PLR 201302002: IRS grants more time to allocate GST exemption to trust gifts

Plain-English summary

The executors of an estate asked for more time to allocate generation-skipping transfer tax exemption to gifts made to an irrevocable trust over several years. The donor's tax professionals either allocated too little exemption or failed to report later gifts, leaving the trust with an unintended inclusion ratio. The IRS found that the taxpayer acted reasonably and in good faith and granted a 120-day extension. The allocations would be effective as of the original transfer dates, subject to supplemental gift tax returns and the ruling's terms.

Ruling snapshot

• Question: Could the estate receive an extension of time to allocate GST exemption to the donor's gifts to the trust?
• Outcome: Approved, the IRS granted a 120-day extension for the specified transfers.
• Key authorities: IRC §§ 2631, 2642, and 6110; Treas. Reg. §§ 26.2632-1(b)(4)(i) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201302002
Third Party Communication: None
Release Date: 1/11/2013
Date of Communication: Not Applicable
Person To Contact:
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
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PLR-111562-12
Date:
September 12, 2012
Re: -----------------------------------------

Legend:
Donor = ----------------------------
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Trust = ---------------------------------------------------
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Date 1 = --------------------------
Date 2 = ---------------------------
Year = -------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
a = -----------
b = -----------
c = ---------
A = -----------------------------------
B = ---------------------------------

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

This letter responds to a letter from your authorized representative dated March 14, 2012, 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 generation-skipping transfer (GST) exemption to gifts made by Donor.

The facts and representations submitted are as follows. On Date 1, Donor created an irrevocable trust (Trust) for the benefit of his children and their issue. Trust has GST
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potential. In Year 1, Donor contributed $a to Trust. In Year 2, he contributed $b to Trust. In each of Year 3, Year 4, and Year 5, he contributed $c to Trust. A, a certified public accountant, advised Donor as to reporting the Year 1 gift and allocating GST exemption to it. Donor intended for Trust to have an inclusion ratio of zero. A prepared and timely filed the Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return for the gift. However, A did not allocate a sufficient amount of GST exemption to the gift for Trust to have an inclusion ratio of zero.

B, a certified public accountant, prepared and timely filed the Form 709 reporting the Year 2 gift. B relied upon A’s calculations in allocating GST exemption to that gift. As a result, B did not allocate a sufficient amount of GST exemption for Trust to have an inclusion ratio of zero. On B’s advice, Donor did not file gift tax returns reporting the gifts made in Year 3, Year 4, and Year 5, and no GST exemption was allocated to those gifts.

Donor died on Date 2. The executors of his estate have requested an extension of time under § 2642(g) and §§ 301.9100-1 and 301.9100-3 to allocate additional GST exemption to Donor’s transfers to Trust.

Section 2601 imposes a tax on every 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 transfer, 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.
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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 § 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.

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.
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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.

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. The executors of Donor’s estate are granted an extension of time of 120 days from the date of this letter to allocate Donor’s GST exemption to the gifts to Trust made in Year 1, Year 2, Year 3, Year 4, and Year 5, as described above. 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 Donor’s GST exemption to be allocated.

The allocations should be made on supplemental Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for the year in which the respective 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.

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.

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 ruling contained in this letter is 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
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submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,
Associate Chief Counsel
(Passthroughs & Special Industries)

Leslie H. Finlow
Senior Technician Reviewer, Branch 4
Office of Associate Chief Counsel
(Passthroughs & Special Industries)

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

cc: