Settlor may make late prior-month rate elections for two CLATs

Plain-English summary

A settlor created two charitable lead annuity trusts and valued each charitable annuity using a section 7520 interest rate from one of the two preceding months. The gift tax returns omitted the statements required to elect those prior-month rates. The settlor had relied on an attorney and a certified public accountant to prepare and file the elections. The IRS found that the requirements for discretionary election relief were satisfied. It granted 120 days to file amended Forms 709 making the elections for both trusts.

Ruling snapshot

• Question: May the settlor make late elections to use prior-month section 7520 rates when valuing charitable annuity interests in two trusts?
• Outcome: Approved.
• Key authorities: IRC §§ 2512, 2522, and 7520(a); Treas. Reg. §§ 25.7520-2(b), 301.9100-1, and 301.9100-3.

Full text (IRS public release)

        Internal Revenue Service                                       Department of the Treasury
                                                                       Washington, DC 20224

       Number: 201518007                                             Third Party Communication: None
       Release Date: 5/1/2015                                        Date of Communication: Not Applicable
                                                                     Person To Contact:

ex Number: 7520.01-00, 9100.00-00 ----------------------- ---------------
Telephone Number:
-------------------------------- --------------------
------------------------- Refer Reply To:
---------------------- CC:PSI:B04
PLR-126064-14
Re: -------------------------- Date:
December 29, 2014

        Legend:

        Settlor                                               =         ---------------------------
        ----------------------------------------------------------------------------------------
        CLAT 1                                                =         ---------------------------------------------
        -------------------------------------------------------------------------------------------------------
        CLAT 2                                                =         -----------------------------------------------------
        ---------------------------------------------------------------------------------
        Charitable Organization                               =        ------------------------------------------------------
        ------------------------------------------------------------------------------
        Trust 1                                               =         -----------------------------------------
        -------------------------------------------------------------------------------------
        Trust 2                                               =        ------------------------------------------------------
        ----------------------------------------------------------------------
        Date 1                                                =        ------------------
        Date 2                                                =        -----------------------
        Date 3                                                =        ---------------------
        Date 4                                                =        -----------------------
        Date 5                                                =        ------------------
        Year 1                                                =        ------
        Year 2                                                =        ------
        Month A                                               =        -------------------
        Month B                                               =        -------------
        Month C                                               =        ------------------
        Month D                                               =        ----------------
        r                                                     =        ------------
        s                                                     =        ---------
        t                                                     =        ------------
        Attorney                                              =        -------------------------
        Certified Public Accountant                           =        ------------------------

PLR-126064-14 2

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

This letter responds to a letter from your authorized representative dated June 25, 2014,
requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to make an election under § 7520(a) of the Internal
Revenue Code. The facts and representations submitted are summarized as follows.

CLAT 1

On Date 1, Settlor transferred property, with a stated value of $r, to an irrevocable trust
(CLAT 1), described as a charitable lead annuity trust. The terms of the trust provide
that an annuity is to be paid to Charitable Organization for a period of s years. On the
expiration of the s-year period, the remaining trust property is to be divided between
Trust 1 and Trust 2 and held for the individual beneficiaries of those trusts.

On Date 2, Settlor filed a gift tax return, Form 709, United States Gift (and
Generation-Skipping Transfer) Tax return, reporting the transfer. The reported value of
the charitable annuity was determined using the § 7520 Federal midterm interest rate
for Month A, a month that was two months preceding Month B, the month in which the
Date 1 transfer was made. However, the gift tax return did not include the statement
and information required under § 25.7520-2(b) for making a prior month election, that is,
an election to value the charitable interest using a prior-month interest rate instead of
the interest rate prescribed for the month in which the transfer was made. The
statement and information were subsequently attached to the Form 1041 (U.S. Income
Tax Return for Estates and Trusts) filed for CLAT 1 for Year 1 on Date 5.

CLAT 2

On Date 3, Settlor transferred property, with a stated value of $t, to another irrevocable
trust (CLAT 2), described as a charitable lead annuity trust. As with CLAT 1, the terms
of CLAT 2 provide that an annuity is to be paid to Charitable Organization for a period of
s years. On the expiration of the s-year period, the remaining trust property is to be
divided between Trust 1 and Trust 2 and held for the individual beneficiaries of those
trusts.

On Date 4, Settlor filed a gift tax return reporting the transfer. The reported value of the
charitable annuity was again determined using the § 7520 interest rate for Month C, a
month that was two months preceding Month D, the month in which the Date 3 transfer
was made. This gift tax return, as well, did not include the statement and information
required under § 25.7520-2(b) for making an election to use a prior month interest rate
in determining the value of the charitable annuity.
PLR-126064-14 3

Settlor relied on Attorney and Certified Public Accountant to prepare and file the
prior-month elections under § 7520(a) as part of her gift tax returns filed for Year 1 and
Year 2. Attorney, who structured the trusts, directed Certified Public Accountant, who
prepared the Form 1041 for Year 1, to attach the election to the Form 1041.

Settlor has requested an extension of time under §§ 301.9100-1 and 301.9100-3 to file
amended Form 709 gift tax returns making the respective prior-month elections in
valuing the charitable annuities payable from CLAT 1 and CLAT 2.

Law and Analysis

Section 2512(a) of the Internal Revenue Code provides that if the gift is made in
property, the value thereof at the date of the gift shall be considered the amount of the
gift.

Section 2522(a) provides that in computing taxable gifts for the calendar year, there
shall be allowed as a deduction the amount of all gifts made during the year to or for the
use of the charitable purposes described therein.

Section 2522(c)(2)(B) provides that where a donor transfers an interest in property to a
person, or for a use, described in subsection (a) and an interest in the same property is
retained by the donor, or is transferred or has been transferred (for less than an
adequate and full consideration in money or money’s worth) from the donor to a person,
or for a use, not described in subsection (a), no deduction shall be allowed for the
interest which is, or has been transferred to the person, or for the use, described in
subsection (a) unless, in the case of any interest other than a remainder interest, the
interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly
of the fair market value of the property (to be determined yearly).

Section 25.2522(c)-3(c)(2)(vi)(a) provides, in part, that the charitable interest is a
guaranteed annuity interest, whether or not such interest is in trust. The term
“guaranteed annuity interest” means an irrevocable right pursuant to the instrument of
transfer to receive a guaranteed annuity. A guaranteed annuity is an arrangement
under which a determinable amount is paid periodically, but not less often than
annually, for a specified term of years or for the life or lives of certain individuals, each
of whom must be living at the date of the gift and can be ascertained at such date.

Under § 25.2512-5(d), the fair market value of annuities is the present value of such
interests determined by the use of standard or special § 7520 actuarial factors. See
also § 25.2512-5A(f)(1).
PLR-126064-14 4

Section 7520(a) provides, in part, that the value of any annuity shall be determined

   (1) under tables prescribed by the Secretary, and

   (2) by using an interest rate (rounded to the nearest 2/10ths of 1 percent) equal
   to 120 percent of the Federal midterm rate in effect under § 1274(d)(1) for the
   month in which the valuation date falls.

Under § 7520(a), if a gift tax charitable contribution is allowable for any part of the
property transferred, the taxpayer may elect to use such Federal midterm rate for either
of the two months preceding the month in which the valuation date falls for purposes of
paragraph (2). In the case of transfers of more than one interest in the same property
with respect to which the taxpayer may use the same rate under paragraph (2), the
taxpayer shall use the same rate with respect to each such interest.

Section 25.7520-2(a)(1) of the Procedure and Administration Regulations provides, in
part, that the fair market value of annuities for which a gift tax charitable deduction is
allowable is the present value of such interests determined under § 25.7520-1.

Section 25.7520-2(a)(2) provides, in part, that if any part of the property interest
transferred qualifies for a gift tax charitable deduction under § 2522, the donor may
elect to compute the present value of the interest transferred by use of the § 7520
interest rate for the month during which the gift is made or the § 7520 interest rate for
either of the two months preceding the month during which the gift is made. The
interest rate for the month so elected is the applicable § 7520 interest rate.

Section 25.7520-2(b)(1) provides that a taxpayer makes a prior-month election under
paragraph (a)(2) of this section by attaching the information described in paragraph
(b)(2) of this section to the donor’s gift tax return or to an amended return for that year
that is filed within 24 months after the later of the date the original return for the year
was filed or the due date for filing the return.

Section 25.7520-2(b)(2) provides that a statement that the prior-month election under
§ 7520(a) of the Code is being made and that identifies the elected month must be
attached to the gift tax return (or to the amended return).

Sections 301.9100 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an election. Section
301.9100-1(a).

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
PLR-126064-14 5

301.9100-3 to make a regulatory election, or a statutory election (but no more than six
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(a) provides, in part, that requests for relief subject to § 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 the grant
of relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) provides, in part, except as provided in § 301.9100-3(b)(3)(i)
through (iii), 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. Settlor is granted an extension of
time of 120 days from the date of this letter to file amended returns making the prior
month elections described above. The elections will be effective as of Date 2 for
CLAT 1 and Date 4 for CLAT 2.

The elections should be made on Forms 709, United States Gift (and
Generation-Skipping Transfer) Tax Return for the years in which the transfers were
made, and filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A
copy of this letter should be attached to each 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.
PLR-126064-14 6

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
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