Walton v. Commissioner

Walton v. Commissioner, 115 T.C. 589 (2000),[1] 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),[2] is valued for gift tax purposes under Section 7520,[3] without regard to the life expectancy of the transferor."[4] 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.[5]

Facts

Audrey J. Walton created two grantor retained annuity trusts (GRATs).[1] Each GRAT had a two-year duration during which Audrey retained the right to receive an annuity.[1] If Audrey died within the two-year period, the annuity payments would be received by her estate.[1] "The balance of the trust property would then be paid to the remainder beneficiaries."[1] 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.[6]

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).[6] Audrey filed a gift-tax return (Form 709) valuing the GRATs as gifts of $0.[7] The IRS "issued a notice of deficiency,"[7] asserting that the taxable value of each gift was $3.8 million.[7] Audrey admitted that a mistake was made, but claimed that each gift was worth only $6k.[7]

Issues

  • How should the value of the gift effected upon the creation of a GRAT be calculated?
  • Did Audrey accurately value her gifts, or did she miscalculate the value of each one by close to $4 million?

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[2] provides a formula for gift valuation: "(Value of property transferred) - (value of any qualified interest retained by the grantor) = value of gift."[8] Then court reasoned that "[i]t is axiomatic that an individual cannot make a gift to himself or to his or her own estate."[8] Consequently, "by default [Audrey] retained all interests in the 2-year term annuities set forth in the trust documents,"[9] 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."[10] 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].[10] 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.[11]

See also

References

  1. ^ a b c d e Walton v. Commissioner, 115 T.C. 589 (T.C. 2000).
  2. ^ a b 26 U.S.C. § 2702
  3. ^ 26 U.S.C. § 7520
  4. ^ 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).
  5. ^ Walton v. Commissioner, 115 T.C. 589, 595 (T.C. 2000) ("It is axiomatic that an individual cannot make a gift to himself or to his or her own estate.").
  6. ^ a b Walton v. Commissioner, 115 T.C. 589, 591 (T.C. 2000).
  7. ^ a b c d Walton v. Commissioner, 115 T.C. 589, 592 (T.C. 2000).
  8. ^ a b Walton v. Commissioner, 115 T.C. 589, 595 (T.C. 2000).
  9. ^ Walton v. Commissioner, 115 T.C. 589, 596 (T.C. 2000).
  10. ^ a b Beth D. Tractenberg & Michael J. Parets,Grantor Retained Annuity Trusts vs. Intentionally Defective Grantor Trusts, Practising Law Institute (2006), at 763.
  11. ^ Beth D. Tractenberg & Michael J. Parets,Grantor Retained Annuity Trusts vs. Intentionally Defective Grantor Trusts, Practising Law Institute (2006), at 766.

Text of Walton v. Commissioner, 115 T.C. 589 (2000) is available from: Google Scholar  Leagle  United States Tax Court