PLR 200729004: Vacation property qualifies as a personal residence, but trust questions go unanswered

Plain-English summary

A property owner planned to divide a vacation property and place the residential parcel in a proposed qualified personal residence trust. The parcel would include a residence and nearby land comparable in size to other residential properties in the area. Based on those facts and the owner's exclusive residential use, the IRS ruled that the parcel was a personal residence for the gift tax trust rules. The IRS declined to rule on whether the proposed trust itself qualified as a qualified personal residence trust or whether an interest in any annuity trust would qualify. It pointed to its published sample trust provisions as guidance for the trust question.

Ruling snapshot

• Question: Would the residential parcel qualify as a personal residence, and would the proposed trust and any annuity interest qualify?
• Outcome: Mixed: the parcel qualified; the IRS declined the two trust-related requests.
• Key authorities: IRC § 2702(a); Treas. Reg. § 25.2702-5(c); Rev. Proc. 2007-3; Rev. Proc. 2003-42

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200729004
Third Party Communication: None
Release Date: 7/20/2007
Date of Communication: Not Applicable
Index Number: 2702.02-02
Person To Contact:
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------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
CC:PSI:B04
PLR-113467-06
Date: APRIL 05, 2007

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

Legend
Grantor = -----------------------------------------------------
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Property = ------------------------------------------------------------------------ Parcel 1 = ----------------- Parcel 2 = ------------------ Trust = -------------------------------------- State = --------------

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

This is in response to your letter from your authorized representative dated January 10, 2006, and subsequent correspondence, in which you request rulings under § 2702 of the Internal Revenue Code.

Facts

The information submitted and the representations made are summarized as follows.
Grantor owns fee simple title to Property. Grantor proposes to subdivide Property into Parcel 1 and Parcel 2. Thereafter, Grantor proposes to transfer Parcel 1 to Trust . A conservation easement will be placed on Parcel 2. Trust is intended to qualify as a qualified personal residence trust (QPRT) as described in section 25.2702-5(c) of the Gift Tax Regulations.
Although not Grantor’s principal residence, Property is used exclusively as a personal residence by Grantor and no individual, other than Grantor has the right to use or occupy Property. Grantor does not rent Property to anyone. Most of the properties located near Property are used as vacation homes. Grantor represents that the
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appurtenant structures on Property are similar to those located on properties nearby. Following the proposed subdivision, Parcel 1 will be comparable to or smaller in size than other properties located in proximity to Parcel 1.

You have requested the following rulings:

1. Parcel 1 is a personal residence within the meaning of section 25.2702- 5(c)(2).
2. Trust constitutes a “qualified personal residence trust” within the meaning of section 2702(a)(3)(A)(ii) and section 25.2702-5.
3. The interest retained by Grantor in any annuity trust created constitutes a qualified interest within the meaning of section 2702(a)(2)(B) and section 25.2702-3.
Law and Analysis
Section 2702(a)(1) provides that solely for purposes of determining whether a transfer of an interest in trust to (or for the benefit of) a member of the transferor's family is a gift (and the value of such transfer), the value of any interest in such trust retained by the transferor or any applicable family member (as defined in section 2701(e)(2)) shall be determined as provided in section 2702(a)(2). Section 2702(a)(2) provides that the value of any retained interest that is not a qualified interest is treated as being zero. The value of any retained interest that is a qualified interest is determined under section 7520.
Section 2702(a)(3)(A)(ii) provides that section 2702(a) shall not apply to any transfer of an interest in trust all the property in which consists of a residence to be used as a personal residence by persons holding term interests in such trust.
Section 25.2702-5(a)(1) provides, in part, that section 2702 does not apply to a transfer in trust meeting the requirements of that section. A transfer in trust meets the requirements of the section only if the trust is a personal residence trust as defined in section 25.2702-5(b). A trust meeting the requirements of a "qualified personal residence trust" as defined in section 25.2702-5(c) is treated as a personal residence trust. Section 25.2702-5(c)(1) provides that for purposes of section 2702(a)(3)(A)(ii), a qualified personal residence trust is a trust meeting all the requirements of the section. These requirements must be met by provisions in the governing instrument, and these governing instrument provisions must by their terms continue in effect during the existence of any term interest in the trust. Section 25.2702-5(c)(5) provides that, in general, except as otherwise provided in sections 25.2702-5(c)(5)(ii) and (c)(8), the governing instrument of a qualified personal residence trust must prohibit the trust from holding, for the entire term of the trust, any asset other than one residence to be used or held for use (within the meaning of section 25.2702-5(c)(7)(i)) as a personal residence of the term holder. Under section 25.2702-
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5(c)(5)(ii), the trust may hold certain assets listed in that section in addition to the personal residence.
Section 25.2702-5(c)(2)(i)(A) provides that a personal residence of a term holder is either the principal residence of the term holder (within the meaning of section 1034), one other residence of the term holder (within the meaning of section 280A(d)(1) but without regard to section 280A(d)(2)), or an undivided fractional interest in either.
Section 25.2702-5(c)(2)(ii) provides that a personal residence may include appurtenant structures used by the term holder for residential purposes and adjacent land not in excess of that which is reasonably appropriate for residential purposes (taking into account the residence's size and location).
Section 25.2702-5(c)(2)(iii) provides that a residence is a personal residence only if its primary use is as a residence of the term holder when occupied by the term holder. A residence is not used primarily as a residence if it is used to provide transient lodging and substantial services in connection with the provision of lodging (e.g., a hotel or a bed and breakfast). A residence is not a personal residence if, during any period not occupied by the term holder, its primary use is other than as a residence. In this case, based on the facts submitted and the representations made, the size of Parcel 1 is comparable to that of properties used for residential purposes in proximity to Parcel 1. Accordingly, for purposes of section 25.2702-5(c)(2)(ii), Parcel 1 includes adjacent land not in excess of that which is reasonably appropriate for residential purposes (taking into account the residence's size and location). In addition, the residence and appurtenant structures located on Parcel 1 satisfy the primary use requirements of section 25.2702-5(c)(2)(iii). Therefore, we conclude that Parcel 1 is a personal residence within the meaning of section 2702(a)(3)(A)(ii) and section 25.2702- 5(c)(2).
Section 4.01(51) of Rev. Proc. 2007-3, 2007-1 I.R.B. 108, 115, provides that rulings will not ordinarily be issued on whether a trust with one term holder satisfies the requirements of section 2702(a)(3)(A) and section 25.2702-5(c) to be a QPRT. Rev. Proc. 2003-42, 2003-1 C.B. 993, provides sample trust provisions for QPRTs. By following the sample trust provisions, taxpayers can be assured that the IRS will recognize a trust as meeting all of the requirements of section 2702(a)(3)(A) and section 25.2702-5(c) if the trust (1) operates consistently with the terms of the trust instrument and (2) is a valid trust under local law. Accordingly, we will not rule on ruling requests 2 and 3.
The rulings contained in this letter are based upon information submitted and representations made 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. 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 representatives.

Sincerely,

George L. Masnik
Chief, Branch 4
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter