PLR 200921007: Taxpayer received more time to allocate GST exemption to two trusts

Plain-English summary

A taxpayer created two irrevocable trusts for separate children and their descendants and transferred cash to each. The trust agreement expressly contemplated allocating the taxpayer's generation-skipping transfer exemption. Although the taxpayer relied on an accounting firm to prepare a timely gift tax return and make the allocations, the supervising accountant omitted both transfers and the related GST allocations. A later accountant discovered the error during an estate-planning review, and the taxpayer promptly sought relief. The IRS found that the taxpayer reasonably relied on a qualified professional and granted 60 days to report the transfers and allocate available GST exemption on a supplemental Form 709. It did not decide whether the allocations would produce zero inclusion ratios.

Ruling snapshot

• Question: Could the taxpayer make late GST exemption allocations to cash previously transferred to two trusts?
• Outcome: Approved: the taxpayer received 60 days to file a supplemental Form 709 and make the allocations.
• Key authorities: IRC §§ 2631, 2632, 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: 200921007
Release Date: 5/22/2009
Index Number: 2601.00-00, 9100.00-00
Person To Contact:
---------------------, ID No. ------------- Telephone Number:
--------------------
---------------------
-----------------------------
Refer Reply To:
---------------------------
CC:PSI:B04 – PLR-135390-08
Date:
January 27, 2009
------------------------------------

Legend:

Taxpayer = ------------------------------------------------------------------
-------------------------------------------------------
Date 1 = -----------------------
Trust = -----------------------------------
Son = ------------------------------
Daughter = -----------------------
Attorney = -----------------------------
Law Firm = ------------------------------------------------------------------
a = --------
Accounting
Firm = -----------------------------------
Accountant 1 = --------------------------------
Year 1 = -------
Accountant 2 = ------------------------------

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

This letter responds to a letter from your authorized representative dated August 6, 2008, requesting an extension of time pursuant to § 2642(g) of the Internal Revenue Code and § 301.9100-3 of the Procedure and Administration Regulations to allocate the generation-skipping transfer (GST) exemptions of Taxpayer to transfers to GST Trust 1 and GST Trust 2.

The facts and representations submitted are summarized as follows: On Date 1, Taxpayer established the Taxpayer GST Trust (Trust) which, upon execution, was split into two irrevocable trusts (“GST Trusts”), each trust for the benefit of one of Taxpayer’s children and that child’s descendants. GST Trust 1 was named for Son, and GST Trust 2 was named for Daughter. The trust agreement was drafted by Attorney, a partner with Law Firm. Each GST trust provides that, in making distributions, the trustee “shall take into consideration the fact that Grantor’s GST exemption shall have
PLR-135390-08
2

been allocated to the property comprising the trusts. . . . “ Upon executing the trust agreement, Taxpayer transferred $a in cash to each of the GST Trusts.

Taxpayer relied on his accounting firm (Accounting Firm) to prepare a Form 709, United States Gift (and Generation-Skipping Transfer) Tax for Year 1 that included the allocation of Taxpayer’s GST exemption to the transfers to the trusts. The return was timely filed. Accountant 1 supervised preparation of the return but failed to report the Date 1 transfers to the trusts or to list them on the notice of GST allocation attached to the return. Thus, Taxpayer’s GST exemption was not allocated to either trust.

Recently, while reviewing Taxpayer’s estate planning, Accountant 2 noticed the failure to report the Date 1 transfers to the trusts and to allocate Taxpayer’s GST exemption to the transfers. Taxpayer was immediately advised to report the gifts and request an extension of time to make the election to allocate GST exemption to them.

Taxpayer has requested an extension of time under § 2642(g) and §§ 301.9100- 1 and 301.9100-3 to allocate Taxpayer’s GST exemption to the Date 1 transfers to GST Trusts 1 and 2.

Section 2601 imposes a tax on every generation-skipping transfer. A GST is defined under § 2611(a) as (1) a taxable distribution, (2) a taxable termination, and (3) a direct skip.

Section 2631(a) provides 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.

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 gift tax purposes and such allocation shall be effective on and after the date of such transfer.
PLR-135390-08
3

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). 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, 2001-34 I.R.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 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) 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 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. Taxpayer is granted an
PLR-135390-08
4

extension of time of 60 days from the date of this letter to allocate Taxpayer’s available GST exemption to the Date 1 transfers of cash to GST Trusts 1 and 2.

The transfers should be reported, and the allocations should be made, on a supplemental Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return for the year in which the Date 1 transfers were made, and filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to each supplemental Form 709. A copy is enclosed for this purpose.

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, 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. Specifically we are not ruling on whether GST Trusts 1 and 2 will have zero inclusion ratios as a result of Taxpayer’s allocations of GST exemption to the Date 1 transfers to the trusts.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

In accordance with a power of attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

Curtis G. Wilson
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter

cc: