PLR 201035008: IRS granted extra time to allocate generation-skipping transfer tax exemption

Plain-English summary

The IRS considered a donor who created an irrevocable trust and failed to allocate available generation-skipping transfer tax exemption to later-created trusts for the donor’s children and descendants. The donor had sufficient exemption remaining, and no taxable distributions, taxable terminations, or other generation-skipping transfer tax events had occurred. The IRS granted 60 days to make the allocations, effective as of the original transfers, because the donor had reasonably relied on a qualified tax professional who failed to make the allocation. The IRS did not rule that the trusts would have zero inclusion ratios as a result.

Ruling snapshot

• Question: May the donor make late allocations of generation-skipping transfer tax exemption to four trusts?
• Outcome: Approved
• Key authorities: IRC §§ 2601, 2611, 2631, 2632, 2641, 2642, and 6110; Treas. Reg. §§ 26.2632-1 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201035008
Release Date: 9/3/2010
Index Number: 2601.00-00, 9100.00-00
Person To Contact:
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Refer Reply To:
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CC:PSI:B04 – PLR-111635-10
Date: May 24, 2010
RE:
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Legend:

Donor = --------------------------
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Date 1 = ------------------
Trust = ------------------------------------------------------- Child 1 = ----------------------------------- Child 2 = ------------------------------- Child 3 = ----------------------------------- Child 4 = --------------------------------------------- Trust 1 = ------------------------------------------ Trust 2 = -------------------------------------- Trust 3 = ------------------------------------------- Trust 4 = ---------------------------------------------------- Year 1 = ------
Company = -------------------
Accounting Firm = -------------------------

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

This responds to the letter dated March 10, 2010, and subsequent correspondence submitted by your authorized representative, requesting an extension of time under § 2642(g) of the Internal Revenue Code and § 301.9100-3 of the Procedure and Administration Regulations to make an allocation of generation-skipping transfer (GST) exemption with respect to transfers to Trusts 1, 2, 3, and 4.

The facts and representations submitted are summarized as follows: On Date 1, prior to December 31, 2000, Donor created Trust, an irrevocable trust, and funded Trust with shares of stock in Company. Under the terms of Trust, the trustee was directed to divide the trust corpus into four separate trusts, one trust for the benefit of each of Donor’s children and their descendants. Pursuant to this directive, the trustee

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established Trust 1 for the benefit of Child 1 and his descendants, Trust 2 for the benefit of Child 2 and his descendants, Trust 3 for the benefit of Child 3 and his descendants, and Trust 4 for the benefit of Child 4 and her descendants.

Donor filed a Year 1 Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. In preparing the Form 709, Accounting Firm failed to allocate Donor's available GST exemption to the Year 1 transfers to Trusts 1, 2, 3, and 4.

It is represented that to date, no taxable distributions, taxable terminations, or any other GST taxable events have occurred with respect to any of the trusts that would result in a GST tax liability on the part of any of the trusts or their beneficiaries. Donor has sufficient GST exemption remaining and available to allocate GST exemption with respect to the Year 1 transfers to Trusts 1, 2, 3, and 4.

Section 2601 imposes a tax on every generation-skipping transfer (GST) made by a “transferor” to a “skip person.” 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 GST tax is determined by multiplying the taxable amount by the applicable rate. Section 2641(a) provides that the term “applicable rate” means with respect to any GST, the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

Under § 2642(a)(1), the inclusion ratio with respect to any property transferred in a generation-skipping transfer is generally defined as the excess of 1 over the “applicable fraction.” The applicable fraction, as defined in § 2642(a)(2), is a fraction, the numerator of which is the amount of GST exemption under § 2631 allocated to the trust (or to property transferred in a direct skip), and the denominator of which is the value of the property transferred to the trust or involved in the direct skip.

Section 2631(a), as in effect for the tax year 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 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)(4) of the Generation-Skipping Transfer Tax Regulations provides that an allocation of GST exemption to property transferred during the transferor's lifetime is made on Form 709.

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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 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)).

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 § 2642(g)(1), 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 (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 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.

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). 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.

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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.

Under § 301.9100-3(b)(iv), 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 representations made, we conclude that the requirements of § 301.9100-3 are satisfied. Therefore, Donor is granted an extension of time of 60 days from the date of this letter to make allocations of Donor's available GST exemption with respect to the Year 1 transfers to Trusts 1, 2, 3, and 4. The allocations will be effective as of the date of the transfers to the trusts, and the gift tax values of the transfers to the trusts will be used in determining the inclusion ratio with respect to each trust.

The allocations should be made on Supplemental Forms 709 for the appropriate calendar year and filed with the Internal Revenue Service, Cincinnati Service Center— Stop 82, Cincinnati, Ohio 45999. A copy of this letter should be attached to each 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 no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the Code. Specifically we are not ruling on whether Trusts 1, 2, 3, and 4 will have zero inclusion ratios as a result of Donor’s allocations of GST exemption to the Year 1 transfers to the trusts. The rulings in this letter pertaining to the federal estate and/or generation-skipping transfer tax apply only to the extent that the relevant sections of the Internal Revenue Code are in effect during the period at issue.

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This ruling is directed only to the taxpayer who requested 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: ____
Lorraine E. Gardner
Senior Counsel, Branch 4
Office of Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter