Donor receives more time to opt out of automatic GST allocation

Plain-English summary

A donor made a cash gift to a trust with generation-skipping transfer tax potential and hired tax professionals to prepare the gift tax return. The professionals failed to elect out of the deemed allocation of GST exemption to that gift. No taxable distribution, taxable termination, or other event creating GST tax liability had occurred. The IRS found that the donor met the good-faith relief standard and granted 120 days to elect out for the original gift and future gifts to the trust. The donor was directed to make the elections on supplemental Forms 709.

Ruling snapshot

• Question: Should the donor receive more time to elect out of automatic GST exemption allocation after tax professionals missed the election?
• Outcome: Approved, with 120 days to file supplemental gift tax returns
• Key authorities: IRC §§ 2632(c)(5) and 2642(g); Notice 2001-50; Treas. Reg. § 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201628018                                             Third Party Communication: None
Release Date: 7/8/2016                                        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: Ruling Request                                         CC:PSI:B04
                                                              PLR-138630-15
                                                              Date:
                                                              March 15, 2016

Legend:

Taxpayer                             =   ---------------------
Trust                                =   -----------------------------------------------
Date 1                               =   ------------------
Date 2                               =   ------------------

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

      This letter responds to your authorized representative’s letter of
October 23, 2015, requesting an extension of time under § 2642 of the Internal
Revenue Code and §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to elect out of the deemed allocation of generation-skipping transfer (GST)
exemption to transfers to a trust.

       The facts, as represented, are as follows. On Date 1, a date after
December 31, 2000, Taxpayer created Trust. Trust has GST tax potential. On Date 2,
Taxpayer made a cash gift to Trust. Taxpayer retained tax professionals to prepare his
Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, reporting
the Date 2 gift to Trust. On the return the tax professionals, however, failed to elect out
of the deemed allocation of GST exemption under § 2632(c)(5).

        Taxpayer represents that, to date no taxable distributions, taxable terminations,
or any other events have occurred with respect to Trust that would give rise to a GST
tax liability.

       Taxpayer requests an extension of time to elect out of the deemed allocation of
GST exemption under § 2632(c) to the gift Taxpayer made to Trust on Date 2 and any
future gifts made to Trust.

Law and Analysis:
PLR-138630-15                                 2

        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 imposed by § 2601 is the
taxable amount multiplied by the applicable rate.

       Section 2641(a) defines the applicable rate as the product of the maximum
federal estate tax rate and the inclusion ratio with respect to the transfer. Under
§ 2642(a), the inclusion ratio with respect to any property transferred in a GST 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.

      Section 2631(a) in effect on the date in question, provides that for purposes of
determining the inclusion ratio, every individual shall be allowed a GST exemption
amount 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(c) provides that, for purposes of § 2631(a), the GST exemption
amount for any calendar year shall be equal to the basic exclusion amount under
§ 2010(c) for such calendar year.

       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, as defined in § 2632(c)(3)(B).

       Section 2632(c)(5)(A)(i) provides that an individual may elect to have § 2632(c) not
apply to (I) an indirect skip or (II) any or all transfers made by such individual to a
particular trust.

       Section 2632(c)(5)(b)(i) provides that an election under § 2632(c)(5)((A)(i)(I) shall
be deemed to be timely if filed 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 2632(c)(5)(B)(ii) provides that an election under § 2632(c)(5)(A)(i)(II) may
be made on a timely filed gift tax return for the calendar year for which the election is to
become effective.

      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
PLR-138630-15                                 3

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
this paragraph.

       Section 2642(g)(1)(B) provides that in determining whether to grant relief under
§ 2642(g)(1), 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
electing out of the automatic allocation rules, and the time for electing 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 § 301.9100-1 through 301.9100-3.

        Sections 301.9100 through 301.9100-3 provide the standards the Commissioner
will use to determine whether to grant an extension of time to make an election. Section
301.9100-1(a).

        Section 9100-2 provides an automatic extension of time for making certain
elections. 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,
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, in part, 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 are satisfied. Therefore, Taxpayer is granted an
PLR-138630-15                                  4

extension of time of 120 days from the date of this letter to elect out of the deemed
allocation of GST exemption under § 2632(c) for the gift to Trust on Date 2 and any
future gifts made to Trust.

      The elections should be made on Supplemental Forms 709 for the year in which
the Date 2 gift occurred and filed with the Internal Revenue Service Center Cincinnati
Service Center - Stop 82, Cincinnati, OH 45999, for association with the Form 709. You
should attach a copy of this letter to the Supplemental Forms 709.

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

      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.

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

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

      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.

                                       Sincerely,


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

Enclosures: Copy for § 6110 purposes