Expired limitations period fixes incorrect gift split but not the husband's GST share

Plain-English summary

A husband funded four trusts for his children, and the spouses elected to split their gifts equally under section 2513. Their gift tax returns mistakenly reported three-fourths of the total gift to the husband and one-fourth to the wife. Because the gift tax assessment period had expired, the IRS ruled that those incorrectly reported amounts were final for gift tax purposes. For generation-skipping transfer tax purposes, however, the gift-splitting regulation still treated the husband as transferor of only one-half of the property. His later GST exemption allocation was therefore effective only for that one-half share and was void to the extent it exceeded the amount needed to produce a zero inclusion ratio for his share.

Ruling snapshot

• Question: Was the husband finally treated as making the three-fourths gift reported on his return, and how much of the trusts could his GST allocation cover?
• Outcome: Approved: the three-fourths amount was final for gift tax, but his GST transferor share remained one-half.
• Key authorities: IRC §§ 2504(c), 2513, 2631, and 6501; Treas. Reg. §§ 25.2504-2, 25.2513-1, 26.2632-1, and 26.2652-1.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201811002 Third Party Communication: None
Release Date: 3/16/2018 Date of Communication: Not Applicable
Index Number: 2504.02-00, 2513.00-00
Person To Contact:
---------------------------------- ------------------------, ID No. --------------
----------------------- Telephone Number:
------------------- ----------------------
------------------------------- Refer Reply To:
CC:PSI:04
Re: ---------------------------- PLR-117349-17
Date:
November 27, 2017

LEGEND
Husband = ----------------------------

Wife = -----------------------

Trusts = --------------------------------------------------------------

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

Accounting Firm = ------------------------------------------------------
Date 1 = ----------------------
Date 2 = ----------------------
Date 3 = ----------------------
Year 1 = -------
Year 2 = -------
q = ------------
r = --------------
s = ------------
t = ------------
u = -------------------

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

This letter responds to your personal representative’s letter of May 17, 2017, and other
correspondence, requesting a ruling regarding the effect of gift splitting under § 2513 of
the Internal Revenue Code on certain transfers.

PLR-117349-17 2

The facts and representations submitted are summarized as follows.
On Date 1 in Year 1 (a date after August 5, 1997 and before January 1, 2001), Husband
created four irrevocable trusts (Trusts) for his four children. Each child is the primary
beneficiary of a separate trust for the benefit of herself and her children.

Under Article First, Paragraph A of each trust, the income of that trust is to be paid to
the child for whom the trust was created. On the child’s death, the principal is to be held
in further trust and distributed outright to her children upon their attaining age 35.

On Date 1, Husband transferred $q to each of the four Trusts. In total, Husband
transferred $r to Trusts on Date 1.

Accounting Firm prepared Year 1 Forms 709, United States Gift (and Generation-
Skipping Transfer) Tax Returns, for Husband and Wife. On his and her respective
timely filed Form 709, Husband and Wife signified their consent to treat their gifts in
Year 1 as having been made one-half by each spouse under § 2513. Nevertheless,
Husband’s Form 709 reported his portion of the total transfer to Trusts to be $s, which is
three-quarters (rather than one-half) of $r. Wife’s Form 709 reported her portion of the
total transfer to Trusts to be $q, which is one-quarter (rather than one-half) of $r. No
amount of Husband’s or Wife’s available GST exemption was allocated to the transfers
to Trusts on the Year 1 Forms 709.

Several years later, Accounting Firm realized that no GST exemption had been
allocated to the transfers to Trusts in Year 1. Accounting Firm advised Husband of the
ability to make a late allocation of GST exemption to the Date 1 transfers to Trusts.
Accounting Firm prepared Husband’s Year 2 Form 709 to include the late allocation of
GST exemption to the Date 1 transfers to Trusts. On Husband’s Year 2 Form 709,
Husband made a late allocation of his available GST exemption to the Date 1 transfers
to Trusts. The late allocation of Husband’s GST exemption erroneously allocated an
amount equal to one-hundred percent of the value of the Date 1 transfers to Trusts
(such value determined as of the effective date of the allocation). The notice of
allocation attached to Husband’s Year 2 Form 709 stated that, as a result of the late
allocation, the inclusion ratio of Trusts was zero. Wife was not advised to make a late
allocation of GST exemption to Wife’s portion of the Date 1 transfers to Trusts.

The period of limitations under § 6501 has expired with respect to Husband’s Forms 709 filed
for Year 1 and Year 2.

You have requested we rule that because the period for assessment of gift tax under
§ 6501 has expired for Husband’s Year 1 Form 709, Husband is treated as the
transferor of $s, the amount reported for Husband’s portion of the Date 1 transfers to
Trusts on Husband’s Year 1 Form 709.

PLR-117349-17 3

LAW AND ANALYSIS

Section 2501(a)(1) imposes a tax for each calendar year on the transfer of property by
gift during the calendar year by any individual, resident or nonresident. Section 2511(a)
provides that subject to certain limitations, the gift tax applies whether the transfer is in
trust or otherwise, direct or indirect, and whether the property transferred is real or
personal, tangible or intangible.

Section 2504(c) provides that if the time has expired under § 6501 within which a tax
may be assessed under chapter 12 on the transfer of property by gift made during a
preceding calendar period, the value thereof shall, for purposes of computing the tax
under chapter 12, be the value as finally determined (within the meaning of
§ 2001(f)(2)) for purposes of chapter 12.

Section 25.2504-2(b) of the Gift Tax Regulations provides that if the time has expired
under § 6501 within which a gift tax may be assessed under chapter 12 on the transfer
of property by gift made during a preceding calendar period, and the gift was made after
August 5, 1997, the amount of the taxable gift or the amount of the increase in taxable
gifts, for purposes of determining the correct amount of taxable gifts for the preceding
calendar periods is the amount that is finally determined for gift tax purposes and such
amount may not be thereafter adjusted. The rule in this paragraph applies to
adjustments involving all issues relating to the gift including valuation issues and legal
issues involving the interpretation of the gift tax law.

Section 2513(a)(1) provides, generally, that a gift made by one spouse to any person
other than the donor’s spouse is considered, for purposes of the gift tax, as made
one-half by the donor and one-half by the donor’s spouse.

Section 25.2513-1(b)(5) provides, in part, that the consent may not be applied only to a
portion of the property interest constituting such gifts. If the consent is effectively
signified on either the husband’s return or the wife’s return, all gifts made by the
spouses to third parties (except as described in § 25.2513-1(b)(1) through (4)), during
the calendar period will be treated as having been made one-half by each spouse.

In this case, Husband and Wife elected to treat their Year 1 gifts (including $r, the total
amount transferred to Trusts) as made one-half by each spouse. However, Husband’s
Form 709 incorrectly reported three-fourths of $r ($s) as his portion of the gift, and
Wife’s Form 709 incorrectly included one-fourth of $r ($q) as her portion of the gift.

Under § 2513, Husband’s Year 1 transfers to Trusts, totaling $r, are considered as
made one-half by Husband and one-half by Wife. However, under § 2504(c) and
§ 25.2504-2(b), because the time has expired under § 6501 within which a gift tax may
be assessed, the amount of the taxable gift is the amount that is finally determined for
gift tax purposes and may not thereafter be adjusted. In this case, the disproportionate

PLR-117349-17 4

gift split reported on Husband’s and Wife’s respective Forms 709 represents the
amounts that are finally determined for gift tax purposes.

Consequently, for gift tax purposes, Husband is treated as transferring $s to Trusts on
Date 1, and Wife is treated as transferring $q to Trusts on Date 1.

However, under § 26.2652-1(a)(4) of the Generation-Skipping Transfer Tax
Regulations, Husband is regarded for GST tax purposes as the transferor of one-half of
the total value of the property transferred to Trusts on Date 1, which is equal to $u,
regardless of the interest Husband is treated as transferring under § 2513 for gift tax
purposes. Accordingly, Husband’s late allocation of GST exemption to Trusts on the
Year 2 Form 709 is effective only to the one-half portion of the property transferred to
Trusts, of which he is considered the transferor for GST tax purposes. See § 2631(a);
§ 26.2632-1(b)(4)(i) (an allocation of GST exemption to a trust is void to the extent the
amount allocated exceeds the amount necessary to obtain an inclusion ratio of zero).

Except as expressly provided herein, we express no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the
Code 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 representatives.

The ruling contained in this letter is 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 Lesho

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

Enclosure: Copy for § 6110 purposes

cc: