Estate receives more time to elect out of automatic GST allocation

Plain-English summary

A taxpayer funded a trust for his children and reported the transfer on a timely Form 709. The return did not include the written election needed to prevent automatic allocation of generation-skipping transfer tax exemption to the trust. After the taxpayer's death, his estate requested relief under IRC § 2642(g) and Treas. Reg. § 301.9100-3. The IRS granted 120 days for the estate's representative to file a supplemental Form 709 electing out of the automatic allocation rules for the original transfer.

Ruling snapshot

• Question: Could the estate make a late election out of automatic GST exemption allocation for the taxpayer's trust contribution?
• Outcome: Approved, with 120 days to file a supplemental Form 709.
• Key authorities: IRC §§ 2632(c)(5), 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: 201638020                                              Third Party Communication: None
Release Date: 9/16/2016                                        Date of Communication: Not Applicable
Index Number: 2632.00-00, 9100.00-00
                                                               Person To Contact:
-----------------------------------                            ---------------------, ID No. -----------------
----------------------------------                             Telephone Number:
---------------------------                                    --------------------
                                                               Refer Reply To:
-----------------------------------------------------          CC:PSI:B04
                                                               PLR-141453-15
                                                               Date:
                                                               June 07, 2016




Legend

Taxpayer                   =         -----------------------
--------------------------------------------------------------
Year                       =        -------
Trust                      =         ----------------------------------------------
-----------------------------------------------------------------------
Tax Professionals =                 ------------------------ ----- ------------------

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

       This letter responds to a letter dated December 4, 2015, and subsequent
correspondence, from the authorized representative of Taxpayer’s estate 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 make the election out
of the automatic allocation of generation-skipping transfer (GST) tax under § 2632(c)(5).

FACTS

       In Year, on a date after December 31, 2000, Taxpayer established and funded
Trust for the primary benefit of his son and daughter. Trust provides that during
Taxpayer’s lifetime the trustee shall make discretionary distributions of income and
principal to Taxpayer’s son and to or for the benefit of the descendants of any deceased
child of Taxpayer, per stirpes. No distributions are to be made to Taxpayer’s daughter
during Taxpayer’s lifetime. Upon Taxpayer’s death, Trust is to be divided into equal
shares, one for Taxpayer’s son and one for Taxpayer’s daughter.

       After Taxpayer’s death, Taxpayer’s son may withdraw one-third (1/3) of his share
of the Trust corpus when he reaches age 25, one-half (½) of the corpus of his share of
the Trust corpus when he reaches age 30, and the remaining balance of his share of
PLR-141453-15                                  2

the Trust corpus when he reaches age 35. If the son is age 35 or older when the
Taxpayer dies, no more than one half (½) of the son’s share of the Trust corpus can be
distributed to him at Taxpayer’s death. Son may withdraw the remainder of his share of
the Trust corpus five years later. During the five-year interim period, the trustee may
make discretionary distributions of income and principal to Taxpayer’s son. If
Taxpayer’s son dies during this five-year period, his Trust share terminates and the
trustee is to distribute the assets in the son’s share of the Trust corpus to his issue, per
stirpes.

       Taxpayer’s daughter is to receive discretionary distributions of income and
principal from her Trust share during her lifetime. Upon the death of Taxpayer’s
daughter, her Trust share terminates and the trustee is to distribute the assets in
daughter’s Trust share to her issue, per stirpes.

        Taxpayer engaged Tax Professionals to prepare his Year Form 709, United
States Gift (and Generation-Skipping Transfer) Tax Return. Taxpayer reported the Year
transfer to Trust as a gift on a timely filed Form 709. Taxpayer did not make the written
election out of the automatic allocation of GST exemption under § 2632(c)(5)(A)(i).

      Taxpayer, through the authorized representative of his estate, requests an
extension of time under § 301.9100-3 to make an election out of automatic GST
exemption with respect to the Year transfer to Trust pursuant to § 2632(c)(5)(A)(i).

LAW AND ANALYSIS

        Section 2601 imposes a tax on every generation-skipping transfer (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 GST tax is the taxable amount
multiplied by the “applicable rate.” Section 2641(a) defines the term “applicable rate” as
the product of the maximum Federal estate tax rate, and the inclusion ratio with respect
to the transfer.

       Section 2642(a)(1) provides that for purposes of chapter 13, the inclusion ratio
with respect to any property transferred in a GST is generally defined as the excess (if
any) of 1 over the “applicable fraction.” The term “applicable fraction,” as defined in
§ 2642(a)(2), is a fraction, the numerator of which is the amount of the GST exemption
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) 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
PLR-141453-15                                 3

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 2632(c) is effective for transfers subject to chapter 11 or 12 made 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)(3)(B) provides that the term “GST
trust” means a trust that could have a generation-skipping transfer with respect to the
transferor unless the trust is described in § 2632(c)(3)(B)(i) through (vi).

        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.

       Section 26.2632-1(b)(2)(iii)(A)(2) 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 one or more (or all) current-year
transfers made by the transferor to a specified trust or trusts.

        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. Under
§ 26.2632-1(b)(2)(iii)(C), 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
PLR-141453-15                                4

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 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
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, Taxpayer is 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 Year transfer to Trust.

       Taxpayer, through the personal representative of Taxpayer’s estate, should
make the allocation on a supplemental Form 709 for Year and file the form with the
Internal Revenue Service, Cincinnati Service Center – Stop 82, Cincinnati, Ohio 45999.
Attach a copy of this letter to the Form 709.
PLR-141453-15                                  5

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

      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.

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


                                                   Sincerely,


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


Enclosures (2)

       Copy for § 6110 purposes
       Copy of this letter

cc: