PLR 200419022: Late GST allocation uses original value of trust gift

Plain-English summary

A taxpayer transferred stock to a trust for descendants but did not timely file a gift tax return or allocate generation-skipping transfer (GST) tax exemption. She said her attorney and accountant had not advised her to do so, and she later filed a return with a late allocation. The IRS granted 60 days to file a supplemental Form 709 with a proper allocation under IRC § 2642(g) and the election relief regulations. The allocation is effective on the original transfer date, and the gift tax value of that transfer is used to determine the exemption allocated. The IRS expressly did not decide the gift tax value of the stock.

Ruling snapshot

• Question: Can a late GST exemption allocation to a descendant trust take effect on the original stock transfer date?
• Outcome: Approved: 60-day extension to file a supplemental Form 709 with the allocation.
• Key authorities: IRC § 2642(g)(1); Treas. Reg. § 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200419022
Release Date: 5/7/04
Index Number: 9100.00-00, 2642.00-00

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Person To Contact:
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------------------------, ID No. -------------
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Telephone Number:
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In Re: Private Letter Ruling Request for
Refer Reply To:
-------------------------------- CC:PSI:B09 / PLR-163832-03
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Date:
January 21, 2004

Legend

Taxpayer = -------------------------------------------------------------------------------------------------
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Trust = -------------------------------------------------------------------------------------------------
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Date 1 = -------------------
x = -----------
Year 1 = -------
Date 2 = -----------------------

Dear Sir:

This is in response to your letter dated September 22, 2003, and subsequent correspondence, requesting an extension of time under § 2642(g) of the Internal Revenue Code and § 301.9100-3 of the Procedure and Administration Regulations to make an allocation of Taxpayer’s generation-skipping transfer (GST) tax exemption.

The facts and representations submitted are summarized as follows: Taxpayer created Trust on Date 1. Trust is an irrevocable trust for the primary benefit of Taxpayer’s descendants.

Item II of the Trust agreement states that the corporate trustee shall, in its discretion, distribute net income and principal of the trust in quarterly or more frequent installments, per stirpes among Taxpayer’s descendants living at the time of each payment. Any income not paid out currently shall be accumulated and added to the principal of the trust.

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Potential beneficiaries include individuals who are two or more generations below the grantors’ generation, therefore, distributions from Trust may be subject to the GST tax.

On Date 1, which is in Year 1, Taxpayers transferred publicly traded stock valued at $x to Trust. Taxpayer failed to timely file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return for Year 1. Taxpayer relied upon the law firm and the certified public accountant representing her to advise her on tax matters. Taxpayer was not properly advised of the need to report the transfer on a Year 1 gift tax return or to make an allocation of her GST tax exemption to the transfer.

The error was later discovered by Taxpayer’s attorney. Taxpayer filed a gift tax return on Date 2 and made a late allocation of her GST tax exemption to Trust.

Taxpayer has requested an extension of time to make an allocation of her GST tax exemption under § 2642(g) with respect to the assets transferred to Trust in Year 1. In addition, Taxpayer requests that the allocation be based on the value of the assets transferred to Trust, as of the original transfer.

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 2631(a) provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST tax 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 2632(a)(1) provides that any allocation by an individual of his or her GST tax 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(b)(1) provides that, except as provided in § 2642(f), if the allocation of the GST tax exemption to any transfers of property is made on a gift tax return filed on or before the date prescribed by § 6075(b) for such transfer or is deemed to be made under § 2632(b)(1) or (c)(1) the value of such property for purposes of § 2642(a) shall be its value as finally determined for purposes of chapter 12 (within the meaning of § 2001(f)(2)), or, in the case of an allocation deemed to have been made at the close of an estate tax inclusion period, on and after the close of such estate tax inclusion period.

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Section 2642(g)(1)(A) provides, generally, 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 tax exemption described in § 2642(b)(1) or (2), and an election 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 tax 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 GST 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 six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except in subtitles E, G, H, and I.

Section 301.9100-3(a) provides that, in general, requests for extensions of time for regulatory elections that do not meet the requirements of § 301.9100-2 must be made under the rules of § 301.9100-3.

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 election 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.

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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 to 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 file a supplemental Form 709 for the Year 1 transfer to Trust. The Form 709 should include a Notice of Allocation properly allocating Taxpayer’s GST exemption to the Year 1 transfer. The allocation will be effective as of the date of the transfer, and the gift tax value of the transfer to Trust will be used in determining the amount of GST tax exemption to be allocated to Trust. The inclusion ratio for Trust will be determined under §§ 2642(a) and 2642(b). A copy of this letter should be attached to the supplemental Forms 709 and filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy is included for this purpose.

Except as expressly provided herein, no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter. We are specifically not ruling on the gift tax value of the transfers to Trust.

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.

Pursuant to the Power of Attorney on file with this office, this letter is being sent to the taxpayers’ representative.

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

Sincerely,

Heather C. Maloy

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

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Enclosures
Copy of this letter
Copy for §6110 purposes

Cc: