Estate receives extension to allocate GST exemption to early trust transfers

Plain-English summary

A decedent created an irrevocable trust for his daughter and grandson and transferred property to it each year for seventeen years. His tax professional did not advise him to file gift tax returns or allocate generation-skipping transfer exemption to the transfers. After a new professional discovered the omission, the estate's executrix requested relief for the first six years. The IRS concluded that the requirements of Treasury Regulation § 301.9100-3 were satisfied and gave the executrix 120 days to allocate the exemption on Forms 709. The allocations would take effect as of the original transfer dates. The ruling also stated that the exemption had been automatically allocated under IRC § 2632(c)(1) to the transfers made in the remaining eleven years.

Ruling snapshot

• Question: Could the estate receive extra time to allocate the decedent's GST exemption to six years of transfers to an irrevocable trust?
• Outcome: Approved. The executrix received 120 days to file Forms 709 for the first six years.
• Key authorities: IRC §§ 2631, 2632, 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

Number: 201422014
Third Party Communication: None
Release Date: 5/30/2014
Date of Communication: Not Applicable
Index Number: 2632.00-00, 9100.00-00
Person To Contact:
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------------------------------, ID No. ------------
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Telephone Number:
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Refer Reply To:
In Re: ------------------------------
CC:PSI:B04
PLR-135950-13
Date:
February 12, 2014

Legend

Decedent = -----------------
Trust = ------------------------------------------------------------------------------------------ Year 1 = ------ Year 2 = ------ Year 3 = ------ Year 4 = ------ Year 5 = ------ Year 6 = ------ Year 7 = ------ Year 8 = ------ Year 9 = ------ Year 10 = ------ Year 11 = ------ Year 12 = ------ Year 13 = ------ Year 14 = ------ Year 15 = ------ Year 16 = ------ Year 17 = ------

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

This letter responds to the submission dated August 13, 2013, and subsequent correspondence, in which executrix requests an extension of time pursuant to § 2642(g)(1) of the Internal Revenue Code and § 301.9100-3 of the Procedure and Administration Regulations to allocate Decedent’s generation-skipping transfer (GST) exemption to transfers Decedent made to Trust, an irrevocable trust.

The facts submitted and the representations made are as follows. In Year 1 the following occurred. Decedent created Trust for the benefit of his daughter and her son.

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Trust has GST potential. Decedent made transfer to Trust each year beginning in Year 1 through Year 17, the year Decedent died. During this period Decedent hired a tax professional to help him comply with his filing requirements. This tax professional did not advise Decedent to file Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns, to report these transfers to Trust and to allocate GST exemption to these transfers. Decedent discovered the failure to report and allocate when he hired a new tax professional in Year 16. It has been represented that Decedent has GST exemption available to allocate to these transfers.

The executrix of Decedent’s estate is requesting an extension of time under §§ 2642(g)(1) and 301.9100-3 to allocate Decedent’s GST exemption to the transfers Decedent made to Trust each year in Year 1 through to Year 6.

Law and Analysis:

Section 2601 imposes a tax on every GST. A GST 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 tax imposed by § 2601 is the taxable amount multiplied by the applicable rate. Section 2641(a) defines the applicable rate as the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer. Under § 2642(g), the inclusion ratio with respect to any property transferred in a GST is the excess (if any) of one over the applicable fraction. The applicable fraction, as defined in § 2642(g), is a fraction, the numerator of which is the amount of the GST exemption under § 2631 allocated to the trust, and the denominator of which is the value of the property transferred to the trust.

Section 2631(a) provides that, for purposes of determining the inclusion ratio, every individual is 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, is irrevocable.

Section 2631(c) provides that for purposes of § 2631(a), the GST exemption amount for any calendar year is equal to the basic exclusion amount under § 2010(c) for such calendar year.

Section 2632(a)(1) 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 2632(c)(1) provides that if any individual makes an indirect skip during such individual’s lifetime, any unused portion of such individual’s GST exemption is

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allocated to the property transferred to the extent necessary to make the inclusion ratio for such property zero. If the amount of the indirect skip exceeds such unused portion, the entire unused portion is allocated to the transferred property.

Section 26.2632-1(b)(4)(i) provides that an allocation of GST exemption to property transferred during the transferor’s lifetime, other than a direct skip, is made on Form 709. The allocation must clearly identify the trust to which the allocation is made, the amount of GST exemption allocated to it, and if the allocation is late or if an inclusion ratio greater than zero is claimed, the value of the trust assets at the effective date of the allocation.

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 or is deemed to be made under § 2632(b)(1) or (c)(1) – (A) the value of such property for purposes of § 2632(a) is its value as finally determined for purposes of chapter 12 (within the meaning of § 2001(f)(2)), and (B) such allocation is effective on and after the date of such transfer.

Section 2642(g)(1)(A) provides that the Secretary will 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 will 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) will 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 deemed 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 six months

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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) 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.

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. Accordingly, executrix is granted an extension of time of 120 days from the date of this letter to allocate Decedent’s GST exemption to the transfers to Trust he made each year in Year 1 through Year 6. The allocations will be effective as of the dates of each transfer. The allocations should be made on Forms 709 for Year 1 through Year 6, and filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to each Form 709. Decedent’s GST exemption was deemed allocated by § 2632(c)(1) to the transfers to Trust he made each year in Year 7 through Year 17.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

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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.

Sincerely,

James F. Hogan

James F. Hogan
Chief, Branch 4
(Passthroughs & Special Industries)

Enclosures:
Copy for section 6110 purposes

cc: