Donor receives 120-day extension to elect out of automatic GST allocation

Plain-English summary

A donor and spouse created four irrevocable trusts primarily for their grandchildren, and the donor later transferred the same redacted amount to each trust. The donor did not intend to allocate generation-skipping transfer exemption to those transfers. Although a gift-tax return was timely filed, the transfers were omitted and the donor did not elect out of the automatic GST exemption allocation. The IRS found that the donor met the standards for late-election relief. It granted 120 days from the ruling date to make the section 2632(b)(3) election on a supplemental Form 709 for the transfer year.

Ruling snapshot

• Question: Could the donor receive extra time to elect out of automatic GST exemption allocation for transfers to four grandchildren's trusts?
• Outcome: Approved, with a 120-day extension.
• Key authorities: IRC §§ 2631, 2632, and 2642; 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: 202001003 Third Party Communication: None
Release Date: 1/3/2020 Date of Communication: Not Applicable
Index Number: 2632.00-00, 2632.02-00,
2642.00-00, 9100.00-00 Person To Contact:
------------------------, ID No. --------------
------------------------- Telephone Number:
-------------------------------- ----------------------
------------------------------- Refer Reply To:
CC:PSI:04
PLR-103608-19
Re: ------------------------- Date:
August 22, 2019

LEGEND
Donor = -------------------------

Spouse = ----------------------------
Date 1 = ---------------------------
Date 2 = ---------------------------
Year = -------
Trust A = -----------------------------------------------------
Trust B = -----------------------------------------------------------
Trust C = ---------------------------------------------------
Trust D = -----------------------------------------------
x = --------------
Tax Department = --------------------------------------------------------
Accounting Firm = ------------------------

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

This letter responds to your representative’s letter dated January 9, 2019, requesting
an extension of time under § 2642(g) of the Internal Revenue Code (Code) and
§ 301.9100-3 of the Procedure and Administration Regulations to make an election under
§ 2632(b)(3) to elect out of the automatic allocation of generation-skipping transfer (GST)
exemption.

The facts submitted and the representations made are as follows.

On Date 1, a date after December 31, 2000, Donor and Spouse created four irrevocable
PLR-103608-19 2

trusts, Trust A, Trust B, Trust C, and Trust D for the primary benefit of their grandchildren.
On Date 2 in Year, Donor transferred $x to each of Trusts A through D.

Donor timely filed a Form 709 (United States Gift (and Generation-Skipping Transfer) Tax
Return) for Year. Donor relied on Tax Department to gather and review the relevant
information and prepare a draft return for Year to be finalized by Accounting Firm.
Although Donor did not intend for GST exemption to be allocated to his transfers to Trust A
through Trust D, the return was erroneously prepared such that the transfers were not
reported and Donor failed to elect out of the automatic allocation of GST exemption to
those transfers.

Donor requests an extension of time to elect out of the automatic allocation rules with
respect to those transfers to Trust A, Trust B, Trust C, and Trust D.

LAW AND ANALYSIS

Section 2601 imposes a tax on every generation-skipping transfer (GST) made by a
“transferor” to a “skip person.” 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 GST 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 2612(c) provides that the term “direct skip” means a transfer of property subject to
a tax imposed by chapter 11 or 12 of an interest in property to a skip person.

Section 2613(a) provides that the term “skip person” means (1) a natural person assigned
to a generation which is 2 or more generations below the generation assignment of the
transferor, or (2) a trust if all interests in such trust are held by skip persons.

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 2631(c) provides that, for purposes of § 2631(a), the GST exemption amount for
any calendar year shall be equal to the basic exclusion amount under § 2010(c) for such
calendar year.
PLR-103608-19 3

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(b)(1) provides that if any individual makes a direct skip during his 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 direct skip exceeds such unused portion, the entire unused portion shall be
allocated to the property transferred.

Section 2632(b)(3) provides that an individual may elect to have this subsection not apply
to a transfer.

Section 26.2632–1(b)(1)(i) of the Generation-Skipping Transfer Tax Regulations provides
that if a direct skip occurs during the transferor’s lifetime, the transferor’s GST exemption
not previously allocated (unused GST exemption) is automatically allocated to the
transferred property (but not in excess of the fair market value of the property on the date of
the transfer). The transferor may prevent the automatic allocation of GST exemption by
describing on a timely-filed United States Gift (and Generation–Skipping Transfer) Tax
Return (Form 709) the transfer and the extent to which the automatic allocation is not to
apply. In addition, a timely-filed Form 709 accompanied by payment of the GST tax (as
shown on the return with respect to the direct skip) is sufficient to prevent an automatic
allocation of GST exemption with respect to the transferred property.

Section 26.2632–1(b)(1)(ii) provides that a Form 709 is timely filed if it is filed on or before
the date required for reporting the transfer if it were a taxable gift (i.e., the date prescribed
by § 6075(b), including any extensions to file actually granted (the due date)). Except as
provided in paragraph (b)(1)(iii) of this section, the automatic allocation of GST exemption
(or the election to prevent the allocation, if made) is irrevocable after the due date. An
automatic allocation of GST exemption is effective as of the date of the transfer to which it
relates. Except as provided above, a Form 709 need not be filed to report an automatic
allocation.

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
PLR-103608-19 4

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
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.

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
301.9100-2 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 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, Donor is granted an
extension of time of 120 days from the date of this letter to make an election under
§ 2632(b)(3) that the automatic allocation rules do not apply to the Year transfers to
Trust A, Trust B, Trust C, and Trust D.

Donor should make the election on a supplemental Form 709 for Year. The supplemental
Form 709 should be filed with the Kentucky Service Center at the following address:
Department of the Treasury, Internal Revenue Service, Stop 824G, 7940 Kentucky Drive,
Florence, KY 41042-2915. A copy of this letter should be attached to the supplemental
Form 709. A copy is enclosed for this purpose.
PLR-103608-19 5

In accordance with the Power of Attorney on file with this office, a copy of this letter is being
sent to your authorized representative.

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,

                                       Associate Chief Counsel
                                       (Passthroughs and Special Industries)


                                       Leslie H. Finlow
                                       Leslie H. Finlow
                                       Senior Technician Reviewer Branch 4
                                       Office of Associate Chief Counsel
                                       (Passthroughs and Special Industries)

Enclosures:
copy for § 6110 purposes

cc: