PLR 1108005: Spouses receive more time to allocate GST exemptions

Plain-English summary

A husband and wife created and funded a trust but their law firm failed to report the transfers on their gift tax returns and did not allocate their generation-skipping transfer tax exemptions. The IRS found that the taxpayers reasonably relied on a qualified tax professional and met the requirements for late-election relief. It granted each spouse 120 days to allocate the applicable GST exemption to the trust through supplemental Forms 709. The allocations would use the gift tax value of the transfers and would be effective as of the transfer dates.

Ruling snapshot

• Question: May the spouses make late allocations of their GST exemptions to transfers to the trust?
• Outcome: Approved
• Key authorities: IRC §§ 2631, 2642(g); Treas. Reg. § 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201108005 Third Party Communication: None
Release Date: 2/25/2011 Date of Communication: Not Applicable
Person To Contact:
Index Number: 2642.00-00, 9100.00-00 --------------------------------
Telephone Number:
----------------------------------------------- -------------------
--------------------------- Refer Reply To:
------------------------------ CC:PSI:04
PLR-123154-10
Date:

     RE: ------------------------------------              November 2, 2010

Legend

Husband = ------------------------------------------------
Wife = ---------------------------------------------------
Trust = ----------------------------------------------------------
Date 1 = ---------------------------
Year 1 = -------
State = ----------------
Law Firm = -----------------------------------------------------------------------

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

This letter responds to a letter from your authorized representatives dated May 20, 2010
requesting an extension of time under § 2642(g) of the Internal Revenue Code and
§ 301.9100-3 of the Procedure and Administration Regulations to allocate
GST exemption to transfers to a trust.

Facts

On Date 1, a date prior to December 31, 2000, Husband and Wife (Taxpayers) created
and funded an irrevocable trust, Trust, for the benefit of their children, grandchildren,
and any grandchildren born subsequent to Date 1. Trust is governed by the community
property laws of State. Accordingly, Taxpayers are each treated as transferring
one-half of the gift to Trust.

Taxpayers retained Law Firm to prepare and file Year 1 Forms 709, United States Gift
(and Generation-Skipping Transfer) Tax Return, to report gifts made by Husband and
Wife in that year. Law Firm prepared and filed Forms 709 for Husband and Wife, but
failed to report the Date 1 transfers to Trust and did not allocate Husband’s
GST exemption and Wife’s GST exemption to the Date 1 transfers to Trust.
PLR-123154-10 2

Husband and Wife request an extension of time under § 2642(g) and § 301.9100-3 to
allocate his and her respective GST exemptions to the Date 1 transfers to Trust.

Law and Analysis

Section 2601 imposes a tax on every generation-skipping transfer (GST), which 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 the taxable amount multiplied
by the applicable rate. Section 2641(a) defines “applicable rate” as the product of the
maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

Section 2642(a)(1) provides that for purposes of chapter 13, the inclusion ratio with
respect to any property transferred in a GST is generally defined as the excess (if any)
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 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 at the time of the transfers, provides that, for purposes of
determining the inclusion ratio, every individual shall be allowed a GST exemption of
$1,000,000 that 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)(4)(i) 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.

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 § 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
§ 2642(g)(1)(A), which was enacted into law on June 7, 2001.
PLR-123154-10 3

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 (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 GST 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 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. Therefore, Husband and Wife are
each granted an extension of time of 120 days from the date of this letter to allocate his
and her respective GST exemptions to the Date 1 transfers to Trust. The allocations
will be effective as of the date of the transfers to Trust, and the value of the transfers to
PLR-123154-10 4

Trust, as determined for federal gift tax purposes, will be used in determining the
amount of Husband’s GST exemption and Wife’s GST exemption to be allocated to
Trust.

The allocations should be made on supplemental Forms 709 for Year 1 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. Two
copies of this letter are enclosed for this purpose.

Except as expressly provided 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. 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
Code are in effect during the period at issue.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the
Code 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 letter is
being sent to your authorized representatives.

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.

                                Sincerely,

                                Associate Chief Counsel
                                (Passthroughs & Special Industries)


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

Enclosures: Copy for § 6110 purposes
Two copies of this letter

cc: