Estate receives more time to elect out of GST allocation

Plain-English summary

An estate asked for more time to elect out of the automatic allocation of generation-skipping transfer exemption to the decedent's 2010 direct gifts to grandchildren and other skip persons. The decedent's attorney and accounting firm had not advised about the 2010 GST rules, and the accounting firm did not prepare a timely gift tax return. The IRS found that the requirements for regulatory relief were satisfied because the decedent reasonably relied on qualified tax professionals who failed to advise about the election. It granted the estate 120 days to make the election on a supplemental 2010 Form 709.

Ruling snapshot

• Question: Should the estate receive an extension to elect out of automatic GST exemption allocation for the decedent's 2010 direct skips?
• Outcome: Approved
• Key authorities: IRC §§ 2632(b)(3), 2642(g); Treas. Reg. § 301.9100-3; Notice 2001-50; Notice 2011-66

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201549025 Third Party Communication: None
Release Date: 12/4/2015 Date of Communication: Not Applicable
Index Number: 2632.00-00, 2642.00-00,
9100.00-00 Person To Contact:
----------------------, ID No. ------------------
----------------------------------- Telephone Number:
------------------------------------------------------------ ----------------------

• Refer Reply To:
  ------------------------- CC:PSI:B4
  ------------------------ PLR-107074-15
  Date:
  July 22, 2015

Legend

Decedent = --------------------------------------------------

Accounting Firm = --------------------

Attorney = ---------------------------

Date 1 = ---------------------------

Date 2 = ------------------------

Date 3 = --------------------

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

   This letter responds to your authorized representative's letter dated February 21,

2015 requesting an extension of time under § 2642(g) of the Internal Revenue Code
(Code) and § 301.9100-3 of the Procedure and Administration Regulations to elect out
of the generation-skipping transfer (GST) exemption automatic allocation rules.

     The facts and representations submitted are summarized as follows:

  In 2010, Decedent made gifts, including gifts not in trust to Decedent’s

grandchildren and other skip persons (Decedent’s 2010 Direct Skips).

 For many years, Decedent had engaged the services of Attorney to assist in

Decedent’s gift and estate planning and Accounting Firm to prepare any necessary tax
PLR-107074-15 2

returns, including any necessary gift tax returns. Neither Attorney nor Accounting Firm
advised Decedent of the rules affecting GSTs in 2010. Specifically, Decedent was not
advised of the GST tax rate in effect in 2010 or of the rules under § 2632(b) regarding
the automatic allocation of GST exemption and the ability to elect out of the automatic
allocation of GST exemption by making an election under § 2632(b)(3).

  Accounting Firm failed to prepare a Form 709, United States Gift (and

Generation-Skipping Transfer) Tax Return, to report Decedent’s 2010 gifts. Therefore,
Decedent did not file a 2010 Form 709 and did not elect out of the automatic allocation
of GST exemption to Decedent’s 2010 Direct Skips.

   On Date 1, Decedent died. On Date 2, Decedent’s personal representative filed

a late Form 709 to report Decedent’s 2010 gifts. On Date 3, Decedent’s personal
representative filed a supplemental 2010 Form 709 for Decedent.

   You, as the executor of Decedent’s estate, request an extension of time under

§ 301.9100-3 to make an election under § 2632(b)(3) to elect out of the automatic
allocation rules with respect to Decedent’s 2010 Direct Skips.

LAW AND ANALYSIS

    Section 2601 imposes a tax on every generation-skipping transfer (GST). A GST

is defined under § 2611(a) as (1) a taxable distribution, (2) a taxable termination, and
(3) a direct skip.

   Section 2612 provides that the term “direct skip” means a transfer subject to a

tax imposed by chapter 11 or 12 of an interest in property to a skip person.

   Section 2613 provides, in relevant part, that the term “skip person” means a

natural person assigned to a generation which is 2 or more generations below the
generation assignment of the transferor.

   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 term
“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 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 term “applicable fraction,” as defined in § 2642(a)(2), is a fraction, the
numerator of which is the amount of the 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).
PLR-107074-15 3

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

every individual shall be 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, shall be irrevocable.

   Section 2632(a)(1) provides that an individual’s GST exemption may be allocated

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
return is required to be filed.

    Section 2632(b)(1) provides that if an individual makes a direct skip during his

lifetime, any unused portion of such individual’s unused 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 direct skip exceeds such unused portion,
the entire unused portion shall be allocated to the property transferred.
Section 2632(b)(3) provides that an individual may elect to have § 2632(b) not apply to
a transfer.

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

provides, in part, that, if a direct skip occurs during the transferor’s lifetime, the
transferor’s GST exemption not previously allocated (unused GST exemption) is
automatically allocated to the transferred property (but not in excess of the fair market
value of the property on the date of the transfer). The transferor may prevent the
automatic allocation of GST exemption by describing on a timely-filed Form 709 the
transfer and the extent to which the automatic allocation is not to apply.

    Section 26.2632-1(b)(1)(ii) provides, in part, that a Form 709 is timely filed if it is

filed on or before the date required for reporting the transfer if it were a taxable gift (i.e.,
the date prescribed by section 6075(b), including any extensions to file actually granted
(the due date)). The automatic allocation of GST exemption (or the election to prevent
the allocation, if made) is irrevocable after the due date. An automatic allocation of GST
exemption is effective as of the date of the transfer to which it relates. Except as
provided above, a Form 709 need not be filed to report an automatic allocation.

   Section A of Title V of the Economic Growth and Tax Relief Reconciliation Act of

2001, P.L. 107-16 (EGTRRA) enacted § 2210 of the Code, which made chapter 13 (the
GST tax) inapplicable to GSTs made in 2010. On December 17, 2010, the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312
(124 Stat. 3296) (TRUIRJCA) became law, and § 301 retroactively reinstated GST
taxes. However, § 302(c) of TRUIRJCA provides that the applicable tax rate for each
GST occurring during 2010 is zero.
PLR-107074-15 4

    Notice 2011-66, 2011-35 I.R.B. 184, provides that because it is clear that a 2010

transfer not in trust to a skip person is a direct skip to which the donor would never want
to allocate GST exemption, the IRS will interpret the reporting of an inter vivos direct
skip not in trust occurring in 2010 on a timely filed Form 709 as constituting the payment
of tax (at the rate of zero percent) and, therefore, as an election out of the automatic
allocation of GST exemption to that direct skip.

   Section 2642(g)(1)(A) provides, generally, 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).

   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
election out of the automatic allocation rules, and the time for election 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
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 date is prescribed by a regulation (and
not expressly provided by statute). In accordance with § 2642(g)(1)(B) and
Notice 2001-50, a taxpayer 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.
PLR-107074-15 5

  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 representations made, we conclude that the

requirements of § 301.9100-3 have been satisfied. Therefore, you are granted an
extension of time of 120 days from the date of this letter to make an election under
§ 2632(b)(3) that the automatic allocation rules do not apply to Decedent’s 2010 Direct
Skips. The election out of the automatic allocation rules of § 2632(b)(1) should be
made on a supplemental Form 709 for 2010. The supplemental Form 709 should be
filed with the Internal Revenue 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 Form 709. A copy is enclosed for
this purpose.

   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) of

the Code provides that it may not be used or cited as precedent.

  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.
PLR-107074-15 6

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to the taxpayer’s authorized representative.

                                   Sincerely,

                                   Associate Chief Counsel
                                   (Passthroughs & Special Industries)


                              By: _____________________________
                                  Karlene M. Lesho
                                  Senior Technician Reviewer, Branch 4
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosures (2)

   Copy of this letter
   Copy for § 6110 purposes