PLR 200402018: Estate gets more time to allocate GST exemption

Plain-English summary

An executor filed a timely estate tax return without Schedule R after relying on a tax professional's advice that no special allocation of generation skipping transfer tax exemption was needed. The executor discovered the omission after filing and sought to allocate the decedent's unused exemption to two charitable remainder unitrusts. The IRS concluded that the executor qualified for relief based on reasonable reliance on the professional. It gave the executor 60 days from the letter date to make the allocations on a supplemental estate tax return, effective as of the decedent's death.

Ruling snapshot

• Question: Could the executor make late allocations of the decedent's GST exemption to two trusts?
• Outcome: Approved: a 60 day extension was granted.
• Key authorities: IRC §§ 2631, 2632, and 2642(g); Treas. Reg. § 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200402018
Washington, DC 20224
Releaser Date: 1/9/2004
Index Numbers: 2632.01-00 Person to Contact:
2642.00-00
9100.19-00
Telephone Number:

Refer Reply To:
CC:PSI:4-PLR-128121-03
Date:
OCTOBER 07, 2003

Re:

LEGEND:

Decedent -
Trust -
Taxpayer -

CPA -
Date 1 -
Date 2 -
Date 3 -
x
-

Dear
:

This is in response to your letter dated April 24, 2003, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations and § 2642(g) of the Internal Revenue Code to make allocations of generation-skipping transfer (GST) exemptions to transfers to trusts.

The facts and representations submitted are summarized as follows:

On Date 1, Decedent created and funded Trust, a revocable family trust.
Decedent died Date 2. Under Decedent’s will, the residue of Decedent’s estate was bequeathed to Trust. As finally amended, Trust provided that upon the death of Decedent, $x was to be distributed to a charitable remainder unitrust (Unitrust 1) for the benefit of Decedent’s grandchild and the balance of the Trust estate was to be distributed to a charitable remainder unitrust (Unitrust 2) for the lifetime benefit of Decedent’s son, followed by the lifetime benefit to grandchild. 2 PLR-128121-03

Taxpayer, Decedent’s executor, hired CPA to prepare the Form 706. The Form 706, as timely filed on Date 3, did not contain a Schedule R. Approximately three months after the return was filed, the executor discovered the failure to file Schedule R and contacted CPA concerning the GST allocation. The CPA promised to review the situation. Within the year, the executor contacted CPA again. Shortly thereafter, the executor hired new counsel to review the GST allocation issue.

Affidavits from CPA indicate that CPA determined that a Schedule R was not required in order to specially allocate Decedent’s available GST exemption to Trust. The executor had relied on CPA’s advice and believed CPA was competent to render advice on federal estate tax and GST matters. Affidavits from the executor indicate a continued attempt to resolve the issue with CPA and the subsequent hiring of new counsel to resolve the allocation issue.

Taxpayer requests an extension of time under § 2642(g) and §§ 301.9100-1 and 301.9100-3 to make an allocation of Decedent’s available GST exemption first to Unitrust 1, with the balance of Decedent’s available GST exemption to Unitrust 2, effective as of the date of the transfers to the trusts.

Section 2601 imposes a tax on every generation-skipping transfer. A generation-skipping transfer is defined under § 2611(a) as (1) a taxable distribution, (2) a taxable termination, and (3) a direct skip.

Section 2602 provides that the amount of the tax is the taxable amount multiplied by the applicable rate. Section 2641(a) defines “applicable rate” as the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

Under § 2642(a)(1), the inclusion ratio with any property transferred in a generation-skipping transfer is generally defined as the excess of 1 over the “applicable fraction.” The applicable fraction, as defined in § 2642(a)(2), is a fraction, the numerator of which is the amount of the GST exemption allocated to the trust (or to property transferred in a direct skip), and the denominator is the value of the property transferred to the trust (or involved in the direct skip).

Section 2631(a) provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption of $1,000,000 (adjusted for inflation under § 2631(c)) which may be allocated by such individual (or his executor) to any property with respect to which such individual is the transferor. Section 2631(b) provides that any allocation under § 2631(a), once made, shall be irrevocable.

Section 2632(a) provides that any allocation by an individual of his or her GST exemption under § 2631(a) may be made at any time on or before the date prescribed for filing the estate tax return for such individual’s estate (determined with regard to extensions), regardless of whether such a return is required to be filed.

Section 2642(g)(1)(A) provides that the Secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of GST exemption described in § 2642(b)(1) or (2), and an election 3 PLR-128121-03

under § 2632(b)(3) or (c)(5). Such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph.

Section 2642(g)(1)(B) provides that in determining whether to grant relief under this paragraph, the Secretary shall take into account all relevant circumstances, including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the Secretary deems relevant. For purposes of determining whether to grant relief under this paragraph, the time for making the allocation (or election) shall be treated as if not expressly prescribed by statute.

Notice 2001-50, 2001-34 I.R.B. 189, provides that under § 2642(g)(1)(B), the time for allocating the GST exemption to lifetime transfers and transfers at death, the time for electing out of the automatic allocation rules, and the time for electing to treat any trust as a generation-skipping trust are to be treated as if not expressly prescribed by statute. The Notice further provides that taxpayers may seek an extension of time to make an allocation described in § 2642(b)(1) or (b)(2) or an election described in § 2632(b)(3) or (c)(5) under the provisions of § 301.9100-3.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Section 301.9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Under § 301.9100-1(b), a regulatory election includes an election whose due date is prescribed by a notice published in the Internal Revenue Bulletin. In accordance with § 2642(g)(1)(B) and Notice 2001-50, taxpayers may seek an extension of time to make an allocation described in § 2642(b)(1) or (b)(2) or an election described in § 2632(b)(3) or (c)(5) under the provisions of § 301.9100-3.

Requests for relief under § 301.9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government.

Section 301.9100-3(b)(1)(v) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.

Based on the facts submitted and the representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. Therefore, Taxpayer is granted an extension of time of 60 days from the date of this letter to allocate Decedent’s unused GST exemption, first to Unitrust 1, with the remaining unused GST exemption 4 PLR-128121-03

allocated to Unitrust 2. The allocations will be effective as of the date of Decedent’s death. This election should be made on a supplemental Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return and filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to the supplemental Form 709. A copy is enclosed for this purpose.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Except as specifically ruled herein, we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the Code.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Sincerely,

Heather C. Maloy
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter