PLR 200618006: Spouses may allocate GST exemptions to eight trusts late

Plain-English summary

Two spouses transferred property to eight trusts for children and descendants and filed gift tax returns reporting split gifts. Their accountant mistakenly believed the trusts did not need allocations of generation-skipping transfer (GST) tax exemption. After discovering the omission, they requested additional time. The IRS found that the requirements for discretionary relief were satisfied and gave each spouse 60 days to make the allocations on supplemental Forms 709. The allocations would take effect on the original transfer dates and use the property values on those dates.

Ruling snapshot

• Question: May both spouses allocate GST exemptions to the eight trusts after the original filing?
• Outcome: Approved: 60 days to file supplemental Forms 709 with allocation notices.
• Key authorities: IRC § 2642(g); Notice 2001-50; Treas. Reg. § 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200618006
Third Party Communication: None
Release Date: 5/5/2006
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:04
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PLR-111845-05
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Date: January 13, 2006

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Legend

Taxpayer = -------------------------------------------------
Spouse = ---------------------------------------------

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 5 = --------------------------------------------------------------
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Trust 6 = ----------------------------------------------------------------
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Trust 7 = ------------------------------------------------------------------
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Trust 8 = ---------------------------------------------------------------
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Date = ------------------
Year = -------
X = ---------
Y = -----------

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

This letter is in response to a letter dated February 9, 2005 from your authorized representative requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations and § 2642(g) of the Internal Revenue Code to make an

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allocation of Taxpayer’s and Spouse’s generation-skipping transfer (GST) tax exemption.

The facts and representations submitted are summarized as follows:

On Date, Taxpayer, as settlor, established irrevocable trusts, Trusts 1-8, for the benefit of his children and descendants of his children. During Year, Taxpayer made transfers to Trusts 1-8 in amounts ranging in value from $X to $Y. Taxpayer and Spouse timely filed United States Gift (and Generation-Skipping Transfer) Tax Returns, Forms 709, to report the transfers to the trusts and consented to split the gifts pursuant to § 2513 for Year. The certified public accountant, who prepared the returns and on whose expertise Taxpayer and Spouse relied, mistakenly believed that the transfers were direct skips in trust that had a zero inclusion ratio because the amount of the gift by each spouse to each trust qualified for the gift tax annual exclusion under § 2503(b). Therefore, no Notice of Allocation of Taxpayer's or Spouse's GST exemption was deemed necessary. However, upon subsequent review, the accountant discovered that Trusts 1-8 were non-skip trusts and that he inadvertently failed to allocate Taxpayer’s and Spouse’s available GST tax exemptions to the transfers reported on the gift tax returns.

It is represented that no additions have been made to Trusts 1-8 since Year, but distributions have been made from the trusts since Year.

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 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 the GST exemption under § 2631 allocated to the trust (or to property transferred in a direct skip), and the denominator of which 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 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

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

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). 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. For purposes of determining whether to grant relief, the time for making the allocation 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 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 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 prescribed 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

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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 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 and Spouse are each granted an extension of time of 60 days from the date of this letter to make allocations of their respective GST exemptions to Trusts 1-8 for Year. The allocations will be effective as of the dates of the transfers in Year and should be made based on the value of the property transferred to the trusts on the dates of the transfers.

The allocations should be made on Supplemental Forms 709 for Taxpayer and Spouse and filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. Each Form 709 should include a Notice of Allocation properly allocating the taxpayer's GST exemption to the transfers to each trust. A copy of this letter should be attached to each supplemental Form 709. Copies are 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.

The ruling contained in this letter is 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 ruling, it is subject to verification on examination.

Pursuant to the Power of Attorney on file with this office, a copy of this letter is being sent to the taxpayer's representative.

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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Sincerely,

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

Enclosures
Copy for section 6110 purposes
2 copies of this letter
cc:

                             Initiator              Reviewer   Reviewer         Reviewer   Reviewer          Reviewer                  Reviewer

Code
Surname

Date
Form 1937-A (Rev 6-80) Correspondence Approval and Clearance
Department of the Treasury/Internal Revenue Service
*U.S. GPO 1989-224-484