01-1471 Cook v. Commissioner of the Internal Revenue Service

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“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. 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.’

“When, as here, a grantor retains the right to revoke a spousal interest, the spousal interest itself is considered to be retained by the grantor. A grantor-retained interest must ‘be for the life of the term holder, or for a specified term of years, or for the shorter (but not the longer) of those periods.’ In the case at bar, the spousal interests created by the Cooks can exist for the life of the grantor or for a term of years, regardless of which term is shorter. As both the Tax Court and the appropriate regulations have demonstrated, this is impermissible.”

Affirmed.

Appeal from the United States Tax Court, Nims, J., Flaum, J.