Taxpayer gets extra time to elect out of automatic GST allocation

Plain-English summary

A taxpayer made two transfers to an irrevocable trust with generation-skipping transfer tax potential. Her tax professional had elected out of automatic GST-exemption allocation for an earlier transfer but inadvertently failed to do so for these later transfers. The IRS found that the taxpayer acted reasonably and in good faith because she relied on a qualified professional who failed to make the election. It granted 120 days from the letter date to file a supplemental Form 709 electing out for the later transfers. The ruling addresses only the late election and expresses no view on other tax consequences.

Ruling snapshot

• Question: Could the taxpayer receive extra time to elect out of automatic GST-exemption allocation for two trust transfers?
• Outcome: Approved, with 120 days to make the election.
• Key authorities: IRC §§ 2632(c)(5) and 2642(g); Treas. Reg. §§ 26.2632-1(b)(2)(iii) and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service                                    Department of the Treasury
                                                            Washington, DC 20224

Number: 201635005                                           Third Party Communication: None
Release Date: 8/26/2016                                     Date of Communication: Not Applicable
Index Number: 2632.00-00, 9100.00-00
                                                            Person To Contact:
-------------------                                         ------------------------------, ID No. ------------
---------------------------------                           -----------------
------------------------------                              Telephone Number:
                                                            --------------------
In Re: Ruling Request                                       Refer Reply To:
                                                            CC:PSI:B04
                                                            PLR-113996-16
                                                            Date:
                                                            May 23, 2016

Legend:

Taxpayer                            =   -------------------
Trust                               =   -------------------------------------------
Year 1                              =   -------
Year 2                              =   -------

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

       This letter responds to your personal representative's letter of April 27, 2016,
requesting an extension of time under § 2642(g) of the Internal Revenue Code and
§ 301.9100-3 of the Procedure and Administration Regulations to make the election out
of the automatic allocation of generation-skipping transfer (GST) exemption under
§ 2632(c)(5)(A)(i)(II).

       The facts submitted and the representations made are as follows. In Year 1, on
a date after December 31, 2000, Taxpayer established and made a transfer to an
irrevocable trust (Trust). Trust has GST tax potential.

       Taxpayer retained a tax professional to prepare her Year 1 Form 709, United
States Gift (and Generation-Skipping Transfer) Tax Return, to report the transfer to
Trust. In preparing this form, the tax professional elected out of the automatic allocation
of GST exemption to the transfer to Trust under § 2632(c)(5)(A)(i)(II).

       In Year 2, Taxpayer made two transfers to Trust. Taxpayer retained the same
tax professional to prepare her Year 2 Form 709 to report the transfers to Trust. In
preparing this form, the tax professional inadvertently failed to elect out of the automatic
allocation of GST exemption to the transfers to Trust under § 2632(c)(5)(A)(i)(II).

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

PLR-113996-16                                  2

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 2632(c) is effective for transfers subject to chapter 11 or 12 made after
December 31, 2000, and to estate tax inclusion periods (ETIPs) ending after
December 31, 2000. See Pub. L. No. 107-16, § 561(a). 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.

       Section 2632(c)(3)(A) provides that for purposes of § 2632(c), 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)(5)(A)(i)(II) provides that an individual may elect to have
§ 2632(c)(1) not apply to any or all transfers made by such individual to a particular
trust. Such an election may be made on a timely filed gift tax return for the calendar
year for which the election is to become effective.

        Section 26.2632-1(b)(2)(iii)(A) 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: (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; (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).

       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.

       Section 26.2632-1(b)(2)(iii)(C) provides that 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.

PLR-113996-16                                3

       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, 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 shall be treated as if not expressly prescribed by statute. See
Notice 2001-50, 2001-2 C.B. 189.

        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 six months
except in the case of a taxpayer who is abroad), under all subtitles of the 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 date is prescribed by a regulation (and
not expressly provided by statute). In accordance with § 2642(b)(1)(B) and
Notice 2001-50, a taxpayer 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.

       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 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
allocation rules with respect to the transfers Taxpayer made to Trust in Year 2.

        Taxpayer’s election should be made on a supplemental Form 709 for Year 2.
The supplemental Form 709 should be filed with the Internal Revenue Service Center at
the following address: Internal Revenue Service, Cincinnati Service Center - Stop 82,

PLR-113996-16                                  4

Cincinnati, OH 45999. A copy of this letter should be attached to the Supplemental
Form 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)
provides that it may not be used or cited as precedent.

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

      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,

                                       Karlene M. Lesho

                                       Karlene M. Lesho
                                       Senior Technician Reviewer, Branch 4
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

Enclosure:
Copy of this letter for § 6110 purposes