Taxpayer received 120 days to opt out of automatic GST allocations

Plain-English summary

A taxpayer created two irrevocable annuity trusts before the automatic generation-skipping transfer tax allocation rules were enacted. The trusts' estate tax inclusion periods ended after those rules took effect, but the taxpayer was not then advised about the ability to elect out and had never affirmatively allocated GST exemption to the trusts. The IRS found that the taxpayer acted reasonably and in good faith because the taxpayer was unaware that an election was necessary. It granted 120 days to elect out of the automatic GST exemption allocations for the original transfers by filing the prescribed Form 709.

Ruling snapshot

• Question: May the taxpayer make late elections out of automatic GST exemption allocations to two trusts?
• Outcome: approved, with 120 days to file the elections
• Key authorities: IRC §§ 2632(c) and 2642(f), (g); Treas. Reg. §§ 26.2632-1 and 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201937010                                              Third Party Communication: None
Release Date: 9/13/2019                                        Date of Communication: Not Applicable
Index Number: 9100.00-00, 2632.00-00,
              2642.00-00                                       Person To Contact:
                                                               ----------------, ID No. ------------------
------------------------                                       Telephone Number:
-------------------------                                      ----------------------
----------------------------------                             Refer Reply To:
                                                               CC:PSI:04
                                                               PLR-132700-18
         Re: ----------------------------------------------    Date:
                                                               May 06, 2019




LEGEND

Taxpayer          =        ----------------------------------------------------
Date 1            =        -----------------------
Year 1            =        -------
Trust 1           =         -----------------------------------------------------------------------------------------
---------------------------------------------------
Trust 2           =         -----------------------------------------------------------------------------------------
---------------------------------------------------
Child 1           =        -----------------------------------
Child 2           =        -----------------------------
Date 2            =        -----------------------
Year 2            =        -------
Date 3            =        -----------------------
Year 3            =        -------


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

       This letter responds to your authorized representative’s letter dated
September 24, 2018, and subsequent correspondence, requesting an extension of time
under § 2642(g) of the Internal Revenue Code and § 301.9100-3 of the Procedure and
Administration Regulations to elect out of the automatic allocation of generation-
skipping transfer (GST) tax exemption.

         The facts and representations submitted are summarized as follows:

       On Date 1 in Year 1 (a date before December 31, 2000), Taxpayer created and
funded Trust 1 and Trust 2, both irrevocable trusts. Trust 1 and Trust 2 have GST
potential. Each of Trust 1 and Trust 2 provides for the payment to Taxpayer of an
PLR-132700-18                                2

annuity for a term of years and, upon the earlier of the expiration of such term or
Taxpayer’s death, for the payment of the remainder to trusts for the benefit of Child 1
and Child 2, respectively. Taxpayer survived the term in Trust 1 and Trust 2. For GST
tax purposes, the estate tax inclusion period (ETIP), with respect to Trust 1, closed on
Date 2 of Year 2 and, with respect to Trust 2, closed on Date 3 of Year 3. Date 2 and
Date 3 are dates after December 31, 2000.

        Trust 1 and Trust 2 were created prior to the enactment of § 2632(c) which
provides for an election out of the automatic allocation rules. Taxpayer was not actively
advised by a tax professional at the time § 2632(c) was enacted in June 2001 or at the
end of the ETIP of Trust 1 or Trust 2. No GST allocation was made to Trust 1 or Trust 2
in the years prior to the enactment of § 2632(c) and no affirmative GST allocation has
ever been made to Trust 1 or Trust 2.

       Taxpayer requests an extension of time under § 2642(g) and § 301.9100-3 to
elect out of the automatic allocation of GST tax exemption under § 2632(c)(5)(A)(i) with
respect to the Year 1 transfers to Trust 1 and Trust 2.

LAW AND ANALYSIS

       Section 2601 provides that a tax is imposed on every generation-skipping
transfer (GST). Section 2611(a) provides that the term “generation-skipping transfer”
means: (1) a taxable distribution; (2) a taxable termination; and (3) a direct skip.

       Section 2602 provides that the amount of GST 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.

       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) 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(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. If the amount of the indirect skip exceeds such unused
portion, the entire unused portion shall be allocated to the property transferred.
PLR-132700-18                                 3



       Section 2632(c)(3)(A) provides that for purposes of this subsection, 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. Section 2632(c)(3)(B) provides, in part,
that the term “GST trust” means a trust that could have a generation-skipping transfer
with respect to the transferor unless the exceptions enumerated in (i) through (vi) apply.

      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)(I) provides that an individual may elect to have § 2632(c)
not apply to an indirect skip. Section 2632(c)(5)(B)(i) provides that an election under
§ 2632(c)(5)(A)(i)(I) 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)(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
§ 26.2632-1(b)(2)(iii)(C). In general, the election out statement must identify the trust,
PLR-132700-18                                 4

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(b)(1)(A) 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 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)), or, in the case of an allocation deemed to have been made at the close of
an ETIP, its value at the time of the close of the ETIP.

       Section 2642(f)(1) provides that for purposes of determining the inclusion ratio, if
an individual makes an inter vivos transfer of property, and the value of such property
would be includible in the gross estate of such individual under chapter 11 if such
individual died immediately after making such transfer (other than by reason of § 2035),
any allocation of GST exemption to such property shall not be made before the close of
the ETIP (and the value of such property shall be determined under § 2642(f)(2)). If
such transfer is a direct skip, such skip shall be treated as occurring as of the close of
the ETIP.

       Section 2642(f)(3) provides that for purposes of § 2642(f), the term “estate tax
inclusion period” means any period after the transfer described in paragraph (1) during
which the value of the property involved in such transfer would be includible in the gross
estate of the transferor under chapter 11 if he died.

       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
PLR-132700-18                                 5

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 301.9100-1(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 Internal Revenue
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). Under § 301.9100-1(b), a regulatory election
includes an election whose due date is prescribed by a notice published in the Internal
Revenue Bulletin. 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 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)(iii) provides that a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer failed to make the election because, after
exercising reasonable diligence (taking into account the taxpayer's experience and the
complexity of the return or issue), the taxpayer was unaware of the necessity for the
election.

       Based upon the facts submitted and representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Therefore, Taxpayer is granted an
extension of time of 120 days from the date of this letter to elect out of the automatic
PLR-132700-18                                6

allocation rules under § 2632(c)(5) for the transfers made during Year 1 to Trust 1 and
Trust 2. The elections should be made on a Form 709 for Year 2. The Form 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 Form 709. We have enclosed a copy for this
purpose.

      In accordance with the Power of Attorney on file with this office, we have sent a
copy of this letter to your authorized representatives.

       Except as expressly provided herein, we neither express nor imply any opinion
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)
provides that it may not be used or cited as precedent.

                                      Sincerely,


                                      Associate Chief Counsel
                                      (Passthroughs & Special Industries)



                                  By: Leslie H. Finlow
                                     Leslie H. Finlow
                                     Senior Technician Reviewer, Branch 4
                                     Office of Associate Chief Counsel
                                     (Passthroughs & Special Industries)


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



cc: