Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-18-16053/USCOURTS-ca9-18-16053-0/pdf.json

Parties Involved:
Judith Badgley
Appellant
United States of America
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JUDITH BADGLEY,

Plaintiff-Appellant,

v.

UNITED STATES OF AMERICA,

Defendant-Appellee.

No. 18-16053

D.C. No.

4:17-cv-00877-HSG

OPINION

Appeal from the United States District Court

for the Northern District of California

Haywood S. Gilliam, Jr., District Judge, Presiding

Argued and Submitted December 2, 2019

San Francisco, California

Filed April 28, 2020

Before: Carlos F. Lucero,* Consuelo M. Callahan,

and Bridget S. Bade, Circuit Judges.

Opinion by Judge Lucero

* The Honorable Carlos F. Lucero, United States Circuit Judge for 

the U.S. Court of Appeals for the Tenth Circuit, sitting by designation.

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2 BADGLEY V. UNITED STATES

SUMMARY**

Tax

The panel affirmed the district court’s summary 

judgment in favor of the Internal Revenue Service, in an 

action challenging the inclusion of a grantor-retained 

annuity trust in a decedent’s gross estate for purposes of the 

estate tax.

At issue in this appeal was whether, under 26 U.S.C. 

§ 2036(a)(1), a grantor’s interest in a grantor-retained 

annuity trust (GRAT) is a sufficient “string” that requires the 

property interest to be included in the gross estate.

After Donald Yoder’s death, his wife, decedent Patricia 

Yoder, succeeded to his fifty-percent partnership interest in 

a family-run company. Decedent created a GRAT to transfer 

that partnership interest to her daughters, while decedent 

retained a right to an annuity paid from the GRAT for 

15 years. Decedent died before the end of the 15-year 

annuity period. The estate tax return reported a total gross 

estate that included the GRAT’s assets. The statutory 

executor of the estate, daughter Judith Badgley, filed a tax 

refund action in district court, asserting an overpayment 

resulting from the inclusion of the entire date-of-death value 

of the GRAT in the gross estate, and arguing that only the 

net present value of the unpaid annuity payments should 

have been included. The district court held that, because the 

decedent’s retained annuity interest was both a retained right 

to income from and continued enjoyment of the property, the 

** This summary constitutes no part of the opinion of the court. It 

has been prepared by court staff for the convenience of the reader.

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BADGLEY V. UNITED STATES 3

entire date-of-death value of the GRAT should be included 

in the gross estate.

The panel first rejected appellant’s argument that, 

because 26 U.S.C. § 2036(a)(1) does not expressly mention 

annuities, the full value of decedent’s GRAT cannot be 

included in the gross estate. The panel explained that in 

§ 2036(a)(1), Congress set forth three “strings” tying a 

grantor to property, and instructed that we look to the 

result—possession, enjoyment, or a right to income 

therefrom—rather than the form those strings take.

The panel next addressed whether the annuity flowing 

from a GRAT falls within the class intended to be treated as 

substitutes for wills by § 2036(a)(1). The panel held that it 

does; to avoid the force of § 2036(a), a grantor must 

completely divest herself of possession, enjoyment, and 

income from the property, and the beneficiaries’ interest 

must take effect prior to the grantor’s death. The panel 

concluded that when a grantor derives substantial present 

economic benefit from property, she retains the enjoyment 

of that property for purposes of § 2036(a)(1). Here, because 

decedent’s annuity was a “substantial present economic 

benefit,” it stemmed from a property interest placed in the 

GRAT, it reserved to decedent the enjoyment of that interest 

during her lifetime, and was not transferred to the 

beneficiaries before decedent’s death, the annuity was 

required to be included in the GRAT’s date-of-death value 

in the estate.

Finally, the panel addressed appellant’s challenges to 

26 C.F.R. § 20.2036-1(c)(2), which includes the formula the 

IRS uses to calculate the portion of the property includable 

under § 2036(a). The panel concluded that, even if this 

challenge were not waived by the cursory manner in which 

it was raised on appeal, it would not apply in this case.

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4 BADGLEY V. UNITED STATES

COUNSEL

Paul Frederic Marx (argued), Rutan & Tucker LLP, Costa 

Mesa, California, for Plaintiff-Appellant.

Nathaniel S. Pollock (argued) and Teresa E. McLaughlin,

Attorneys; Richard E. Zuckerman, Principal Deputy 

Assistant General; Tax Division, United States Department 

of Justice, Washington, D.C.; for Defendant-Appellee.

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BADGLEY V. UNITED STATES 5

OPINION

LUCERO, Circuit Judge:

Thanks to Benjamin Franklin, death and taxes are 

inextricably linked in most Americans’ minds as the only 

two things in this world that are certain. Thanks to the estate 

tax, certainty is not the only tie. For the duration of its 

existence, taxpayers have attempted to avoid the estate tax 

by utilizing a variety of legal mechanisms to transfer 

property during their lifetimes while holding onto the fruits 

of that property. In response to taxpayers’ impulse to retain 

a legal interest in the property despite the transfer, Congress 

enacted what is now 26 U.S.C. § 2036(a).

At the most colloquial level, § 2036(a) stands for the 

proposition that if the taxpayer does not let property go, 

neither will the taxman. It delineates three criteria—

possession, enjoyment, and a right to income—for 

determining when the connection between a grantor and 

property is sufficient to require the property’s inclusion in 

the grantor’s estate for purposes of the federal estate tax. 

§ 2036(a)(1). Unless a taxpayer “absolutely, unequivocally, 

irrevocably, and without possible reservations, parts with” 

her possession of, enjoyment of, or a right to income from 

the property—leaving no “string” tying her to the property—

property transferred inter vivos is included in a decedent’s 

gross estate. Comm’r v. Church’s Estate, 335 U.S. 632, 645 

(1949); see also Estate of McNichol v. Comm’r, 265 F.2d 

667, 670–73 (3d Cir. 1959).

Judith Badgley challenges the application of § 2036(a) 

by the Internal Revenue Service (“IRS”) to her mother’s 

grantor-retained annuity trust (“GRAT”). The district court 

granted summary judgment in favor of the IRS. To resolve 

this appeal, we must determine whether under § 2036(a)(1), 

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6 BADGLEY V. UNITED STATES

a grantor’s interest in a GRAT is a sufficient “string” that 

requires the property interest to be included in a gross estate. 

Exercising jurisdiction under 28 U.S.C. § 1291, we affirm, 

holding that because the grantor retains enjoyment of a 

GRAT, it is properly included in the gross estate.

I

A GRAT allows a grantor to transfer property to a 

beneficiary while retaining the right to an annuity from the 

transferred property. John F. Bergner, 44 U. Miami L. Ctr. 

on Est. Plan. ¶ 401.1 (2019). The grantor creates an 

irrevocable grantor trust for a fixed term of years, transfers 

assets into it, and designates trustees and beneficiaries. She 

receives an annuity for a specified term of years. Id. At the 

end of the term, the GRAT dissolves and the property is 

transferred to the beneficiaries. Howard Zaritsky, Tax 

Planning for Family Wealth Transfers During Life: Analysis 

with Forms, ¶ 12.06(1) (5th ed. 2013 & Supp. 2020).

At the time of transfer into a GRAT, property is subject 

to a gift tax on the present value of the GRAT’s remainder 

interest, valued according to the methodology in 26 U.S.C. 

§ 7520. Id. A reduction in the transferred property’s gift 

value for tax purposes is permitted if the recipient is a family 

member and the transferor or a family member retains a 

“qualified interest” in the property, which includes “any 

interest which consists of the right to receive fixed amounts 

payable not less frequently than annually.” 26 U.S.C. 

§ 2702. For a GRAT, this means that the value of the 

transferred property subject to the gift tax is lessened by the 

amount of the retained annuity. Depending on the structure 

of the GRAT, it is possible to eliminate the applicable gift 

tax entirely by modifying the trust term and annuity amount 

to zero out any remainder. Zaritsky, supra, ¶ 12.06(3)(c)(i). 

This permits assets to be transferred to beneficiaries at the 

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BADGLEY V. UNITED STATES 7

termination of a GRAT’s term without the imposition of a 

gift tax. Id. Moreover, if the term of a GRAT ends before 

the grantor dies, the property is not included in the grantor’s 

gross estate for purposes of the estate tax. See § 2036(a).

In this case, Patricia Yoder (“Decedent”) was married to 

Donald Yoder, a fifty-percent partner in Y&Y Company, a 

family-run general partnership and property development 

company in southern California. After Mr. Yoder’s death in 

1990, Decedent succeeded to his fifty-percent partnership 

interest. In February 1998, Decedent created a GRAT to 

transfer the partnership interest in Y&Y, valued at 

$2,418,075, to her daughters, Judith Badgley and Pamela 

Yoder. The interest was the only property placed in the 

GRAT. Decedent retained a right to an annuity of $302,259 

paid from the GRAT for fifteen years, equivalent to 

12.5 percent of the date-of-gift value of the partnership 

interest. In April 1999, Decedent filed a gift tax return 

reporting the gift to her daughters of the GRAT’s remainder 

interest and paid a gift tax of $180,606.

Decedent was both the grantor and trustee of the GRAT, 

with her daughters serving as special trustees. The GRAT 

instrument provided that the special trustees could make 

additional distributions to Decedent if requested. At the end 

of the fifteen-year annuity term or upon her death, whichever 

occurred earlier, the GRAT’s corpus would pass to her 

daughters. Decedent explained to them that if she did not 

outlive the fifteen-year annuity term, the partnership interest 

“would probably go back into her estate” for tax purposes.

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8 BADGLEY V. UNITED STATES

From 2002 to 2012, Y&Y reported income ranging from 

$994,642 to $1,325,478.1 Half of Y&Y’s income was 

distributed to the GRAT. Y&Y made cash distributions to 

the GRAT ranging from $435,400 to $730,000. Although 

neither party identified the source of the annuity payments 

in a given year, these cash distributions were sufficient to 

pay the annuity without decreasing the value of the 

partnership interest or requiring the sale of any of Y&Y’s 

holdings.

Decedent died on November 2, 2012, shortly before the 

fifteen-year annuity period expired. The estate tax return 

reported a total gross estate of $36,829,057. This included 

the GRAT’s assets, which consisted of the Y&Y partnership 

interest (valued at $6,409,000); $1,384,558 held in a bank 

account; and $3,193,471 held in an investment account. The 

estate paid $11,187,475 in taxes.

In 2016, Badgley, in her capacity as statutory executor 

of Decedent’s estate, sought a refund of an overpayment of 

Decedent’s estate tax in the amount of $3,810,004. She 

asserted that the overpayment resulted from the inclusion of 

the entire date-of-death value of the GRAT in Decedent’s 

gross estate and argued that only the net present value of the 

unpaid annuity payments should have been included.

The IRS did not act on Badgley’s refund claim within six 

months, and Badgley filed a refund action in district court, 

as authorized by 26 U.S.C. § 6532(a)(1). Both parties filed 

motions for summary judgment. The district court denied 

Badgley’s motion and granted the government’s crossmotion. It held that Decedent’s retained annuity interest was 

1 The parties have not produced evidence of Y&Y’s income before 

2002.

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BADGLEY V. UNITED STATES 9

both a retained right to income from and continued 

enjoyment of the property. Both “strings” tied the GRAT to 

Decedent, requiring inclusion of the entire date-of-death 

value of the GRAT in her gross estate.2 The court also 

concluded that 26 C.F.R. § 20.2036-1(c)(2), the Treasury 

regulation construing § 2036(a)(1) to apply to GRATs, was 

valid. Badgley timely appealed.

II

We review a district court’s order granting or denying 

summary judgment de novo, examining all evidence in the 

light most favorable to the non-moving party. Oswalt v. 

Resolute Indus., Inc., 642 F.3d 856, 859 (9th Cir. 2011). The 

court “does not weigh the evidence or determine the truth of 

the matter, but only determines whether there is a genuine 

issue for trial,” Balint v. Carson City, 180 F.3d 1047, 1054 

(9th Cir. 1999) (en banc), and whether the district court 

“applied the relevant substantive law,” Tzung v. State Farm 

Fire & Cas. Co., 873 F.2d 1338, 1339–40 (9th Cir. 1989).

Section 2036(a) provides:

The value of the gross estate shall include the 

value of all property to the extent of any 

interest therein of which the decedent has at 

any time made a transfer (except in case of a 

bona fide sale for an adequate and full 

consideration in money or money’s worth), 

by trust or otherwise, under which he has 

retained for his life or for any period not 

2 26 C.F.R. § 20.2036-1(c)(2) caps this amount at the total value of 

the GRAT’s corpus on the date of death rather than the value otherwise 

calculated under the formula provided in the section.

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10 BADGLEY V. UNITED STATES

ascertainable without reference to his death 

or for any period which does not in fact end 

before his death—

(1) the possession or enjoyment of, or the 

right to the income from, the 

property . . . .

Id. “The general purpose of the statute [i]s to include in a 

decedent’s gross estate transfers that are essentially 

testamentary—i.e., transfers which leave the transferor a 

significant interest in or control over the property transferred 

during his lifetime.” United States v. Estate of Grace, 

395 U.S. 316, 320 (1969).3 To this end, a decedent’s gross 

estate includes the value of property transferred while the 

decedent was alive if the decedent retained possession of, 

enjoyment of, or the right to income from the property. 

These three factors—possession, enjoyment, and income—

are referred to as “strings” tying the transferor to the property 

despite the transfer. See, e.g., United States v. Brown, 

134 F.2d 372, 373 (9th Cir. 1943).

A

At the outset, we address Badgley’s argument that 

because § 2036(a) does not include the term “annuity,” it 

unambiguously does not apply to annuities. In § 2036(a)(1), 

Congress set forth the three “strings” tying a grantor to 

property, but did not specify which property interests 

qualify. One could imagine a version of the statute that 

3 Estate of Grace addressed a prior version of § 2036(a), § 811(c) of 

the Internal Revenue Code of 1939. Section 2036(a) has been amended 

since its original passage in 1916, but Badgley does not argue that these

amendments are substantive.

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BADGLEY V. UNITED STATES 11

includes property in the grantor’s gross estate if the decedent 

“retained an annuity drawn from the property” or “lived on 

the property for more than half a year.” But Congress did 

not include such specifications. Instead, it instructed us to 

look to the result—possession, enjoyment, or a right to 

income therefrom—rather than the form those strings take. 

See Estate of McNichol, 265 F.2d at 673 (“[T]he criterion for 

determining whether property transferred inter vivos is 

subject to a death tax is the effect of the transfer . . . .”).

The fact that § 2036(a)(1) does not include the term 

“annuity” does not exclude annuities from its ambit. This is 

consistent with the decisions of the Supreme Court and our 

sibling circuits, which have concluded that interests such as 

reversionary interests, the power of appointment, and rent—

also not expressly listed in § 2036(a)—nevertheless fall into 

one of the three categories. See, e.g., Estate of Spiegel v. 

Comm’r, 335 U.S. 701, 705 (1949) (potential reversionary 

interest in property is possession or enjoyment); Fid.-Phila. 

Tr. Co. v. Rothensies, 324 U.S. 108, 111 (1945) 

(beneficiaries’ estates “took effect in enjoyment” only at 

transferor’s death because she held power of appointment); 

Estate of McNichol, 265 F.2d at 671 (rent from property is 

enjoyment).

As far back as the 1940s, the Supreme Court rejected the 

proposition that taxpayers could “escape the force of this 

section by hiding behind the legal niceties contained in 

devices and forms created by conveyances.” Church’s 

Estate, 335 U.S. at 646 (quotation omitted); see also Fid.-

Phila., 324 U.S. at 111 (“The application of this tax does not 

depend upon elusive and subtle casuistries.” (quotation 

omitted)). We reject Badgley’s argument that because 

§ 2036(a)(1) does not expressly mention annuities, the full 

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12 BADGLEY V. UNITED STATES

value of Decedent’s GRAT cannot be included in the gross 

estate.

B

We turn to the main issue: whether the annuity flowing 

from a GRAT “fall[s] . . . within the class intended to be 

treated as substitutes for wills” by § 2036(a)(1). Church’s 

Estate, 335 U.S. at 646. We need only look to Supreme 

Court precedent construing the statute to conclude that it 

does. To avoid the force of § 2036(a), a grantor must 

“absolutely, unequivocally, and without possible 

reservations, part[] with all of his title and all of his 

possession and all of his enjoyment of the transferred 

property . . . [and the transfer] must be unaffected by whether 

the grantor lives or dies.” Id. at 645–46. Thus, § 2036(a)(1) 

focuses on both the grantor, who must completely divest 

herself of possession, enjoyment, and income, and the 

beneficiaries, whose interest must “take effect” prior to the 

grantor’s death. See id. at 637.

From the passage of the first federal estate tax in 1916 

until the Supreme Court decided May v. Heiner, 281 U.S. 

238 (1930), the Treasury Department treated trust transfers 

that distributed the corpus at the grantor’s death but reserved 

a life income to the grantor as falling within the sweep of 

§ 2036(a)’s precursors. See Church’s Estate, 335 U.S. 

at 639. In May, however, the Court “upset[] the century-old 

historic meaning and the long standing Treasury 

interpretation of the ‘possession and enjoyment’ clause” by 

holding that “because legal title had passed from the settlor 

irrevocably when the trust was executed,” the retention of 

income did not constitute an interest in the transferred 

property. Id. at 639–41. Congress quickly corrected the 

Court, amending the statute to clarify that retention of any 

possession, enjoyment, or income from the transferred 

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BADGLEY V. UNITED STATES 13

property rendered the property includable. See id. at 639–40 

(discussing congressional action following May, 281 U.S. 

at 243); H.R.J. Res. 529, 71st Cong. (1931) (enacted).

The Court deviated from May’s holding when it 

addressed a similar question in Helvering v. Hallock, 

309 U.S. 106 (1940). Hallock held that transfers of property 

with retained reversionary interests made the transfers 

contingent upon the decedent’s death and thus were “too 

much akin to testamentary dispositions not to be subjected 

to the same” estate tax. Id. at 112.

In Church’s Estate, the Court explicitly overruled May, 

holding that retention of the right to income for life from 

transferred stocks constituted possession or enjoyment of the 

stocks. 335 U.S. at 637, 641, 644–45. Looking to the 

historical meaning of “possession or enjoyment,” the Court 

noted its “return[] to the interpretation of the ‘possession or 

enjoyment’ section under which an estate tax cannot be 

avoided by any trust transfer except by a bona fide transfer 

in which the settlor, absolutely, unequivocally, irrevocably, 

and without possible reservations, parts with all of his title 

and all of his possession and all of his enjoyment of the 

transferred property.”4 Id. at 637–39, 645.

Further, “[i]t is well settled that the terms ‘enjoy’ and 

‘enjoyment,’ as used in various estate tax statutes, are not 

4 Following Church’s Estate, Congress passed the Technical 

Changes Act, which proscribed retroactive application of Church’s 

Estate to any transfers made prior to March 4, 1931 by a decedent who 

died prior to January 1, 1950, thereby exempting transfers made in 

reliance on May. See Comm’r v. Estate of Canfield, 306 F.2d 1, 4–6 (2d 

Cir. 1962). In 1953, it extended the exemption to all transfers completed 

before March 4, 1931, regardless of the decedent’s date of death. See id.

at 5.

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14 BADGLEY V. UNITED STATES

terms of art, but connote substantial present economic 

benefit rather than technical vesting of title or estates.” 

United States v. Byrum, 408 U.S. 125, 145 (1972) 

(quotations omitted); see also Comm’r v. Estate of Holmes, 

326 U.S. 480, 486 (1945) (same). In Estate of McNichol, the 

Third Circuit held that rent from income-producing real 

estate constituted enjoyment. 265 F.2d at 671. McNichol 

had transferred real estate to his children, with an oral 

agreement to retain the rent from the property. Id. at 669. 

Concluding that “[h]e who receives the rent in fact enjoys 

the property,” the court held that “[t]he conclusion is 

irresistible that the petitioners’ decedent ‘enjoyed’ the 

properties until he died” because “one of the most valuable 

incidents of income-producing real estate is the rent which it 

yields.” Id. at 671, 673; see also Estate of Stewart v. 

Comm’r, 617 F.3d 148, 154–55 (2d Cir. 2010) (holding that 

when determining who retains “substantial present 

economic benefit,” “[a]ll we have to do is follow the 

money”); cf. Greene v. United States, 237 F.2d 848, 853 (7th 

Cir. 1956) (holding beneficiaries who received income from 

securities and then paid it to decedent did not have beneficial 

possession or enjoyment because they “were neither able to 

retain nor to enjoy the income from the securities”).

In Commissioner v. Clise, 122 F.2d 998 (9th Cir. 1941), 

involving annuity contracts outside of the trust context, we 

concluded that when a grantor retained the “economic 

benefit” of annuity payments, she retained enjoyment of the 

property. Id. at 999, 1003–04. Because the annuities went 

to Clise for her lifetime and to a designated second annuitant 

upon her death, “[t]he practical effect of the annuity 

contracts was to reserve to [her] the enjoyment of the 

property transferred and to postpone the fruition of the 

economic benefits thereof to the second annuitants until her 

death.” Id. at 1004; see also Forster v. Sauber, 249 F.2d 

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BADGLEY V. UNITED STATES 15

379, 380 (7th Cir. 1957) (holding retained annuity includable 

in gross estate because “grantor has retained the economic 

enjoyment of the contracts for life”); Mearkle’s Estate v. 

Comm’r, 129 F.2d 386, 388 (3d Cir. 1942) (holding annuity 

contracts includable because their practical effect was “to 

reserve to the annuitant the enjoyment of the property 

transferred and to postpone the fruition of the economic 

benefits to the second annuitant until after the death of the 

first”).

We conclude that when a grantor derives substantial 

present economic benefit from property, she retains the 

enjoyment of the property for purposes of § 2036(a)(1).5 As 

in Clise, Decedent’s annuity was a “substantial present 

economic benefit,” requiring inclusion of the GRAT’s dateof-death value in her estate. She received $302,259 per year 

for fifteen years through the annuity. Moreover, because the 

partnership was the only property placed in the GRAT, the 

annuity stemmed from that property interest. As “something 

of value enjoyed by her,” Bayliss v. United States, 326 F.2d 

458, 461 (4th Cir. 1964), the annuity reserved to Decedent 

the enjoyment of the partnership interest during her lifetime. 

And because Decedent died before the termination of the 

GRAT, the property was not transferred to its beneficiaries 

before her death—and remained tied to her by the string she 

created.

5 We reject Badgley’s argument that “economic benefit” means

“income.” Certainly, income is one type of economic benefit, see, e.g., 

Church’s Estate, 335 U.S. at 644–45, but it is not the sole form that 

economic benefit may take.

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16 BADGLEY V. UNITED STATES

C

Badgley argues that the Supreme Court has disavowed 

the “substance-over-form” approach described above in 

favor of a plain-language method of statutory interpretation. 

She cites Byrum as a more recent Supreme Court decision 

addressing § 2036(a). But Byrum itself states that enjoyment 

connotes substantial present economic benefit. 408 U.S. 

at 145.

We agree with Badgley that statutory interpretation 

begins with the plain meaning of the statute at the time of its 

drafting. See Wis. Cent. Ltd. v. United States, 138 S. Ct. 

2067, 2070 (2018). Yet “[w]hile every statute’s meaning is 

fixed at the time of enactment, new applications may arise in 

light of changes in the world,” and courts must determine 

whether new applications fit within the statute’s meaning. 

Id. at 2074 (alterations omitted). That precisely is what we 

do here: we begin with the text of § 2036(a)(1) and 

determine whether, within the statute’s meaning, a grantor’s 

retained interest in a GRAT constitutes enjoyment.

The Court’s “substance over form” approach is entirely 

consistent with this method of statutory interpretation. 

Section 2036(a)(1) provides that property is included in a 

gross estate if the decedent retained possession or enjoyment 

of the property or the right to income from it. In applying 

the statute, we focus on the substance of the retained interest. 

Labels are not dispositive. See Church’s Estate, 335 U.S. 

at 644 (“However we label the device if it is but a means by 

which the gift is rendered incomplete until the donor’s death 

the possession or enjoyment provision applies.” (quotation 

and alteration omitted)). “[T]echnical concepts pertaining to 

the law of conveyancing cannot be used as a shield against 

the impact of death taxes when in fact possession or 

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BADGLEY V. UNITED STATES 17

enjoyment of the property by the transferor . . . ceases only 

with his death.” Estate of McNichol, 265 F.2d at 673.

D

Badgley makes much of the distinction between a trust’s 

income and its principal. She argues that because the 

GRAT’s principal exceeded the annuity for several years of 

the fifteen-year term, the annuity could have been drawn 

from prior year distributions from the partnership and the 

interest earned on those distributions. We decline her 

invitation to speculate about the precise part of the trust from 

which Decedent’s annuity could have been drawn.

Further, such an inquiry is irrelevant. Badgley argues 

that Decedent’s decision not to use the word “income” in the 

GRAT document should permit her to avoid estate tax 

responsibilities. But as noted above, when determining 

whether a decedent has retained a string under § 2036(a), our 

charge is to look at the substance of the arrangement, rather 

than at formalities. See, e.g., Church’s Estate, 335 U.S. 

at 644. The only property in the GRAT was the partnership 

interest, and the annuity was drawn from the GRAT. Thus, 

any money received by Decedent as part of the annuity came 

from the partnership interest, and, as discussed above, 

conveyed substantial economic benefit to Decedent. The 

GRAT corpus was within § 2036(a)(1)’s reach.6

6 Because we conclude that in any event, Decedent’s annuity 

constituted enjoyment under § 2036(a)(1), we do not address the parties’ 

arguments whether Decedent retained a right to income from the 

property. We also do not reach the government’s argument that the 

GRAT was part of the gross estate because Decedent continued to 

exercise managerial duties for and retain tax benefits from the 

partnership after creating the GRAT.

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18 BADGLEY V. UNITED STATES

E

Inclusion of the GRAT’s corpus in Decedent’s gross 

estate should come as no surprise to GRAT grantors. A 

GRAT’s risks are well-known, with the foremost being that 

the grantor may die before the GRAT’s termination. See

Kerry O’Rourke Perri, Understanding Grantor Retained 

Annuity Trusts, Practical Law Trusts & Estates (2020); 

Bergner, supra, ¶ 401.4.A.2 (“There is no solution to the 

problem of dying earlier than expected.”). In setting up a 

GRAT, a grantor makes the decision that the potential 

benefits outweigh this risk. If the grantor does not die before 

the termination of a GRAT, the property passes to the 

beneficiaries free of the estate tax and with a gift tax that is 

diminished or even eliminated by the value of the retained 

annuity. Zaritsky, supra, ¶ 12.06. This benefit exceeds that 

of either immediate transfer of the properties (which would 

result in the application of the gift tax to the entire value of 

the property) or a transfer at death (which would result in the 

application of the estate tax to the entire property). GRATs, 

like other tax-avoidance devices, cannot “escape the force of 

this section by hiding behind legal niceties contained in 

devices and forms created by conveyancers.” Church’s 

Estate, 335 U.S. at 646 (quotation omitted).

III

Badgley also challenges 26 C.F.R. § 20.2036-1(c)(2), 

which includes the formula the IRS uses to calculate the 

portion of the property includable under § 2036(a). The 

regulation interprets § 2036(a) to provide that GRATs are 

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BADGLEY V. UNITED STATES 19

includable in a grantor’s gross estate because they are 

sufficiently tied to the grantor.7

Badgley’s argument regarding the formula is limited to 

two sentences and two footnotes, without a single citation to 

legal authority. As we have previously held, arguments 

presented in such a cursory manner are waived. Federal 

Rule of Appellate Procedure 28(a)(8)(A) requires an 

appellant’s opening brief to contain the “appellant’s 

contentions and the reasons for them, with citations to the 

authorities and parts of the record on which the appellant 

relies.” Id. “Arguments made in passing and not supported 

by citations to the record or to case authority are generally 

deemed waived.” United States v. Graf, 610 F.3d 1148, 

1166 (9th Cir. 2010).

Even were Badgley’s challenge to the formula not 

waived, it would not apply to this case. She asserts that the 

formula is flawed because it assumes that the annuity 

payment will come entirely from the GRAT’s income, rather 

than contemplating the amortization of principal. But she 

does not argue that Decedent’s annuity contemplated the 

amortization of principal, or even that the formula is flawed 

with regards to Decedent’s annuity. She also does not 

contest the government’s assertion that her argument about 

the formula does not apply to Decedent’s annuity. Rather, 

she merely contends the formula might be arbitrary if 

applied to a short-term GRAT that contemplates the 

amortization of principal as the primary source for the 

annuity payment, which is not the case here. Without 

7 Badgley argues this is an invalid interpretation of the statute. 

Because we conclude that GRATs are includable under § 2036(a)(1), we 

do not address this argument.

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20 BADGLEY V. UNITED STATES

sufficient or compelling argument, we decline to address the 

validity of § 20.2036-1(c)(2).

IV

AFFIRMED.

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