Estate received relief for GST allocations and election-outs

Plain-English summary

A married donor funded five trusts for grandchildren and elected gift splitting with the donor's spouse. Their first tax preparer failed to allocate the spouse's generation-skipping transfer exemption to those trust gifts. In a later year, another preparer failed to elect out of automatic GST exemption allocations for direct-skip gifts that the couple did not want sheltered. After the spouse died, the estate requested relief for both errors. The IRS granted 120 days to allocate the spouse's GST exemption retroactively to the five trusts and to elect out of the automatic allocations for the later direct skips by filing supplemental Forms 709.

Ruling snapshot

• Question: Could the estate make late GST exemption allocations to five trusts and late elections out for separate direct skips?
• Outcome: Approved, 120-day extension for both forms of relief
• Key authorities: IRC §§ 2632 and 2642(g); 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: 201622006                                             Third Party Communication: None
Release Date: 5/27/2016                                       Date of Communication: Not Applicable
Index Number: 9100.00-00, 2632.00-00,
              2642.00-00                                      Person To Contact:
                                                              -----------------------------------------------------
---------------------------------------                       -------------------------------------
--------------------------------------------------            Telephone Number:
-----------------------------------------                     --------------------
----------------------------                                  Refer Reply To:
                                                              CC:PSI:B04
                                                              PLR-128313-15
                                                              Date:
                                                              February 19, 2016
         ----------------------------------------



Legend

Spouse                            -----------------------------------------------
Donor                             --------------------------------------------
Date 1                            ------------------------
Date 2                            ------------------
Date 3                            ------------------
Year 1                            ------
Year 2                            ------
Trust 1                           --------------------------------------------------------
Trust 2                           --------------------------------------------------------
Trust 3                           --------------------------------------------------------
Trust 4                           --------------------------------------------------------
Trust 5                           --------------------------------------------------------
x                                 -----------------------------------------------------------------------------------
Company                           --------
a                                 ----------
b                                 ----------
c                                 ----------
d                                 ----------
e                                 ----------
Accountant                        ----------------------
Trust Company 1                   --------------------------
Trust Company 2                   -----------------------

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

      This letter responds to your authorized representative’s letter dated
August 24, 2015, and subsequent correspondence, requesting an extension of time
under § 2642(g) of the Internal Revenue Code (Code) and § 301.9100-3 of the
PLR-128313-15                                2

Procedure and Administration Regulations to allocate Spouse’s generation-skipping
transfer (GST) exemption to certain trusts and to make an election to elect out of the
automatic allocation of GST exemption to certain direct skips.

      The facts and representations submitted are summarized as follows:

       On Date 1, which is a date in Year 1, Donor created and funded Trust 1, Trust 2,
Trust 3, Trust 4, and Trust 5 (Trusts), for the benefit of each of x grandchildren. Donor
funded Trusts with shares of Company. Donor funded Trust 1 with shares valued at $a,
Trust 2 with shares valued at $b, Trust 3 with shares valued at $c, Trust 4 with shares
valued at $d, and Trust 5 with shares valued at $e.

       Donor hired Trust Company 1 to prepare Donor’s and Spouse’s Forms 709,
United States Gift (and Generation-Skipping Transfer) Tax Returns for Year 1. Donor
and Spouse elected to gift-split on their Forms 709. Accountant, an employee of Trust
Company 1, reported the gifts made in Year 1, but did not allocate GST exemption for
the transfers. Donor and Spouse timely filed their Forms 709 before Date 2, the due
date of the returns.

        During Year 2, Donor made gifts to several trusts and direct skips to several
individuals. It is represented that Donor did not intend to allocate GST exemption to the
direct skips. Donor hired Trust Company 2 to prepare Donor’s and Spouse’s Forms 709
for Year 2. Donor and Spouse elected to gift-split on their Forms 709. The
representatives of Trust Company 2 prepared the Forms 709 but did not inform Donor
and Spouse that they had to elect out of the deemed allocation rules of § 2632(b) in
order not to have their GST exemption automatically allocated to the direct skips.
Consequently, Trust Company 2 failed to make the proper written election out of the
deemed allocation rules on Donor’s and Spouse’s Year 2 Forms 709. Spouse died on
Date 3.

      You have requested the following rulings:

      1. An extension of time under § 2642(g) and § 301.9100-3 to allocate Spouse’s
         GST exemption to the Year 1 transfers to Trusts 1 through 5.

      2. An extension of time under § 301.9100-3 to have the deemed allocation of
         GST exemption to lifetime direct skips under § 2632(b) not apply to certain
         direct skips made by Spouse in Year 2.

LAW AND ANALYSIS

Rulings 1 and 2

      Section 2513(a)(1) provides, generally, that a gift made by one spouse to any
person other than the donor’s spouse is considered for purposes of the gift tax as made
PLR-128313-15                                3

one-half by the donor and one-half by the donor’s spouse, but only if at the time of the
gift each spouse is a citizen or resident of the United States.

        Section 2601 imposes a tax on every generation-skipping transfer. A
generation-skipping transfer 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 tax imposed by § 2601 is the
taxable amount multiplied by the applicable rate. Section 2641(a) defines applicable
rate as the product of the maximum federal estate tax rate and the inclusion ratio with
respect to the transfer.

      Section 2631(a), as in effect for Year 1, provides that for purposes of determining
the GST tax, every individual shall be allowed a GST exemption of $1,000,000 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 2631(a), as in effect for Year 2, 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 2631(c) provides
that, for purposes of § 2631(a), the GST exemption amount for any calendar year shall
be equal to the applicable exclusion amount under § 2010(c) for such calendar year.

       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
PLR-128313-15                                   4

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 § 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 26.2632-1(b)(4)(i) provides 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.

        Under § 2642(a)(1), the inclusion ratio with respect to any property transferred in
a generation-skipping transfer is the excess (if any) of 1 over the applicable fraction.
The applicable fraction, as defined in § 2642(a)(2), is a fraction, the numerator of which
is the amount of the GST exemption under § 2631 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, reduced by the sum of any federal
estate tax or state death tax actually recovered from the trust attributable to such
property, and any charitable deduction allowed under § 2055 or 2522 with respect to
such property.

        Section 2642(b)(1) provides that, except as provided in § 2642(f), if the allocation
of the GST exemption to any transfers of property is made on a gift tax return filed on or
before the date prescribed by § 6075(b) for such transfer or is deemed to be made
under § 2632(b)(1) or (c)(1), the value of such property for purposes of § 2642(a) shall
be its value as finally determined for purposes of chapter 12 (within the meaning of
§ 2001(f)(2)), or, in the case of an allocation deemed to have been made at the close of
an estate tax inclusion period, its value at the time of the close of the estate tax
inclusion period.

      Section 2642(g)(1)(A) provides 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). Such regulations shall include procedures for requesting
comparable relief with respect to transfers made before the date of the enactment of
§ 2642(g).

       Section 2642(g)(1)(B) provides that in determining whether to grant relief under
this paragraph, 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 under this paragraph, the time for making the allocation (or
PLR-128313-15                                5

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

        Section 2652(a)(2) provides 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
such individual, such gift shall be so treated for purposes of chapter 13. Under
§ 26.2652-1(a)(4) of the Generation-Skipping Transfer Tax Regulations, in the case of a
transfer with respect to which the donor’s spouse makes an election under § 2513 to
treat the gift as made one-half by the spouse, the electing spouse is treated as the
transferor of one-half of the entire value of the property transferred by the donor,
regardless of the interest the electing spouse is actually deemed to have transferred
under § 2513. The donor is treated as the transferor of one-half of the value of the
entire property.

        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 is 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) under the provisions of
§ 301.9100-3.

       Section 301.9100-3 provides the standards used to determine whether to grant
an extension of time to make an election whose due date is prescribed by a regulation
(and not expressly provided by statute). In accordance with § 2642(g)(1)(B) and Notice
2001-50, 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 301.9100-3(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)(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 the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Therefore, Spouse is granted an
extension of time of 120 days from the date of this letter to allocate his available GST
exemption to the Year 1 transfer to Trusts 1 through 5. The allocations will be effective
as of the respective date of the transfers and the value of the transfers as determined
for federal gift tax purposes will be used in determining the amount of GST exemption to
be allocated to each trust.
PLR-128313-15                                6

        Spouse is also 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 the Year 2 direct skips.

       The allocations should be made on supplemental Forms 709 for Year 1 and Year

2. The Forms 709 should be filed with the Cincinnati 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. A copy
is enclosed for this purpose.

      In accordance with the Power of Attorney on file with this office, we have sent a
copy of this letter to your authorized representatives.

       Except as expressly provided herein, we neither express nor imply any opinion
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

      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.

      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.


                                         Sincerely,

                                         Associate Chief Counsel
                                         Passthroughs and Special Industries


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



Enclosures
      Copy for § 6110 purposes
      Copy of this letter

cc: