Extra time granted to allocate GST exemption to a trust after a missed gift tax return

Plain-English summary

A married couple set up an irrevocable trust for their children and more remote
descendants and funded it with company stock, on an attorney's advice that the
trust would be exempt from the generation-skipping transfer (GST) tax. To make
that exemption stick, each spouse needed to file a gift tax return (Form 709)
for the year of the transfer, elect to split the gift equally between them under
section 2513, and allocate their GST exemption to the trust. Because of poor
communication with the tax preparer, no returns were filed and no GST exemption
was allocated. Years later a new law firm caught the omission, and the spouses
filed late returns. The wife then asked the IRS for an extension of time under
section 2642(g) and the section 301.9100-3 relief rules to allocate her GST
exemption to her half of the transfer. The IRS granted a 120-day extension,
finding she acted reasonably and in good faith by relying on a tax professional
who failed to advise the filing. The allocation is valued as of the original
transfer date, which is favorable because it locks in the older, lower value.
This matters to families doing generation-skipping planning: a missed election
that would otherwise expose the trust to GST tax can often be cured through 9100
relief.

Ruling snapshot

• Question: Should the IRS grant an extension of time to allocate GST exemption to a trust where the spouses failed to timely file gift tax returns?
• Outcome: approved (120-day extension granted under section 2642(g) and Treas. Reg. § 301.9100-3)
• Key authorities: IRC §§ 2513, 2631, 2642(a), 2642(g), 2652(a)(2); Treas. Reg. §§ 301.9100-3, 26.2632-1; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201847003 Third Party Communication: None
Release Date: 11/23/2018 Date of Communication: Not Applicable
Index Number: 9100.00-00, 2642.00-00
Person To Contact:
---------------------------- ---------------, ID No. -----------------
------------------------------------- Telephone Number:
----------------------------------------------- ---------------------
Refer Reply To:
CC:PSI:B04
PLR-105052-18
In Re:------------------------------ Date:
August 10, 2018

LEGEND

Date 1 = ------------------
Husband = --------------------------------------------------------
Wife = -------------------------------------------------------
Trust = ---------------------------------------------------------------
x = ---------
Company = -------------------------------
Tax Preparer = -----------------------
Attorney = ------------------------
Date 2 = ----------------------
Year = -------
Law Firm = -------------------------

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

This letter responds to your authorized representative’s letter dated December 29,
2017, requesting an extension of time pursuant to § 2642(g) of the Internal Revenue
Code and §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to allocate generation-skipping transfer (GST) exemption to a trust.

FACTS

The facts submitted and the representations made are as follows:

On Date 1, a date prior to December 31, 2000, Husband and Wife established an
irrevocable trust, Trust, for the benefit of their children and more remote descendants.
PLR-105052-18 2

Accordingly, Trust has GST potential. On the same date, Husband transferred x shares
of Company to Trust.

Trust was established on the advice of Attorney, who advised that Trust would be
exempt from GST tax. Tax Preparer was informed of Trust, but due to the lack of
effective communication, Husband and Wife each failed to file a timely Form 709,
United States Gift (and Generation-Skipping Transfer) Tax Return, to report the Date 1
transfer to Trust and signify consent to treat all gifts made by both spouses as having
been made one-half by each under § 2513. Accordingly, no GST exemption was
allocated to the Date 1 transfer to Trust.

Recently, Husband and Wife engaged Law Firm for estate planning and tax preparation
services and Law Firm discovered no Form 709 for Year had been filed by either
Husband or Wife. On Date 2, on the advice of Law Firm, Husband and Wife each filed
a Form 709 for Year. On his and her respective Form 709, Husband and Wife signified
their consent to treat all gifts made by Husband and Wife in Year as having been made
one-half by each spouse under § 2513. In addition, Husband and Wife each allocated
GST exemption to the one-half portion of the Date 1 transfer that was attributable to
them based on the consent under § 2513.

Wife requests an extension of time pursuant to § 2642(g) and §§ 301.9100-1 and
301.9100-3 to make a timely allocation of GST exemption to Wife’s portion of the Date 1
transfer to Trust, effective as of the date of the transfer to Trust.

LAW AND ANALYSIS

Section 2513(a)(1) provides that a gift made by one spouse to any person other than his
spouse shall be considered as made one-half by him and one-half by his spouse, but
only if at the time of the gift each spouse is a citizen or resident of the United States.

Section 2513(a)(2) provides that § 2513(a)(1) shall apply only if both spouses have
signified (under the regulations provided for in § 2513(b)) their consent to the
application of § 2513(a)(1) in the case of all such gifts made during the calendar year by
either while married to the other.

Section 25.2513-2(b)(1)(i) of the Gift Tax Regulations provides that the consent required
by § 2513(a)(2) may not be signified after the 15th day of April following the close of the
calendar year of the gift unless before such 15th day, no return has been filed for the
year by either spouse, in which case the consent may not be signified after a return for
the year is filed by either spouse.

Section 2601 imposes a tax on every GST, which is defined under § 2611(a) as (1) a
taxable distribution, (2) a taxable termination, and (3) a direct skip.
PLR-105052-18 3

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 applicable fraction, as defined in § 2642(a)(2), is
a fraction, the numerator of which is the amount of 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), as in effect at the time of the transfer, provides that, for purposes of
determining the inclusion ratio, every individual shall be allowed a GST exemption of
$1,000,000 that 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 is made on Form 709.

Section 2642(b)(1) provides 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, 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 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
§ 2642(g)(1)(A), which was enacted into law on June 7, 2001.

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 (or election) shall be treated as if not expressly prescribed by
statute.
PLR-105052-18 4

Section 2652(a)(2) provides that if, under § 2513, one-half of a gift is treated as made
by an individual and one-half of the gift is treated as made by the spouse of such
individual, such gift shall be so treated for purposes of the GST tax.

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.

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).

Section 301.9100-3(a) provides, in part, that 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 § 301.9100-3 have been satisfied. For GST tax purposes, Wife will be
treated as the transferor of one-half of the total value of the property transferred to Trust
on Date 1. See § 25.2513-2(b)(1) and § 2652(a)(2). Wife is granted an extension of
time of 120 days from the date of this letter to allocate GST exemption to that one-half
portion of the transferred property. The allocation will be based on the value of the
property transferred to Trust on Date 1 and effective as of the date of Date 1.

The allocation should be made on a supplemental Form 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 return.

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.
PLR-105052-18 5

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 your authorized representative.

                                       Sincerely,

                                       Associate Chief Counsel
                                       (Passthroughs & Special Industries)


                                   By: Karlene M. Lesho
                                      Karlene M. Lesho
                                      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: