UNITED STATES TAX COURT



            AUDREY J. WALTON, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3824-99.                     Filed December 22, 2000.


     P established and funded with corporate stock two
substantially identical grantor retained annuity trusts
(GRAT’s). Each GRAT had a 2-year term during which P
retained the right to receive an annuity. In the event
that P died prior to expiration of the 2-year term, the
remaining scheduled annuity payments were to be made to
her estate. The balance of the trust property would
then be paid to the remainder beneficiaries.

     Held: For purposes of determining the value under
sec. 2702, I.R.C., of the gift effected upon creation
of each GRAT, P’s retained qualified interest is to be
valued as an annuity for a specified term of years,
rather than as an annuity for the shorter of a term
certain or the period ending upon P’s death.

     Held, further, Sec. 25.2702-3(e), Example (5),
Gift Tax Regs., is an invalid interpretation of sec.
2702, I.R.C.
                                - 2 -

     Richard B. Covey and Jerome J. Caulfield, for petitioner.

     Carmen M. Baerga and Marie E. Small, for respondent.



                               OPINION


     NIMS, Judge:    Respondent determined a deficiency in Federal

gift tax against petitioner for 1993 in the amount of

$4,532,776.82.    The sole issue for decision is the valuation

under section 2702 of gifts resulting from petitioner’s creation

of two grantor retained annuity trusts (GRAT’s).

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the year in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                             Background

     This case was submitted fully stipulated pursuant to Rule

122, and the facts are so found.    The stipulations of the

parties, with accompanying exhibits, are incorporated herein by

this reference.    At the time the petition was filed in this case,

petitioner resided in Versailles, Missouri.

     Prior to April 7, 1993, petitioner was the sole owner of,

and held in her name, 7,223,478 shares of common stock of Wal-

Mart Stores, Inc., a publicly traded entity.    Then, on April 7,

1993, petitioner established two substantially identical GRAT’s,

each of which had a term of 2 years and was funded by a transfer
                               - 3 -

of 3,611,739 shares of the above Wal-Mart stock.   The fair market

value of the Wal-Mart stock on that date was $27.6875 per share,

and the consequent initial fair market value of each trust was

$100,000,023.56.

     According to the provisions of each GRAT, petitioner was to

receive an annuity amount equal to 49.35 percent of the initial

trust value for the first 12-month period of the trust term and

59.22 percent of such initial value for the second 12-month

period of the trust term.   In the event that petitioner’s death

intervened, the annuity amounts were to be paid to her estate.

The sums were payable on December 31 of each taxable year but

could be paid up through the date by which the Federal income tax

return for the trust was required to be filed.   The payments were

to be made from income and, to the extent income was not

sufficient, from principal.   Any excess income was to be added to

principal.

     Upon completion of the 2-year trust term, the remaining

balance was to be distributed to the designated remainder

beneficiary.   Petitioner’s daughter Ann Walton Kroenke was the

beneficiary so named under one trust instrument; petitioner’s

daughter Nancy Walton Laurie was named in the other.

     Each trust was irrevocable, prohibited additional

contributions, specified that the grantor’s interest was not

subject to commutation, and mandated that no payment be made
                                 - 4 -

during the trust term to any person other than the grantor or the

grantor’s estate.    The two trustees for each respective trust

were petitioner and the daughter for whose benefit the trust was

created.

     The following payments were made to petitioner from each of

the GRAT’s:

   Date of         Form of     Number of    Value per       Amount of
   Payment         Payment      Shares        Share          Payment
    7/9/93          Cash                                $    117,381.52
   10/4/93          Cash                                     117,381.52
   7/15/94          Stock      1,434,518     $25.1900   36,135,508.42
    1/5/94          Cash                                     117,381.52
   4/14/94          Cash                                     153,498.91
    7/3/94          Cash                                     153,498.91
   10/3/94          Cash                                      92,531.89
   6/26/95          Stock      2,142,517     26.1875    56,107,163.94
    1/5/95          Cash                                      92,531.89
   4/14/95          Cash                                     108,861.05
   6/26/95          Stock        34,704      26.1875         908,811.00
                               3,611,739                94,104,550.57

     The assets of each GRAT were exhausted upon the final

payment of stock in June of 1995, as all income and principal had

been distributed to petitioner pursuant to the scheduled annuity

payments.     Since the aggregate amount of annuity payments called

for by each trust instrument was $108,570,025.58 (49.35 percent x

$100,000,023.56 + 59.22 percent x $100,000,023.56), each GRAT
                                - 5 -

resulted in a $14,465,475.01 shortfall in annuity payments to the

grantor and left no property to be delivered to the remainder

beneficiary.

     Petitioner timely filed a United States Gift (and

Generation-Skipping Transfer) Tax Return, Form 709, for the

taxable year 1993.    Therein, petitioner valued at zero the gifts

to her daughters of remainder interests in the GRAT’s.

Petitioner represented that the value of her retained interests

in the GRAT’s equaled 100 percent of the value of the Wal-Mart

stock on the date of the transfer, thus eliminating any taxable

gift to the remaindermen.    Respondent subsequently issued a

notice of deficiency determining that petitioner had understated

the value of the gifts resulting from her establishment of the

two GRAT’s.    Petitioner now concedes on brief that the gift

occasioned by each GRAT should be valued at $6,195.10, while

respondent asserts that the taxable value of each gift by

petitioner is $3,821,522.12.

                             Discussion

I.   General Rules

     Section 2501 imposes a tax for each calendar year on the

transfer of property by gift by any taxpayer.    Pursuant to

section 2512, the value of the transferred property as of the

date of the gift “shall be considered the amount of the gift”.

Generally, where property is transferred in trust but the donor
                                  - 6 -

retains an interest in such property, the value of the gift is

the value of the property transferred, less the value of the

donor’s retained interest.      See sec. 25.2512-5A(e), Gift Tax

Regs.; sec. 25.2512-5T(d)(2), Temporary Gift Tax Regs., 64 Fed.

Reg. 23224 (Apr. 30, 1999).      However, if the gift in trust is to

a family member (as defined in section 2704(c)(2)), the value of

the gift is determined subject to the limitations of section

2702.   See 

herein, section 2702 provides:

     SEC. 2702.    SPECIAL VALUATION RULES IN CASE OF
                   TRANSFERS OF INTERESTS IN TRUSTS.

           (a) Valuation Rules.--

                (1) In general.--Solely for purposes of
           determining whether a transfer of an interest in
           trust to (or for the benefit of) a member of the
           transferor’s family is a gift (and the value of
           such transfer), the value of any interest in such
           trust retained by the transferor or any applicable
           family member * * * shall be determined as
           provided in paragraph (2).

                  (2) Valuation of retained interests.--

                       (A) In general.--The value of any
                  retained interest which is not a qualified
                  interest shall be treated as being zero.

                       (B) Valuation of qualified interest.--
                  The value of any retained interest which is a
                  qualified interest shall be determined under
                  section 7520 [providing for use of valuation
                  tables prescribed by the Secretary for
                  annuities, life interests, etc.].


                       *    *     *       *   *   *   *
                                - 7 -


          (b) Qualified Interest.--For purposes of this
     section, the term “qualified interest” means--

                 (1) any interest which consists of the right
            to receive fixed amounts payable not less
            frequently than annually,

                 (2) any interest which consists of the right
            to receive amounts which are payable not less
            frequently than annually and are a fixed
            percentage of the fair market value of the
            property in the trust (determined annually), and

                 (3) any noncontingent remainder interest if
            all of the other interests in the trust consist of
            interests described in paragraph (1) or (2).

     Regulations promulgated under section 2702 define, and

expand upon, certain of the terms employed in section 2702.

“Retained” denotes “held by the same individual both before and

after the transfer in trust.”    Sec. 25.2702-2(a)(3), Gift Tax

Regs.   The statutory definition of “qualified interest” is

likewise elucidated in the following manner:    “Qualified interest

means a qualified annuity interest, a qualified unitrust

interest, or a qualified remainder interest.”    Sec. 25.2702-

2(a)(5), Gift Tax Regs.    A “qualified annuity interest”, in turn,

is “an interest that meets all the requirements of § 25.2702-3(b)

and (d).”    Sec. 25.2702-2(a)(6), Gift Tax Regs.

     The above-referenced paragraph (b) of section 25.2702-3,

Gift Tax Regs., requires that a “qualified annuity interest”

consist of “an irrevocable right to receive a fixed amount”,

“payable to (or for the benefit of) the holder of the annuity
                                - 8 -

interest for each taxable year of the term.”    Sec. 25.2702-

3(b)(1)(i), Gift Tax Regs.    In this context, a “fixed amount” is

either a stated dollar amount or a fixed fraction or percentage

(not to exceed 120 percent of the fixed fraction or percentage

payable in the preceding year) of the initial fair market value

of the property transferred to the trust as finally determined

for Federal tax purposes.    Sec. 25.2702-3(b)(1)(ii), Gift Tax

Regs.   In either case, the fixed amount must be payable

periodically but not less frequently than annually.    See 

of section 25.2702-3, Gift Tax Regs., then

adds the following requirement dealing with the term of the

annuity interest:   “The governing instrument must fix the term of

the annuity or unitrust interest.    The term must be for the life

of the term holder, for a specified term of years, or for the

shorter (but not the longer) of those periods.”    Sec. 25.2702-

3(d)(3), Gift Tax Regs.   Furthermore, the trust instrument must

also prohibit distributions from the trust to or for the benefit

of any person other than the holder of the qualified annuity

interest during the term of the qualified interest.    See sec.

25.2702-3(d)(2), Gift Tax Regs.

II.   Contentions of the Parties

      Respondent contends that in establishing each GRAT,

petitioner created three separate and distinct interests:    (1)

The annuity payable to her during her lifetime, (2) the
                               - 9 -

“contingent” interest of her estate to receive the annuity

payments in the event of her death prior to expiration of the 2-

year trust term, and (3) the remainder interest granted to her

daughter.   Of these three, it is respondent’s position that only

the first interest, but not the second, constitutes a qualified

retained interest within the meaning of section 2702 and the

regulations promulgated thereunder.    Respondent particularly

relies upon section 25.2702-3(e), Example (5), Gift Tax Regs.

(hereinafter Example 5), as a valid interpretation of the statute

and as governing the issues involved in this case.

     Hence, according to respondent, only the value of an annuity

payable for the shorter of 2 years or the period ending upon

petitioner’s death may be subtracted from the fair market value

of the stock in calculating the value of the taxable gift made by

reason of petitioner’s establishment of the GRAT’s.    Respondent

concludes that the present value of the retained qualified

interest in each GRAT was $96,178,501.88 and the taxable gift

$3,821,522.12 (consisting of the estate’s contingent interest of

$2,938,000.00 and the remainder interest of $883,522.12).

     Conversely, petitioner maintains that for valuation purposes

under section 2702, each GRAT is properly characterized as

creating only two separate interests:    (1) A retained annuity

payable for a fixed term of 2 years, and (2) a remainder interest

in favor of her daughter.   Petitioner further asserts that the
                                - 10 -

former, in its entirety, is a qualified interest within the

meaning of the statute.    Accordingly, it is petitioner’s position

that the retained interest to be subtracted in computing the

amount of the taxable gift occasioned by each GRAT is to be

valued as a simple 2-year term annuity, without regard to any

mortality factor.     Using this method, petitioner calculates the

retained annuity as having a value of $99,993,828.90, such that

each GRAT effected a gift of $6,195.10.

       To the extent that Example 5 would appear to suggest

otherwise, petitioner avers that the example is an invalid and

unreasonable interpretation of section 2702.    Petitioner argues

that the example is unsupported by statutory language or

legislative history and is inconsistent with other regulations

and examples, especially section 25.2702-3(d)(3), Gift Tax Regs.

In the alternative, petitioner claims that even if Example 5 is a

permissible interpretation of the statute on substantive grounds,

it is procedurally invalid as issued in violation of the notice

and comment provisions of the Administrative Procedures Act, 5

U.S.C. sec. 553 (1994).

III.    Application

       As pertinent here, section 2702 provides a facially simple

formula for valuation:     (Value of property transferred in trust)

- (value of any qualified interest retained by the grantor) =

value of gift.    Applying this formula, however, requires
                              - 11 -

resolution of potentially complex subsidiary issues.   For

instance, in order to determine the amount that may be

subtracted, the following are among the questions that must be

addressed:   The nature of the interest “retained” by the grantor,

the extent to which that interest is “qualified”, and the

actuarial value of the qualified interest.

     A.   The Nature of the Interest Retained

     Commencing with the threshold inquiry of what interest or

interests petitioner “retained”, we conclude that, even if we

were to view the GRAT indentures as creating separate interests

in favor of petitioner and petitioner’s estate, both such

interests must be construed as retained by petitioner.   It is

axiomatic that an individual cannot make a gift to himself or to

his or her own estate.   An attempt to do so has long been treated

at common law as a retention by the individual of the interest

purportedly transferred.   For example, 1 Restatement, Trusts 2d,

section 127 comment b (1959), states:

          Where the owner of property, whether real or
     personal, transfers it in trust to pay the income to
     himself for a period of years and at the expiration of
     the period to pay the principal to him, he is the sole
     beneficiary of the trust. He is likewise the sole
     beneficiary where he transfers property in trust to pay
     the income to himself for life and on his death to pay
     the principal to his estate, or to his personal
     representatives. * * *

Hence, because petitioner could not as a matter of law give an

interest in property to her estate, she by default retained all
                               - 12 -

interests in the 2-year term annuities set forth in the trust

documents.   Such interests thus were, as required by the

regulations, “held by the same individual both before and after

the transfer in trust.”    Sec. 25.2702-2(a)(3), Gift Tax Regs.

     B.   The Extent of the Qualified Interest

     Having therefore decided that petitioner, either

individually or through her estate, retained the 2-year annuities

in their entirety, we next consider the extent to which these

interests are “qualified”.    In this connection, section 2702

itself provides only that “qualified interest” means “any

interest which consists of the right to receive fixed amounts

payable not less frequently than annually”.     Sec. 2702(b)(1).

Since a simple 2-year annuity would appear to fall within this

definition, we turn to whether relevant regulations set forth

additional restrictions.

     The regulatory provision which enumerates the permissible

terms for a qualified annuity mandates that the term be “for the

life of the term holder, for a specified term of years, or for

the shorter (but not the longer) of those periods.”     Sec.

25.2702-3(d)(3), Gift Tax Regs.    Petitioner thus contends that

her 2-year annuities are sanctioned by the second of these three

options and may be valued as such.      Respondent, however, asserts

that petitioner’s annuities are in fact of the third listed type
                             - 13 -

and cites Example 5 and section 25.2702-3(e), Example (1), Gift

Tax Regs., among others, in support of this position.   Example 5

states as follows:

     A transfers property to an irrevocable trust, retaining
     the right to receive 5 percent of the net fair market
     value of the trust property, valued annually, for 10
     years. If A dies within the 10-year term, the unitrust
     amount is to be paid to A’s estate for the balance of
     the term. A’s interest is a qualified unitrust
     interest to the extent of the right to receive the
     unitrust payment for 10 years or until A’s prior death.

Section 25.2702-3(e), Example (1), Gift Tax Regs., provides:

     A transfers property to an irrevocable trust, retaining
     the right to receive the greater of $10,000 or the
     trust income in each year for a term of 10 years. Upon
     expiration of the 10-year term, the trust is to
     terminate and the entire trust corpus is to be paid to
     A’s child, provided that if A dies within the 10-year
     term the trust corpus is to be paid to A’s estate. A’s
     annual payment right is a qualified annuity interest to
     the extent of the right to receive $10,000 per year for
     10 years or until A’s prior death, and is valued under
     section 7520 without regard to the right to receive any
     income in excess of $10,000 per year. The contingent
     reversion is valued at zero. The amount of A’s gift is
     the fair market value of the property transferred to
     the trust less the value of the qualified annuity
     interest.

     We agree with respondent that Example 5, if valid, would

preclude the valuation methodology for which petitioner argues.

To say that Example 5 is not on point because it involves a

unitrust rather than an annuity interest would be to rely on a

distinction without a substantive difference.   Consequently, we

are faced squarely with the question of this regulation’s

validity.
                              - 14 -

     The regulations at issue here are interpretative regulations

promulgated under the general authority vested in the Secretary

by section 7805(a).   Hence, while entitled to considerable

weight, they are accorded less deference than would be

legislative regulations issued under a specific grant of

authority to address a matter raised by the pertinent statute.

See Chevron U.S.A., Inc. v. Natural Resources Defense Council,

Inc., 

, 843-844 (1984) (Chevron); United States v.

Vogel Fertilizer Co., 

, 24 (1982).    A legislative

regulation is to be upheld unless “arbitrary, capricious, or

manifestly contrary to the statute.”    Chevron U.S.A., Inc. v.

Natural Resources Defense Council, Inc., supra at 843-844.

     With respect to interpretative regulations, the appropriate

standard is whether the provision “‘implement[s] the

congressional mandate in some reasonable manner.’” United States

v. Vogel Fertilizer Co., supra at 24 (quoting United States v.

Correll, 

, 307 (1967)).    In applying this test, we

look to the following two-part analysis enunciated by the Supreme

Court:

          When a court reviews an agency’s construction of
     the statute which it administers, it is confronted with
     two questions. First, always, is the question whether
     Congress has directly spoken to the precise question at
     issue. If the intent of Congress is clear, that is the
     end of the matter; for the court, as well as the
     agency, must give effect to the unambiguously expressed
     intent of Congress. If, however, the court determines
     Congress has not directly addressed the precise
     question at issue, the court does not simply impose its
                               - 15 -

     own construction on the statute, as would be necessary
     in the absence of an administrative interpretation.
     Rather, if the statute is silent or ambiguous with
     respect to the specific issue, the question for the
     court is whether the agency’s answer is based on a
     permissible construction of the statute. [Chevron
     U.S.A., Inc. v. Natural Resources Defense Council,
     Inc., supra at 842-843; fn. refs. omitted.]

A challenged regulation is not considered such a permissible

construction or reasonable interpretation unless it harmonizes

both with the statutory language and with the statute’s origin

and purpose.   See United States v. Vogel Fertilizer Co., supra at

25-26; National Muffler Dealers Association v. United States, 

, 477 (1979) (National Muffler).

     We pause to note that before the Chevron standard of review

was enunciated by the Supreme Court, the traditional standard was

simply “whether the regulation harmonizes with the plain language

of the statute, its origin, and its purpose”, as prescribed by

the Supreme Court in National Muffler Dealers Association v.

United States, supra at 477.   As we have observed in a previous

case, the opinion of the Supreme Court in Chevron failed to cite

National Muffler and may have established a different formulation

of the standard of review.   See Central Pa. Sav. Association v.

Commissioner, 

, 390-391 (1995).   In the case before

us, we conclude that it is unnecessary to parse the semantics of

the two tests to discern any substantive difference between them,

because the result here would be the same under either.
                              - 16 -

     Because section 2702 does not speak to the issue of the

permissible term for a qualified annuity, Example 5 does not

expressly contradict any statutory language.   Accordingly, we

focus on the statute’s origin and purpose for further guidance.

Section 2702 was enacted as part of the Omnibus Budget

Reconciliation Act of 1990, Pub. L. 101-508, sec. 11602, 104

Stat. 1388-491.   Legislative history1 describes the aims which

prompted the measure:

     the committee is concerned about the undervaluation of
     gifts valued pursuant to Treasury tables. Based on
     average rates of return and life expectancy, those
     tables are seldom accurate in a particular case, and
     therefore, may be the subject of adverse selection.
     Because the taxpayer decides what property to give,
     when to give it, and often controls the return on the
     property, use of Treasury tables undervalues the
     transferred interests in the aggregate, more often than
     not.

          Therefore, the committee determines that the
     valuation problems inherent in trusts and term
     interests in property are best addressed by valuing


     1
       Sec. 2702 originated in the Senate version of the Omnibus
Budget Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat.
1388-400. See H. Conf. Rept. 101-964 (1990), 1991-2 C.B. 560,
1131-1133. The Senate bill was prepared under very limited time
constraints. See 136 Cong. Rec. 30485 (1990). In order to avoid
delay, the bill was brought to the floor without printing a
formal report of the Senate Budget Committee. See 

thereof, the report language that had been submitted to the
Budget Committee, for inclusion in its report, by the Senate
Finance Committee relating to the bill’s provisions within the
Finance Committee’s jurisdiction, including sec. 2702, was
printed in the Congressional Record. See 

of the
Senate version of sec. 2702, the subject of the report language
printed in the Congressional Record, was identical in all
material respects to the statute ultimately enacted. See 

                                  - 17 -

     retained interests at zero unless they take an easily
     valued form--as an annuity or unitrust interest. By
     doing so, the bill draws upon present law rules valuing
     split interests in property for purposes of the
     charitable deduction. [136 Cong. Rec. 30538-30539
     (1990).]

The legislative record then goes on to explain the statute’s

intended operation:

          The bill requires that the value of a remainder
     interest be determined by subtracting the value of the
     income interest from the value of the entire property.
     The bill provides that the value of an interest
     retained by the transferor or an applicable family
     member is zero unless such interest is a “qualified
     interest”. A qualified interest is (1) a right to
     receive fixed amounts payable at least annually, (2) a
     right to receive amounts payable at least annually
     which are a fixed percentage of the trust’s assets
     (determined annually), or (3) a non-contingent
     remainder interest if all the other interests in the
     trust are qualified payments.30 A qualified interest
     generally would be valued under present law, e.g., by
     reference to section 7520.

          Thus, a person who makes a completed transfer of
     nonresidential property in trust and retains (1) the
     right to the income of the trust for a term of years
     and (2) a reversionary right (or a testamentary general
     power of appointment) with respect to trust corpus is
     treated as making a transfer equal to the value of the
     whole property. * * * In contrast, the creation of a
     trust the only interests in which are an annuity for a
     term of years and a noncontingent remainder interest is
     valued under present law.
     _______________
           30
              These interests are similar to those permitted in
     charitable split-interest trusts under Section 664.

& n.30.

     Based on these statements, it is clear that the principal

objective of section 2702 was to prevent undervaluation of gifted
                               - 18 -

interests.    Moreover, the foregoing language reflects that the

statute was designed primarily to restrict a donor’s ability to

calculate the amount of a gift by subtracting certain elements of

actuarial value that would or might in fact pass to the donee.     A

fixed-term annuity, payable to the grantor or the grantor’s

estate, would therefore appear to fall within the statute’s

permissible parameters, as elucidated by the legislative history.

Such an interest would further seem to fall within the class of

easily valued rights which the final sentence in the passage

above indicates Congress envisioned would not be afforded a

lesser value under the new rules.

     Respondent, however, characterizes the annuities at issue

here as equivalent to the reversionary rights referenced by

Congress as nonqualified, rather than to the fixed-term interests

approved by the lawmakers.    In respondent’s view, the

congressional concern underlying section 2702 reaches

petitioner’s annuities.

     Respondent alleges that Congress sought to curb the then-

current practice of dividing trusts into numerous interests and

selectively retaining interests based on mortality, such as

reversions.    Respondent points out the common estate planning

device of creating a trust, with a term short enough that the

grantor’s risk of dying during the term would be minimal, in

which the grantor retained both an income interest and a
                                - 19 -

contingent reversion in the trust corpus to take effect in the

event of his or her death during the term.     The value of the gift

to the remaindermen would then be calculated by subtracting

actuarial amounts for each of these interests, despite the

negligible chance that the reversion would become operative.

     Respondent then goes on to frame the annuities payable to

petitioner’s estate as no different in substance from such

reversions.     Respondent’s position is that both represent

separate rights to receive property contingent upon the grantor’s

death during the trust term.     Because contingent rights, not

fixed or ascertainable at the creation of the trust, do not fall

within any of the three forms defined as qualified in section

2702(b), respondent maintains that both are properly valued at

zero.     On this basis, respondent argues that Example 5 is

consistent not only with the purpose of section 2702 but also

with other regulations which deal with post-death interests,

particularly section 25.2702-3(e), Example (1), Gift Tax Regs.

        Respondent further contends that Congress’ reference to a

trust consisting only of a fixed-term annuity and a noncontingent

remainder was describing a situation different from that of

petitioner here.     Respondent avers that the scenario contemplated

by the lawmakers was one in which the donor transferred the lead

annuity to an entity with perpetual life and retained a

noncontingent remainder.     According to respondent, only in that
                                - 20 -

context is it possible for a donor to create strictly an annuity

for a term of years and a noncontingent remainder.      Hence, it is

only that kind of situation which respondent claims is sanctioned

by the mention of an annuity “for a specified term of years” in

section 25.2702-3(d)(3), Gift Tax Regs., with the result that

there exists no inconsistency between Example 5 and such

regulatory section.

     In response to this latter argument, we would simply point

out that the statute does not contemplate a transfer of the lead

annuity to a perpetual-life entity.      See secs. 2702(e),

2704(c)(2) (defining “member of the family” for purposes of

bringing a transaction within the section 2702 rules).        We

therefore turn to respondent’s broader contentions regarding

Example 5’s consistency with the underlying purpose of section

2702.   On this issue, we conclude that the annuities here are

more akin to the fixed-term interests cited with approval in the

legislative history than to the reversionary interests identified

as leading to undervaluation.    We base our conclusions on the

statutory text, on the above-quoted policy concerns, and on the

comparable situation in the section 664 context (dealing with

valuation of split-interest gifts to charity), to which the

legislative history alludes.
                              - 21 -

     With respect to the text itself, the short answer is that an

annuity for a specified term of years is consistent with the

section 2702(b) definition of a qualified interest; a contingent

reversion is not.

     As regards policy, permitting reduction to gift value for

reversionary interests was resulting in arbitrary and abusive

elimination of value which was intended to, and typically did,

pass to the donee.   Donors were subtracting the full actuarial

value of a reversionary interest in the trust corpus and were not

merely treating their retained interests as an annuity for a

fixed term of years.   Although we acknowledge that, in the case

of a reversion, at least the equivalent of the term annuity’s

value would be payable to the grantor or the grantor’s estate in

all events, Congress was entitled to require that interests be

cast in one of three specified forms to receive the favorable

treatment afforded qualified interests.   Accordingly, the

Commissioner is equally justified in assigning a zero value to

reversionary interests outside the scope of the statutory

definition and refusing to consider whether such interests can

have the practical effect of a different form of interest not

chosen by the grantor.   See sec. 25.2702-3(e), Example (1), Gift

Tax Regs.

     In contrast, there exists no rationale for refusing to take

into account for valuation purposes a retained interest of which
                               - 22 -

both the form and the effect are consistent with the statute.      We

further observe that respondent’s attempts to equate the estate’s

rights here with other contingent, post-death interests are

premised on the bifurcation of the estate’s interest from that of

petitioner.   Yet, given the historical unity between an

individual and his or her estate, we believe such separation is

unwarranted where the trust is drafted in the form of a specified

interest retained by the grantor, with the estate designated only

as the alternate payee of that precise interest.    This is the

result that would obtain if the governing instrument were simply

silent as to the disposition of the annuity in the event of the

grantor’s death during the trust term.    Additionally, any other

construction would effectively eliminate the qualified term-of-

years annuity, a result not contemplated by Congress.

     Moreover, we note in this connection that the Commissioner

has defined noncontingent for purposes of determining a qualified

remainder interest as follows:    “an interest is non-contingent

only if it is payable to the beneficiary or the beneficiary’s

estate in all events.”    Sec. 25.2702-3(f)(1)(iii), Gift Tax Regs.

We are satisfied that this principle is equally applicable in the

circumstances at bar.    For similar reasons, we decline

respondent’s invitation to treat term annuities payable to a

grantor or the grantor’s estate as having two separate “holders”

for purposes of the regulatory requirement of section 25.2702-
                                - 23 -

3(b)(1)(i), Gift Tax Regs., that the annuity amount “be payable

to (or for the benefit of) the holder of the annuity interest for

each taxable year of the term.”

     Lastly, we observe that the legislative history indicates

section 2702 was to draw upon the rules for valuing split-

interest gifts to charity under section 664.   Section 664 deals

with charitable remainder annuity trusts and unitrusts for which

a tax deduction is available.    Yet under this statute, respondent

apparently acknowledges that an annuity payable for a term of

years to an individual or the individual’s estate is valued as a

fixed-term interest.   Section 1.664-2(c), Income Tax Regs.,

provides that the present value of an annuity is to be computed

in accordance with regulations promulgated under section 2031.

Such regulations, in turn, contain the following example:

     Example 4. Annuity payable for a term of years. The
     decedent, or the decedent’s estate, was entitled to
     receive an annuity of $10,000 a year payable in equal
     quarterly installments at the end of each quarter
     throughout a term certain. At the time of the
     decedent’s death, the section 7520 rate was 9.8
     percent. A quarterly payment had just been made prior
     to the decedent’s death and payments were to continue
     for 5 more years. Under Table B in § 20.2031-7(d)(6)
     for the interest rate of 9.8 percent, the factor for
     the present value of a remainder interest due after a
     term of 5 years is .626597. Converting the factor to
     an annuity factor, as described in paragraph
     (d)(2)(iv)(A) of this section, the factor for the
     present value of an annuity for a term of 5 years is
     3.8102. The adjustment factor from Table K in §
     20.2031-7(d)(6) at an interest rate of 9.8 percent for
     quarterly annuity payments made at the end of the
     period is 1.0360. The present value of the annuity is,
     therefore, $39,473.67 ($10,000 x 3.8102 x 1.0360).
                              - 24 -

     [Sec. 20.2031-7T(d)(5), Example (4), Temporary Estate
     Tax Regs., 64 Fed. Reg. 23214 (April 30, 1999); see
     also pre-1999 sec. 20.2031-7(d)(5), Example (4), Estate
     Tax Regs.]

It strikes us as incongruous that respondent is willing to

recognize the full value of a term annuity, whether payable to a

taxpayer or to the taxpayer’s estate, when to do so will reduce

the amount of a charitable deduction, but refutes this approach

when it will decrease the amount of a taxable gift.

     Thus, given the above authorities, we construe each of the

subject GRAT’s as creating a single, noncontingent annuity

interest payable for a specified term of years to the

undifferentiated unit of petitioner or her estate.    We further

conclude that Congress meant to allow individuals to retain

qualified annuity interests for a specified term of years, and

that the proper method for doing so is to make the balance of any

payments due after the grantor’s death payable to the grantor’s

estate.   We hold that Example 5 is an unreasonable interpretation
                              - 25 -

and an invalid extension of section 27022, and we need not reach

the issue of whether it was adopted in violation of the

Administrative Procedures Act.   Accordingly, the qualified

interest retained by petitioner in each GRAT here is an annuity

payable for a specified term of 2 years.

     C.   The Actuarial Value of the Qualified Interests

     Having decided the nature and extent of the qualified

interests retained by petitioner, we say a few words regarding

the calculation of their actuarial value.   In compliance with

section 2702(a)(2)(B), these interests are to be valued under

section 7520.   There appears, however, to be some disagreement

between the parties as to the mechanics of this computation.

They seem to differ with respect to how properly to account for

the timing of the payments and the partial years involved where a

GRAT is established other than on January 1.   Because we believe




     2
       We note that sec. 25.2702-3(e), Example (5), Gift Tax
Regs. (hereinafter Example 5), was cited and its alleged
underlying rationale was alluded to in support of our holding in
Cook v. Commissioner, 

(2000). In that case, neither
party challenged the validity of any regulations promulgated
under sec. 2702, and it is not the typical practice of this Court
to raise such issues sua sponte. Suffice it to say at this point
that we would have reached the same result absent any reliance on
Example 5. The spousal interests at issue there were in fact
contingent in a sense violative of the policy behind sec. 2702.
They would never take effect if the spouse were to predecease the
grantor, and any value attributable thereto would pass to the
donee. The statute does not sanction treatment of such interests
as qualified.
                              - 26 -

that such issues are more appropriately dealt with when fully

articulated pursuant to Rule 155 proceedings, we defer from

expressing any opinion on this matter at the present time.

     To reflect the foregoing,



                                        Decision will be entered

                                   under Rule 155.

     Reviewed by the Court.

     WELLS, CHABOT, SWIFT, RUWE, WHALEN, COLVIN, HALPERN,
CHIECHI, LARO, VASQUEZ, GALE, and MARVEL, JJ., agree with this
opinion.

     BEGHE, FOLEY, and THORNTON, JJ., did not participate in the
consideration of this opinion.