Opinion ID: 2995367
Heading Depth: 2
Heading Rank: 1

Heading: Contingency of the Spousal Interests

Text: In determining that the spousal interests contained in the Cooks’ GRATs were contingent, the Tax Court relied upon regulations promulgated under section 2702. These regulations state that [t]he governing instrument [of a GRAT] must fix the term of the annuity or the unitrust interest. Treas. Regs. sec. 25.2702-3(d)(3), Gift Tax Regs. Specifically, the lower court relied upon language stating that a particular interest was non-contingent because its terms were fixed and ascertainable at the creation of the interest. Treas. Regs. sec. 25.2702-3(e), Example 6, Gift Tax Regs. Relying upon Example 6, the court interpreted these regulations to mean that the terms of a remainder interest must be fixed and ascertainable at the inception of the trust. The lower court made this interpretation after examining several examples contained in the regulations promulgated under section 2702. In their appeal, the Cooks claim that the fixed and ascertainable standard applied by the Tax Court is both inappropriate and illogical. According to the Cooks, the fixed and ascertainable standard should not be employed because it appears only in a demonstrative example to a regulation and not in the regulation itself. Furthermore, in opposition to the fixed and ascertainable standard, the Cooks cite Walton v. Comm. of the I.R.S., 115 T.C. 589 (2000). In that case, a grantor created a trust that provided her fixed annual payments. Id. In the event of the grantor’s death, the annual payments were to continue to her estate for the remainder of the annuity term. Id. The court did not, however, disqualify these remainder payments as contingent because they would vest upon the grantor’s death. Id. According to the Cooks, the spousal interests contained their GRATs are identical to the remainder interests discussed in Walton and are no less valid. We find the Cooks’ arguments in this regard unavailing. First, the fact that the fixed and ascertainable standard comes from an example contained in a regulation, rather than the body of a regulation, is of no import, as examples set forth in regulations remain persuasive authority so long as they do not conflict with the regulations themselves. Freeport Country Club v. United States, 430 F.2d 986, 992 (7th Cir. 1970). Second, Walton is distinguishable from the case at bar. In Walton, the contingent annuity payments were made payable to the grantor’s estate in the event of the grantor’s death. The Tax Court properly treated the annuity in question as one for a term of years because a grantor cannot make a gift to himself or to his estate. It is clear that, in drafting section 2702, Congress intended to curb potential valuation abuse associated with intra- family transfers of wealth. 136 Cong. Rec. 30,538 (1990). The clearest way to curb against such valuation abuse is to make sure that terms of any gift are fixed. We agree with the Tax Court’s interpretation and find that, in order to be considered non-contingent, the terms of a remainder interest in a GRAT must be fixed and ascertainable at a trust’s inception. When we examine the terms of the Cooks’ respective GRATs, we also agree that the spousal interests contained in each are not qualified interests under section 2702. First and foremost, the interests are contingent. Under both the 1993 and 1995 GRATs, a spouse is entitled to income only if: (1) the spouse survived the grantor and; (2) the spouse and the grantor have remained married. With these pre-conditions in place, it is possible (perhaps even probable) that a spouse’s interest might never vest. If, for tax purposes, the value of a gift made in trust can be reduced by an ephemeral interest, the potential for valuation abuse increases considerably./3 In light of this concern, and the fact that the residual interests contained in the Cooks’ GRATs leave open the possibility for manipulation, we hold that they are not qualified interests.