PLR 200637011: Late GST exemption allocations may use original gift values

Plain-English summary

A taxpayer funded two trusts for children and their descendants and reported the transfers on a timely gift tax return. The accountant preparing the return inadvertently omitted allocations of the taxpayer's generation-skipping transfer tax exemption. The IRS granted 60 days to make the allocations on a supplemental Form 709. The allocations would take effect on the original transfer dates and use the transfers' gift tax values to calculate the exemption allocated.

Ruling snapshot

• Question: May the taxpayer allocate GST exemption to the trust transfers after the filing deadline?
• Outcome: Approved; the taxpayer has 60 days to file a supplemental Form 709 with the allocations.
• Key authorities: IRC § 2642(g)(1); Treas. Reg. § 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Number: 200637011
Release Date: 9/15/2006
Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Third Party Communication: None
Index Number: 9100.00-00, 2642.00-00
Date of Communication: Not Applicable

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Person To Contact:
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--------------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
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CC:PSI:B09
PLR-110123-06
Date:
May 26, 2006

LEGEND

Taxpayer = ---------------------
Date 1 = ------------------
Trust 1 = ------------------------------------------------------
Son = -------------------
Trust 2 = ---------------------------------------------------------
Daughter = ----------------------
$a = -----
$b = ------------
Date 2 = --------------------
Year 1 = -------
Accountant = ----------------------
Date 3 = -----------------------

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

This responds to your authorized representative’s letter dated January 31, 2006, 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 allocations of Taxpayer’s generation-skipping transfer (GST) tax exemption.

The facts and representations submitted are summarized as follows: On Date 1, Taxpayer created Trust 1, an irrevocable trust for the benefit of Son and Son’s descendants, and Trust 2, an irrevocable trust for the benefit of Daughter and Daughter’s descendants.

The provisions of Trust 1 and Trust 2 are substantially similar. The trusts provide, generally, for the distribution of trust income and principal to the child for whom the trust was created. Each child is granted a limited testamentary power to appoint all or any part of his or her respective trust in favor of such child’s surviving spouse, such child’s issue, or any one or more of Taxpayer’s issue, in such proportions and in such
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manner as the child shall designate. At a child’s death, any portion of such child’s trust not effectively appointed pursuant to the testamentary limited power of appointment described above shall be distributed to the child’s issue.

On Date 1, Taxpayer funded each of Trust 1 and Trust 2 with $a. On Date 2, Taxpayer transferred publicly traded stock valued at $b to each of Trust 1 and Trust 2. Date 1 and Date 2 are both dates in Year 1.

Taxpayer hired Accountant to prepare Taxpayer’s Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return for Year 1. Accountant reported the transfers to Trust 1 and Trust 2 as taxable gifts on the Form 709, but inadvertently failed to allocate Taxpayer’s GST exemption to the transfers. Taxpayer timely filed the Form 709 that was prepared by Accountant on or about Date 3.

Taxpayer now requests that an extension of time be granted under §§ 2642(g)(1) and 301.9100-3 to make allocations of his available GST exemption with respect to the Year 1 transfers to Trust 1 and Trust 2. Taxpayer further requests that the allocations will be effective as of the dates of the transfers to Trust 1 and Trust 2, and that the gift tax values of the transfers will be used to determine the amount of GST exemption to be allocated to the trusts.

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. Section 2642(a) provides the method for determining the inclusion ratio.

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 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, United States Gift (and Generation-Skipping Transfer) Tax Return.
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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 determining the inclusion ratio shall be its value for purposes of chapter 12 (within the meaning of § 2001(f)(2)), 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), 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 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.
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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 with respect to the Year 1 transfers to Trust 1 and Trust 2, we conclude that the requirements of § 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 60 days from the date of this letter for Taxpayer to make allocations of his GST exemption to the Year 1 transfers to Trust 1 and Trust 2. The allocations will be effective as of the dates of transfer, and the gift tax value of the transfers will be used in determining the amount of GST exemption to be allocated. The allocations of Taxpayer’s GST exemption to the Year 1 transfers should be made on a supplemental Form 709 and filed with the Internal Revenue Service Center, Cincinnati, OH 45999. A copy of this letter should be attached to the Form 709. A copy is enclosed for this purpose.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

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.

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.

Sincerely,

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

Enclosures
Copy of letter
Copy for 6110 purposes