Late allocation of GST exemption to a charitable lead trust is allowed after the accountant forgot to make it

Plain-English summary

A married couple set up and funded an irrevocable charitable lead unitrust that
pays a foundation for 20 years, then hands the remainder to their grandchildren.
Because the grandchildren are two generations down, transfers to the trust can
trigger the generation-skipping transfer (GST) tax unless the couple allocates
their GST exemption to shield it. The couple's accounting firm prepared their
gift tax returns (Forms 709) but never actually made that allocation, and the
mistake surfaced only when a later advisor reviewed the file. Here the couple
asked the IRS for extra time to make the allocation. Because the deadline for a
GST allocation is treated as set by regulation rather than by statute, the IRS
can grant an extension under the "9100 relief" rules when the taxpayer acted
reasonably and in good faith. Relying on a qualified tax professional who dropped
the ball counts as good faith, so the IRS granted 120 days to file supplemental
Forms 709 allocating the exemption, effective as of the original transfer date.

Ruling snapshot

• Question: May a couple who failed to allocate GST exemption to a charitable lead trust (because their accountant did not do it) get an extension of time to make the allocation?
• Outcome: Approved (120-day extension granted)
• Key authorities: IRC §§ 2642(g), 2631, 2632, 2513; 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: 201839001                              Third Party Communication: None
Release Date: 9/28/2018                        Date of Communication: Not Applicable
Index Number: 2642.00-00, 9100.00-00
                                               Person To Contact:
                                               --------------------------, ID No. --------------
--------------------------                     Telephone Number:
----------------------                         ----------------------
-------------------------                      Refer Reply To:
-------------------------------------          CC:PSI:B04
                                               PLR-100598-18

                                               Date:
                                               June 18, 2018
         -------------------------------------------------------


LEGEND

Settlor                             = ------------------------------------------------------
Spouse                              = --------------------------------------------------
Accounting Firm                     = ------------------------
Trust                               = ----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Foundation                          = -------------------------------------------------------------
Date                                = -----------------------
Year                                = -------
x                                   = ---------

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

This letter responds to your authorized representative's letter dated November 15, 2017,
requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations and § 2642(g) of the Internal Revenue Code to allocate
generation-skipping transfer (GST) exemption to a transfer to a trust.

FACTS

The facts and representations submitted are summarized as follows:

Settlor executed and funded an irrevocable charitable lead unitrust (Trust) on Date, in
Year, for the benefit of Foundation and Settlor's grandchildren. No additional gifts have
been made to Trust.

Article II, section (a) of Trust provides, in relevant part, that commencing on the date Trust
is funded, and for a period of 20 years thereafter (Termination Date), the trustees shall pay
to Foundation, a not-for-profit corporation, during each taxable year of the trust, a unitrust
amount equal to x percent of the net fair market value of the assets of the trust valued as
of the first business day of each taxable year of the trust. Article II, section (b) provides
that the unitrust amount shall be paid annually at the end of each taxable year of the trust.

Under Article II, section (f), if Foundation ceases to be an organization described in
§§ 170(b)(1)(A), 170(c), 2055(a) and 2522(a), the trustee shall instead make distributions
to any one or more organizations described in §§ 170(b)(1)(A), 170(c), 2055(a) and
2522(a) as trustee shall select, whose purposes are most similar to Foundation.

Article II, section (j) provides that upon the Termination Date, the trust shall terminate and
the remaining trust estate, after payment of the final unitrust amount, shall be divided and
distributed to Settlor's grandchildren in equal shares.

After Settlor created and funded Trust, Settlor engaged Accounting Firm to prepare the
Year Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return for
Settlor and Spouse. On his and her respective timely-filed Forms 709, Settlor and Spouse
signified their consent to treat their gifts in Year as having been made one-half by each
spouse under § 2513. The Forms 709, however, did not allocate any of Settlor's or
Spouse's GST exemption to Trust. The error was discovered when Settlor's current tax
advisor reviewed the trust agreement and the Year returns.

Settlor, Spouse and Accounting Firm each signed affidavits stating that Settlor and Spouse
intended to allocate their available GST exemption to Trust. Settlor and Spouse relied on
Accounting Firm to prepare the Forms 709 and to allocate GST exemption to Trust.

It is represented that at the time of the Year transfer, Settlor and Spouse each had
exemption available to allocate to Trust.

You have requested an extension of time under § 2642(g)(1) and § 301.9100-3 to allow
Settlor and Spouse to allocate their respective GST exemption to the Year transfer to
Trust.

LAW AND ANALYSIS

Section 2513(a)(1) provides that a gift made by one spouse to any person other than the
donor's spouse is considered for purposes of the gift tax as made one-half by the donor
and one-half by the donor's spouse, but only if at the time of the gift each spouse is a
citizen or resident of the United States. Section 2513(a)(1) only applies if both spouses
have signified their consent to the application of this section in the case of all such gifts
made during the calendar year by either while married to the other.

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 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.

Under § 2642(a)(1), the inclusion ratio with respect to any property transferred in a
generation-skipping transfer is generally defined as the excess 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 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 2642(b)(1)(A) provides, in part, that, except as provided in § 2642(f), 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) for such transfer or is deemed to be
made under § 2632(b)(1) or (c)(1), the value of such property for purposes of § 2642(a)
shall be its value as finally determined for purposes of chapter 12 (within the meaning of
§ 2001(f)(2)).

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 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.

Section 2632(a) 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 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 regulation 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 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.

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, are to be treated
as if not expressly prescribed by statute and taxpayers may seek an extension of time to
make an allocation described in § 2642(b)(1) or (b)(2) under the provisions of
§ 301.9100-3.

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 6 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 due date is prescribed by a regulation (and
not expressly provided by statute).

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 the representations made, we conclude that the
requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, Settlor
and Spouse are granted an extension of time of 120 days from the date of this letter to
allocate Settlor's and Spouse's available GST exemption to their respective share of the
Year transfer to Trust. The allocations will be effective as of the date of the transfer to
Trust and the value of the transfer to Trust as determined for federal estate tax purposes
will be used in determining the amount of Settlor's and Spouse's GST exemption to be
allocated to Trust.

This allocation should be made on supplemental Forms 709 and 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 Forms 709.

A copy of this letter should be attached to any gift, estate, or generation-skipping transfer
tax returns that you may file relating to these matters.

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.

Except as specifically ruled herein, we do not express or imply any opinion concerning the
tax consequences of the transaction or any subsequent transaction regarding Trust under
the cited provisions or under any other provisions of the Code.

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 & Special Industries



                                          Leslie H. Finlow
                                          _________________________
                                          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


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