Walton v. Commissioner
Encyclopedia
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." 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.
. Each GRAT had a two-year duration during which Audrey retained the right to receive an annuity. If Audrey died within the two-year period, the annuity payments would be received by her estate. "The balance of the trust property would then be paid to the remainder beneficiaries." 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.
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). Audrey filed a gift-tax return (Form 709) valuing the GRATs as gifts of $0. The IRS "issued a notice of deficiency," asserting that the taxable value of each gift was $3.8 million. Audrey admitted that a mistake was made, but claimed that each gift was worth only $6k.
§ 2702 provides a formula for gift valuation: "(Value of property transferred) - (value of any qualified interest retained by the grantor) = value of gift." Then court reasoned that "[i]t is axiomatic that an individual cannot make a gift to himself or to his or her own estate." Consequently, "by default [Audrey] retained all interests in the 2-year term annuities set forth in the trust documents," even though the annuity payments would belong to her estate in the event she died within the two-year period.
United States Tax Court
The United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme Court"...
in favor of taxpayer Audrey J. Walton
Walton family
The Walton Family is one of the richest families in the world, their wealth inherited from Bud and Sam Walton, founders of the world's largest retailer, Wal-Mart. The five most prominent members The Walton Family is one of the richest families in the world, their wealth inherited from Bud and Sam...
, "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." 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.
Facts
Audrey J. Walton created two grantor retained annuity trusts (GRATs)Grantor Retained Annuity Trust
A grantor retained annuity trust , is a financial instrument commonly used in the United States to make large financial gifts to family members without paying a U.S. gift tax.-Basic Mechanism:...
. Each GRAT had a two-year duration during which Audrey retained the right to receive an annuity. If Audrey died within the two-year period, the annuity payments would be received by her estate. "The balance of the trust property would then be paid to the remainder beneficiaries." Audrey's daughter, Ann Walton Kroenke
Ann Walton Kroenke
Ann Walton Kroenke is, indirectly, an heir to part of the Wal-Mart fortune. Along with her sister, Nancy Walton Laurie, Kroenke inherited stock from father, Bud Walton , who was an early business partner and brother of Wal-Mart founder Sam Walton...
was the beneficiary of one GRAT, and her other daughter, Nancy Walton Laurie
Nancy Walton Laurie
Nancy Walton Laurie is the daughter of the late Bud Walton, the brother and business partner of Wal-Mart founder Sam Walton. At Bud's death, she and her sister Ann Walton Kroenke inherited a stake in Wal-Mart now worth over USD$6 billion....
, was the beneficiary of the other.
The GRATs did not return the full annuity payments expected by Audrey (because Wal-Mart
Wal-Mart
Wal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...
stock had underperformed expectations), so no property remained for the daughters (the remainder beneficiaries). Audrey filed a gift-tax return (Form 709) valuing the GRATs as gifts of $0. The IRS "issued a notice of deficiency," asserting that the taxable value of each gift was $3.8 million. Audrey admitted that a mistake was made, but claimed that each gift was worth only $6k.
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 IRCInternal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
§ 2702 provides a formula for gift valuation: "(Value of property transferred) - (value of any qualified interest retained by the grantor) = value of gift." Then court reasoned that "[i]t is axiomatic that an individual cannot make a gift to himself or to his or her own estate." Consequently, "by default [Audrey] retained all interests in the 2-year term annuities set forth in the trust documents," 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." 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]. 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.External links
- http://www.ustaxcourt.gov/InOpHistoric/walton.TC.WPD.pdfFull case posted by the United States Tax CourtUnited States Tax CourtThe United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme Court"...
]