GST allocation substantially complied despite missing notice

Plain-English summary

A taxpayer transferred property to an irrevocable trust with generation-skipping transfer tax potential. The taxpayer timely filed Form 709, elected out of automatic GST exemption allocation, and affirmatively reported an allocation on Schedule C, but the law firm omitted the required Notice of Allocation. A copy of the trust instrument was attached to the return. The IRS found that the return and trust demonstrated the taxpayer's intent to allocate the stated amount of GST exemption and supplied enough information for substantial compliance. The allocation was therefore treated as timely under sections 2632(a) and 2642(g)(2).

Ruling snapshot

• Question: Did the taxpayer substantially comply with the GST exemption allocation requirements despite omitting the Notice of Allocation?
• Outcome: approved, the reported GST exemption allocation was treated as timely
• Key authorities: IRC §§ 2632(a), 2632(c), and 2642(g)(2); Treas. Reg. § 26.2632-1(b)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201936001                                              Third Party Communication: None
Release Date: 9/6/2019                                         Date of Communication: Not Applicable
Index Number: 2632.00-00
                                                               Person To Contact:
----------------------------                                   ---------------, ID No. ----------------
-------------------------                                      Telephone Number:
 ----------------------------                                  --------------------
                                                               Refer Reply To:
                                                               CC:PSI:04
         Re: ----------------------------                      PLR-101687-19
                                                               Date:
                                                               May 06, 2019




LEGEND

Date              =        -----------------
Year              =        ------
Taxpayer          =        ------------------------------------------------------
Trust             =        ---------------------------------------------------------
a                 =        ----------
Law Firm          =        -----------------------------



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

This letter responds to your authorized representative’s letter dated January 28, 2019,
requesting a ruling under § 2642(g)(2) that Taxpayer substantially complied with the
requirements of § 2632(a) to allocate generation-skipping transfer (GST) exemption to
Trust.

The facts and representations submitted are as follows. On Date (a date after
December 31, 2000), Taxpayer created an irrevocable trust, Trust to benefit Taxpayer’s
spouse and their descendants. On the same date, Taxpayer funded Trust with $a.
Trust has GST tax potential.

Taxpayer retained Law Firm to prepare Taxpayer’s Form 709, United States Gift (and
Generation-Skipping Transfer) Tax Return. The transfer to Trust was correctly reported
as an indirect skip on Schedule A, Part 3. Taxpayer elected out of the automatic
allocation rules with respect to the transfer to Trust. Taxpayer also allocated GST
exemption to the transfer on Schedule C, Part 2, Line 6. However, Law Firm failed to
attach a Notice of Allocation for this transfer. Law Firm timely filed the Form 709 and
attached a copy of Trust to the return.
PLR-101687-19                                 2


Taxpayer requests a ruling that for purposes of § 2642(g)(2), the Form 709 contains
sufficient information to constitute substantial compliance with the requirements of
§ 2632(a) to allocate Taxpayer’s GST exemption to the transfer to Trust.

LAW AND ANALYSIS

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 term “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 2632(a)(1) provides that any allocation by an individual of his 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(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 shall be
allocated to the property transferred to the extent necessary to make the inclusion ratio
for such property zero.

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)(i) provides, in part, that
the election 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.

Section 26.2632-1(b)(2)(ii) of the Generation-Skipping Transfer Tax Regulations
provides that, except as otherwise provided in forms or other guidance published by the
Service, the transferor may prevent the automatic allocation of GST exemption with
regard to an indirect skip (including indirect skips to which § 2642(f) may apply) by
making an election, as provided in § 26.2632-1(b)(2)(iii). Notwithstanding
§ 26.2632-1(b)(2)(iii)(B), the transferor may also prevent the automatic allocation of
PLR-101687-19                                 3

GST exemption with regard to an indirect skip by making an affirmative allocation of
GST exemption on a Form 709 filed at any time on or before the due date for timely
filing (within the meaning of § 26.2632-1(b)(1)(ii)) of an amount that is less than (but not
equal to) the value of the property transferred as reported on that return, in accordance
with the provisions of § 26.2632-1(b)(4).

Section 2642(g)(2) provides that an allocation of GST exemption under § 2632 that
demonstrates an intent to have the lowest possible inclusion ratio with respect to a
transfer to a trust shall be deemed to be an allocation of so much of the transferor’s
unused GST exemption as produces the lowest possible inclusion ratio. In determining
whether there has been substantial compliance, all relevant circumstances shall be
taken into account, including evidence of intent contained in the trust instrument.

In this case, Taxpayer elected out of the automatic allocation rules with respect to the
transfer to Trust on a timely filed Form 709. Nonetheless, Taxpayer could still allocate
GST exemption to the transfer by properly reporting the allocation on a timely filed
Form 709. Taxpayer properly reported the allocation of GST exemption on Schedule C,
Part 2, Line 6. However, Taxpayer failed to attach a Notice of Allocation with the
Form 709. The information on the Form 709, in combination with the terms of Trust (a
copy of which was attached to the return), demonstrates Taxpayer’s intent to allocate $a
of his GST exemption to Trust and provides sufficient information to constitute
substantial compliance under § 2642(g)(2).

Accordingly, based upon the facts submitted and the representations made, we
conclude that, for purposes of § 2642(g)(2), Taxpayer substantially complied with the
requirements of § 2632(a) to timely allocate his GST exemption to the transfer to Trust.

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.

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.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of provides
that it may not be used or cited as precedent.
PLR-101687-19                                  4

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,


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




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