Badgley v. United States, No. 18-16053 (9th Cir. 2020)
Annotate this CaseUnder 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. The Ninth Circuit affirmed the district court's grant of summary judgment to the IRS in an action brought by plaintiff, challenging the inclusion of her mother's GRAT in a gross estate for purposes of the estate tax. The panel explained that the annuity flowing from a GRAT falls within the class intended to be treated as substitutes for wills by section 2036(a)(1). In this case, the panel held that the grantor retains enjoyment of a GRAT and thus it is properly included in the gross estate. Finally, even if plaintiff'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 section 2036(a) were not waived, the formula would not apply in this case.
Court Description: 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 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. 4 BADGLEY V. UNITED STATES
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