Donor receives more time to opt out of automatic GST exemption allocation

Plain-English summary

A donor made a cash gift to a trust with generation-skipping transfer potential and hired a tax professional to prepare the gift tax return. Both the original return and a later amended return omitted an election out of the automatic allocation of GST exemption under IRC § 2632(c)(5). The IRS concluded that the donor satisfied the discretionary-relief standard based on reliance on the tax professional and granted 120 days to make the opt-out election. The donor must file the election on a supplemental Form 709 for the year of the gift and attach the ruling.

Ruling snapshot

• Question: May the donor make a late election out of the deemed allocation of GST exemption to the trust gift?
• Outcome: Approved. The IRS granted 120 days to file the opt-out election on a supplemental Form 709.
• Key authorities: IRC §§ 2631, 2632(c), 2642(g); Treas. Reg. §§ 301.9100-1, 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201724015 Third Party Communication: None
Release Date: 6/16/2017 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
In re: -------------------- PLR-130943-16
Date:
March 09, 2017

LEGEND:
Taxpayer = --------------------
--------------------------------------
Date 1 = ---------------------------
Date 2 = ---------------------------
Year = -------
Trust = ----------------------------

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

This letter responds to your authorized representative’s letter of September 23, 2016,
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 a
transfer 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 a tax professional to prepare her Form 709, United
States Gift (and Generation-Skipping Transfer) Tax Return reporting the Date 2 gift.
Six months later, the tax professional prepared an amended Form 709 to include certain

PLR-130943-16 2

outright gifts (having no GST tax potential) made in Year, and this amended Form 709
again reported the Date 2 gift. On the returns, however, the tax professional 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 to the gift Taxpayer made to Trust on Date 2.

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 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 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.

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 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).

PLR-130943-16 3

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)(ll) 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 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

PLR-130943-16 4

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) provides, in part, except as provided in § 301.9100-3(b)(3)(i)
through (iii), 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
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.

The election should be made on a Supplemental Form 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 Form 709.

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

The ruling contained in this letter is 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 a ruling, it is subject to verification on examination.

Except as specifically ruled herein, we express no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.

PLR-130943-16 5

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

                                            Sincerely,
                                            Associate Chief Counsel
                                            (Passthroughs and Special Industries)


                                      By:    Melissa C. Liquerman
                                            Melissa C. Liquerman
                                            Chief, Branch 4
                                            Office of Associate Chief Counsel
                                            (Passthroughs and Special Industries)

Enclosure:
Copy for 6110 purposes