Grantor received extra time to stop automatic GST exemption allocations

Plain-English summary

A grantor and spouse created an irrevocable trust with three separate trusts for their children, each with generation-skipping transfer tax potential. An accounting firm prepared a gift tax return electing out of automatic GST exemption allocation for the grantor's current and future gifts to those trusts, but the firm failed to file the return on time. The grantor represented that no taxable distributions, taxable terminations, or other events producing GST tax liability had occurred. The IRS found that the discretionary-relief requirements were satisfied. It gave the grantor 120 days to file a supplemental Form 709 making the election out for the specified and future gifts.

Ruling snapshot

• Question: Could the grantor make a late election preventing automatic GST exemption allocation to gifts made to the three trusts?
• Outcome: approved
• Key authorities: IRC §§ 2632(c)(5), 2642(g); Treas. Reg. §§ 26.2632-1(b)(2)(iii), 301.9100-1, 301.9100-2, 301.9100-3; Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                   Department of the Treasury
                                                           Washington, DC 20224

Number: 201737007                                          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:B04
                                                           PLR-138994-16
                                                           Date:
                                                           June 01, 2017




Legend

Date                  =        --------------------------
Year                  =        -------
Grantor               =        --------------------------
Trust                 =        -------------------------------------------------
Trust 1               =        -------------------------------------------------
                      ---------------------------------------------------------------------
Trust 2               =        -------------------------------------------------
             ----------------------------------------------------------------------
Trust 3               =        --------------------------------------------------
                      -------------------------------------------------------------------
Child 1               =        --------------------------------
Child 2               =        ---------------------------------
Child 3               =        ------------------------------
Accounting Firm       =        ------------------------

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

       This letter responds to the letter dated December 1, 2016, submitted by your
authorized representative, 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.

         The facts and representations submitted are as follows:

        On Date, a date after December 31, 2000, Grantor and Grantor’s spouse
established an inter vivos irrevocable trust, Trust. Trust established three separate
trusts, Trust 1, Trust 2, and Trust 3, for the benefit of Grantor’s children, Child 1, Child 2,

PLR-138994-16                                 2

and Child 3, respectively. On Date, Grantor made gifts to Trusts 1 through 3. Trusts 1
through 3 have GST tax potential.

       Accounting Firm discussed and advised Grantor of the rules under § 2632(c)
regarding the automatic allocation of GST exemption and the ability to elect out of the
automatic allocation of GST exemption by making an election under § 2632(c)(5).
Thereafter, Accounting Firm reported Grantor’s Date gifts on a Year Form 709 (United
States Gift (and Generation-Skipping Transfer) Tax Return) that included an election out
of the automatic allocation of GST exemption with respect to Grantor’s Date gifts and all
future gifts to Trusts 1 through 3. As a result of errors by Accounting Firm, however,
Grantor’s Year Form 709 was not timely filed. Accordingly, Grantor failed to elect out of
the automatic allocation of GST exemption for Grantor’s Date gifts and all future (after
Date) gifts to Trusts 1 through 3.

       Grantor requests an extension of time to elect out of the automatic allocation
rules with respect to Grantor’s Date gifts and all future (after Date) gifts to Trusts 1
through 3.

         Grantor represents that no taxable distributions, taxable terminations, or any
other events have occurred with respect to Trust that would give rise to a GST tax
liability.

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 2641(b) provides that the term “maximum Federal estate tax rate” means
the maximum rate imposed by § 2001 on the estates 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.

PLR-138994-16                                 3

       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).

       Under § 2632(c)(5)(A)(i)(I) and (II), an individual may elect to have the automatic
allocation rule in § 2632(c)(1) not apply to an indirect skip, or to any or all transfers
made by such individual to a particular trust.

     Section 2632(c)(5)(B)(ii) provides that an election under § 2632(c)(5)(A)(i)(II) 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)(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

PLR-138994-16                                 4

§ 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 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
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

PLR-138994-16                                  5

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, Grantor 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 Grantor’s Date gifts and all
future (after Date) gifts to Trusts 1 through 3. The election should be made on a
supplemental Form 709 for Year. The 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. You should attach a copy of this letter to the
supplemental Form 709. We have enclosed a copy 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.

         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,

                                       Office of Associate Chief Counsel
                                       (Passthroughs & Special Industries)

                                       Lorraine E. Gardner

                                  By: _____________________________
                                      Lorraine E. Gardner
                                      Senior Counsel, Branch 4
                                      Office of Associate Chief Counsel
                                      Passthroughs & Special Industries
Enclosures (2)
      Copy of letter
      Copy for § 6110 purposes

cc: