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portion (not to exceed 120 percent of the set portion 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, and that the fixed amount must be payable
periodically but not less frequently than annually. See sec.
25.2702-3(b)(1)(ii), Gift Tax Regs. The regulations require that
the trust instrument: (1) “prohibit distributions from the trust
to or for the benefit of any person other than the holder of the
qualified annuity or unitrust interest during the term of the
qualified interest”, sec. 25.2702-3(d)(2), Gift Tax Regs., and
(2) “fix the term of the annuity or unitrust interest * * * 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.
Respondent argues that the spousal interests at issue were
not qualified interests because: (1) The spousal interests were
contingent on the grantor’s failing to survive the applicable 2-
or 4-year term (in other words, the interests were not fixed and
ascertainable), and (2) the spousal interests were not payable
for the life of the term holder, for a term of years, or for the
shorter of those periods. As respondent sees it, each grantor’s
retained annuity is a qualified interest to the extent that it is
payable for a term of years or the grantor’s earlier death, but
not to the extent it continues for the surviving spouse for the
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