PLR 200818011: Grantor gets more time to allocate GST exemption to trust gift

Plain-English summary

A grantor funded a trust for a spouse and descendants but did not file the gift tax return needed to allocate generation skipping transfer (GST) exemption to the gift. The trust's attorney expected the grantor to tell an accountant about the transfer, while the grantor thought no return was required. After the error was discovered, the IRS granted 60 days to allocate available GST exemption on Form 709. The allocation would take effect as of the original transfer date, using the gift tax value of the transferred property to calculate the trust's GST inclusion ratio. The ruling was based on the submitted facts, including that the trust had received no later additions or GST taxable distributions or terminations.

Ruling snapshot

• Question: Could the grantor make a late allocation of GST exemption to the trust gift?
• Outcome: Approved; a 60 day extension was granted for filing Form 709.
• Key authorities: IRC §§ 2631, 2632, and 2642(g)(1); Treas. Reg. § 301.9100-3.

Full text (IRS public release)

Internal Revenue Service

Number: 200818011
Release Date: 5/2/2008
Index Number: 2632.01-00; 9100.00-00

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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:
CC:PSI:B04
PLR-148056-06
Date: January 3, 2008
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Re: --------------------------------------------------------

Legend

Grantor = -----------------------
Trust = --------------------------------------------------------------------------------------
----
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$X = ------------
Trustees = --------------------------------------------------------
Administrative
Trustee = -----------------------------------------------------------
Attorney 1 = --------------------
Attorney 2 = ------------------------
Date 1 = -------------------
Year 1 = -------

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

This is in response to a letter from your authorized representative and subsequent correspondence requesting an extension of time under § 301.9100 of the Procedure and Administration Regulations to make an allocation of generation-skipping transfer (GST) exemption.

Facts

The facts and representations submitted are summarized as follows. Grantor created Trust on Date 1, for the benefit of his spouse and descendants. Trustees are currently serving as the trustees of Trust, and Administrative Trustee is currently serving as administrative trustee. Grantor funded Trust with $X in Year 1.

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Attorney 1 drafted the Trust agreement. Attorney 1 advised Grantor that his gift to Trust was a taxable gift, but that by reason of the applicable unified credit, no gift tax would be due. Attorney 1 did not customarily prepare gift tax returns, and erroneously assumed that Grantor would notify his accountant about the transfer and that the accountant would prepare the necessary Form 709 United States Gift (and Generation- Skipping Transfer) Tax Return, which would include an allocation of a portion of Grantor’s GST exemption. Grantor mistakenly believed that it was not necessary to file a gift tax return. As a result of the miscommunication, Grantor did not notify his accountant of the transfer to Trust. Consequently, no return was filed for Year 1 and no GST exemption was applied to the transfer. Grantor discovered the error when he consulted with Attorney 2.

It is represented that there have been no additions to Trust since Trust was initially funded. In addition, it is represented that there have been no distributions from Trust, or terminations with respect to Trust that would be subject to GST tax.

Law and Analysis

Section 2601 of the Internal Revenue Service 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), in general, the inclusion ratio with respect to any property transferred in a generation-skipping transfer is the excess (if any) of 1 over the applicable fraction determined for the trust from which such transfer is made, or in the case of a direct skip, the applicable fraction determined for such transfer. Section 2642(a)(2) provides that the applicable fraction is a fraction (A) the numerator of which is the amount of the GST exemption allocated to the trust under § 2631(a), and (B) the denominator of which is (i) the value of the property transferred to the trust, reduced by (ii) the sum of (I) any Federal estate tax or State death tax actually recovered from the trust attributable to such property and (II) any charitable deduction allowed under §§ 2055 or 2522 with respect to such property.

Section 2631(a), as in effect for the tax years at issue, provided 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

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is the transferor. Section 2631(b) provides that any allocation under § 2631(a), once made, shall be irrevocable.

Section 26.2632-1(b)(4) 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 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 under § 2642(a) shall be its value as finally determined for purposes of chapter 12 (within the meaning of § 2001(f)(2)), or, in the case of an allocation deemed to have been made at the close of an estate tax inclusion period, its value at the time of the close of the estate tax inclusion period, and such allocation shall be effective on and after the date of such transfer, or, in the case of an allocation deemed to have been made at the close of an estate tax inclusion period, on and after the close of such estate tax inclusion period.

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), and an election under § 2632(b)(3) or (c)(5). Such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph.

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.

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 transfer 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.

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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.

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). 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.

Based on the facts submitted and the representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. Therefore, Grantor is granted an extension of time of 60 days from the date of this letter to make an allocation of his available GST exemption, with respect to his $X transfer to Trust in Year 1. The allocation will be effective as of the date of the transfer to the Trust, and the value of the transfer to the Trust as determined for federal gift tax purposes will be used in determining the inclusion ratio with respect to the Trust.

This allocation should be made on Form 709 reporting the Year 1 transfer to Trust, and 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 Form 709.

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.

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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
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter