Grantor received extra time to prevent GST exemption allocations to two trusts

Plain-English summary

A taxpayer created a family trust for descendants and a grantor retained annuity trust whose remaining assets would pass to the family trust after the estate tax inclusion period ended. The taxpayer did not intend to allocate generation-skipping transfer tax exemption to gifts made to either trust. The accounting firm reported the gifts in the wrong part of a timely Form 709, failed to make an effective election out of automatic allocation, and did not advise the taxpayer about another election opportunity when the GRAT's inclusion period closed. The IRS found that the discretionary-relief standards were met. It gave the taxpayer 120 days to file a supplemental gift tax return electing out of automatic GST exemption allocation for the transfers to both trusts.

Ruling snapshot

• Question: Could the taxpayer make a late election preventing automatic GST exemption allocation to transfers made to the family trust and GRAT?
• Outcome: approved
• Key authorities: IRC §§ 2632(c), 2642(f), 2642(g); Treas. Reg. §§ 26.2632-1, 301.9100-1, 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201737006                                             Third Party Communication: None
Release Date: 9/15/2017                                       Date of Communication: Not Applicable
Index Number: 2632.00-00, 2642.00-00,
              9100.00-00                                      Person To Contact:
                                                              ----------------, ID No. ------------------
-------------------                                           Telephone Number:
--------------------------------                              ----------------------
----------------------------------                            Refer Reply To:
                                                              CC:PSI:04
                                                              PLR-138503-16
         -----------------------------                        Date:
                                                              June 12, 2017




LEGEND


Date 1                    =   --------------------------
Year 1                    =   -------
Taxpayer                  =   ---------------------------------------------
Family Trust              =   ----------------------------------------------------------------------
GRAT                      =   --------------------------------------------------------------------------------------
                              --------------------------
x                         =   ------------
Company                   =   ---------------
a                         =   ----
Date 2                    =   -----------------------------
Year 2                    =   -------
Accounting Firm           =   --------------------------




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

This letter responds to the letter dated December 6, 2016, submitted by your authorized
representative, requesting an extension of time pursuant to § 2642(g) of the Internal

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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 1 of Year 1, a date after December 31, 2000, Taxpayer created Family Trust,
an irrevocable trust, for the benefit of his issue. Family Trust has GST tax potential.

On the same date, Taxpayer established an irrevocable grantor retained annuity trust,
GRAT. Taxpayer transferred x shares of Company to GRAT and $a to Family Trust
(Year 1 Transfers). Under the terms of GRAT, Taxpayer’s retained interest terminated
and any remaining principal passed to Family Trust on Date 2 of Year 2. Thus, for
GST tax purposes, the estate tax inclusion period (ETIP) with respect to the transfer to
GRAT closed on Date 2 of Year 2.

Family Trust was created for the benefit of Taxpayer’s children and Taxpayer did not
intend for the trust to later provide benefits for any potential grandchildren. Family Trust
was also established to be the recipient of any assets remaining in GRAT following the
end of the GRAT term. Taxpayer did not intend to allocate his GST exemption to the
Year 1 Transfers to GRAT and Family Trust.

Taxpayer engaged Accounting Firm to prepare all federal and state tax filings, including
Taxpayer’s Year 1 Form 709 (United States Gift (and Generation-Skipping Transfer)
Tax Return). On a timely-filed Form 709 for Year 1, Accounting Firm inadvertently
reported the Year 1 Transfers to GRAT and Family Trust on Schedule A, Part 1 (Gifts
Subject Only to Gift Tax), instead of Schedule A, Part 3 (Indirect Skips), and failed to
effectively elect out of the automatic allocation of GST exemption with respect to the
Year 1 Transfers to GRAT and Family Trust. In addition, Accounting Firm failed to
advise Taxpayer of the opportunity to elect out of the automatic allocation of GST
exemption with respect to the transfer to GRAT on a timely-filed Form 709 for Year 2
(the year in which the ETIP closed).

Taxpayer requests an extension of time pursuant to § 2642(g) and § 301.9100-3 to elect
out of the automatic allocation rules of Taxpayer’s GST exemption with respect to the
Year 1 Transfers to GRAT and Family Trust under § 2632(c)(5).

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.

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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.

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).

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) provides, in part, that an individual may elect to have § 2632(c)
not apply to an indirect skip or any or all transfers made by such individual to a
particular trust. Section 2632(c)(5)(B)(ii) provides that the 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)(i) of the Generation-Skipping Transfer Tax Regulations
provides that, in the case of an indirect skip made after December 31, 2000, to which

PLR-138503-16                                 4

§ 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 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; 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,
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(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).

PLR-138503-16                                 5

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 § 2642(f)(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
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 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.

PLR-138503-16                                6

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
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 file a Year 1 supplemental
Form 709 to elect, under § 2632(c)(5), out of the automatic allocation rules of
§ 2632(c)(1) for the Year 1 Transfers to GRAT and Family Trust. The supplemental
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. A
copy of this letter should be attached to the supplemental Form 709. A copy is
enclosed for this purpose.

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-138503-16                                  7


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,

                                       Associate Chief Counsel
                                       (Passthroughs & Special Industries)


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




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


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