Donor receives more time to allocate GST exemption to trust

Plain-English summary

A donor transferred an asset to a trust for his daughter and her descendants before 2001. His accountant mistakenly reported the transfer as an outright gift to the daughter and failed to allocate generation-skipping transfer tax exemption to the trust. An estate-planning law firm later discovered both errors. The IRS granted the donor 120 days to file a supplemental Form 709 allocating available GST exemption based on the asset's gift-tax value when transferred, effective as of the original transfer date.

Ruling snapshot

• Question: Could the donor make a late allocation of GST exemption to the earlier trust contribution?
• Outcome: Approved, with 120 days to file a supplemental Form 709.
• Key authorities: IRC §§ 2631, 2632, 2642(g); Treas. Reg. §§ 26.2632-1, 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Internal Revenue Service                           Department of the Treasury
                                                   Washington, DC 20224

Number: 201638017                                  Third Party Communication: None
Release Date: 9/16/2016                            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-140692-15
                                                   Date:
                                                   June 09, 2016
-----------------------



Legend

Donor                                ------------------------------------------
Daughter                             ---------------
Date                                 -----------------------
Year 1                               ------
Year 2                               ------
Trust                                -------------------------------------------
Asset                                --------------------------------------------------------------------
                                     ----------------------
Accountant                           -----------------
Law Firm                             ---------------------------

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

      This letter responds to your authorized representative’s letter dated November
18, 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 allocate Donor’s generation-skipping transfer (GST)
exemption to Trust.

         The facts and representations submitted are summarized as follows:

       On Date, Donor created Trust for the benefit of his daughter, Daughter, and
Daughter’s descendants. In Year 1, before January 1, 2001, Donor transferred Asset to
Trust.
PLR-140692-15                                 2

       Donor hired Accountant to prepare his Form 709, United States Gift (and
Generation-Skipping Transfer) Tax Return for Year 1. Accountant mistakenly reported
the transfer of Asset as an outright gift to Daughter and not as a gift to Trust.
Additionally, Accountant did not allocate GST exemption to this transfer.

      Donor engaged Law Firm for estate planning purposes. In Year 2, an employee
of Law Firm discovered the errors made on the Year 1 Form 709.

       You have requested an extension of time under § 2642(g) and § 301.9100-3 to
allocate Donor’s GST exemption to Trust, based on the gift tax value of Asset as of the
date of transfer to Trust.

LAW AND ANALYSIS

        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
(adjusted for inflation under § 2631(c)) 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)(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 26.2632-1(b)(4)(i) of the Generation-Skipping Transfer Tax Regulations
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
PLR-140692-15                                 3

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), as in effect for Year 1, provides that 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) or is deemed to be made under § 2632(b)(1),
the value of such property for purposes of § 2642(a) shall be its value as finally
determined for purposes of chapter 12, and such allocation shall be effective on and
after the date of such transfer.

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

        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.
PLR-140692-15                                 4

      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, Donor 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 Trust. The allocations will be effective as of the
respective date of the transfer and the value of the transfer as determined for federal gift
tax purposes will be used in determining the amount of GST exemption to be allocated
to Trust.

       The allocation should be made on a supplemental Form 709 for Year 1. The
Form 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 Form 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.
PLR-140692-15                                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,

                                         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: