Taxpayer may elect out of automatic GST allocation for three trusts

Plain-English summary

A taxpayer made transfers to a grantor retained annuity trust and two descendant trusts with generation-skipping transfer potential. The taxpayer intended not to allocate GST exemption, but the accountant reported the transfers in the wrong parts of Forms 709 and failed to make effective elections under IRC § 2632(c)(5). One trust's transfer became an indirect skip when its estate tax inclusion period ended, while the other trusts received transfers in two separate years. The IRS found that reliance on the accountant satisfied Treasury Regulation § 301.9100-3. It granted 120 days to file supplemental Forms 709 electing out of automatic GST exemption allocation for all of the transfers.

Ruling snapshot

• Question: Could the taxpayer make late elections to prevent automatic GST exemption allocation to transfers involving three trusts?
• Outcome: approved
• Key authorities: IRC §§ 2632(c)(5) and 2642(f), (g); Treas. Reg. §§ 26.2632-1(b)(2), (c)(1) and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201729007 Third Party Communication: None
Release Date: 7/21/2017 Date of Communication: Not Applicable
Index Number: 2632.00-00, 2642.00-00,
9100.00-00 Person To Contact:
----------------, ID No. ------------------
-------------------------- Telephone Number:
------------------------- ----------------------
----------------------------------------- Refer Reply To:
CC:PSI:04
PLR-130239-16
Re: Date:
--------------------------------------------- March 20, 2017

LEGEND
Taxpayer = ----------------------------------------------------
Date 1 = ----------------------
Year 1 = -------
Trust 1 = -----------------------------------------------------------------
------------------------------
Year 5 = -------
Date 2 = --------------------------
Child 1 = ---------------------
Trust 2 = --------------------------------------------------------------------------------

Child 2 = ---------------------------
Trust 3 = --------------------------------------------------------------------------------

Year 2 = -------
x = ----------
y = ----------
a = ----------
Corporation = -----------------------------------
Year 3 = -------
Attorney = --------------------------
Accountant = -------------------------------

Dear -----------------:
PLR-130239-16 2

This letter responds to the letter dated September 28, 2016, submitted by your
authorized representative, requesting an extension of time pursuant to § 2642(g) of the
Internal Revenue Code and § 301.9100-3 of the Procedure and Administration
Regulations to make an election under § 2632(c)(5) to opt out of the generation-
skipping transfer (GST) exemption automatic allocation rules under § 2632(c) with
respect to transfers to certain trusts.

FACTS

The facts and representations submitted are as follows.

On Date 1, Year 1 (a date after December 31, 2000), Taxpayer established an
irrevocable grantor retained annuity trust, Trust 1. Taxpayer transferred marketable
securities to Trust 1 (Year 1 Transfer). Trust 1 has GST tax potential.

Taxpayer’s retained interest in Trust 1 terminated at the end of the annuity term on a
date in Year 5. The estate tax inclusion period (ETIP) with respect to the Year 1
Transfer closed for GST tax purposes on the date in Year 5 that Taxpayer’s retained
interest in Trust 1 terminated.

On Date 2 (a date after December 31, 2000), Taxpayer established Trust 2 for the
benefit of Child 1 and Child 1’s lineal descendants and Trust 3 for the benefit of Child 2
and Child 2’s lineal descendants. In Year 2, Taxpayer transferred x shares of
Corporation to Trust 2 and y shares of Corporation to Trust 3 (Year 2 Transfers). In
Year 3, Taxpayer transferred $a to each of Trust 2 and Trust 3 (Year 3 Transfers).
Trust 2 and Trust 3 have GST tax potential.

Attorney provided Taxpayer with legal and tax advice in connection with the creation
and establishment of Trust 1, Trust 2, and Trust 3. Attorney advised Taxpayer of the
rules under § 2632(c) regarding the automatic allocation of GST exemption and the
ability to elect out of the automatic allocation of GST exemption by making an election
under § 2632(c)(5). Pursuant to this discussion, Taxpayer decided that she did not
want GST exemption allocated to any of the transfers to Trust 1, Trust 2, or Trust

3. Taxpayer retained Accountant to prepare and file Taxpayer’s Year 1, Year 2, and
   Year 3 Forms 709, United States Gift (and Generation-Skipping Transfer) Tax
   Return. On timely-filed Forms 709 for Year 1, Year 2, and Year 3, Accountant
   inadvertently reported the respective Year 1 Transfer, Year 2 Transfers, and Year 3
   Transfers on Schedule A, Part 1 (Gifts Subject Only to Gift Tax), instead of Schedule A,
   Part 3 (Indirect Skips), and failed to effectively elect out of the automatic allocation of
   GST exemption to the transfers to Trust 1, Trust 2, and Trust 3 pursuant to
   § 2632(c)(5)(A)(i).

Taxpayer requests the following rulings:
PLR-130239-16 3

1. Taxpayer requests pursuant to § 2642(g) and § 301.9100-3 to elect out of the
   automatic allocation of Taxpayer’s GST exemption to the Year 1 Transfer to Trust 1
   under § 2632(c)(5).

2. Taxpayer requests pursuant to § 2642(g) and § 301.9100-3 to elect out of the
   automatic allocation of Taxpayer’s GST exemption to the Year 2 Transfers and Year 3
   Transfers to Trust 2 and Trust 3 under § 2632(c)(5).

LAW AND ANALYSIS

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.

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 applicable exclusion amount under § 2010(c)
for such calendar year.

Section 2632(a)(1) provides that any allocation by an individual of his or her 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(a)(2) provides that the manner in which allocations are to be made shall
be prescribed by forms or regulations issued by the Secretary.

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 is treated
as 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.
PLR-130239-16 4

Under § 2632(c)(3)(A), 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). Under § 2632(c)(3)(B), a GST trust is a trust that could have
GST potential with respect to the transferor unless the trust satisfies any of the
exceptions listed in § 2632(c)(3)(B)(i)-(vi).

Section 2632(c)(4) provides that for purposes of § 2632(c), an indirect skip to which
§ 2642(f) applies shall be deemed to have been made only at the close of the ETIP.
The fair market value of such transfer shall be the fair market value of the trust property
at the close of the ETIP.

Section 2632(c)(5)(A)(i) provides that an individual may elect to have the automatic
allocation rules of § 2632(c)(1) not apply to an indirect skip, or any or all transfers made
by such individual to a particular trust. Section 2632(c)(5)(B)(ii) provides that the
election may be made on a timely filed gift tax return for the calendar year for which the
election is to become effective.

Section 26.2632-1(b)(2)(i) of the Generation-Skipping Transfer Tax Regulations
provides that in the case of an indirect skip made after December 31, 2000, to which
§ 2642(f) (relating to transfers subject to the estate tax inclusion period or ETIP) 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). This 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.

Section 26.2632-1(b)(2)(ii) provides that, except as otherwise provided, the transferor
may prevent the automatic allocation of GST exemption with regard to an indirect skip
by making an election as provided in § 26.2632-1(b)(2)(iii).

Section 26.2632-1(b)(2)(iii)(A) provides, in part, that a transferor may prevent the
automatic allocation of GST exemption (elect out) with respect to any transfer or
transfers constituting an indirect skip made to a trust or to one or more separate shares
that are treated as separate trusts under § 26.2654-1(a)(1). A transferor may elect out
with respect to: (1) one or more prior-year transfers subject to § 2642(f) (regarding
ETIPs) made by the transferor to a specified trust or trusts; (2) one or more (or all)
current-year transfers made by the transferor to a specified trust or trusts; (3) one or
more (or all) future transfers made by the transferor to a specified trust or trusts; and (4)
all future transfers made by the transferor to all trusts (whether or not in existence at the
time of the election out); or (5) any combination of (1) through (4) above.

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
PLR-130239-16 5

§ 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 26.2632-1(c)(1)(i) provides that a direct skip or an indirect skip that is subject to
an ETIP is deemed to have been made only at the close of the ETIP. The transferor
may prevent the automatic allocation of GST exemption to a direct skip or an indirect
skip by electing out of the automatic allocation rules at any time prior to the due date of
the Form 709 for the calendar year in which the close of the ETIP occurs (whether or
not any transfer was made in the calendar year for which the Form 709 was filed, and
whether or not a Form 709 otherwise would be required to be filed for that year).

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
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 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 § 301.9100-3.

Sections 301.9100-1 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 301.9100-2 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
PLR-130239-16 6

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 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. Accordingly, Taxpayer is granted an
extension of time of 120 days from the date of this letter to make an election under
§ 2632(c)(5) that the automatic allocation rules do not apply to the Year 1 Transfer to
Trust 1. Also, Taxpayer is granted an extension of time of 120 days from the date of
this letter to make an election under § 2632(c)(5) that the automatic allocation rules do
not apply to the Year 2 Transfers and Year 3 Transfers to Trust 2 and Trust 3. The
election should be made on supplemental Forms 709 for Year 1, Year 2, and Year 3.
The Forms 709 should be filed with the Cincinnati Service Center at the following
address: Internal Revenue Service, Cincinnati Service Center - Stop 82, Cincinnati, OH
45999. You should attach a copy of this letter to each supplemental Form 709. We
have enclosed a copy for this purpose.

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.
PLR-130239-16 7

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

                                   Sincerely,

                                   Office of Associate Chief Counsel
                                   (Passthroughs & Special Industries)



                                By: Karlene M. Lesho
                                   Karlene M. Lesho
                                   Senior Technician Reviewer, Branch 4
                                   Office of Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2)
Copy for § 6110 purposes
Copy of this letter

cc: