-16-
Gift Tax Regs., where the 10-year revocable spousal interest is
in all events payable to the spouse beginning at the end of the
grantor’s 10-year term. The spousal annuity in that example
meets the duration rule of section 25.2702-3(d)(3), Gift Tax
Regs., in that the 10-year interests of both the grantor and the
spouse are upon creation of the trust fixed and ascertainable.
In other words, the spousal interest in the example is not
contingent upon the grantor’s death before the expiration of the
initial 10-year term but is dependent on the spouse’s survival of
that term. If the spouse survives until the start of the spousal
interest, he or she will receive that interest in all events
(subject to the grantor’s retained right of revocation).
Petitioners rely primarily upon Schott v. Commissioner,
319 F.3d 1203 (9th Cir. 2003), to support their view that the
spousal interests at issue are qualified interests. In Schott v.
Commissioner, supra at 1207, the Court of Appeals for the Ninth
Circuit held that “the Commissioner’s interpretation of * * *
[section 25.2702-2(d)(1), Example (7), Gift Tax Regs.,] to
exclude the contingency of the spouse’s being alive at the time
her annuity begins is unreasonable and invalid” and that a “two-
life annuity, based on the lives of the grantor and spouse with a
limit of fifteen years, falls ‘within the class of easily valued
rights’ that Congress meant to qualify.” The GRAT there provided
for fixed annuity payments to the grantor until the earlier of
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