PLR 1027005: Spouses granted more time to allocate GST exemptions to trust transfers

Plain-English summary

The IRS granted spouses an extension of time to allocate their generation-skipping transfer tax exemptions to lifetime transfers made to an irrevocable trust. The spouses had reported the transfers on gift tax returns but failed to properly allocate their GST exemptions. The IRS found that they had reasonably relied on tax professionals and gave them 60 days to make the allocations based on the gift tax values at the time of the transfers. The allocations had to be made on supplemental Forms 709, with a copy of the ruling attached to each form.

Ruling snapshot

• Question: Could the spouses receive more time to allocate their GST exemptions to prior transfers to an irrevocable trust?
• Outcome: approved, subject to making the allocations within 60 days
• Key authorities: IRC §§ 2513, 2601, 2611, 2631, 2632, and 2642; Treas. Reg. §§ 26.2632-1 and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201027005
Release Date: 7/9/2010
Index Number: 2601.00-00, 9100.00-00 Person To Contact:
---------------------, ID No. -------------
Telephone Number:

                                                      ---------------------

-------------------------------------- Refer Reply To:
---------------------------- CC:PSI:B04 – PLR-109864-10
Date: March 29, 2010
RE:
---------------------------------------------

      Legend:

      Spouse 1        = ----------------
      Spouse 2        = -----------------------------------------------
      Date 1           = -------------------------
      Date 2           = -------------------------
      Date 3           = ------------------
      Date 4           = ----------------------------
      Attorney 1      = --------------------------------
      Attorney 2      = ----------------------------------
      Tax Preparer    = ---------------
      Accountant      = ------------------------
      Accounting Firm = -------------------------------
      Law Firm 1       = -------------------------
      Law Firm 2       = ------------------------------
      Year 1           = -------
      Year 2           = -------
      Year 3           = -------
      Year 4           = -------
      Trust            = ----------------------------------------
      Company         = --------------------------------
      Bank            = ------------------------------------------------
      x                = ---------
      y                = ---------

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

   This letter responds to a letter from your authorized representative dated

November 30, 2009, and other correspondence, 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 Spouse 1 and Spouse 2 (Taxpayers) to Year 1 transfers to Trust.
PLR-109864-10 2

    The facts and representations submitted are summarized as follows: On Date 1,

Taxpayers executed an irrevocable trust agreement creating Trust for the benefit of
Taxpayers’ children and issue. Paragraph (d) of Article Second of Trust provides that
“[t]he Donors intend that the property to be held in [Trust] shall consist entirely of
property exempt from the federal generation-skipping transfer (“GST”) Tax.” The trust
agreement was drafted by Attorney 1 of Law Firm 1 who advised Taxpayers to allocate
their GST exemptions to all gifts made to Trust. On Dates 2 and 3 in Year 1, Spouse 1
transferred to Trust x shares and y shares, respectively, of stock in Company, a publicly
traded company (the Year 1 transfers).

   In Year 2, Taxpayers relied on Tax Preparer in the Tax Department of Bank to

prepare their Year 1 Forms 709, United States Gift (and Generation-Skipping Transfer)
Tax Returns, to report the Year 1 transfers to Trust, to split the gifts, and to allocate
each spouse’s GST exemption to the transfers. On the Year 1 Forms 709, Tax
Preparer reported the Year 1 transfers to Trust but failed to allocate properly any part of
either Taxpayer’s GST exemption to Trust.

    In Years 3 and 4, Spouse 1 hired Accountant of Accounting Firm to assist with

preparations for her divorce from Spouse 2. Accountant reviewed Taxpayers’ Year 1
gift tax returns and concluded that Taxpayers had not allocated their GST exemptions
on their Year 1 gift tax returns. In their divorce settlement, Spouse 1 and Spouse 2
agreed to have Attorney 2 of Law Firm 2 request this ruling on behalf of Taxpayers.
Their divorce became final on Date 4 in Year 4.

   Taxpayers have requested an extension of time under § 2642(g) and

§§ 301.9100-1 and 301.9100-3 to allocate Taxpayers’ GST exemptions to the Year 1
transfers to Trust.

    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.
PLR-109864-10 3

   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.

   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, 2001-2 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. 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.
PLR-109864-10 4

   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. Pursuant to § 2513, Spouse 1
and Spouse 2 consented to split the Year 1 gifts. Thus, Spouse 1 and Spouse 2 are
treated as the transferors for GST purposes of one-half of the entire value of transfers
made by the donor spouse, regardless of the interest the electing spouse is actually
deemed to have transferred under § 2513. Taxpayers are granted an extension of time
of 60 days from the date of this letter to allocate their available GST exemptions to the
Year 1 transfers to Trust, based on the gift tax values of those transfers on the dates of
each transfer.

  The allocations should be made on supplemental Forms 709, United States Gift

(and Generation-Skipping Transfer) Tax Return for the years in which the 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.
PLR-109864-10 5

   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 Trust will have a zero
inclusion ratio as a result of Taxpayers’ allocations of their GST exemptions to the Year
1 transfers to the trust.

  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,


                                          Associate Chief Counsel
                                          (Passthroughs and Special Industries)



                                   By:   ____________________________
                                         Leslie H. Finlow
                                         Acting Senior Technician Reviewer
                                         Branch 4
                                         Office of Associate Chief Counsel
                                         (Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter