lower court relied upon language stating that a particular interest was non-contingent because its terms were "fixed and ascertainable at the creation of the interest." Treas. Regs. § 25.2702-3(e), Example 6, Gift Tax Regs. Relying upon Example 6, the court interpreted these regulations to mean that the terms of a remainder interest must be fixed and ascertainable at the inception of the trust. The lower court made this interpretation after examining several examples contained in the regulations promulgated under section 2702.
In their appeal, the Cooks claim that the "fixed and ascertainable" standard applied by the Tax Court is both inappropriate and illogical. According to the Cooks, the "fixed and ascertainable" standard should not be employed because it appears...
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