Spouses received extra time to elect out of automatic GST exemption allocation

Plain-English summary

A married couple created an irrevocable trust that divided into separate trusts for their children, including two trusts with generation-skipping transfer tax potential. Their accounting firm prepared gift tax returns that attempted to elect out of automatic GST exemption allocation for specified transfers and future transfers to those two trusts, but the returns were not filed on time. The couple represented that no taxable distribution, taxable termination, or other event creating GST tax liability had occurred. The IRS concluded that the Treasury Regulation section 301.9100-3 standards were satisfied. Each spouse received 120 days to file a supplemental Form 709 making the election out for the specified transfers.

Ruling snapshot

• Question: Could each spouse obtain extra time to elect out of automatic GST exemption allocation for transfers to the two trusts?
• Outcome: approved
• Key authorities: IRC §§ 2632(c)(5), 2642(g); Treas. Reg. §§ 26.2632-1(b)(2)(iii), 301.9100-1, 301.9100-2, 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201738009                                             Third Party Communication: None
Release Date: 9/22/2017                                       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-138998-16
                                                              Date:
         RE: --------------------------                       June 06, 2017


Legend

Date                      = --------------------------
Husband                   = ----------------------------------------------------
Wife                      = ----------------------------------------------------
Trust                     = ---------------------------------------------------------------------------------------
                            ---------------------
Trust 1                   = ---------------------------------------------------------------------------------------
                            -----------------------------------------------------
Trust 2                   = ---------------------------------------------------------------------------------------
                            -------------------------------------------------------------
Child 1                   = -----------------------------
Child 2                   = ------------------------------------
Year                      = -------
Accounting Firm           = ------------


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

This letter responds to the letter dated December 1, 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
elect out of the generation-skipping transfer (GST) exemption automatic allocation rules.

FACTS

The facts and representations submitted are as follows.

On Date, a date after December 31, 2000, Husband and Wife established an inter vivos
irrevocable trust, Trust. Trust established four separate trusts for the benefit of
Husband’s and Wife’s children. Trust 1 and 2 have GST tax potential. This ruling

PLR-138998-16                                2

request applies to Trust 1 and Trust 2, established as the GST non-exempt trusts for the
benefit of Child 1 and Child 2.

On Date, Husband made transfers of cash and limited partnership interests to each of
Trust 1 and Trust 2. On Date, Wife made transfers of cash to each of Trust 1 and
Trust 2.

Accounting Firm discussed and advised Husband and Wife 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). On
respective Year Forms 709 (United States Gift (and Generation-Skipping Transfer) Tax
Return), Accounting Firm reported Husband’s Date transfers to Trust 1 and Trust 2 and
Wife’s Date transfers to Trust 1 and Trust 2, including an election out of the automatic
allocation of GST exemption with respect to the Date transfers and all future transfers to
Trust 1 and Trust 2. However, Husband and Wife failed to timely file their respective
Forms 709. Accordingly, Husband and Wife failed to elect out of the automatic
allocation of GST exemption for the Date transfers and all future transfers to Trust 1 and
Trust 2.

Husband and Wife, respectively requests an extension of time to elect out of the
automatic allocation rules with respect to transfers made in Year and all future transfers
made to Trust 1 and Trust 2.

Husband and Wife represent that no taxable distributions, taxable terminations, or any
other events have occurred with respect to Trust that would give rise to a GST tax
liability.

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 2641(b) provides that the term “maximum Federal estate tax rate” means the
maximum rate imposed by § 2001 on the estates of decedents dying at the time of the
taxable distribution, taxable termination, or direct skip, as the case may be.

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

PLR-138998-16                                  3

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 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.

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).

Under § 2632(c)(5)(A)(i)(I) and (II), an individual may elect to have the automatic
allocation rule in § 2632(c)(1) not apply to an indirect skip, or to any or all transfers
made by such individual to a particular trust.

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 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.

PLR-138998-16                                 4


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 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
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 generation-skipping transfer 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
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

PLR-138998-16                                5

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, Husband and Wife are
each 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 not apply to their
respective Date transfers to Trust 1 and Trust 2. Each election should be made on
supplemental Forms 709 for Year. The supplemental 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 the 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.

                                      Sincerely,

                                      Office of Associate Chief Counsel
                                      (Passthroughs & Special Industries)

                                          Lorraine E. Gardner
                                      By:______________________________
                                      Lorraine E. Gardner
                                      Senior Counsel, Branch 4
                                      Office of Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosures (2)