GST exemption allocation substantially complied despite wrong form line

Plain-English summary

A taxpayer made gifts to two trusts with generation-skipping transfer tax potential and hired a tax professional to prepare the related gift tax return. The preparer intended to allocate an amount of the taxpayer's GST exemption to the trusts but reported the allocation on the wrong line of Form 709. The IRS found that the return contained enough information to substantially comply with the allocation requirements. It therefore treated the exemption as allocated to the transfers under § 2642(g)(2), which respects a demonstrated intent to produce the lowest possible inclusion ratio.

Ruling snapshot

• Question: Did the gift tax return substantially comply with the rules for allocating GST exemption to two trusts?
• Outcome: Approved, the reported information constituted substantial compliance
• Key authorities: IRC §§ 2632(a) and 2642(g)(2); Treas. Reg. § 26.2632-1(b)(4)(i)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201442017 Third Party Communication: None
Release Date: 10/17/2014 Date of Communication: Not Applicable
Index Number: 2632.00-00
Person To Contact:
------------------------ ------------------------------
----------------------------------------------------- ID No. ----------------
------------------------- Telephone Number:
--------------------
In Re: Ruling Request Refer Reply To:
CC:PSI:B04
PLR-114637-14
Date:
July 14, 2014

Legend:

Taxpayer = --------------------
Year = ------
X = -------------

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

   This letter responds to your authorized representative’s letter of March 12, 2014,

requesting a ruling under § 2642(g) that Taxpayer substantially complied with the
requirements of § 2632(a) to allocate generation-skipping transfer (GST) exemption to
two trusts.

   The facts submitted and the representations made are as follows. In Year,

Taxpayer made gifts with a total reported value of $X to two trusts with GST tax
potential. Taxpayer retained a tax professional to prepare her Form 709, United States
Gift (and Generation-Skipping Transfer) Tax Return, for Year. In preparing the Form
709, the tax professional indicated that $X of Taxpayer’s available GST exemption was
no longer available and reported the allocation of this exemption on the wrong line of
the Form 709.

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 2631(a) provides that for purposes of determining the inclusion ratio,

every individual has GST exemption amount which the individual (or his executor) can
allocate 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.
PLR-114637-14 2

  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(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 shall
be 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 shall be allocated to the property transferred.

   Section 2632(c)(2) provides that for purposes of § 2632(c)(1), the unused portion

of an individual’s GST exemption is that portion of such exemption which has not
previously been -- (A) allocated by such individual, (B) treated as allocated under
§ 2632(b) with respect to a direct skip occurring during or before the calendar year in
which the indirect skip is made, or (C) treated as allocated under paragraph (c)(1) with
respect to a prior indirect skip.

   Section 26.2632-1(b)(4)(i) of the Generation-Skipping Transfer Tax Regulations

provides in part 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(g)(2) provides that an allocation of GST exemption under § 2632

that demonstrates an intent to have the lowest possible inclusion ratio with respect to a
transfer or a trust shall be deemed to be an allocation of so much of the transferor’s
unused GST exemption as produces the lowest possible inclusion ratio. In determining
whether there has been substantial compliance, all relevant circumstances are to be
taken into account, including evidence of intent contained in the trust instrument or
instrument of transfer and such other factors as the Secretary deems relevant.

  In this case, based upon the facts submitted and the representations made, we

conclude that the Form 709 contains sufficient information to constitute substantial
compliance under § 2642(g)(2) with the requirements of § 2632(a) to allocate $X of
Taxpayer’s GST exemption to the transfers to the trusts in Year.

   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.
PLR-114637-14 3

  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,

                                  Leslie H. Finlow

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

Enclosure:
Copy for § 6110 purposes