Estate of Focardi v. Commissioner
| Decision Date | 27 March 2006 |
| Docket Number | Dkt. No. 3130-03.,Dkt. No. 1892-03. |
| Citation | 91 T.C.M. 936 |
| Parties | Estate of Claude C. Focardi, Deceased, Nina M. Focardi, Personal Representative, Petitioner v. Commissioner Nina M. Focardi, Petitioner v. Commissioner. |
| Court | U.S. Tax Court |
Edward F. Koren and Douglas A. Wright, for petitioners.
Stephen R. Takeuchi, for respondent.
In docket No. 1892-03, Estate of Claude C. Focardi, Deceased (decedent), Nina M. Focardi, Personal Representative, petitioned the Court to redetermine respondent' determination of deficiencies of $903,784 and $3,123 in the estate' Federal gift tax for 1996 and 1997, respectively.In docket No. 3130-03, Nina M. Focardi(Focardi) petitioned the Court to redetermine respondent' determination of deficiencies of $824,019 and $3,123 in Focardi' Federal gift tax for 1996 and 1997, respectively.The cases resulting from these petitions were consolidated for purposes of trial, briefing, and opinion.
Following the parties' stipulation of the applicable value of the stock discussed herein1 and the submission of these cases under Rule 122, we now decide whether the respective revocable spousal interests contained in four grantor retained annuity trusts (GRATs) are qualified interests under section 2702(b).2We hold they are not.We also decide whether the GRATs created annuities that are valued on the basis of their stated term of years (as opposed to annuities that are valued on the basis of the actuarial life of the particular grantor) in that the documents establishing the GRATs state that the spousal interests are to be disregarded if they are not qualified interests, and such disregard makes each annuity one for its set term of years.We hold that the GRATs do not create annuities for their stated term of years.
All facts were set forth in stipulations or contained in the exhibits submitted therewith.We find the facts accordingly.Focardi is decedent' surviving spouse and the personal representative of his estate.When the petition was filed in docket no. 3130-03, Nina M. Focardi resided in St. Petersburg, Florida.When the petition was filed in docket No. 1892-03, the "legal address" of decedent' estate was in St. Petersburg, Florida.
On October 25, 1996, decedent transferred 817,500 shares of stock of Great Bay Distributors, Inc.(Great Bay), into a trust (decedent 2-year GRAT) named "Claude C. Focardi Two Year Grantor Retained Annuity Trust".On the same day, decedent transferred 817,500 shares of Great Bay stock into a trust (decedent 4-year GRAT) named "Claude C. Focardi Four Year Grantor Retained Annuity Trust".The terms of the instruments establishing the decedent 2-year GRAT and the decedent 4-year GRAT (collectively, decedent GRATs) were identical in all material regards except for the annuity term and the percentage used to calculate the amount of the first annuity payment.
On April 14, 1997 and 1998, decedent filed a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for 1996 and 1997, respectively, reporting that his October 25, 1996, transfer was a gift for Federal gift tax purposes.On the 1996 return, decedent calculated the value of that gift by reducing the value of his transferred shares by the actuarially determined value of a 2-life annuity under section 7520; i.e., the present value of the annuity payable until the earlier of (1) the end of the applicable 2- or 4-year term or (2) the deaths of both decedent and Focardi.On the 1997 return, decedent reported gifts for prior periods inclusive of the taxable gifts reported on his Form 709 for 1996.
Respondent determined that decedent gift tax for 1996 must be calculated by reducing the value of decedent' transferred shares by the value of a single-life annuity; i.e., the present value of the annuity payable until the earlier of (1) the end of the applicable 2- or 4-year period or (2) the death of decedent.Respondent also determined a gift tax deficiency for 1997 due to the increase in prior year gifts as a result of his determination for 1996.
On October 25, 1996, Focardi transferred 817,500 shares of Great Bay stock into a trust (Focardi 2-year GRAT) named "Nina M. Focardi Two Year GRAT".On the same day, Focardi transferred 817,500 shares of Great Bay stock into a trust (Focardi 4-year GRAT) named "Nina M. Focardi Four Year GRAT".The terms of the instruments establishing the Focardi 2-year GRAT and the Focardi 4-year GRAT (collectively, Focardi GRATs) were identical in all material regards except for the annuity term and the percentage used to calculate the amount of the first annuity payment.
On April 14, 1997 and 1998, Focardi filed a Form 709 for 1996 and 1997, respectively, reporting that her October 25, 1996, transfer was a gift for Federal gift tax purposes.On the 1996 return, Focardi calculated the value of that gift by reducing the value of her transferred shares by the actuarially determined value of a 2-life annuity under section 7520; i.e., the present value of the annuity payable until the earlier of (1) the end of the applicable 2- or 4-year term or (2) the deaths of both decedent and Focardi.On the 1997 return, Focardi reported gifts from prior periods inclusive of the taxable gifts reported on her Form 709 for 1996.
Respondent determined that Focardi' gift tax for 1996 must be calculated by reducing the value of Focardi' transferred shares by the value of a single-life annuity; i.e., the present value of the annuity payable until the earlier of (1) the end of the applicable 2- or 4-year term or (2) the death of Focardi.Respondent also determined a gift tax deficiency for 1997 due to the increase in prior year gifts as a result of his determination for 1996.
Each of the instruments establishing the decedent GRATs states in relevant part as follows:
A.Annuity Term.During the period beginning on the date of this agreement and ending on the date ["2" in the case of the decedent 2-year GRAT and "4" in the case of the decedent 4-year GRAT] years thereafter (the "Annuity Term"), Trustee shall pay to me from the net income, or (to the extent that net income is insufficient) from the principal, of the trust an annuity (the "Annuity") in an amount equal to ["51.2535" in the case of the decedent 2-year GRAT and "22.9876" in the case of the decedent 4-year GRAT] percent of the initial fair market value of the assets contributed to the trust as finally determined for federal tax purposes.The annuity will increase by twenty percent (20%) each year during the Annuity Term, * * * If I die before the expiration of the Annuity Term, the Trustee shall pay to my estate any part of the Annuity that is accrued and undistributed at my death, based on a daily proration through the date of my death.* * * The remaining trust assets are to be administered and distributed as provided elsewhere in this agreement.* * *
B.Termination of Trust.Except as otherwise provided in this agreement, at the end of the Annuity Term, Trustee shall distribute the remaining net income, if any, and principal of the trust not required to be paid out in satisfaction of the final Annuity payment, as provided in Article Six below.
C.Annual Payment, Additional Contributions, Etc.During the Annuity Term and until the final Annuity payment has been made, the following provisions will apply with respect to the trust estate:
1.Trustee shall distribute the Annuity in at least one annual payment at the end of each taxable year, except for the taxable year in which the Annuity Term ends, when that payment will be made by the end of the Annuity Term.If Trustee deems it to be desirable, Trustee may pay less than the full Annuity during any taxable year, but Trustee must pay any unpaid amount no later than the due date for filing the trust' income tax return for that taxable year, without regard to extensions.In addition, Trustee may, in its sole and absolute discretion, distribute all or a portion of the Annuity in monthly, quarterly, semi-annual installments or at any other time the Trustee deems appropriate, subject to the time limitations of the prior sentence.
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D.Qualified Annuity Interest.I intend that my retained annuity interest in this trust (and the annuity interest of my wife[1] if she survives me and receives the Annuity under paragraph E below) be a "qualified annuity interest" as defined in Code section 2702(b)(1)andTreasury Regulation Section 25.2702-3(b) and (d).All provisions of this agreement are to be interpreted accordingly and any provision of this agreement inconsistent with that intention is to be of no effect.In furtherance of this intention, I specifically empower Trustee to amend this trust during the Annuity Term for the sole purpose of complying with the requirements of the foregoing Code section and Treasury Regulations, and any such amendment will apply retroactively to the inception of the trust.No power, right, or duty under this agreement will be effective or exercisable to the extent that it would cause my retained annuity interest (or my wife' interest, if any) hereunder to fail to qualify as a "qualified annuity interest" under Code section 2702(b)(1)andTreasury Regulation Section 25.2702-3(b) and (d).
E.Revocable Contingent Spousal Annuity Trust.If, and only if, I die before the Annuity Term ends, my wife survives me, and I have not exercised my right to revoke all or a portion of my wife' interest under this agreement, then...
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