Walton v. Commissioner

Walton v. Commissioner, 115 T.C. 589 (2000), a decision of the United States Tax Court in favor of taxpayer Audrey J. Walton, "ruled that a grantor's right to receive a fixed amount for a term of years, if that right is a qualified interest within the meaning of Section 2702(b), is valued for gift tax purposes under Section 7520, without regard to the life expectancy of the transferor."[1] More simply, a grantor's estate's contingent interest in a grantor-created annuity upon the grantor's death does not constitute a gift to anyone; but rather, is a retained interest of the grantor.[2]

Facts

Audrey J. Walton created two grantor retained annuity trusts (GRATs).[3] Each GRAT had a two-year duration during which Audrey retained the right to receive an annuity.[3] If Audrey died within the two-year period, the annuity payments would be received by her estate.[3] "The balance of the trust property would then be paid to the remainder beneficiaries."[3] Audrey's daughter, Ann Walton Kroenke was the beneficiary of one GRAT, and her other daughter, Nancy Walton Laurie, was the beneficiary of the other.[4]

The GRATs did not return the full annuity payments expected by Audrey (because Wal-Mart stock had underperformed expectations), so no property remained for the daughters (the remainder beneficiaries).[4] Audrey filed a gift-tax return (Form 709) valuing the GRATs as gifts of $0.[5] The IRS "issued a notice of deficiency,"[5] asserting that the taxable value of each gift was $3.8 million.[5] Audrey admitted that a mistake was made, but claimed that each gift was worth only $6k.[5]

Issues

Holding

In calculating gift tax for the creation of a GRAT, the grantor's estate's contingent interest in the annuity payments upon the grantor's death should be considered a retained interest of the grantor, not as a gift to someone. The court sided with Audrey, but declined to make specific gift-tax calculations because timing disagreements remained that could best be dealt with through Rule 155 proceedings.

Reasoning

First the court noted that IRC § 2702 provides a formula for gift valuation: "(Value of property transferred) - (value of any qualified interest retained by the grantor) = value of gift."[6] Then court reasoned that "[i]t is axiomatic that an individual cannot make a gift to himself or to his or her own estate."[6] Consequently, "by default [Audrey] retained all interests in the 2-year term annuities set forth in the trust documents,"[7] even though the annuity payments would belong to her estate in the event she died within the two-year period.

Impact

This case has led to the proliferation of "Walton GRATs," which tax experts Beth D. Tractenberg & Michael J. Parets describe as GRATs that last "for a term of years, with the annuity payable to the grantor's estate if the grantor dies during the annuity term."[8] This allows the grantor to retain a qualified interest that is equal to the property transferred, resulting in a gift valuation of zero to the remainder-interest party[ies].[8] The hope is that there will be an upswing in the market, allowing the remainder-interest party[ies] to take home excess returns (above the annuity returns to the grantor) without the imposition of a gift tax.[9]

See also

References

  1. ↑ Carlyn S. McCaffrey, Lloyd Leva Plaine, & Pam H. Schneider, The Aftermath of Walton: The Rehabilitation of the Fixed-term, Zeroed-out GRAT, Journal of Taxation (Dec. 2001) (internal footnote omitted).
  2. ↑ Walton v. Comm'r, 115 T.C. 589, 595 (2000) ("It is axiomatic that an individual cannot make a gift to himself or to his or her own estate.").
  3. 1 2 3 4 Walton v. Comm'r, 115 T.C. 589 (2000)
  4. 1 2 Walton v. Comm'r, 115 T.C. 591 (2000)
  5. 1 2 3 4 Walton v. Comm'r, 115 T.C. 592 (2000)
  6. 1 2 Walton v. Comm'r, 115 T.C. 595 (2000)
  7. ↑ Walton v. Comm'r, 115 T.C. 596 (2000)
  8. 1 2 Beth D. Tractenberg & Michael J. Parets,Grantor Retained Annuity Trusts vs. Intentionally Defective Grantor Trusts, Practising Law Institute (2006), at 763.
  9. ↑ Beth D. Tractenberg & Michael J. Parets,Grantor Retained Annuity Trusts vs. Intentionally Defective Grantor Trusts, Practising Law Institute (2006), at 766.

External links

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