Patricia A. Schott, Stephen C. Schott v. Commissioner of Internal Revenue

Stephen C. Schott and Patricia A. Schott petition for review of a judgment of the Tax Court sustaining a deficiency in gift tax assessed by the Commissioner of Internal Revenue (the Commissioner). The question presented is whether the two-life annuity retained by the Schotts in their grantor-retained annuity trusts (GRATs) is an interest qualified under 26 U.S.C. § 2702 and so to be subtracted from the value of the gift. We hold that the interest does qualify under Treasury Regulations § 25.2702 and so reverse the Tax Court.

FACTS

On May 31, 1994, Patricia A. Schott, aged fifty-four, transferred 11,400 shares of nonvoting common stock of SCS Development Corp. to herself as trustee of the Patricia A. Schott 1994 Qualified Annuity Trust, a grantor-retained annuity trust (GRAT). The trust provided that 11.54% of the initial net fair market value was to be paid to the grantor commencing on May 31, 1994, and ending on the date that was fifteen years after the commencement date or, if sooner, on the date of the death of the grantor. If the grantor died prior to the end of the fifteen-year term, the annuity was to be paid to the spouse for the balance of the term, unless the right had…