*96 WELLS, CHABOT, SWIFT, RUWE, WHALEN, COLVIN, HALPERN, CHIECHI, LARO, VASQUEZ, GALE, and MARVEL, JJ., agree with this opinion.
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.
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,
Regs., is an invalid interpretation of
*590 OPINION
NIMS, JUDGE: 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
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.
BACKGROUND
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*98 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.
*591 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*99 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
1/5/94 Cash 117,381.52
4/14/94 Cash 153,498.91
*100 7/3/94 Cash 153,498.91
10/3/94 Cash 92,531.89
6/26/95
1/5/95 Cash 92,531.89
4/14/95 Cash 108,861.05
6/26/95
_________ _____________
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*101 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 *592 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.
DISCUSSION
I. GENERAL RULESAs pertinent herein,
INTERESTS IN TRUSTS.
(a) Valuation Rules. --
(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*103 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 *593 7520 [providing for
use of valuation tables prescribed by the Secretary
for annuities, life interests, etc.].
* * * * * * *
(b) Qualified Interest. -- For purposes of this section,
the term "qualified interest" means --
(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
*104 value of the property in the trust (determined annually),
and
(3) any noncontingent remainder interest if all of the
other interests in the trust consist of interests described
in paragraph (1) or (2).
Regulations promulgated under
The above-referenced paragraph (b) of
Paragraph (d) of
II. CONTENTIONS*106 OF THE PARTIES
Respondent contends that in establishing each GRAT, petitioner created three separate and distinct interests: (1) The annuity payable to her during her lifetime, (2) the "contingent" interest of her estate to receive the annuity payments in the event of her death prior to expiration of the 2-year trust term, and (3) the remainder interest granted to her daughter. Of these three, it is respondent's position that only the first interest, but not the second, constitutes a qualified retained interest within the meaning of
Hence, according to respondent, only the value of an annuity payable for the shorter of 2 years or the period ending upon petitioner's death may be subtracted from the fair market value of the stock in calculating the value of the taxable gift made by reason of petitioner's establishment of the GRAT's. Respondent concludes that the present value of the retained qualified interest in each GRAT was*107 $ 96,178,501.88 and the taxable gift $ 3,821,522.12 (consisting of the estate's contingent interest of $ 2,938,000.00 and the remainder interest of $ 883,522.12).
Conversely, petitioner maintains that for valuation purposes under
To the extent that Example 5 would appear to suggest otherwise, petitioner avers that the example is an invalid and unreasonable interpretation of
As pertinent here,
Commencing with the threshold inquiry of what interest or interests petitioner "retained", we conclude that, even if we were to view the GRAT indentures*109 as creating separate interests in favor of petitioner and petitioner's estate, both such interests must be construed as retained by petitioner. It is axiomatic that an individual cannot make a gift to himself or to his or her own estate. An attempt to do so has long been treated at common law as a retention by the individual of the interest purportedly transferred. For example, 1 *596
Where the owner of property, whether real or personal,
transfers it in trust to pay the income to himself for a period
of years and at the expiration of the period to pay the
principal to him, he is the sole beneficiary of the trust. He is
likewise the sole beneficiary where he transfers property in
trust to pay the income to himself for life and on his death to
pay the principal to his estate, or to his personal
representatives. * * *
Hence, because petitioner could not as a matter of law give an interest in property to her estate, she by default retained all interests in the 2-year term annuities set forth in the trust documents. Such interests thus were, as required*110 by the regulations, "held by the same individual both before and after the transfer in trust."
Having therefore decided that petitioner, either individually or through her estate, retained the 2-year annuities in their entirety, we next consider the extent to which these interests are "qualified". In this connection,
The regulatory provision which enumerates the permissible terms for a qualified annuity mandates that the term be "for the life of the term holder, for a specified term of years, or for the shorter (but not the longer) of those periods."
A transfers property to an irrevocable trust, retaining the
right to receive 5 percent of the net fair market value of the
trust property, valued annually, for 10 years. If A dies within
the 10-year term, the unitrust *597 amount is to be paid to A's
estate for the balance of the term. A's interest is a qualified
unitrust interest to the extent of the right to receive the
unitrust payment for 10 years or until A's prior death.
A transfers property to an irrevocable trust, retaining the
right to receive the greater of $ 10,000 or the trust income in
each year for a term of 10 years. Upon expiration of the 10-year
term, the trust is to terminate and the entire trust corpus is
to be paid to A's child, provided that if A dies within the 10-
year term the trust corpus is to be paid to A's estate. A's
annual payment right is a qualified*112 annuity interest to the
extent of the right to receive $ 10,000 per year for 10 years or
until A's prior death, and is valued under section 7520 without
regard to the right to receive any income in excess of $ 10,000
per year. The contingent reversion is valued at zero. The amount
of A's gift is the fair market value of the property transferred
to the trust less the value of the qualified annuity interest.
We agree with respondent that Example 5, if valid, would preclude the valuation methodology for which petitioner argues. To say that Example 5 is not on point because it involves a unitrust rather than an annuity interest would be to rely on a distinction without a substantive difference. Consequently, we are faced squarely with the question of this regulation's validity.
The regulations at issue here are interpretative regulations promulgated under the general authority vested in the Secretary by section 7805(a). Hence, while entitled to considerable weight, they are accorded less deference than would be legislative regulations issued under a specific grant of authority to address a matter raised by the pertinent statute. See
With respect to interpretative regulations, the appropriate standard is whether the provision "'implement[s] the congressional mandate in some reasonable manner.'"
*598 When a court reviews an agency's construction of the
statute which it administers, it is confronted with two
questions. First, always, is the question whether Congress has
directly spoken to the precise question at issue. If the intent
of Congress is clear, that is the end of the matter; for the
court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress. If, however, the
court determines*114 Congress has not directly addressed the precise
question at issue, the court does not simply impose its own
construction on the statute, as would be necessary in the
absence of an administrative interpretation. Rather, if the
statute is silent or ambiguous with respect to the specific
issue, the question for the court is whether the agency's answer
is based on a permissible construction of the statute. [Chevron
A challenged regulation is not considered such a permissible construction or reasonable interpretation unless it harmonizes both with the statutory language and with the statute's origin and purpose. See
We pause to note that before the Chevron standard of review was enunciated by the Supreme Court, the traditional standard was simply "whether the regulation harmonizes with the plain language of the statute, its origin, and*115 its purpose", as prescribed by the Supreme Court in
Because
*116
*599 the committee is concerned about the undervaluation of gifts
valued pursuant to Treasury tables. Based on average rates of
return and life expectancy, those tables are seldom accurate in
a particular case, and therefore, may be the subject of adverse
selection. Because the taxpayer decides what property to give,
when to give it, and often controls the return on the property,
use of Treasury tables undervalues the transferred interests in
the aggregate, more often than not.
Therefore, the committee determines that the valuation
problems inherent in trusts and term interests in property are
best addressed by valuing retained interests at zero unless they
take an easily valued form -- as an annuity or unitrust
interest. By doing so, the bill draws upon present law rules
valuing split interests in property for purposes of the
charitable deduction. [136 Cong. Rec. 30538-30539 (1990).]
The legislative record then goes on to explain the statute's intended
operation:
The bill requires that the value of a remainder interest be
*117 determined by subtracting the value of the income interest from
the value of the entire property. The bill provides that the
value of an interest retained by the transferor or an applicable
family member is zero unless such interest is a "qualified
interest". A qualified interest is (1) a right to receive fixed
amounts payable at least annually, (2) a right to receive
amounts payable at least annually which are a fixed percentage
of the trust's assets (determined annually), or (3) a non-
contingent remainder interest if all the other interests in the
trust are qualified payments. 30 A qualified interest
generally would be valued under present law, e.g., by reference
to section 7520.
