Audrey J. Walton - Page 9

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          “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              

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