Judith Badgley v. United States, 957 F.3d 969

In 1998 Decedent (Patricia Yoder) transferred her 50% partnership interest in Y&Y to an irrevocable grantor-retained annuity trust (GRAT) and retained a 15-year annuity of $302,259 per year (12.5% of date‑of‑gift value).
Decedent was grantor and trustee; daughters were remainder beneficiaries and special trustees; Decedent executed a gift tax return and paid gift tax on the remainder value.
Y&Y made distributions sufficient to pay the annuity without selling partnership assets; Decedent died in 2012 shortly before the GRAT term ended.
The estate included the GRAT’s full date‑of‑death value in gross estate and paid estate tax; Badgley (executor) sought a refund arguing only the present value of unpaid annuities should be included.
District court granted summary judgment for the IRS, holding the retained annuity constituted both enjoyment and a right to income under 26 U.S.C. § 2036(a)(1); Ninth Circuit affirmed.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether a grantor's retained annuity from a GRAT is a "string" under § 2036(a)(1) (possession/enjoyment/right to income)	Badgley: GRAT annuity is not a retained interest that makes corpus includable; § 2036(a) does not mention “annuity”	Government: Retained annuity yields substantial present economic benefit and thus is enjoyment/right to income making corpus includable	Court: Retained annuity is "enjoyment" (substantial present economic benefit); GRAT corpus included in gross estate (affirmed)
Whether omission of the word "annuity" in § 2036(a) excludes annuities from the statute	Badgley: statute’s plain text excludes annuities because it doesn’t use the term	Government: statute covers any interest that amounts to possession, enjoyment, or right to income regardless of label	Court: Text and precedent require examining substance over labels; omission does not exclude annuities
Validity/applicability of Treasury Reg. 26 C.F.R. § 20.2036-1(c)(2) formula for computing includable amount	Badgley: formula is flawed (assumes annuity paid from income, not principal amortization)	Government: Regulation interprets § 2036 and caps inclusion at corpus; in this case formula not shown to apply or affect result	Court: Argument waived for cursory treatment; in any event not outcome‑determinative here, so court declines to rule on validity

Comm’r v. Church’s Estate, 335 U.S. 632 (1949) (retention of right to income constitutes possession/enjoyment; donor must divest all enjoyment to avoid inclusion)
United States v. Byrum, 408 U.S. 125 (1972) ("enjoyment" means substantial present economic benefit)
May v. Heiner, 281 U.S. 238 (1930) (earlier holding that legal vesting could defeat inclusion; later overruled by Church’s Estate)
Helvering v. Hallock, 309 U.S. 106 (1940) (reversionary interests can make transfers effectively testamentary and taxable)
United States v. Estate of Grace, 395 U.S. 316 (1969) (purpose of § 2036 is to capture transfers that are essentially testamentary)
Commissioner v. Clise, 122 F.2d 998 (9th Cir. 1941) (annuity contracts reserving economic benefit are includable as enjoyment)
Estate of McNichol v. Comm’r, 265 F.2d 667 (3d Cir. 1959) (rent/income from property constitutes enjoyment)