Donor and spouse may elect out of automatic GST allocation

Plain-English summary

A donor transferred cash and marketable securities to an irrevocable trust for descendants and intended to split the gift with his spouse without allocating generation-skipping transfer tax exemption. The donor assumed the lawyer who drafted the trust would prepare the gift tax return, while the lawyer assumed the donor's accountant would do so. No Form 709 was filed, and the omission was later discovered by an investment-adviser employee. The IRS found that the standards for regulatory-election relief were satisfied. It granted the donor and spouse 120 days to file separate Forms 709, elect out of automatic GST exemption allocation for the transfer, and consent to gift splitting.

Ruling snapshot

• Question: Could the donor and spouse make a late election out of automatic GST exemption allocation for a transfer to the descendants' trust?
• Outcome: Approved, with 120 days to file Forms 709.
• Key authorities: IRC §§ 2513, 2632(c)(5), and 2642(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: 201636020                                              Third Party Communication: None
Release Date: 9/2/2016                                         Date of Communication: Not Applicable
Index Number: 9100.00-00, 2632.00-00,
              2642.00-00                                       Person To Contact:
                                                               --------------------------------------------------
--------------------------------------                         Telephone Number:
------------------------------                                 --------------------
-----------------------                                        Refer Reply To:
-----------------------------------                            CC:PSI:B04

-                                                              PLR-138602-15
                                                               Date:
                                                               May 27, 2016

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--------------------------------------



Legend

Donor                                          ---------------------------------------------------------
Spouse                                         -----------------------------------------------------------------
Date 1                                         --------------------------
Date 2                                         --------------------------
Date 3                                         --------------------------
Year 1                                         ------
Year 2                                         ------
Trust                                          --------------------------------------------
Trustee                                        -----------------------------------------------------------------------
                                               -----------------
Investment Adviser                             ------------------------------------------
Accountant                                     ------------------
Attorney                                       -------------------

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

       This letter responds to your authorized representative’s letter dated
November 24, 2015, 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 elect out of the generation-skipping transfer (GST) exemption automatic
allocation rules with respect to certain transfers to a trust.

         The facts and representations submitted are summarized as follows:
PLR-138602-15                                 2

       On Date 1, a date after December 31, 2000, Donor created Trust. Trust is an
irrevocable trust for the benefit of Donor’s descendants.

        Article 3(A) of Trust provides that the trustees may make discretionary
distributions of income and principal to the Donor’s descendants of all generations.
Article 3(B) provides that the trustees may, subject to certain conditions, divide the trust
property into separate shares for the Donor’s then living descendants. On Date 3, Trust
was divided into separate shares for the benefit of each of Donor’s two children and
their respective descendants.

       On Date 2, during Year 1, Donor transferred cash and marketable securities to
Trust. Donor represents that he intended to split the gift with his wife, Spouse. Donor
also represents that he did not intend to allocate any GST exemption to Trust.

      Trustee serves as trustee of Trust. Investment Adviser, an entity affiliated with
Trustee, serves as an investment adviser of Trust. Donor is a partner of Investment
Adviser. Donor retained Attorney to draft Trust. After Trust was executed and funded,
Donor assumed that Attorney would prepare the Year 1 Form 709 (United States Gift
(and Generation-Skipping Transfer) Tax Return). Attorney states that she was never
asked to prepare the Form 709 and assumed that Accountant, who had prepared
Donor’s income tax return for Year 1, would prepare the Form 709. In early Year 2, an
employee of Investment Adviser discovered that the Form 709 for Year 1 was never
prepared or filed.

       Donor and Spouse request an extension of time under § 301.9100-3 to elect
under § 2632(c)(5) not to have the automatic allocation rules contained in § 2632(c)(1)
apply to Donor’s Year 1 transfer to Trust.

LAW & ANALYSIS

       Section 2513(a)(1) provides that a gift made by one spouse to any person other
than his spouse shall, for purposes of this chapter, be considered as made one-half by
him and one-half by his spouse, but only if at the time of the gift each spouse is a citizen
or resident of the United States.

       Section 2513(a)(2) provides that § 2513(a)(1) shall apply only if both spouses
have signified (under the regulations provided for in § 2513(b)) their consent to the
application of § 2513(a)(1) in the case of all such gifts made during the calendar year by
either while married to the other.

       Section 25.2513-2(b)(1)(i) of the Gift Tax Regulations provides that the consent
required by § 2513(a)(2) may not be signified after the 15th day of April following the
close of the calendar year of the gift unless before such 15th day, no return has been
PLR-138602-15                                 3

filed for the year by either spouse, in which case the consent may not be signified after
a return for the year is filed by either spouse.

       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 the applicable rate as the product of the maximum
federal estate tax rate and the inclusion ratio with respect to the transfer.

       Section 2641(b) provides that the term “maximum Federal estate tax rate” means
the maximum rate imposed by § 2001 on the estate of decedents dying at the time of
the taxable distribution, taxable termination, or direct skip, as the case may be.

        Under § 2642(a)(1), the inclusion ratio with respect to any property transferred in
a generation-skipping transfer is the excess (if any) of 1 over the applicable fraction.
The applicable fraction, as defined in § 2642(a)(2), is a fraction, the numerator of which
is the amount of the GST exemption under § 2631 allocated to the trust (or to property
transferred in a direct skip), and the denominator of which is the value of the property
transferred to the trust or involved in the direct skip, reduced by the sum of any federal
estate tax or state death tax actually recovered from the trust attributable to such
property, and any charitable deduction allowed under § 2055 or 2522 with respect to
such property.

       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 applicable exclusion amount under
§ 2010(c) for such calendar year.

         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
PLR-138602-15                                 4

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 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)(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)(iii)(A) of the Generation-Skipping Transfer Tax
Regulations provides 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 paragraphs
(b)(2)(ii)(A)(1) through (4) of this section.

        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. Prior-
year transfers that are subject to § 2642(f), and to which the election out is to apply,
must be specifically described or otherwise identified in the election out statement.
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(b)(3)(iii) provides that a GST trust election will cause all
transfers made by the electing transferor to the trust subject to the election to be
deemed to be made to a GST trust as defined in § 2632(c)(3)(B). Thus, the electing
transferor’s unused GST exemption may be allocated automatically to such transfers. A
transferor may prevent the automatic allocation of GST exemption to future transfers to
the trust either by terminating the GST trust election or by electing out of the automatic
allocation of GST exemption in accordance with § 26.2632-1(b)(2).
PLR-138602-15                                 5


       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). Such regulations shall include procedures for
requesting comparable relief with respect to transfers made before the date of the
enactment of this paragraph.

       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 301.9100-1(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 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
PLR-138602-15                                 6

faith, and the grant of relief will not prejudice the interests of the Government.

       Section 301.9100-3(b)(1) provides, in part, except as provided in
§ 301.9100-3(b)(3)(i) through (iii), 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 upon the facts submitted and representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Therefore, Donor and Spouse are
granted an extension of time of 120 days from the date of this letter to elect out of the
automatic allocation rules under § 2632(c)(5) for the transfer made during Year 1 to
Trust.

        Since neither Donor nor Spouse have yet filed Forms 709 for Year 1, Donor and
Spouse should expeditiously file individual Forms 709 for Year 1, in order to: (a) elect
out of the automatic allocation rules under § 2632(c)(5) for the transfer made during
Year 1 and (b) to signify his and her consent to consider the gifts made by one spouse
to be considered as made one-half by each spouse in accordance with § 2513. See
§ 25.2513-2(b)(1)(i). The Forms 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 the Forms 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.
PLR-138602-15                                7


      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 and Special Industries)




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




      Enclosures
            Copy for § 6110 purposes
            Copy of this letter



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