Spouses receive 120 days to elect out of automatic GST allocations

Plain-English summary

A husband and wife made transfers to several irrevocable trusts with generation-skipping transfer tax potential and elected gift splitting on their annual gift tax returns. Their tax professionals failed to report the transfers and therefore did not file elections opting out of automatic GST exemption allocations. After the husband's death, his executor and the wife sought relief for the affected years. The IRS found that they reasonably relied on qualified professionals and granted each 120 days to make the late elections. The husband's elections must be made on supplemental Forms 709 for three years, and the wife's election on a supplemental Form 709 for one year.

Ruling snapshot

• Question: May the spouses make late elections out of automatic GST exemption allocations after their tax professionals omitted the transfers?
• Outcome: Approved, with 120 days to file supplemental Forms 709.
• Key authorities: IRC §§ 2513, 2632(c)(5), 2642(g), and 2652(a)(2); 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: 201614016                                            Third Party Communication: None
Release Date: 4/1/2016                                       Date of Communication: Not Applicable
Index Number: 2632.00-00, 9100.00-00
                                                             Person To Contact:
------------------------                                     ------------------------------, ID No. ------------
--------------------                                         ----------------
---------------------                                        Telephone Number:
--------------------------                                   --------------------
                                                             Refer Reply To:
In Re: --------------------------------------------------- CC:PSI:B04
--------------------------------------------               PLR-124335-15
                                                             Date:
                                                             December 21, 2015




Husband                          =      --------------------------
Wife                             =      ------------------------
Husband’s Trusts                 =      ---------------------------------------------------------------------------
                                        ---------------------------------------------------------------------------
                                        ---------------------------------------------------------------------------
                                        ---------------------------------------------------------------------------
                                        ---------------------------------------------------------------------------
                                        ----------------------------------------------------------------
Wife’s Trust                     =      --------------------------------------------------
Year 1                           =      ------
Year 2                           =      ------
Year 3                           =      ------

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

       This letter responds to your personal representative's letter of July 14, 2015, and
subsequent correspondence, requesting an extension of time under § 2642(g) of the
Internal Revenue Code and § 301.9100-3 of the Procedure and Administration
Regulations to make the election out of the automatic allocation of generation-skipping
transfer (GST) exemption under § 2632(c)(5)(A)(i).

       The facts submitted and the representations made are as follows. In Year 1
through Year 3, on dates after December 31, 2000, Husband established and made
transfers to several irrevocable trusts (Husband’s Trusts). The trusts had GST tax
potential. In Year 2, Wife created and funded an irrevocable trust (Wife’s Trust) for the
benefit of Husband. Wife’s Trust had GST tax potential. Husband died in Year 3.

      For Year 1 through Year 3, Husband and Wife retained tax professionals to
prepare their yearly Forms 709, United States Gift (and Generation-Skipping Transfer)
Tax Returns. On these returns, Husband and Wife elected to treat gifts made by each
PLR-124335-15                                  2

as made by both under § 2513. The tax professionals failed on the returns to report the
transfers Husband made in Year 1 through Year 3 and Wife made in Year 2 and, thus,
failed to make proper elections with respect to Husband’s Trusts and Wife’s Trust.

      The executor of Husband’s estate and Wife request an extension of time under
§ 301.9100-3 to make an election out of the deemed allocation of GST exemption with
respect to Husband’s Year 1 through Year 3 transfers and Wife’s Year 2 transfer
pursuant to § 2632(c)(5)(A)(i).

LAW AND ANALYSIS

        Section 2513(a) provides generally that, for gift tax purposes, if the parties’
consent, a gift made by one spouse to any person other than his or her spouse shall, for
gift tax purposes, be considered as made one-half by the donor spouse and one-half by
his or her spouse.

        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 2632(c) is effective for transfers subject to chapter 11 or 12 made after
December 31, 2000, and to estate tax inclusion periods (ETIPs) ending after
December 31, 2000. See Pub. L. No. 107-16, § 561(a). 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)(5)(A)(i)(I) provides that an individual may elect to have
§ 2632(c)(1) not apply to an indirect skip. Such an election shall be deemed to be
timely if made on a timely filed gift tax return for the calendar year in which the transfer
was made or deemed to have been made pursuant to § 2632(c)(4) or on such later date
or dates as may be prescribed by the Secretary.

        Section 26.2632-1(b)(2)(iii)(A) of the Generation-Skipping Transfer Tax
Regulations provides, in relevant part, 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
PLR-124335-15                                 3

(whether or not in existence at the time of the election out); or (5) any combination of
(1) through (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.

       Section 26.2632-1(b)(2)(iii)(C) provides that 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 2652(a)(2) and § 26.2652-1(a)(4) provide that, if, under § 2513, one-half
of a gift is treated as made by an individual and one-half of such gift is treated as made
by the spouse of the individual, then for purposes of the GST tax, each spouse is
treated as the transferor of one-half of the entire value of the property transferred by the
donor spouse, regardless of the interest the electing spouse is actually deemed to have
transferred under § 2513.

        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
PLR-124335-15                                4

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 representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Therefore, the executor of
Husband’s estate and Wife are each granted an extension of time of 120 days from the
date of this letter to elect out of the automatic allocation rules with respect to the
transfers Husband made in Year 1 through Year 3 and the transfer Wife made in
Year 2.

      Husband elections should be made on supplemental Forms 709 for Year 1
through Year 3. Wife’s election should be made on a supplemental Form 709 for
Year 2. The supplemental Forms 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 Forms 709.

      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, we have sent a
copy of this letter to your authorized representative.

                                      Sincerely,


                                      Melissa C. Liquerman
                                      Melissa C. Liquerman
                                      Chief, Branch 4
                                      (Passthroughs & Special Industries)


Enclosures: Copy for § 6110 purposes

cc: