PLR 200411006: Spouses may allocate GST exemptions to two trusts late

Plain-English summary

A taxpayer funded two trusts for her daughters and their descendants. She and her spouse elected gift splitting, so each was treated as making half of the transfers, but their accounting firm failed to allocate their generation-skipping transfer (GST) tax exemptions on the gift tax returns. The IRS found that they qualified for an extension under Treas. Reg. § 301.9100-3. It gave both spouses 60 days to allocate their available exemptions on supplemental gift tax returns. The allocations would be effective as of the original transfer date and based on the property's value then. The IRS did not determine that value.

Ruling snapshot

• Question: May both spouses allocate GST exemptions late to their respective shares of transfers to two trusts?
• Outcome: Approved, with a 60-day deadline to file supplemental returns.
• Key authorities: IRC §§ 2513, 2642(g), 2652(a)(2); Treas. Reg. § 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200411006
Release Date: 03/12/2004
Index Number: 2642.01-00, 9100.00-00

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Person To Contact:
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--------------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
-In Re: --------------------------------
CC:PSI:B09 – PLR-156351-03
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Date:
December 8, 2003

Legend:

Trust 1 = ------------------------------------------------------------------------
Trust 2 = ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Taxpayer 1 = ---------------------------------------------------
Taxpayer 2 = ---------------------------------------------------
Daughter 1 = -------------------------------------------------
Daughter 2 = ----------------------------------------------
Company = ------------------------------------
Accounting Firm = ---------------------------------------
Date 1 = ------------------
Date 2 = ----------------
a = -----------
b = -----------

Dear ----------------------------:

This is in response to your letter dated September 3, 2003, and subsequent correspondence, in which you requested an extension of time pursuant to ' 2642(g) of the Internal Revenue Code and ' 301.9100-3 of the Procedure and Administration Regulations to make the allocation of Taxpayer 1’s and Taxpayer 2’s generation- skipping transfer (GST) tax exemptions to transfers made to two irrevocable trusts.

A summary of the facts and representations submitted is as follows. On Date 1, Taxpayer 1 created two irrevocable trusts, one for the benefit of Daughter 1 and her descendants (Trust 1) and one for the benefit of Daughter 2 and her descendants (Trust 2). The terms of Trusts 1 and 2 are identical.

Article Third, Paragraph A1 of each Trust provides that the trustee may make discretionary distributions of trust income and principal to the daughter for whom the trust was established (beneficiary). Income not distributed is to be added to principal. 2 PLR-156351-03

Article Third, Paragraph A2 provides that each Trust will terminate when the beneficiary dies. Upon termination, the trust’s remaining principal and undistributed income is to be distributed among Taxpayer 1’s then living issue as directed by a testamentary special power of appointment exercised by the beneficiary. Property not effectively appointed is to be distributed to the beneficiary’s then living issue, if any; if none, pursuant to the terms of Article Third, Paragraph C.

Article Third, Paragraph C provides that, in the event the beneficiary’s sister survives the beneficiary’s death, the remaining principal and income from the beneficiary’s trust is to be distributed to the sister’s trust and disposed of as part thereof. If the beneficiary’s sister is deceased, the beneficiary’s remaining trust property is to be distributed to the sister’s then living issue, if any; if none to Taxpayer 1’s then living issue.

On Date 1, Taxpayer 1 transferred to each Trust a shares of stock in Company. Taxpayer 1 reported the value of each transfer at $b. Taxpayers 1 and 2 retained Accounting Firm to prepare their Forms 709, United States Gift (and Generation- Skipping Transfer Tax) Returns for the Date 1 year. On their respective Forms 709, Taxpayers 1 and 2 consented to treat Taxpayer 1’s transfers to Trusts 1 and 2 as made one-half by each pursuant to ' 2513. In preparing the gift tax returns, Accounting Firm failed to effectively allocate Taxpayer 1’s and Taxpayer 2’s GST exemptions to the Date 1 transfers to Trusts 1 and 2. On Date 2, while in the process of updating the estate plan for Taxpayer 1 and Taxpayer 2, their new attorney discovered the failure.

It has been represented that Taxpayers 1 and 2 have sufficient GST exemption available to allocate to the Date 1 transfers to Trusts 1 and 2 and that, aside from the Date 1 transfers, there have been no additional transfers to Trusts 1 and 2.

Taxpayers 1 and 2 request an extension of time to allocate their respective GST exemptions to the Date 1 transfers to Trusts 1 and 2, and a ruling that such allocations will be based on the value of the property transferred to Trusts 1 and 2 on Date 1.

Law and Analysis:

Section 2601 imposes a tax on every generation-skipping transfer (GST). A GST 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 3 PLR-156351-03

maximum federal estate tax rate and the inclusion ratio with respect to the transfer. Section 2642(a) provides the method for determining the inclusion rato.

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 26.2632-1(b)(2) of the Generation-Skipping Transfer Tax Regulations provides that an allocation of GST exemption to property transferred during the transferor’s lifetime, other than in a direct skip, is made on Form 709.

As applicable during the year at issue, § 2642(b)(1) provided in relevant part that if the allocation of the GST exemption to any transfers of property is made on a timely filed gift tax return or is deemed to be made under § 2632(b)(1) [deemed allocations to certain lifetime direct skips] –

(A) the value of such property for purposes of determining the inclusion ratio shall be its value for purposes of chapter 12, and

(B) such allocation shall be effective on and after the date of such transfer.

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). Such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of § 2642(g)(1)(A), which was enacted into law on June 7, 2001.

Section 2642(g)(1)(B) provides that in determining whether to grant relief, 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. Section 2642(g)(1)(B) further provides that for purposes of determining whether to grant relief, the time for making the allocation shall be treated as if not expressly prescribed by statute. 4 PLR-156351-03

Section 2652(a)(2) provides that if, under § 2513, one-half of a gift is treated as made by an individual and one-half of the gift is treated as made by the spouse of such individual, such gift shall be so treated for purposes of the generation-skipping transfer tax.

Notice 2001-50, 2001-34 I.R.B. 189, provides that under § 2624(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 transfer 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 election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the 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) 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.

Conclusion:

Based on the facts submitted and the representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. Therefore, Taxpayer 1 and 5 PLR-156351-03

Taxpayer 2 are granted an extension of time of sixty (60) days from the date of this letter to allocate their available GST exemptions to the Date 1 transfers to Trusts 1 and 2. The allocations will be effective as of Date 1, and should be made based on the value of the property transferred to Trust 1 and Trust 2 on Date 1.

The allocations should be made on supplemental Forms 709 for the Date 1 year and filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to each supplemental Form 709. Two copies are enclosed for this purpose.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer(s) 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 expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed or implied regarding the value of property Taxpayer 1 transferred to Trusts 1 and 2 on Date 1 for federal transfer tax purposes.

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

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your representative.

Sincerely,

Heather C. Maloy

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

Enclosure: Copy for § 6110 purposes
Two copies of this letter

Cc: