GST exemption allocated automatically despite reporting errors

Plain-English summary

A settlor transferred partnership interests, corporate stock, and promissory notes to two trusts for children and later descendants. The settlor and spouse split the first-year gifts but their tax professionals reported the transfers as ordinary gifts instead of indirect skips and failed to show GST exemption allocations on the relevant schedules. The trusts nevertheless met the definition of GST trusts, and the transfers were indirect skips made after 2000. The IRS ruled that the settlor's and spouse's available generation-skipping transfer tax exemptions allocated automatically to the first-year transfers and that the settlor's exemption also allocated automatically to the later transfers. The allocation applied regardless of the gift tax return reporting errors.

Ruling snapshot

• Question: Did GST exemption allocate automatically to transfers that were incorrectly reported on the donors' gift tax returns?
• Outcome: Approved, the available exemptions automatically applied to all specified transfers
• Key authorities: IRC §§ 2631 and 2632(c); Treas. Reg. § 26.2632-1(b)(2)(i)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201628007                                              Third Party Communication: None
Release Date: 7/8/2016                                         Date of Communication: Not Applicable
Index Number: 2632.00-00
                                                               Person To Contact:
-------------------------------------------------------        --------------------------------------------------
----------------------                                         Telephone Number:
----------------------------                                   --------------------
                                                               Refer Reply To:
                                                               CC:PSI:B04
                                                               PLR-132264-15
                                                               Date:
                                                               March 23, 2016
         ---------------------------------------------------



Legend

Settlor                     --------------------------------------------------
Spouse                      --------------------------------------------------
Year 1                      ------
Year 2                      ------
Date 1                      ----------------
Date 2                      -----------------
Date 3                      ---------------------
Date 4                      --------------------------
Trust 1                     -----------------------------------------------------------------------------------------
Trust 2                     -----------------------------------------------------------------------------------------
LP                          ----------------------------
Corporation                 ------------------------------------------------------------
a                           5
b                           ----------
c                           ---------
d                           1

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

        This letter responds to your authorized representative’s letter dated
August 24, 2015, requesting a ruling that the automatic allocation rules under § 2632(c)
of the Internal Revenue Code apply to the transfers made by Settlor and Spouse in
Year 1 and Year 2.

         The facts and representations submitted are as follows:
PLR-132264-15                                2

       On Date 1, in Year 1 (a date after December 31, 2000), Settlor established
Trust 1 and Trust 2. It is represented that Trust 1 and Trust 2 are trusts within the
meaning of § 2632(c)(3)(B).

        Paragraph 4 of each trust provides, in relevant part, that after the deaths of
Settlor and Spouse, the trustees are to apportion the remaining trust fund into equal
trust shares as follows: one such equal trust share to be allocated to each of the then
living children of Settlor and one such equal trust share to be allocated to the family
group composed of the then living issue of any child of Settlor who is then deceased. In
the case of each trust share allocated to a living child of Settlor, the trustees are to
make distributions of income and principal to the beneficiary and the living issue of such
beneficiary as trustees determine in their sole and complete discretion.

       On Date 1, Settlor transferred an a percent interest in LP, a limited partnership,
to Trust 1, and b shares of non-voting common stock of Corporation to Trust 2.

       On Date 2, in Year 1, Settlor transferred c shares of non-voting common stock of
Corporation to Trust 2. On Date 3, in Year 1, Settlor transferred a d percent interest in
LP to Trust 1. On Date 4, in Year 2, Settlor transferred several promissory notes to
Trust 1.

      Settlor and Spouse retained tax professionals to prepare their Year 1 and Year 2
Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns. On the
Year 1 Forms 709, Settlor and Spouse consented, under § 2513, to treat the gifts made
by each in Year 1 as made by both of them. The Year 1 Forms 709 were timely filed.
The Year 1 transfers to Trust 1 and Trust 2 were incorrectly reported on Forms 709,
Schedule A, Part 1-Gifts Subject Only to Gift Tax instead of Schedule A, Part 3-Indirect
Skips. Furthermore, the automatic allocation of the GST exemption was not reported on
Schedule C.

       On Settlor’s Year 2 Form 709, the Year 2 transfers to Trust 1 were incorrectly
reported on Form 709, Schedule A, Part 1-Gifts Subject Only to Gift Tax instead of
Schedule A, Part 3-Indirect Skips. Furthermore, the automatic allocation of the
GST exemption was not reported on Schedule C. Schedule D did not reflect that any
current or previous GST exemption had been allocated to any current or previous
transfer, including the Year 1 transfers.

       You have requested the following rulings:

1.       Settlor’s available GST exemption was automatically allocated to the Year 1
         transfers to Trust 1 and Trust 2.

2.       Spouse’s available GST exemption was automatically allocated to the Year 1
         transfers to Trust 1 and Trust 2.
PLR-132264-15                                 3


3.       Settlor’s available GST exemption was automatically allocated to the Year 2
         transfers to Trust 1.

LAW AND ANALYSIS

Rulings 1-3

      Section 2513(a) provides, generally, that 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 and one-half by the donor’s 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 2602 provides that the amount of the tax 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 2642(a) provides the method for determining the inclusion ratio.

       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) provides that any allocation by an individual of his
GST exemption under § 2631(a) may be made 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 a return is required to be filed.

        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 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, in relevant part, that the term “GST trust”
means a trust that could have a generation-skipping transfer with respect to the
transferor unless the trust falls within any of six enumerated exceptions.
PLR-132264-15                                  4

        Section 26.2632-1(b)(2)(i) of the Generation-Skipping Transfer Tax Regulations
provides, in relevant part, that an indirect skip is a transfer of property to a GST trust as
defined in § 2632(c)(3)(B) provided that the transfer is subject to gift tax and does not
qualify as a direct skip. In the case of an indirect skip made after December 31, 2000,
to which § 2642(f) does not apply, 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 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.

        In this case, the terms of Trust 1 and Trust 2 satisfy the definition of a GST trust
under § 2632(c)(3)(B). Therefore, the transfers that Settlor and Spouse made to Trust 1
and Trust 2 in Year 1 and the transfers that Settlor made to Trust 1 in Year 2 satisfy the
definition of indirect skips under § 2632(c)(3)(A) and § 26.2632-1(b)(2)(i). Pursuant to
§ 2632(c)(1), the GST exemption of Settlor and Spouse was automatically allocated to
the transfers that they made to Trust 1 and Trust 2 in Year 1 and Year 2. Accordingly,
based upon the facts submitted and the representations made, we conclude that:

       1.        Settlor’s available GST exemption was automatically allocated to the
                 Year 1 transfers to Trust 1 and Trust 2.

       2.        Spouse’s available GST exemption was automatically allocated to the
                 Year 1 transfers to Trust 1 and Trust 2.

       3.        Settlor’s available GST exemption was automatically allocated to the
                 Year 2 transfers to Trust 1.

      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.
PLR-132264-15                               5


      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,



                                         Leslie H. Finlow
                                         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


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