PLR 201109005: The IRS granted more time to allocate GST exemptions to trust transfers

Plain-English summary

Grantor and Spouse asked for more time to allocate their generation-skipping transfer tax exemptions to transfers made to an irrevocable trust. Their accountant and tax preparer failed to make the allocations on their gift tax returns, even though the accountant had noted that the allocations were needed. The IRS found that the taxpayers acted reasonably and in good faith because they relied on qualified tax professionals, and that relief would not prejudice the government's interests. It granted 120 days from the ruling date to make the allocations on supplemental Forms 709, effective as of the transfer date.

Ruling snapshot

• Question: May Grantor and Spouse make late allocations of their GST exemptions to transfers to the trust?
• Outcome: Approved, subject to making the allocations within 120 days.
• Key authorities: IRC §§ 2601, 2631, and 2642(g); 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

Third Party Communication: None
Number: 201109005
Date of Communication: Not Applicable
Release Date: 3/4/2011
Person To Contact:
-----------------------------, ID No. --------------
Index Number: 2642.00-00, 9100.00-00
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Telephone Number:
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Refer Reply To:
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CC:PSI:B04
PLR-122426-10
Date: NOVEMBER 05, 2010

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

Legend

Grantor = ----------------------------------------------------------
Spouse = --------------------------------------------------
Daughter 1 = -------------------------
Daughter 2 = -----------------------------
Trust = -------------------------------------
Share 1 = -----------------------------------------------------------------------
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Share 2 = --------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
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Accountant = ------------------------
Attorney = ---------------------
Date 1 = ---------------------------
Year 1 = -------
Year 2 = -------

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

This letter responds to your authorized representative’s letter of May 25, 2010, requesting an extension of time pursuant to § 2642(g) of the Internal Revenue Code and § 301.9100 of the Procedure and Administration Regulations to allocate Grantor’s GST exemption to a transfer to a trust and Spouse’s GST exemption to a transfer to a trust.

Facts

The facts and representations submitted are summarized as follows: On Date 1, a date prior to December 31, 2000, Grantor and Spouse created an irrevocable trust (Trust). Trust was then divided into two equal shares, Share 1 for the benefit of
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Daughter 1 and her descendants and Share 2 for the benefit of Daughter 2 and her descendants. Grantor and Spouse each transferred property to Trust in Year 1.

Grantor and Spouse instructed their Accountant to prepare separate Forms 709 United States Gift (and Generation-Skipping Transfer) Tax Returns for Grantor and Spouse to report the gifts to Trust. Attorney, who advised the taxpayers to establish Trust, and Accountant, who was also involved in the planning of Trust, discussed the need to allocate each taxpayer’s GST exemption to his or her transfer to Trust on their respective Form 709. Accountant employed a certified public accountant to prepare the Forms 709. The preparer did not notice the memorandum in the file from Accountant stating that each taxpayer’s GST exemption needed to be allocated to his or her transfers to Trust and did not make these allocations on the Forms 709. When Accountant reviewed the Forms 709, he failed to notice the memorandum and did not correct the errors. Attorney discovered the errors in Year 2 after she reviewed Grantor and Spouse’s estate plan and copies of the Forms 709. No taxable distributions have been made from Trust to any skip persons.

Law and Analysis

Section 2601 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)(4)(i) 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 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
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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 120 days from the date of this letter to allocate Grantor’s GST exemption and Spouse’s GST exemption to the Year 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 Trust as determined for federal gift tax purposes will be used in determining the amount of Grantor’s GST exemption and Spouse’s GST exemption to be allocated to Trust.

These allocations should be made on supplemental Forms 709 and filed with the Cincinnati Service Center at the following address: Internal Revenue Service, Cincinnati
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Service Center – Stop 82, Cincinnati, OH 45999. A copy of this letter should be attached to the supplemental Forms 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. Specifically, we are not ruling on whether Trust 1 or Trust 2 will have a zero inclusion ratio as a result of Grantor’s and Spouse’s allocations of their GST exemptions to the Year 1 transfers to Trust 1 and Trust 2. 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.

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,

Associate Chief Counsel
(Passthroughs & Special Industries)

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

Enclosures
Copy for section 6110 purposes