PLR 200704003: Couple may allocate missed GST exemption using original gift values

Plain-English summary

A couple created seven family trusts, but their accounting firm failed to allocate generation-skipping transfer exemption to their first-year gifts to five of them. Later gifts received automatic allocations, and an estate-plan review uncovered the earlier omissions. The IRS granted each spouse 60 days to allocate available GST exemption to the affected earlier gifts on supplemental Forms 709. The allocations take effect on the original transfer dates and use the gift-tax values from those dates to determine the trusts' inclusion ratios. They also precede the automatic allocations for the later gifts. The relief relies on the stated facts, including the absence of taxable distributions or terminations from the five affected trusts.

Ruling snapshot

• Question: May the spouses make late GST exemption allocations effective on the original gift dates?
• Outcome: Approved, with 60 days to file supplemental gift tax returns using original transfer values.
• Key authorities: IRC §§ 2642(g), 2642(b)(1), 2631, and 2632; Treas. Reg. § 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200704003
Third Party Communication: None
Release Date: 1/26/2007
Date of Communication: Not Applicable
Index Number: 9100.00-00, 2642.01-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B04
PLR-106475-06
Date: OCTOBER 16, 2006

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Re: ------------------------------------

Legend

Husband = --------------------------------------
Wife = -----------------------------------
Trust = -----------------------------------
Trust 1 = ----------------------------------------------------------------- Trust 2 = ----------------------------------------------------------------------- Trust 3 = ---------------------------------------------------------------- Trust 4 = ------------------------------------------------------------- Trust 5 = ----------------------------------------------------------------- Trust 6 = -------------------------------------------------------------------- Trust 7 = -------------------------------------------------------------------- Date = ---------------------- Year 1 = ------ Year 2 = ------ x = ------------------------------------------- Accounting Firm = ------------------------------------------------

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

This is in response to a letter from your authorized representative dated March 9, 2006, and prior correspondence, requesting an extension of time under § 2642(g) of the Internal Revenue Code and § 301.9100 of the Procedure and Administration Regulations to make allocations of generation-skipping transfer (GST) exemption. 2 PLR-106475-06

The facts and representations submitted are summarized as follows: Husband and Wife established an irrevocable trust, Trust, on Date. Trust creates seven separate trusts, Trust 1 through Trust 7. Trusts 1 through 5 are for the benefit of Taxpayers’ children and their descendants, and Trust 6 and Trust 7 are for the children of Taxpayers’ deceased son. In Year 1, Husband and Wife each transferred x to Trust. Accounting Firm prepared and Husband and Wife filed separate Forms 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) for Year 1. However, in the preparation of the Forms 709, Accounting Firm inadvertently failed to allocate any GST exemption to Trusts 1 through 5 on Husband’s or Wife’s Form 709.

In Year 2, Husband and Wife each made an additional transfer of x to Trust. The automatic allocations rules of § 2632 allocated Husband’s and Wife’s GST exemption to that transfer. The failure to allocate Husband’s and Wife’s GST exemption to the Year 1 transfers was discovered in a recent review of Taxpayers’ estate planning.

To date, no taxable distributions or taxable terminations have occurred with respect to Trusts 1 through 5.

You request the following rulings: (1) an extension of time pursuant to § 2642(g) and §§ 301.9100-1 and 301-9100-3 to make an allocation of your respective GST exemption; (2) the allocations will be effective as of the date of those gifts, and (3) the date of gift value of each transfer will be used in determining the amount of the GST exemption to be allocated.

Law and Analysis

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 2631(a), as in effect for the tax years at issue, provided that, for purposes of determining the GST tax, 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.

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. 3 PLR-106475-06

Section 26.2632-1(b)(2) 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 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 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)).

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) or (2).

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. See Notice 2001-50, 2001-2 C.B. 189.

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 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) 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. 4 PLR-106475-06

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, Husband is granted an extension of time of 60 days from the date of this letter to make an allocation of Husband’s available GST exemption, with respect to Husband=s transfers to Trusts 1 through 5 in Year. In addition, Wife is granted an extension of time of 60 days from the date of this letter to make an allocation of Wife’s available GST exemption, with respect to Wife’s transfers to Trusts 1 through 5 in Year. The allocations will be effective as of the respective date of the transfers, and the inclusion ratios of Trusts 1 through 5 will be determined based on the value of the transfers to the trusts as determined for federal gift tax purposes and the amount of exemption allocated to the trusts. Further, the value of the transferred assets to Trusts 1 through 5 as of the respective date of the original transfers to Trusts 1 through 5 will be used in determining the amount of Husband’s and Wife’s GST exemption to be allocated to Trusts 1 through 5. The allocations will precede in time the automatic allocations to the Year 2 transfers.

Husband and Wife should make these allocations on supplemental Forms 709 for Year. The forms should be filed with the Cincinnati Service Center at the following address: Internal Revenue Service, Cincinnati Service Center – Stop 82, Cincinnati, OH 45999. A copy of this letter should be attached to the forms.

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.
PLR-106475-06
5

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,

William P. O’Shea
Acting Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter