Taxpayer receives 120 days to elect out of automatic GST exemption allocations for three years

Plain-English summary

A taxpayer made transfers over three years to an irrevocable trust primarily benefiting the taxpayer's spouse. The taxpayer's longtime return preparer incorrectly advised that no gift tax returns were required, so the taxpayer did not file Forms 709 or elect out of the automatic allocation of generation-skipping transfer tax exemption. The taxpayer represented that no GST exemption was intended to be allocated to those transfers. The IRS found that the taxpayer reasonably relied on a qualified tax professional and satisfied the standards for late-election relief. It granted 120 days to file Forms 709 for all three years and elect out of the automatic allocations.

Ruling snapshot

• Question: Could the taxpayer make late elections preventing automatic GST exemption allocations to three years of transfers to the spouse's trust?
• Outcome: Approved, with 120 days from the ruling date to file the Forms 709.
• Key authorities: IRC §§ 2632(c)(5), 2642(g); Treas. Reg. §§ 26.2632-1, 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202134007 Third Party Communication: None
Release Date: 8/27/2021 Date of Communication: Not Applicable
Index Number: 2632.00-00, 9100.00-00
Person To Contact:
------------------------- ---------------, ID No. -----------------
------------------------- Telephone Number:
---------------------------- --------------------
Refer Reply To:
CC:PSI:04
RE: ------------------------- PLR-124659-20
Date:
March 16, 2021

LEGEND

Taxpayer = ----------------------------------------------------
Trust = ---------------------------------------------------------------------
Spouse = --------------------------
Date = ------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Accountant = ----------------------------

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

   This letter responds to your authorized representative’s letter dated October 16,

2020, requesting an extension of time pursuant to § 2642(g) of the Internal Revenue
Code and § 301.9100-3 of the Procedure and Administration Regulations to elect out of
the generation-skipping transfer (GST) exemption automatic allocation rules.

FACTS

    The facts and representations submitted are as follows.

    On Date (a date after December 31, 2000), Taxpayer established an irrevocable

trust, Trust, for the primary benefit of Spouse. Taxpayer made transfers to Trust in
Year 1, Year 2, and Year 3. Trust has GST tax potential.

   Taxpayer retained his long-term tax return preparer, Accountant, to advise and

prepare any necessary gift tax returns. Accountant advised Taxpayer that no gift tax
returns were required because the transfers were made to a trust for the benefit of
Spouse. Accordingly, Taxpayer failed to file any gift tax returns to report the transfers to

PLR-124659-20 2

Trust in Year 1, Year 2, and Year 3, and also to elect out of the automatic allocation of
GST exemption for the transfers to Trust. At the time of the transfers to Trust, Taxpayer
did not intend for GST exemption to be allocated to the transfers to Trust, which were
established to primarily benefit Spouse.

   Taxpayer requests an extension of time to elect out of the automatic allocation

rules with respect to Taxpayer’s transfers to Trust in Year 1, Year 2, and Year 3.

LAW AND ANALYSIS

    Section 2601 imposes a tax on every GST. 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 the 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 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 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(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 is
treated as 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.

   Under § 2632(c)(3)(A), 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,
as defined in § 2632(c)(3)(B). Under § 2632(c)(3)(B), a GST trust is a trust that could
have GST potential with respect to the transferor unless the trust satisfies any of the
exceptions listed in § 2632(c)(3)(B)(i)-(vi).

PLR-124659-20 3

  Section 2632(c)(5)(A)(i)(I) provides that an individual may elect to have

§ 2632(c)(1) not apply to an indirect skip.

   Section 26.2632-1(b)(2)(iii)(A)(2) of the Generation-Skipping Transfer Tax

Regulations provides, in relevant part, that a transferor may prevent the automatic
allocation of GST exemption (elect out) with respect to one or more (or all) current-year
transfers made by the transferor to a specified trust or trusts.

    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,
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 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 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 301.9100-2 provides an automatic extension of time for making certain

elections. Section 301.9100-3 provides the standards used to determine whether to

PLR-124659-20 4

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, Taxpayer is
granted an extension of time of 120 days from the date of this letter to make an election
under § 2632(c)(5) that the automatic allocation rules not apply to the Year 1, Year 2,
and Year 3 transfers to Trust. The election should be made on Forms 709 for Year 1,
Year 2, and Year 3. The Forms 709 should be filed with the Service Center at the
following address: Department of the Treasury, Internal Revenue Service Center,
Kansas City, MO 64999. You should attach a copy of this letter to the Forms 709.

   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.

PLR-124659-20 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.

                                   Sincerely,

                                   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: