Taxpayer may elect out of automatic GST allocation late

Plain-English summary

A taxpayer made several cash gifts to a trust with generation-skipping potential and timely reported the gifts on Forms 709. The taxpayer did not elect out of the automatic allocation of GST exemption because the advising firm failed to explain the GST consequences and election option. No distributions had been made from the trust to a skip person. The IRS concluded that the requirements for discretionary relief were met and granted 120 days to file the election out under section 2632(c)(5). The taxpayer must file supplemental Forms 709 with copies of the ruling, and the election will be effective as of the transfer dates.

Ruling snapshot

• Question: May the taxpayer make a late election out of automatic GST-exemption allocation for transfers to the trust?
• Outcome: Yes, by filing supplemental Forms 709 within 120 days.
• Key authorities: IRC §§ 2632 and 2642; Treas. Reg. §§ 26.2632-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201606001                                              Third Party Communication: None
Release Date: 2/5/2016                                         Date of Communication: Not Applicable
Index Number: 2642.00-00, 9100.00-00
                                                               Person To Contact:
----------------------                                         --------------------, ID No. ----------------
-------------------------------                                Telephone Number:
--------------------------------------                         --------------------
                                                               Refer Reply To:
                                                               CC:PSI:B4
                                                               PLR-108926-15
                                                               Date:
                                                               August 07, 2015




LEGEND

Taxpayer          =         ----------------------
----------------------------------------------------

Trust             =        ------------------------------------------------------------------------------------------

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

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

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

Year 1            =        ------

Year 2            =        ------

Firm              =        ---------------------------------

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

       This letter responds to a letter dated March 5, 2015, and subsequent
correspondence, 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 make an election under § 2632(c)(5) to elect out of the automatic
allocation of generation-skipping transfer (GST) tax exemption.

FACTS
PLR-108926-15                                  2

       On Date 1, a date after December 31, 2000, Taxpayer created Trust. Trust has
GST tax potential. On Date 1 and Date 2, in Year 1, and on Date 3, in Year 2, Taxpayer
made transfers of cash to Trust. Taxpayer reported the transfers as gifts on timely filed
Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for
Year 1 and Year 2, but Taxpayer did not make an election out of the automatic
allocation of GST exemption under § 2632(c)(5) for the transfers.

       Taxpayer relied upon Firm to advise him regarding the tax consequences of the
Year 1 and Year 2 transfers to Trust. Firm failed to advise Taxpayer with respect to the
GST implications of the transfers. Taxpayer represents that if he had been advised of
the option to make an election under § 2632(c)(5), he would have elected out of the
automatic allocation of GST tax exemption for the Year 1 and Year 2 transfers to Trust.

      It is represented that no distributions have been made from Trust to a skip
person as defined in § 2613.

RULING REQUESTED

       Taxpayer requests an extension of time under § 301.9100-3 to make an election
under § 2632(c)(5)(A)(i)(II) to have the automatic allocation rules contained in
§ 2632(c)(1) not apply to the Year 1 and Year 2 transfers to Trust and all future
transfers to Trust.

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 2602 provides that the amount of the GST tax 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 for purposes of chapter 13, 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).

       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
PLR-108926-15                                  3

the transferor. Section 2631(b) provides that any allocation under § 2631(a), once
made, shall be irrevocable.

        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)(3)(A) provides that for purposes of § 2632(c), the term “indirect
skip” means any transfer of property (other than a direct skip) subject to the tax imposed
by chapter 12 made to a GST Trust. Section 2632(c)(3)(B) provides that the term “GST
trust” means a trust that could have a generation-skipping transfer with respect to the
transferor unless the trust is described in § 2632(c)(3)(B)(i) through (vi).

        Section 2632(c)(5)(A)(i)(II) provides that an individual may elect to have
§ 2632(c)(1) not apply to any or all transfers made by such individual to a particular
trust. Section 2632(c)(5)(B)(ii) provides that such an election may be made on a timely
filed gift tax return for the calendar year for which the election is to become effective.

        Section 26.2632-1(b)(2)(i) of the Generation-Skipping Transfer Tax Regulations
provides, in part, that, in the case of an indirect skip made after December 31, 2000, the
transferor’s unused GST exemption is automatically allocated to the property
transferred (but not in excess of the fair market value of the property on the date of the
transfer). The automatic allocation pursuant to § 26.2632-1(b)(2)(i) is effective whether
or not a Form 709 is filed reporting the transfer, and is effective as of the date of the
transfer to which it relates. An automatic allocation is irrevocable after the due date of
the Form 709 for the calendar year in which the transfer is made. The automatic
allocation of exemption applies even if an allocation of exemption is made to the indirect
skip in accordance with § 2632(a).

       Section 26.2632-1(b)(2)(ii) provides, in part, that the transferor may prevent the
automatic allocation of GST exemption with regard to an indirect skip by making an
election, as provided in paragraph (b)(2)(iii) of § 26.2632-1.

         Section 26.2632-1(b)(2)(iii)(A) provides that a transferor may prevent the
automatic allocation of GST exemption (elect out) with respect to: (1) one or more
prior-year transfers subject to § 2642(f) (regarding ETIPs) made by the transferor to a
specified trust or trusts; (2) one or more (or all) current-year transfers made by the
transferor to a specified trust or trusts; (3) one or more (or all) future transfers made by
the transferor to a specified trust or trusts; (4) all future transfers made by the transferor
to all trusts (whether or not in existence at the time of the election out); or (5) any
combination of paragraphs (b)(2)(ii)(A)(1) through (4) of this section.
PLR-108926-15                                 4

        Section 26.2632-1(b)(2)(iii)(B) provides that to elect out, the transferor must
attach an election out statement to a Form 709 filed within the time period provided in
§ 26.2632-1(b)(2)(iii)(C). In general, the election out statement must identify the trust,
and specifically must provide that the transferor is electing out of the automatic
allocation of GST exemption with respect to the described transfer or transfers. Under
§ 26.2632-1(b)(2)(iii)(C), to elect out, the Form 709 with the attached election out
statement must be filed on or before the due date for timely filing the Form 709 for the
calendar year in which: (1) for a transfer subject to § 2642(f), the ETIP closes; or (2) for
all other elections out, the first transfer to be covered by the election out was made.

       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 shall be treated as if not expressly prescribed by statute. See
Notice 2001-50, 2001-2 C.B. 189.

        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(b)(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.

      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.
PLR-108926-15                                  5


        Based on the facts submitted and representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Therefore, Taxpayer is granted an
extension of time of 120 days from the date of this letter to make the written election out
of the automatic allocation of GST exemption under § 2632(c)(5). The election will be
effective as of the date of the transfers. Taxpayer should make the election on
supplemental Forms 709. The Forms 709 should be filed with the Internal Revenue
Service, Cincinnati Service Center – Stop 82, Cincinnati, Ohio 45999. Attach a copy of
this letter to each Form 709.

       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.

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

                                           Sincerely,



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

Enclosures (2)

       Copy of this letter
       Copy for § 6610 purposes


cc: