PLR 201025019: IRS granted more time to allocate GST exemption to trust transfers

Plain-English summary

The IRS granted a grantor and spouse 60 days to allocate their generation-skipping transfer (GST) tax exemptions to transfers made to an irrevocable family trust. Their attorney had failed to advise them to file the required gift tax returns and make the allocations. The trust later experienced a taxable termination, and the error was discovered during an internal review. The IRS concluded that relief under section 301.9100-3 was appropriate, allowing the allocations to be effective as of the dates of the transfers.

Ruling snapshot

• Question: Could the grantor and spouse make late allocations of their GST exemptions to transfers made to the trust?
• Outcome: Approved
• Key authorities: IRC §§ 2601, 2631, and 2642; Treas. Reg. § 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201025019
Third Party Communication: None
Release Date: 6/25/2010
Date of Communication: Not Applicable
Index Number: 2642.00-00, 9100.00-00
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-132221-09
In Re: ---------------------------------------------------- Date: DECEMBER 08, 2009
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Legend

Grantor = ---------------------------------------------------
Spouse = -----------------------------------------------
Son = ---------------------------
Trust = --------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------
Firm = ---------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Vic President = -------------------
Date 1 = -----------------------
Date 2 = -----------------
Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 4 = ------
Year 5 = ------

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

This responds to your authorized representative’s letter of July 14, 2009, requesting an extension of time pursuant to § 2642(g) of the Internal Revenue Code and § 301.9100 of the Procedure and Administration Regulations to make an allocation of generation-skipping transfer (GST) exemption.

Facts
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The facts and representations submitted are summarized as follows: Grantor and Spouse created an irrevocable trust (Trust) on Date 1, for the benefit of Son and his family. Trust was funded in Year 1, and additions were made in Years 2 and 3. Firm is the current Trustee of Trust. Son and his wife had withdrawal rights in each of the years. Grantor and Spouse had intended to treat each transfer as having been made one-half by each of them under § 2513(a). Grantor’s attorney failed to adequately advise Grantor and Spouse of the requirement to file the Forms 709 Unites States Gift (and Generation-Skipping) Tax Returns to elect to treat the transfer as “split gifts” and allocate GST exemption. Consequently, no GST exemption was allocated to trust in Years 1-3. Grantor filed Forms 709 concurrently with this request. Neither Taxpayer nor Spouse has allocated any of their GST exemption to any transfers they have made.

Son died in Year 4 and upon his death, the assets became distributable to Son’s issue. Firm became Trustee in Year 3. Firm failed to advise Grantor that a taxable termination had occurred at Son’s death and that GST tax could be avoided if Grantor and Spouse timely filed Year 4 Forms 709 and allocated GST exemption. Grantor and Spouse have sufficient exemption available to allocate to Trust to reduce the inclusion ration of Trust to zero. Vice President of Firm signed an affidavit stating that Firm failed to timely notify Grantor of the taxable termination, and that the taxable termination resulted in GST tax. He also stated that Firm failed to advise Grantor and Spouse that each of them could have made a late allocation of their respective GST exemptions to Trust as of the date of the taxable termination and thereby avoid GST tax. The error was discovered in Year 5 as a result of an internal review of Trust. No taxable distributions have been made from Trust to any skip persons.

Law and Analysis

Section 2601 of the Internal Revenue Code 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 inclusion ratio, every individual shall be allowed a GST exemption of $1,000,000 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 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 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
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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), 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 is to be treated as if not expressly prescribed by statute and taxpayers may seek an extension of time to make an allocation described in § 2642(b)(1) or (b)(2) 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.

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 and Spouse are granted an extension of time of 60 days from the date of this letter to make an allocation of their available GST exemption, with respect to their transfers to Trust in
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Years 1, 2 and 3. The allocation will be effective as of the respective dates of the transfers to Trust and the value of the transfers to Trust as determined for federal gift tax purposes will be used in determining the amount of Grantor’s exemption to be allocated to Trust.

This allocation should be made on a supplemental Form 709 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 supplemental 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.

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,

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

Enclosures
Copy for section 6110 purposes
Copy of this letter