Judith Badgley v. United States of America

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

JUDITH BADGLEY,
Plaintiff-Appellant,

v.

UNITED STATES OF AMERICA,
Defendant-Appellee.
No. 18-16053

D.C. No.
4:17-cv-00877-HSG

OPINION

Appeal from the United States District Court
for the Northern District of California
Haywood S. Gilliam, Jr., District Judge, Presiding

Argued and Submitted December 2, 2019
San Francisco, California

Filed April 28, 2020

Before: Carlos F. Lucero,
*
Consuelo M. Callahan,
and Bridget S. Bade, Circuit Judges.

Opinion by Judge Lucero

*
The Honorable Carlos F. Lucero, United States Circuit Judge for
the U.S. Court of Appeals for the Tenth Circuit, sitting by designation.

2 BADGLEY V. UNITED STATES

SUMMARY
**

Tax
The panel affirmed the district court’s summary
judgment in favor of the Internal Revenue Service, in an
action challenging the inclusion of a grantor-retained
annuity trust in a decedent’s gross estate for purposes of the
estate tax.
At issue in this appeal was whether, under 26 U.S.C.
§ 2036(a)(1), a grantor’s interest in a grantor-retained
annuity trust (GRAT) is a sufficient “string” that requires the
property interest to be included in the gross estate.
After Donald Yoder’s death, his wife, decedent Patricia
Yoder, succeeded to his fifty-percent partnership interest in
a family-run company. Decedent created a GRAT to transfer
that partnership interest to her daughters, while decedent
retained a right to an annuity paid from the GRAT for
15 years. Decedent died before the end of the 15-year
annuity period. The estate tax return reported a total gross
estate that included the GRAT’s assets. The statutory
executor of the estate, daughter Judith Badgley, filed a tax
refund action in district court, asserting an overpayment
resulting from the inclusion of the entire date-of-death value
of the GRAT in the gross estate, and arguing that only the
net present value of the unpaid annuity payments should
have been included. The district court held that, because the
decedent’s retained annuity interest was both a retained right
to income from and continued enjoyment of the property, the

**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.

BADGLEY V. UNITED STATES 3

entire date-of-death value of the GRAT should be included
in the gross estate.
The panel first rejected appellant’s argument that,
because 26 U.S.C. § 2036(a)(1) does not expressly mention
annuities, the full value of decedent’s GRAT cannot be
included in the gross estate. The panel explained that in
§ 2036(a)(1), Congress set forth three “strings” tying a
grantor to property, and instructed that we look to the
result—possession, enjoyment, or a right to income
therefrom—rather than the form those strings take.
The panel next addressed whether the annuity flowing
from a GRAT falls within the class intended to be treated as
substitutes for wills by § 2036(a)(1). The panel held that it
does; to avoid the force of § 2036(a), a grantor must
completely divest herself of possession, enjoyment, and
income from the property, and the beneficiaries’ interest
must take effect prior to the grantor’s death. The panel
concluded that when a grantor derives substantial present
economic benefit from property, she retains the enjoyment
of that property for purposes of § 2036(a)(1). Here, because
decedent’s annuity was a “substantial present economic
benefit,” it stemmed from a property interest placed in the
GRAT, it reserved to decedent the enjoyment of that interest
during her lifetime, and was not transferred to the
beneficiaries before decedent’s death, the annuity was
required to be included in the GRAT’s date-of-death value
in the estate.
Finally, the panel addressed appellant’s challenges to
26 C.F.R. § 20.2036-1(c)(2), which includes the formula the
IRS uses to calculate the portion of the property includable
under § 2036(a). The panel concluded that, even if this
challenge were not waived by the cursory manner in which
it was raised on appeal, it would not apply in this case.

4 BADGLEY V. UNITED STATES

COUNSEL
Paul Frederic Marx (argued), Rutan & Tucker LLP, Costa
Mesa, California, for Plaintiff-Appellant.

Nathaniel S. Pollock (argued) and Teresa E. McLaughlin,
Attorneys; Richard E. Zuckerman, Principal Deputy
Assistant General; Tax Division, United States Department
of Justice, Washington, D.C.; for Defendant-Appellee.

BADGLEY V. UNITED STATES 5

OPINION
LUCERO, Circuit Judge:
Thanks to Benjamin Franklin, death and taxes are
inextricably linked in most Americans’ minds as the only
two things in this world that are certain. Thanks to the estate
tax, certainty is not the only tie. For the duration of its
existence, taxpayers have attempted to avoid the estate tax
by utilizing a variety of legal mechanisms to transfer
property during their lifetimes while holding onto the fruits
of that property. In response to taxpayers’ impulse to retain
a legal interest in the property despite the transfer, Congress
enacted what is now 26 U.S.C. § 2036(a).
At the most colloquial level, § 2036(a) stands for the
proposition that if the taxpayer does not let property go,
neither will the taxman. It delineates three criteria—
possession, enjoyment, and a right to income—for
determining when the connection between a grantor and
property is sufficient to require the property’s inclusion in
the grantor’s estate for purposes of the federal estate tax.
§ 2036(a)(1). Unless a taxpayer “absolutely, unequivocally,
irrevocably, and without possible reservations, parts with”
her possession of, enjoyment of, or a right to income from
the property—leaving no “string” tying her to the property—
property transferred inter vivos is included in a decedent’s
gross estate. Comm’r v. Church’s Estate, 335 U.S. 632, 645
(1949); see also Estate of McNichol v. Comm’r, 265 F.2d
667, 670–73 (3d Cir. 1959).
Judith Badgley challenges the application of § 2036(a)
by the Internal Revenue Service (“IRS”) to her mother’s
grantor-retained annuity trust (“GRAT”). The district court
granted summary judgment in favor of the IRS. To resolve
this appeal, we must determine whether under § 2036(a)(1),

6 BADGLEY V. UNITED STATES

a grantor’s interest in a GRAT is a sufficient “string” that
requires the property interest to be included in a gross estate.
Exercising jurisdiction under 28 U.S.C. § 1291, we affirm,
holding that because the grantor retains enjoyment of a
GRAT, it is properly included in the gross estate.
I
A GRAT allows a grantor to transfer property to a
beneficiary while retaining the right to an annuity from the
transferred property. John F. Bergner, 44 U. Miami L. Ctr.
on Est. Plan. ¶ 401.1 (2019). The grantor creates an
irrevocable grantor trust for a fixed term of years, transfers
assets into it, and designates trustees and beneficiaries. She
receives an annuity for a specified term of years. Id. At the
end of the term, the GRAT dissolves and the property is
transferred to the beneficiaries. Howard Zaritsky, Tax
Planning for Family Wealth Transfers During Life: Analysis
with Forms, ¶ 12.06(1) (5th ed. 2013 & Supp. 2020).
At the time of transfer into a GRAT, property is subject
to a gift tax on the present value of the GRAT’s remainder
interest, valued according to the methodology in 26 U.S.C.
§ 7520. Id. A reduction in the transferred property’s gift
value for tax purposes is permitted if the recipient is a family
member and the transferor or a family member retains a
“qualified interest” in the property, which includes “any
interest which consists of the right to receive fixed amounts
payable not less frequently than annually.” 26 U.S.C.
§ 2702. For a GRAT, this means that the value of the
transferred property subject to the gift tax is lessened by the
amount of the retained annuity. Depending on the structure
of the GRAT, it is possible to eliminate the applicable gift
tax entirely by modifying the trust term and annuity amount
to zero out any remainder. Zaritsky, supra, ¶ 12.06(3)(c)(i).
This permits assets to be transferred to beneficiaries at the

