PLR 200550029: Late GST exemption allocations may use original trust transfer values

Plain-English summary

A taxpayer funded two irrevocable trusts for his children but did not file a gift tax return or allocate his generation skipping transfer tax exemption to the transfers. He said his accountant had not advised him that the return was needed, and a later review uncovered the omission. The IRS granted 60 days from the ruling date to allocate the available exemption on Form 709. The allocations will take effect as of the original transfer date, using the gift tax value of the property when transferred. This lets the taxpayer seek the intended exemption treatment despite the missed filing.

Ruling snapshot

• Question: Could the taxpayer make late GST exemption allocations to the two trusts effective on the original transfer date?
• Outcome: Approved. The IRS granted 60 days to file Form 709, with original transfer date values used for the allocations.
• Key authorities: IRC § 2642(g); Treas. Reg. § 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200550029
Third Party Communication: None
Release Date: 12/16/2005
Date of Communication: Not Applicable
Index Number: 2642.00-00, 9100.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B09
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PLR-136809-05
Date:
August 30, 2005

Legend:

Year 1 = -------
Taxpayer = -------------------------------------------------------------------------------------------------
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Law Firm = --------------------------
Trust 1 = -------------------------------------------------------------------------------------------------
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Trust 2 = -------------------------------------------------------------------------------------------------
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Date 1 = -----------------
Z = ---------
Year 2 = -------
Firm = ----------------------------------------------------

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

This is in response to your authorized representative’s letter dated July 11, 2005, 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 allocations of Generation-Skipping Transfer (GST) exemption.

The facts and representations submitted are summarized as follows: In Year 1, Taxpayer retained the services of Law Firm to draft Trust 1 and Trust 2, irrevocable trusts, one trust for the benefit of each of his children. Trust 1 and Trust 2 were established on Date 1, and are both trusts with GST potential. Also on Date 1, Taxpayer transferred $Z cash to each of Trust 1 and Trust 2.

Taxpayer retained the services of an accountant to prepare his personal tax returns. Due to an oversight, Taxpayer was not advised of the necessity to file a Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return (“gift tax return”)

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for Year 1. Thus, no gift tax return was filed for Year 1 and no allocation of Taxpayer’s GST exemption was made to Trust 1 or Trust 2.

In Year 2, Taxpayer retained Firm to review various income and estate tax matters for Taxpayer and his family. During the course of the review, Firm discovered that a Year 1 gift tax return had not been filed, and thus, no allocation of Taxpayer’s GST exemption had been made to Trust 1 or Trust 2.

Taxpayer has requested the following rulings: (1) an extension of time under ' 2642(g) and '' 301.9100-1 and 301.9100-3 to allocate his available GST exemption with respect to the Year 1 transfers to Trust 1 and Trust 2; and (2) that the allocations will be effective as of the date of the original transfer and made based on the value of the property transferred to Trust 1 and Trust 2 as of the date of the original transfer.

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), in effect at the time of the transfer, provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption of $1,000,000 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.

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

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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 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.

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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 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 allocations of Taxpayer’s available GST exemption with respect to the Year 1 transfers to Trust 1 and Trust 2. The allocations will be effective as of Date 1, the date of the original transfers, and the gift tax value of the transfers to Trust 1 and Trust 2 will be used in determining the amount of GST exemption to be allocated to the trusts.

The allocations of Taxpayer’s GST exemption to the Year 1 transfers should be made on 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 Form 709. Copies are 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 representative.

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

Sincerely,

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

Enclosures:
Copy for § 6110 purposes
Copy of letter