PLR 200551005: Mistaken direct skip classification led to late GST allocation relief

Plain-English summary

A taxpayer gave property to four trusts benefiting children, grandchildren, and later descendants. An accountant mistakenly reported the gifts as direct skips and assumed generation-skipping transfer (GST) exemption would be allocated automatically, so no allocation notice was filed. Because the trusts included both skip and non-skip beneficiaries, the taxpayer asked for more time to allocate exemption. The IRS granted 60 days to file a supplemental gift tax return with the allocations. It said the allocations would take effect on the original gift date, using the gift tax values of the transfers.

Ruling snapshot

• Question: Could the taxpayer make late GST exemption allocations to the four trusts?
• Outcome: Approved. The IRS granted a 60-day extension with allocation effective on the gift date.
• 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: 200551005
Third Party Communication: None
Release Date: 12/23/2005
Date of Communication: Not Applicable
Index Number: 9100.00-00, 2642.00-00
Person To Contact:
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---------------, ID No. ------------
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Telephone Number:
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Refer Reply To:
CC:PSI:04
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PLR-112750-05
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Date:AUGUST 31, 2005

Legend

Taxpayer = --------------------------------------------------
Trust 1 = --------------------------------------------------------------------
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Trust 2 = --------------------------------------------------------------------------------
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Trust 3 = -----------------------------------------------------------------
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Trust 4 = ---------------------------------------------------------------------------------
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Trust Company = -------------------------------------------------------
Date 1 = ----------------------
Year = -------
A = ---------------------
a dollars = ---------
b dollars = -----------

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

This is in response to your letter dated February 28, 2005, requesting 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 an allocation of generation- skipping transfer (GST) tax exemption.

The facts and representations submitted are summarized as follows:

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Taxpayer established four irrevocable trusts, Trusts 1-4, for the benefit of Taxpayer’s children, grandchildren, and lineal descendants. The trustee of Trusts 1-4 is Trust Company.

On Date 1, Taxpayer made gifts to Trusts 1-4. The amount of the gift to each of Trusts 1-3 was $a. The amount of the gift to Trust 4 was $b. A Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) reporting Taxpayer’s transfer to Trusts 1-3 of $a, and transfer to Trust 4 of $b was prepared by A, an accountant, and timely filed by Taxpayer. The transfers to Trusts 1-4 were reported on Taxpayer’s gift tax return on Schedule A, Part 2 as Gifts That are Direct Skips and are Subject to Both Gift Tax and Generation-Skipping Transfer Tax. Because A mistakenly believed that the gifts made to Trusts 1-4 were direct skips and thus subject to the deemed automatic GST allocation rules, no Notice of Allocation of GST exemption was filed with the gift tax return. The transfers to Trusts 1-4 should have been reported on Schedule A, Part 1 as Gifts Subject Only to Gift Tax, because the beneficiaries of Trusts 1-4 include both skip and non-skip persons.

You have requested a ruling under § 301.9100-3 to extend the time to make allocations of Taxpayer’s GST exemption under § 2642(g).

Section 2501(a) of the Internal Revenue Code imposes a tax on the transfer of property by gift during each calendar year by any individual.

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 maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

Under § 2642(a)(1), the inclusion ratio with respect to 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 GST exemption under § 2631 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.

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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.

Section 2642(b)(1) provides, 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) or (c)(1), (A) the value of such property for purposes of determining the inclusion ratio shall be its value as finally determined 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 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. For purposes of determining whether to grant relief, 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 is 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) 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 not 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 section 301.9100-1(b), a regulatory

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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.

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 his available GST exemptions, with respect to Taxpayer’s transfers on Date 1 to Trusts 1-3 of $a and transfer to Trust 4 of $b. The allocation will be effective as of Date 1, the date of the transfers to Trusts 1-4, and the gift tax values of the transfers will be used in determining the amount of GST exemption to be allocated to each transfer.

This allocation should be made on a supplemental Form 709, United States Gift (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 any aspect of any transaction or item discussed or referenced in this letter 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.

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

Sincerely,

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

Enclosures
Copy for section 6110 purposes
Copy of this letter