PLR 200450009: Late GST allocation to trust may secure zero inclusion ratio

Plain-English summary

A taxpayer funded a trust for a child and grandchild but, after relying on advisers, filed no gift tax return for the transfer and allocated no generation skipping transfer tax exemption. Later estate planning professionals found the omission. The IRS granted 60 days to allocate the taxpayer's available exemption on Form 709, effective as of the original transfer and using its gift tax value. If the allocation equaled that value, the trust would have a zero inclusion ratio from the transfer date.

Ruling snapshot

• Question: Could the taxpayer make a late GST allocation and obtain a zero inclusion ratio for the trust?
• Outcome: Approved, if sufficient available exemption was allocated as directed.
• Key authorities: IRC §§ 2631, 2632, 2642(g); Treas. Reg. § 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200450009
Third Party Communication: None
Release Date: 12/10/04
Date of Communication: Not Applicable
Index Number: 2642.00-00, 9100.00-00
Person To Contact:
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----------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
CC:PSI:B09
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PLR-112870-04
Date:
September 01, 2004

Legend:

Date 1 = ----------------------
Taxpayer = ---------------------------------------------------------------------------------------------
-------------------------
Trust = ----------------------------
Child = --------------------
Grandchild = --------------------------
z = -----
Accountants = ------------------------------------------------- Attorney = ------------------------

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

This is in response to your authorized representative’s letter dated February 19, 2004, requesting an extension of time under ' 2642(g) of the Internal Revenue Code and '§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make an allocation of Generation-Skipping Transfer (GST) exemption.

The facts and representations submitted are summarized as follows: On Date 1, Taxpayer established the Trust, an irrevocable trust for the benefit of Child and Grandchild.

Article Four of the Trust provides, generally, that during the life of Child, the trustee shall pay to or for the benefit of Child so much of the annual net income of the Trust, up to the whole thereof, as the trustee may in his sole discretion determine. Upon the death of Child, if Grandchild has not attained the age of 45 years, the trustee shall pay to or apply for the benefit of Grandchild so much of the annual net income of the Trust, up to the whole thereof, as the trustee may, in his sole discretion, determine reasonably necessary for the health, education, and support of Grandchild. The trustee may, in the trustee’s discretion, pay to or apply for the benefit of Grandchild such amounts of trust principal, up to the whole thereof, as the trustee deems advisable for the health, education or support of Grandchild in her accustomed manner of living. If

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Grandchild is 45 years of age at the time of Child’s death or upon Grandchild attaining age 45, the Trust shall terminate and all of the trust estate, including any accumulated or undistributed net income of the trust, shall be distributed to Grandchild.

On Date 1, Taxpayer funded the Trust with $z cash. It is represented that no subsequent gifts have been made to the Trust. Taxpayer relied on Accountants and Attorney to advise her with respect to tax matters, however, Taxpayer was not advised to file a Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return (“gift tax return”) for Year 1. As a result, no gift tax return was filed for Year 1 and no allocation of Taxpayer’s GST exemption was made for the Year 1 transfer to the Trust. Subsequently, Taxpayer retained the services of estate planning professionals. Upon their review of Taxpayer’s prior gift tax returns and trust documents, the estate planning professionals discovered that a Year 1 gift tax return had not been filed and that none of Taxpayer’s GST exemption had been allocated to the Trust.

Taxpayer has requested the following rulings: (1) an extension of time under ' 2642(g) and '' 301.9100-1 and 301.9100-3 to make an allocation of Taxpayer=s GST exemption with respect to the Year 1 transfer to the Trust; (2) that the allocation will be made based on the value of the property transferred to the Trust as of the date of the original transfer; and (3) that if relief is granted and if an allocation is made, the Trust will have an inclusion ratio of zero as of Date 1.

Section 2601 imposes a tax on every 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 Aapplicable rate@ as the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

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)) that 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 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)(i) of the Generation-Skipping Transfer Tax Regulations provides, in part, 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. An allocation of GST exemption to a trust is void to the extent the amount allocated exceeds the amount necessary to obtain an inclusion ratio of zero with respect to the trust.

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Section 2642(b)(1) provides that, except as provided in ' 2642(f), if the allocation of the GST 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, its value at the time of the close of the estate tax inclusion period, and such allocation shall be effective on and after the date of such transfer, 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.

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 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 ' 2642(g)(1), which was enacted into law on June 7, 2001.

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, 2001-2 C.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 election (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

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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 make an allocation of Taxpayer=s available GST exemption, with respect to the transfer to the Trust. The allocation will be effective as of the date of the transfer, and the gift tax value of the transfer to the Trust will be used in determining the amount of GST exemption to be allocated to the Trust. If an allocation of GST exemption is made pursuant to the grant of relief in this letter ruling and provided the amount of GST exemption allocated to the Trust is equal to the gift tax value of the transfer to the Trust on Date 1, the Trust will have an inclusion ratio of zero as of Date 1.

This allocation should be made on a Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return and filed with the Internal Revenue Service Center, Cincinnati, OH 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.

In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representatives.

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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 & Special Industries)