Mistaken GST allocation received retroactive correction

Plain-English summary

A grantor's accountant reported a gift to the wrong trust and failed to allocate GST exemption to the actual irrevocable trust. After the error was discovered, the grantor made a late allocation but sought relief to make the allocation effective as of the original transfer date. The IRS granted 120 days to file a supplemental Form 709 with a retroactive allocation; because that allocation precedes the later one, any later allocation exceeding what was needed for a zero inclusion ratio was void.

Ruling snapshot

• Question: Could the grantor allocate GST exemption retroactively to the original trust transfer and displace an unnecessary later allocation?
• Outcome: Approved, with a 120-day extension and retroactive effect.
• 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: 201432004 [Third Party Communication:
Release Date: 8/8/2014 Date of Communication: Month DD, YYYY]
Index Number: 2642.00-00, 9100.00-00
Person To Contact:
------------------- ----------------------------, ID No. ------------
-------------------------- Telephone Number:
------------------------------ --------------------
Refer Reply To:
In Re: -------------------------------- CC:PSI:B04
PLR-141510-13
Date:
March 19, 2014

Legend

Grantor = ----------------------------------------------
Child 1 = ----------------
Child 2 = -----------------------
Child 3 = -------------------
Trust = -------------------------------------------------------------------
Trustee = ------------------------------
Accounting Firm = -----------------------
Attorney = ---------------
Date 1 = -----------------
Year 1 = ------
Year 2 = ------

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

   This is in response to a letter from your authorized representative dated

September 12, 2013 requesting an extension of time under § 301.9100 of the
Procedure and Administration Regulations to make an allocation of generation-skipping
transfer (GST) exemption.

Facts

   The facts and representations submitted are summarized as follows: Grantor

established Trust, an irrevocable trust, on Date 1, in Year 1, a date prior to December
31, 2000. Trust was created for the benefit of Child 1, Child 2, and Child 3 and their
descendants. Trust was funded with stock. No additional transfers have been made to
Trust.

   Article 1 provides in part that during Grantor’s lifetime, the Trustee, in his sole

discretion may pay all of so much of the income of Trust as the trustee deems advisable

to any of Grantor’s descendants. In addition to income, Trustees may, in his sole
discretion, pay or apply principal for the use or benefit of any of Grantor’s descendants.

   At Grantor’s death, Trust is to be divided into as many equal shares to provide

one share for each child then living, and one equal share for the then living descendants
of a deceased child of Grantor. Trust terminates 21 years after the death of the last to
survive of Grantor’s descendants as shall be living on the date of execution of Trust.

    Accounting Firm prepared the Form 709 United States Gift (and Generation-

Skipping Transfer) Tax Returns for Year 1. Grantor’s Year 1 Form 709 reflected the gift,
however, it reported the gift as being made to the wrong trust and Accounting Firm did
not allocate any of Grantor’s GST exemption to Trust.

     The error was discovered in Year 2 when Attorney reviewed Grantor’s

Form 709 and discovered that the gift was reported to the wrong trust and that no
GST exemption had been allocated to the Year 1 transfers. When Attorney realized
that Accounting Firm had not allocated Grantor’s available GST exemption to the Date 1
transfer to Trust, he notified Accounting Firm. Consequently, Accounting Firm advised
Grantor to make a late allocation of Grantor’s GST exemption to Trust. Accounting Firm
then prepared and filed the Year 2 Form 709 on which a late allocation of Grantor’s
GST exemption was made to Trust.

   Grantor signed an affidavit stating that he discussed the GST tax with his tax

advisors and was informed that making an allocation of his GST exemption to Trust
would result in Trust being exempt for the GST tax. Accountant signed an affidavit
stating that Accounting Firm erroneously reported the gift to the wrong trust and did not
allocate any of Grantor’s GST exemption to Trust.

    You have requested an extension of time to allow Grantor to make an election

under § 2642(g)(1) to allocate GST exemption to the transfer to Trust in Year 1,
effective as of the date of the transfer to Trust. In addition you have requested a ruling
that the Year 2 late allocation of Grantor’s GST exemption to Trust is void.

Law and Analysis

   Section 2601 of the Internal Revenue Code 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 (adjusted for inflation under § 2631(c)) 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) 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
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.

    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). 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. Therefore, Grantor is granted an
extension of time of 120 days from the date of this letter to make an allocation of his
available GST exemption, with respect to his Year 1 transfer to Trust. The allocation
will be effective as of the respective date of the transfer to Trust and the value of the
transfer to Trust as determined for federal gift tax purposes will be used in determining
the amount of Grantor’s GST exemption to be allocated to the trusts.

  This allocation should be made on a supplemental Form 709 and filed with the

Cincinnati Service Center at the following address: Internal Revenue Service, Cincinnati
Service Center – Stop 82, Cincinnati, OH 45999. A copy of this letter should be
attached to the supplemental Forms 709.

    Because the allocation will be effective as of Date 1, the allocation will be

deemed to precede in time the allocation Grantor made on the Form 709 filed in Year 2.
To the extent Grantor’s allocation exceeds the amount necessary to obtain an inclusion
ratio of zero with respect to Trust under § 25.2632-1(b)(4)(i), such allocation is void.

  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.

  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,



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

Enclosures
Copy for section 6110 purposes
Copy of this letter

cc: