In Nosirrah Management, LLC vs. AutoZone, Inc. (W.D. Tenn. April 14, 2025), a district court held on summary judgment that an insider didn’t have to disgorge his profits from the sale of stock received from a grantor retained annuity trust.
The taxpayer, William Rhodes III, established a GRAT with shares of stock in Autozone, Inc. As an insider of Autozone, his transactions with the stock are subject to insider trading rules. Six months after the GRAT paid him his annuity in shares, he sold those shares for a profit. Another shareholder (Nosirrah Management LLC) brought a derivative action on behalf of the company to disgorge William’s profit.
Section 16(b) of the Securities Exchange Act permits a corporation to recover profits insiders make on certain transactions. The insider, who owns more than 10% of any one class of the company’s securities, must have made a purchase and a sale within a 6-month period. However, there’s an exception for a transaction that’s only a “change in the form of beneficial ownership without changing a person’s pecuniary interest” in the securities.
Usually, funding a GRAT and receiving an annuity payment would constitute a sale and purchase, respectively, but a 1997 No-Action Letter issued by the SEC held that creation of a GRAT and the subsequent annuity payment to the grantor qualify for the “change in the form of beneficial ownership” exception.
Many GRATs include a so-called “swap” power in which the grantor is permitted to substitute assets of equivalent value with the GRAT. Prior case law in the Southern District of New York (Morales v. Quintiles Transnational Corp. 25 F. Suppp. 2d 369 (S.D. N.Y 1998) and Donoghue v. Smith, 2022 U.S. Dist. LIEXIS 76071 (S.D. N.Y. April 26, 2022)) has held that exercising the swap power could be considered a purchase under the insider trading rules. In this case, the GRAT included a swap power, but the grantor didn’t exercise it. A preliminary 2024 Order in the case addressing evidentiary issues denied a motion to dismiss and indicated that the mere existence of the swap power, without exercise, could trigger the insider trader rules. Estate planners were particularly interested in seeing how this issue was resolved.
The final 2025 Order ruling on motions for summary judgment confirmed that the transaction qualified for the “change in beneficial ownership” exception. The court noted that William had an indirect beneficial interest in the securities through the GRAT. After the annuity payment, he had a direct interest in the securities. That change in beneficial interest, from indirect to direct, was in form only and qualified for the exception.
The 2025 Order didn’t mention the issue of the swap power, so there’s no definitive answer on this point, but it would appear that merely including a swap power isn’t problematic. However, cautious estate planners may still want to think carefully about the risks of including a swap power for insider trading.
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