Walton v. Commissioner

Audrey Walton (plaintiff) owned over seven million shares in Wal-Mart Stores, Inc. She established two almost-identical grantor-retained annuity trusts (GRATs) and funded each with half of the shares, giving each an initial value of approximately $100 million. Each irrevocable GRAT had a two-year term and specified that Walton was to receive an annuity in the first year of 49.35 percent of the initial trust value and an annuity in the second year of 59.22 percent of the initial trust value. The payments were to be paid from trust income and, if income was not sufficient, from trust principal. If Walton died before the two-year term ended, any outstanding annuity amounts were to be paid to her estate. At the end of each GRAT’s term, any remaining balance was to be distributed to the GRAT’s one remainder beneficiary, which for each GRAT was one of Walton’s two daughters. When the two-year term ended, neither GRAT had any assets to distribute to the remainder beneficiary because Walton’s annuity payments had consumed all trust income and principal. In 1993, when Walton created the GRATs, she filed a federal gift-tax return. Walton valued the remainder interests gifted to her daughters at $0, reasoning that her retained annuity interests exceeded the initial trust value and thus eliminated any taxable gift. The commissioner of Internal Revenue (commissioner) (defendant) later issued a notice of deficiency, claiming that the taxable value of the gifted remainder interests was approximately $3.8 million, not $0. The commissioner reasoned that the value of Walton’s retained interest had to be reduced by her estate’s contingent interest. Walton sued the commissioner in tax court to contest the deficiency notice.