BADGLEY V. UNITED STATES 7

termination of a GRAT’s term without the imposition of a
gift tax. Id. Moreover, if the term of a GRAT ends before
the grantor dies, the property is not included in the grantor’s
gross estate for purposes of the estate tax. See § 2036(a).
In this case, Patricia Yoder (“Decedent”) was married to
Donald Yoder, a fifty-percent partner in Y&Y Company, a
family-run general partnership and property development
company in southern California. After Mr. Yoder’s death in
1990, Decedent succeeded to his fifty-percent partnership
interest. In February 1998, Decedent created a GRAT to
transfer the partnership interest in Y&Y, valued at
$2,418,075, to her daughters, Judith Badgley and Pamela
Yoder. The interest was the only property placed in the
GRAT. Decedent retained a right to an annuity of $302,259
paid from the GRAT for fifteen years, equivalent to
12.5 percent of the date-of-gift value of the partnership
interest. In April 1999, Decedent filed a gift tax return
reporting the gift to her daughters of the GRAT’s remainder
interest and paid a gift tax of $180,606.
Decedent was both the grantor and trustee of the GRAT,
with her daughters serving as special trustees. The GRAT
instrument provided that the special trustees could make
additional distributions to Decedent if requested. At the end
of the fifteen-year annuity term or upon her death, whichever
occurred earlier, the GRAT’s corpus would pass to her
daughters. Decedent explained to them that if she did not
outlive the fifteen-year annuity term, the partnership interest
“would probably go back into her estate” for tax purposes.

8 BADGLEY V. UNITED STATES

From 2002 to 2012, Y&Y reported income ranging from
$994,642 to $1,325,478.
1
Half of Y&Y’s income was
distributed to the GRAT. Y&Y made cash distributions to
the GRAT ranging from $435,400 to $730,000. Although
neither party identified the source of the annuity payments
in a given year, these cash distributions were sufficient to
pay the annuity without decreasing the value of the
partnership interest or requiring the sale of any of Y&Y’s
holdings.
Decedent died on November 2, 2012, shortly before the
fifteen-year annuity period expired. The estate tax return
reported a total gross estate of $36,829,057. This included
the GRAT’s assets, which consisted of the Y&Y partnership
interest (valued at $6,409,000); $1,384,558 held in a bank
account; and $3,193,471 held in an investment account. The
estate paid $11,187,475 in taxes.
In 2016, Badgley, in her capacity as statutory executor
of Decedent’s estate, sought a refund of an overpayment of
Decedent’s estate tax in the amount of $3,810,004. She
asserted that the overpayment resulted from the inclusion of
the entire date-of-death value of the GRAT in Decedent’s
gross estate and argued that only the net present value of the
unpaid annuity payments should have been included.
The IRS did not act on Badgley’s refund claim within six
months, and Badgley filed a refund action in district court,
as authorized by 26 U.S.C. § 6532(a)(1). Both parties filed
motions for summary judgment. The district court denied
Badgley’s motion and granted the government’s cross-
motion. It held that Decedent’s retained annuity interest was

1
The parties have not produced evidence of Y&Y’s income before
2002.

BADGLEY V. UNITED STATES 9

both a retained right to income from and continued
enjoyment of the property. Both “strings” tied the GRAT to
Decedent, requiring inclusion of the entire date-of-death
value of the GRAT in her gross estate.
2
The court also
concluded that 26 C.F.R. § 20.2036-1(c)(2), the Treasury
regulation construing § 2036(a)(1) to apply to GRATs, was
valid. Badgley timely appealed.
II
We review a district court’s order granting or denying
summary judgment de novo, examining all evidence in the
light most favorable to the non-moving party. Oswalt v.
Resolute Indus., Inc., 642 F.3d 856, 859 (9th Cir. 2011). The
court “does not weigh the evidence or determine the truth of
the matter, but only determines whether there is a genuine
issue for trial,” Balint v. Carson City, 180 F.3d 1047, 1054
(9th Cir. 1999) (en banc), and whether the district court
“applied the relevant substantive law,” Tzung v. State Farm
Fire & Cas. Co., 873 F.2d 1338, 1339–40 (9th Cir. 1989).
Section 2036(a) provides:
The value of the gross estate shall include the
value of all property to the extent of any
interest therein of which the decedent has at
any time made a transfer (except in case of a
bona fide sale for an adequate and full
consideration in money or money’s worth),
by trust or otherwise, under which he has
retained for his life or for any period not

2
26 C.F.R. § 20.2036-1(c)(2) caps this amount at the total value of
the GRAT’s corpus on the date of death rather than the value otherwise
calculated under the formula provided in the section.

10 BADGLEY V. UNITED STATES

ascertainable without reference to his death
or for any period which does not in fact end
before his death—
(1) the possession or enjoyment of, or the
right to the income from, the
property . . . .
Id. “The general purpose of the statute [i]s to include in a
decedent’s gross estate transfers that are essentially
testamentary—i.e., transfers which leave the transferor a
significant interest in or control over the property transferred
during his lifetime.” United States v. Estate of Grace,
395 U.S. 316, 320 (1969).
3
To this end, a decedent’s gross
estate includes the value of property transferred while the
decedent was alive if the decedent retained possession of,
enjoyment of, or the right to income from the property.
These three factors—possession, enjoyment, and income—
are referred to as “strings” tying the transferor to the property
despite the transfer. See, e.g., United States v. Brown,
134 F.2d 372, 373 (9th Cir. 1943).
A
At the outset, we address Badgley’s argument that
because § 2036(a) does not include the term “annuity,” it
unambiguously does not apply to annuities. In § 2036(a)(1),
Congress set forth the three “strings” tying a grantor to
property, but did not specify which property interests
qualify. One could imagine a version of the statute that

3
Estate of Grace addressed a prior version of § 2036(a), § 811(c) of
the Internal Revenue Code of 1939. Section 2036(a) has been amended
since its original passage in 1916, but Badgley does not argue that these
amendments are substantive.

BADGLEY V. UNITED STATES 11

includes property in the grantor’s gross estate if the decedent
“retained an annuity drawn from the property” or “lived on
the property for more than half a year.” But Congress did
not include such specifications. Instead, it instructed us to
look to the result—possession, enjoyment, or a right to
income therefrom—rather than the form those strings take.
See Estate of McNichol, 265 F.2d at 673 (“[T]he criterion for
determining whether property transferred inter vivos is
subject to a death tax is the effect of the transfer . . . .”).
The fact that § 2036(a)(1) does not include the term
“annuity” does not exclude annuities from its ambit. This is
consistent with the decisions of the Supreme Court and our
sibling circuits, which have concluded that interests such as
reversionary interests, the power of appointment, and rent—
also not expressly listed in § 2036(a)—nevertheless fall into
one of the three categories. See, e.g., Estate of Spiegel v.
Comm’r, 335 U.S. 701, 705 (1949) (potential reversionary
interest in property is possession or enjoyment); Fid.-Phila.
Tr. Co. v. Rothensies, 324 U.S. 108, 111 (1945)
(beneficiaries’ estates “took effect in enjoyment” only at
transferor’s death because she held power of appointment);
Estate of McNichol, 265 F.2d at 671 (rent from property is
enjoyment).
As far back as the 1940s, the Supreme Court rejected the
proposition that taxpayers could “escape the force of this
section by hiding behind the legal niceties contained in
devices and forms created by conveyances.” Church’s
Estate, 335 U.S. at 646 (quotation omitted); see also Fid.-
Phila., 324 U.S. at 111 (“The application of this tax does not
depend upon elusive and subtle casuistries.” (quotation
omitted)). We reject Badgley’s argument that because
§ 2036(a)(1) does not expressly mention annuities, the full

12 BADGLEY V. UNITED STATES

value of Decedent’s GRAT cannot be included in the gross
estate.
B
We turn to the main issue: whether the annuity flowing
from a GRAT “fall[s] . . . within the class intended to be
treated as substitutes for wills” by § 2036(a)(1). Church’s
Estate, 335 U.S. at 646. We need only look to Supreme
Court precedent construing the statute to conclude that it
does. To avoid the force of § 2036(a), a grantor must
“absolutely, unequivocally, and without possible
reservations, part[] with all of his title and all of his
possession and all of his enjoyment of the transferred
property . . . [and the transfer] must be unaffected by whether
the grantor lives or dies.” Id. at 645–46. Thus, § 2036(a)(1)
focuses on both the grantor, who must completely divest
herself of possession, enjoyment, and income, and the
beneficiaries, whose interest must “take effect” prior to the
grantor’s death. See id. at 637.
From the passage of the first federal estate tax in 1916
until the Supreme Court decided May v. Heiner, 281 U.S.
238 (1930), the Treasury Department treated trust transfers
that distributed the corpus at the grantor’s death but reserved
a life income to the grantor as falling within the sweep of
§ 2036(a)’s precursors. See Church’s Estate, 335 U.S.
at 639. In May, however, the Court “upset[] the century-old
historic meaning and the long standing Treasury
interpretation of the ‘possession and enjoyment’ clause” by
holding that “because legal title had passed from the settlor
irrevocably when the trust was executed,” the retention of
income did not constitute an interest in the transferred
property. Id. at 639–41. Congress quickly corrected the
Court, amending the statute to clarify that retention of any
possession, enjoyment, or income from the transferred

BADGLEY V. UNITED STATES 13

property rendered the property includable. See id. at 639–40
(discussing congressional action following May, 281 U.S.
at 243); H.R.J. Res. 529, 71st Cong. (1931) (enacted).
The Court deviated from May’s holding when it
addressed a similar question in Helvering v. Hallock,
309 U.S. 106 (1940). Hallock held that transfers of property
with retained reversionary interests made the transfers
contingent upon the decedent’s death and thus were “too
much akin to testamentary dispositions not to be subjected
to the same” estate tax. Id. at 112.
In Church’s Estate, the Court explicitly overruled May,
holding that retention of the right to income for life from
transferred stocks constituted possession or enjoyment of the
stocks. 335 U.S. at 637, 641, 644–45. Looking to the
historical meaning of “possession or enjoyment,” the Court
noted its “return[] to the interpretation of the ‘possession or
enjoyment’ section under which an estate tax cannot be
avoided by any trust transfer except by a bona fide transfer
in which the settlor, absolutely, unequivocally, irrevocably,
and without possible reservations, parts with all of his title
and all of his possession and all of his enjoyment of the
transferred property.”
4
Id. at 637–39, 645.
Further, “[i]t is well settled that the terms ‘enjoy’ and
‘enjoyment,’ as used in various estate tax statutes, are not

4
Following Church’s Estate, Congress passed the Technical
Changes Act, which proscribed retroactive application of Church’s
Estate to any transfers made prior to March 4, 1931 by a decedent who
died prior to January 1, 1950, thereby exempting transfers made in
reliance on May. See Comm’r v. Estate of Canfield, 306 F.2d 1, 4–6 (2d
Cir. 1962). In 1953, it extended the exemption to all transfers completed
before March 4, 1931, regardless of the decedent’s date of death. See id.
at 5.

14 BADGLEY V. UNITED STATES

terms of art, but connote substantial present economic
benefit rather than technical vesting of title or estates.”
United States v. Byrum, 408 U.S. 125, 145 (1972)
(quotations omitted); see also Comm’r v. Estate of Holmes,
326 U.S. 480, 486 (1945) (same). In Estate of McNichol, the
Third Circuit held that rent from income-producing real
estate constituted enjoyment. 265 F.2d at 671. McNichol
had transferred real estate to his children, with an oral
agreement to retain the rent from the property. Id. at 669.
Concluding that “[h]e who receives the rent in fact enjoys
the property,” the court held that “[t]he conclusion is
irresistible that the petitioners’ decedent ‘enjoyed’ the
properties until he died” because “one of the most valuable
incidents of income-producing real estate is the rent which it
yields.” Id. at 671, 673; see also Estate of Stewart v.
Comm’r, 617 F.3d 148, 154–55 (2d Cir. 2010) (holding that
when determining who retains “substantial present
economic benefit,” “[a]ll we have to do is follow the
money”); cf. Greene v. United States, 237 F.2d 848, 853 (7th
Cir. 1956) (holding beneficiaries who received income from
securities and then paid it to decedent did not have beneficial
possession or enjoyment because they “were neither able to
retain nor to enjoy the income from the securities”).
In Commissioner v. Clise, 122 F.2d 998 (9th Cir. 1941),
involving annuity contracts outside of the trust context, we
concluded that when a grantor retained the “economic
benefit” of annuity payments, she retained enjoyment of the
property. Id. at 999, 1003–04. Because the annuities went
to Clise for her lifetime and to a designated second annuitant
upon her death, “[t]he practical effect of the annuity
contracts was to reserve to [her] the enjoyment of the
property transferred and to postpone the fruition of the
economic benefits thereof to the second annuitants until her
death.” Id. at 1004; see also Forster v. Sauber, 249 F.2d

BADGLEY V. UNITED STATES 15

379, 380 (7th Cir. 1957) (holding retained annuity includable
in gross estate because “grantor has retained the economic
enjoyment of the contracts for life”); Mearkle’s Estate v.
Comm’r, 129 F.2d 386, 388 (3d Cir. 1942) (holding annuity
contracts includable because their practical effect was “to
reserve to the annuitant the enjoyment of the property
transferred and to postpone the fruition of the economic
benefits to the second annuitant until after the death of the
first”).
We conclude that when a grantor derives substantial
present economic benefit from property, she retains the
enjoyment of the property for purposes of § 2036(a)(1).
5
As
in Clise, Decedent’s annuity was a “substantial present
economic benefit,” requiring inclusion of the GRAT’s date-
of-death value in her estate. She received $302,259 per year
for fifteen years through the annuity. Moreover, because the
partnership was the only property placed in the GRAT, the
annuity stemmed from that property interest. As “something
of value enjoyed by her,” Bayliss v. United States, 326 F.2d
458, 461 (4th Cir. 1964), the annuity reserved to Decedent
the enjoyment of the partnership interest during her lifetime.
And because Decedent died before the termination of the
GRAT, the property was not transferred to its beneficiaries
before her death—and remained tied to her by the string she
created.

5
We reject Badgley’s argument that “economic benefit” means
“income.” Certainly, income is one type of economic benefit, see, e.g.,
Church’s Estate, 335 U.S. at 644–45, but it is not the sole form that
economic benefit may take.

16 BADGLEY V. UNITED STATES

C
Badgley argues that the Supreme Court has disavowed
the “substance-over-form” approach described above in
favor of a plain-language method of statutory interpretation.
She cites Byrum as a more recent Supreme Court decision
addressing § 2036(a). But Byrum itself states that enjoyment
connotes substantial present economic benefit. 408 U.S.
at 145.
We agree with Badgley that statutory interpretation
begins with the plain meaning of the statute at the time of its
drafting. See Wis. Cent. Ltd. v. United States, 138 S. Ct.
2067, 2070 (2018). Yet “[w]hile every statute’s meaning is
fixed at the time of enactment, new applications may arise in
light of changes in the world,” and courts must determine
whether new applications fit within the statute’s meaning.
Id. at 2074 (alterations omitted). That precisely is what we
do here: we begin with the text of § 2036(a)(1) and
determine whether, within the statute’s meaning, a grantor’s
retained interest in a GRAT constitutes enjoyment.
The Court’s “substance over form” approach is entirely
consistent with this method of statutory interpretation.
Section 2036(a)(1) provides that property is included in a
gross estate if the decedent retained possession or enjoyment
of the property or the right to income from it. In applying
the statute, we focus on the substance of the retained interest.
Labels are not dispositive. See Church’s Estate, 335 U.S.
at 644 (“However we label the device if it is but a means by
which the gift is rendered incomplete until the donor’s death
the possession or enjoyment provision applies.” (quotation
and alteration omitted)). “[T]echnical concepts pertaining to
the law of conveyancing cannot be used as a shield against
the impact of death taxes when in fact possession or

BADGLEY V. UNITED STATES 17

enjoyment of the property by the transferor . . . ceases only
with his death.” Estate of McNichol, 265 F.2d at 673.
D
Badgley makes much of the distinction between a trust’s
income and its principal. She argues that because the
GRAT’s principal exceeded the annuity for several years of
the fifteen-year term, the annuity could have been drawn
from prior year distributions from the partnership and the
interest earned on those distributions. We decline her
invitation to speculate about the precise part of the trust from
which Decedent’s annuity could have been drawn.
Further, such an inquiry is irrelevant. Badgley argues
that Decedent’s decision not to use the word “income” in the
GRAT document should permit her to avoid estate tax
responsibilities. But as noted above, when determining
whether a decedent has retained a string under § 2036(a), our
charge is to look at the substance of the arrangement, rather
than at formalities. See, e.g., Church’s Estate, 335 U.S.
at 644. The only property in the GRAT was the partnership
interest, and the annuity was drawn from the GRAT. Thus,
any money received by Decedent as part of the annuity came
from the partnership interest, and, as discussed above,
conveyed substantial economic benefit to Decedent. The
GRAT corpus was within § 2036(a)(1)’s reach.
6

6
Because we conclude that in any event, Decedent’s annuity
constituted enjoyment under § 2036(a)(1), we do not address the parties’
arguments whether Decedent retained a right to income from the
property. We also do not reach the government’s argument that the
GRAT was part of the gross estate because Decedent continued to
exercise managerial duties for and retain tax benefits from the
partnership after creating the GRAT.

18 BADGLEY V. UNITED STATES

E
Inclusion of the GRAT’s corpus in Decedent’s gross
estate should come as no surprise to GRAT grantors. A
GRAT’s risks are well-known, with the foremost being that
the grantor may die before the GRAT’s termination. See
Kerry O’Rourke Perri, Understanding Grantor Retained
Annuity Trusts, Practical Law Trusts & Estates (2020);
Bergner, supra, ¶ 401.4.A.2 (“There is no solution to the
problem of dying earlier than expected.”). In setting up a
GRAT, a grantor makes the decision that the potential
benefits outweigh this risk. If the grantor does not die before
the termination of a GRAT, the property passes to the
beneficiaries free of the estate tax and with a gift tax that is
diminished or even eliminated by the value of the retained
annuity. Zaritsky, supra, ¶ 12.06. This benefit exceeds that
of either immediate transfer of the properties (which would
result in the application of the gift tax to the entire value of
the property) or a transfer at death (which would result in the
application of the estate tax to the entire property). GRATs,
like other tax-avoidance devices, cannot “escape the force of
this section by hiding behind legal niceties contained in
devices and forms created by conveyancers.” Church’s
Estate, 335 U.S. at 646 (quotation omitted).
III
Badgley also challenges 26 C.F.R. § 20.2036-1(c)(2),
which includes the formula the IRS uses to calculate the
portion of the property includable under § 2036(a). The
regulation interprets § 2036(a) to provide that GRATs are

BADGLEY V. UNITED STATES 19

includable in a grantor’s gross estate because they are
sufficiently tied to the grantor.
7

Badgley’s argument regarding the formula is limited to
two sentences and two footnotes, without a single citation to
legal authority. As we have previously held, arguments
presented in such a cursory manner are waived. Federal
Rule of Appellate Procedure 28(a)(8)(A) requires an
appellant’s opening brief to contain the “appellant’s
contentions and the reasons for them, with citations to the
authorities and parts of the record on which the appellant
relies.” Id. “Arguments made in passing and not supported
by citations to the record or to case authority are generally
deemed waived.” United States v. Graf, 610 F.3d 1148,
1166 (9th Cir. 2010).
Even were Badgley’s challenge to the formula not
waived, it would not apply to this case. She asserts that the
formula is flawed because it assumes that the annuity
payment will come entirely from the GRAT’s income, rather
than contemplating the amortization of principal. But she
does not argue that Decedent’s annuity contemplated the
amortization of principal, or even that the formula is flawed
with regards to Decedent’s annuity. She also does not
contest the government’s assertion that her argument about
the formula does not apply to Decedent’s annuity. Rather,
she merely contends the formula might be arbitrary if
applied to a short-term GRAT that contemplates the
amortization of principal as the primary source for the
annuity payment, which is not the case here. Without

7
Badgley argues this is an invalid interpretation of the statute.
Because we conclude that GRATs are includable under § 2036(a)(1), we
do not address this argument.

20 BADGLEY V. UNITED STATES

sufficient or compelling argument, we decline to address the
validity of § 20.2036-1(c)(2).
IV
AFFIRMED.