Thus, a person who makes a completed transfer of
nonresidential property in trust and retains (1) the right to
the income of the trust for a term of years and (2) a
reversionary right (or a testamentary general power of
appointment) with respect to trust corpus is treated as making a
transfer equal to the value of the whole property. * * * In
*118 contrast, the creation of a trust the only interests in which
are an annuity for a term of years and a noncontingent remainder
interest is valued under present law.
_____________
Id. at 30540 & n.30.
*600 Based on these statements, it is clear that the principal objective of
Respondent, however, characterizes the annuities at issue*119 here as equivalent to the reversionary rights referenced by Congress as nonqualified, rather than to the fixed-term interests approved by the lawmakers. In respondent's view, the congressional concern underlying
Respondent alleges that Congress sought to curb the then- current practice of bifurcating trusts into numerous interests and selectively retaining interests based on mortality, such as reversions. Respondent points out the common estate planning device of creating a trust, with a term short enough that the grantor's risk of dying during the term would be minimal, in which the grantor retained both an income interest and a contingent reversion in the trust corpus to take effect in the event of his or her death during the term. The value of the gift to the remaindermen would then be calculated by subtracting actuarial amounts for each of these interests, despite the negligible chance that the reversion would become operative.
Respondent then goes on to frame the annuities payable to petitioner's estate as no different in substance from such reversions. Respondent's position is that both represent separate rights to receive property*120 contingent upon the grantor's death during the trust term. Because contingent rights, not fixed or ascertainable at the creation of the trust, do not fall within any of the three forms defined as qualified in
Respondent further contends that Congress' reference to a trust consisting only of a fixed-term annuity and a noncontingent remainder was describing a situation different from that of petitioner here. Respondent avers that the scenario contemplated by the lawmakers was one in which the donor transferred the lead annuity to an entity with perpetual life and retained a noncontingent remainder. According to respondent, only in that context is it possible for a donor to create strictly an annuity for a term of years and a noncontingent remainder. Hence, it is only that kind of situation which respondent claims is sanctioned by the mention of an annuity "for a specified term*121 of years" in
In response to this latter argument, we would simply point out that the statute does not contemplate a transfer of the lead annuity to a perpetual-life entity. See
With respect to the text itself, the short answer is that an annuity for a specified term of years is consistent with the
As regards policy, permitting reduction to gift value for reversionary interests was resulting in arbitrary and abusive elimination of value which was intended to, and typically did, pass to the donee. Donors were subtracting the full actuarial value of a reversionary interest in the trust corpus and were not merely treating their retained interests as an annuity for *602 a fixed term of years. Although we acknowledge that, in the case of a reversion, at least the equivalent of the term annuity's value would be payable to the grantor or the grantor's estate in all events, Congress was entitled to require that interests be cast in one of three specified forms to receive the favorable treatment afforded qualified interests. Accordingly, the Commissioner is equally justified in assigning a zero value to reversionary interests outside the scope of the statutory definition and refusing to consider whether such interests can have the practical effect of a different form of interest not chosen by the grantor. See
In contrast, there exists no rationale for refusing to take into account for valuation purposes*123 a retained interest of which both the form and the effect are consistent with the statute. We further observe that respondent's attempts to equate the estate's rights here with other contingent, post-death interests are premised on the bifurcation of the estate's interest from that of petitioner. Yet, given the historical unity between an individual and his or her estate, we believe such separation is unwarranted where the trust is drafted in the form of a specified interest retained by the grantor, with the estate designated only as the alternate payee of that precise interest. This is the result that would obtain if the governing instrument were simply silent as to the disposition of the annuity in the event of the grantor's death during the trust term. Additionally, any other construction would effectively eliminate the qualified term-of-years annuity, a result not contemplated by Congress.
Moreover, we note in this connection that the Commissioner has defined noncontingent for purposes of determining a qualified remainder interest as follows: "an interest is non-contingent only if it is payable to the beneficiary or the beneficiary's estate in all events."
*603 Lastly, we observe that the legislative history indicates
*125 EXAMPLE 4. ANNUITY PAYABLE FOR A TERM OF YEARS. The decedent, or
the decedent's estate, was entitled to receive an annuity of
$ 10,000 a year payable in equal quarterly installments at the
end of each quarter throughout a term certain. At the time of
the decedent's death, the section 7520 rate was 9.8 percent. A
quarterly payment had just been made prior to the decedent's
death and payments were to continue for 5 more years. Under
Table B in section 20.2031-7(d)(6) for the interest rate of 9.8
percent, the factor for the present value of a remainder
interest due after a term of 5 years is .626597. Converting the
factor to an annuity factor, as described in paragraph
(d)(2)(iv)(A) of this section, the factor for the present value
of an annuity for a term of 5 years is 3.8102. The adjustment
factor from Table K in section 20.2031-7(d)(6) at an interest
rate of 9.8 percent for quarterly annuity payments made at the
end of the period is 1.0360. The present value of the annuity
is, therefore, $ 39,473.67 ($ 10,000 x 3.8102 x 1.0360).
[Sec. 20.2031-7T(d)(5), *126 Example (4), Temporary Estate Tax Regs.,
20.2031-7(d)(5), Example (4), Estate Tax Regs.]
It strikes us as incongruous that respondent is willing to recognize the full value of a term annuity, whether payable to a taxpayer or to the taxpayer's estate, when to do so will reduce the amount of a charitable deduction, but refutes this approach when it will decrease the amount of a taxable gift.
Thus, given the above authorities, we construe each of the subject GRAT's as creating a single, noncontingent annuity interest payable for a specified term of years to the undifferentiated unit of petitioner or her estate. We further conclude that Congress meant to allow individuals to retain qualified annuity interests for a specified term of years, and that the proper method for doing so is to make the balance of any payments due after the grantor's death payable to the *604 grantor's estate. We hold that Example 5 is an unreasonable interpretation and an invalid extension of
Having decided*128 the nature and extent of the qualified interests retained by petitioner, we say a few words regarding the calculation of their actuarial value. In compliance with
To reflect the foregoing,
Decision will be entered under Rule 155.
Reviewed by the Court.
WELLS, CHABOT, SWIFT, RUWE, WHALEN, COLVIN, HALPERN, CHIECHI, LARO, VASQUEZ, GALE, and MARVEL, JJ., agree with this opinion.
Footnotes
1.
Sec. 2702 originated in the Senate version of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat. 1388- 400. See H. Conf. Rept. 101-964 (1990),2 C.B. 560">1991-2 C.B. 560 , 1131-1133. The Senate bill was prepared under very limited time constraints. See 136 Cong. Rec. 30485 (1990). In order to avoid delay, the bill was brought to the floor without printing a formal report of the Senate Budget Committee. See id. In lieu thereof, the report language that had been submitted to the Budget Committee, for inclusion in its report, by the Senate Finance Committee relating to the bill's provisions within the Finance Committee's jurisdiction, includingsec. 2702 , was printed in the Congressional Record. See id. The text of the Senate version ofsec. 2702↩ , the subject of the report language printed in the Congressional Record, was identical in all material respects to the statute ultimately enacted. See id. at 30818.30. These interests are similar to those permitted in
charitable split-interest trusts under Section 664. ↩
2. We note that
sec. 25.2702-3(e) , Example (5), Gift Tax Regs. (hereinafter Example 5), was cited and its alleged underlying rationale was alluded to in support of our holding inCook v. Commissioner, 115 T.C. 15">115 T.C. 15 , 115 T.C. No. 2">115 T.C. No. 2 (2000). In that case, neither party challenged the validity of any regulations promulgated undersec. 2702 , and it is not the typical practice of this Court to raise such issues sua sponte. Suffice it to say at this point that we would have reached the same result absent any reliance on Example 5. The spousal interests at issue there were in fact contingent in a sense violative of the policy behindsec. 2702↩ . They would never take effect if the spouse were to predecease the grantor, and any value attributable thereto would pass to the donee. The statute does not sanction treatment of such interests as qualified.