PLR 1042005: IRS grants more time to elect out of automatic GST exemption allocation

Plain-English summary

The IRS considered Donor and Spouse's request for more time to elect out of automatic generation-skipping transfer tax exemption allocation to an irrevocable trust. Their accountant had prepared the gift tax returns and later discovered that the GST exemption had been automatically allocated when the estate tax inclusion period closed. The IRS concluded that the requirements for relief were satisfied and granted 120 days from the ruling date to amend the Year 2 Forms 709 to make the election. The amended filings had to be sent to the Cincinnati Service Center with a copy of the ruling associated with the Forms 709. The ruling did not express an opinion on other federal tax consequences.

Ruling snapshot

• Question: May Donor and Spouse receive more time to elect out of automatic GST exemption allocation to the trust?
• Outcome: Approved
• Key authorities: IRC §§ 2513, 2632(c)(1), 2632(c)(5), 2642(g)(1), and 6110(k)(3); Treas. Reg. § 26.2632-1(b)(2)(iii); Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201042005
Release Date: 10/22/2010
Index Number: 9100.00-00, 2632.02-00 Person To Contact:
-------------------, ID No. ----------
Telephone Number:

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

---------------------------------------------- Refer Reply To:
------------------------------ CC:PSI:B04 – PLR-104721-10
---------------------------- Date:
July 07, 2010

Re: ---------------------------------------------------------

Legend:
Donor ---------------------------------------------------
Spouse -------------------------------------------------
Date -------------------
Trust ---------------------------------------------------------------------------------------------------
Year 1 -------
Year 2 -------
Accountant -----------------------

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

   This responds to your letter dated January 20, 2010, from your authorized

representative, requesting an extension of time under § 2642(g) of the Internal Revenue
Code and §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to elect out of the automatic allocation rules contained in § 2632(c)(1) with
respect to a transfer to a trust.

Facts

     Prior to December 31, 2000, on Date, Year 1, Donor established an irrevocable

trust (Trust), a grantor retained annuity trust. At the end of five years, on Date 2,
Donor’s retained interest in Trust terminated and the assets of Trust passed to separate
trusts for the benefit of Donor’s living children and lineal descendants of Donor’s
deceased children. The estate tax inclusion period (ETIP) with respect to Donor’s
transfer to Trust closed for GST purposes on Date 2, which is after December 31, 2000.

   Donor and Spouse retained Accountant to prepare and file Donor’s and Spouse’s

Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns for Year

1. Donor and Spouse elected to treat the transfer to Trust as made one-half by each
   PLR-104721-10 2

spouse under § 2513. Several years later, Accountant discovered that Donor’s and
Spouse’s GST exemption had been automatically allocated to Trust at the close of the
ETIP in Year 2. Accountant states that Donor and Spouse never intended to allocate
their GST exemption to Trust and that the failure to elect out of the automatic allocations
was inadvertent.

   Donor and Spouse request an extension of time under § 301.9100-3 to, pursuant

to § 2632(c)(5), elect out of the automatic allocation rules under § 2632(c)(1).

Law and Analysis

    Section 2513(a) provides, generally, that, for gift tax purposes, if the parties

consent, a gift made by one spouse to any person other than his or her spouse shall, for
gift tax purposes, be considered as made one-half by the donor spouse and one-half by
his or her spouse.

  Section 2601 imposes a tax on every generation-skipping transfer (GST) (within

the meaning of subchapter B). 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 transfer, the product of the
maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

   Under § 2642(a), 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), provides that, for purposes of determining the inclusion ratio,

every individual shall be allowed a GST exemption amount 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)(iii)(A) of the Generation-Skipping Transfer Tax

Regulations provides that a transferor may prevent the automatic allocation of GST
exemption (elect out) with respect to: (1) one or more prior-year transfers subject to
§ 2642(f) (regarding ETIPs) made by the transferor to a specified trust or trusts; (2) one
or more (or all) current-year transfers made by the transferor to a specified trust or
PLR-104721-10 3

trusts; (3) one or more (or all) future transfers made by the transferor to a specified trust
or trusts; and (4) all future transfers made by the transferor to all trusts (whether or not
in existence at the time of the election out).

   Section 26.2632-1(b)(2)(iii)(B) provides that to elect out, the transferor must

attach an election out statement to a Form 709 filed within the time period provided in
§ 26.2632-1(b)(2)(iii)(C). In general, the election out statement must identify the trust,
and specifically must provide that the transferor is electing out of the automatic
allocation of GST exemption with respect to the described transfer or transfers.
Prior-year transfers that are subject to § 2642(f), and to which the election out is to
apply, must be specifically described or otherwise identified in the election out
statement. Under § 26.2632-1(b)(2)(iii)(C), to elect out, the Form 709 with the attached
election out statement must be filed on or before the due date for timely filing the Form
709 for the calendar year in which: (1) for a transfer subject to § 2642(f), the ETIP
closes; or (2) for all other elections out, the first transfer to be covered by the election
out was made.

   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.

    Section 2652(a)(2) and § 26.2652-1(a)(4) provide that, if, under § 2513, one-half

of a gift is treated as made by an individual and one-half of such gift is treated as made
by the spouse of the individual, then for purposes of the GST tax, each spouse is
treated as the transferor of one-half of the entire value of the property transferred by the
donor spouse, regardless of the interest the electing spouse is actually deemed to have
transferred under § 2513.

    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.
PLR-104721-10 4

    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.

   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 and Spouse are granted
an extension of time of 120 days from the date of this letter to amend their Year 2
Forms 709 to elect out of the automatic allocation rules for that year.

   The Donor and Spouse’s GST election should be made on Forms 709 and filed

with the Internal Revenue Service Center in Cincinnati. A copy of this letter should be
forwarded to the Internal Revenue Service, Cincinnati Service Center – Stop 82,
Cincinnati, OH 45999, for association with the Form 709.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayers 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.

  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 the Power of Attorney on file with this office, a copy of this

PLR-104721-10 5

letter is being sent to your authorized representative.

  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.

                                      Sincerely,

                                      Associate Chief Counsel
                                      (Passthroughs and Special Industries)


                                      By:__________________________
                                        Lorraine E. Gardner
                                        Senior Counsel, Branch 4
                                        Office of the Associate Chief Counsel
                                        (Passthroughs and Special Industries)

Enclosure
Copy for section 6110 purposes
Copy of this letter

cc: