Taxpayer may elect out of automatic GST allocation for two GRATs

Plain-English summary

A taxpayer created two grantor retained annuity trusts, transferred company stock to them, and intended to elect out of automatic generation-skipping transfer exemption allocation. The taxpayer's attorney advised making the elections, but the return preparer reported the gifts on the wrong portions of Forms 709 and did not effectively elect out. Each trust had GST potential, and its estate tax inclusion period later ended before the assets were distributed to the taxpayer's children. The IRS found that the taxpayer satisfied the discretionary relief requirements, including reasonable reliance on a qualified tax professional. It granted 120 days to make section 2632(c)(5) elections out for both transfers on supplemental Forms 709. The ruling addressed only the timing relief and did not opine on other tax consequences.

Ruling snapshot

• Question: May the taxpayer make late elections preventing automatic GST exemption allocation to transfers made to two GRATs?
• Outcome: approved (the taxpayer received 120 days to file supplemental Forms 709)
• Key authorities: IRC §§ 2632(c), 2642(f), 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: 202019011 Third Party Communication: None
Release Date: 5/8/2020 Date of Communication: Not Applicable
Index Number: 9100.00-00, 2632.00-00,
2642.00-00 Person To Contact:
----------------------, ID No. -----------------
----------------------------------------- Telephone Number:
------------------------------------------ --------------------
---------------------------------- Refer Reply To:
---------------------------- CC:PSI:B04
PLR-114730-19
Date:
December 10, 2019

Legend

Taxpayer -----------------------------------------------
Date 1 ----------------------
Date 2 --------------------------
Date 3 --------------------------
Date 4 -------------------------
Year 1 -------
Year 2 -------
Year 3 -------
Year 4 -------
Trust 1 --------------------------------------------
Trust 2 --------------------------------------------
Attorney ---------------------------------
Accountant ---------------------
Company -------------------------------------

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

 This letter responds to your authorized representative’s letter dated

May 28, 2019, and subsequent correspondence, 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.

    The facts and representations submitted are summarized as follows:

PLR-114730-19 2

  On Date 1 in Year 1 (a date after December 31, 2000), Taxpayer established an

irrevocable grantor retained annuity trust, Trust 1. During Year 1, Taxpayer transferred
common shares of Company to Trust 1. Trust 1 has GST tax potential.

  Taxpayer's retained interest in Trust 1 terminated at the end of the annuity term

on Date 3 in Year 3. The estate tax inclusion period (ETIP) with respect to the Year 1
transfer closed for GST tax purposes on Date 3. Shortly after Date 3, pursuant to the
trustee’s absolute discretion, the assets of Trust 1 were distributed to Taxpayer’s
children.

  On Date 2 in Year 2 (a date after December 31, 2000), Taxpayer established

another irrevocable grantor retained annuity trust, Trust 2. During Year 2, Taxpayer
transferred common shares of Company to Trust 2. Trust 2 has GST tax potential.

  Taxpayer's retained interest in Trust 2 terminated at the end of the annuity term

on Date 4 in Year 4. The ETIP with respect to the Year 2 transfer closed for GST tax
purposes on Date 4. Shortly after Date 4, pursuant to the trustee’s absolute discretion,
the assets of Trust 2 were distributed to Taxpayer’s children.

    Attorney provided Taxpayer with legal and tax advice in connection with the

creation and establishment of Trust 1 and Trust 2. Attorney advised Taxpayer 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). Attorney advised Taxpayer to elect out of the automatic allocation of
GST exemption to the transfers to Trust 1 and Trust 2.

  Taxpayer retained Accountant to prepare and file Taxpayer's Year 1 and Year 2

Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns. On
timely filed Forms 709 for Year 1 and Year 2, Accountant inadvertently reported the
respective Year 1 transfer to Trust 1 and the Year 2 transfer to Trust 2 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 to the
transfers to Trust 1 and Trust 2 pursuant to § 2632(c)(5)(A)(i).

 Taxpayer requests 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 Taxpayer’s Year 1 transfer to Trust 1 and Taxpayer’s Year 2 transfer to Trust 2.

LAW AND ANALYSIS

  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

PLR-114730-19 3

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 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
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 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 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 that an individual may elect to have the

automatic allocation rules of § 2632(c)(1) 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
§ 2642(f) (relating to transfers subject to the 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,

PLR-114730-19 4

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, in part, that a transferor may prevent the

automatic allocation of GST exemption (elect out) with respect to any transfer or
transfers constituting an indirect skip made to a trust or to one or more separate shares
that are treated as separate trusts under § 26.2654-1(a)(1). A transferor may 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. 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).

  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

PLR-114730-19 5

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 6 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
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 upon the facts submitted and 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 elect out of the automatic
allocation rules under § 2632(c)(5) for the transfer made during Year 1 to Trust 1 and for
the transfer made during Year 2 to Trust 2. The election should be made on
supplemental Forms 709 for Year 1 and Year 2. The supplemental Forms 709 should
be filed with the Internal Revenue Service Center at the following address: Department
of the Treasury, Internal Revenue Service, Stop 824G, 7940 Kentucky Drive, Florence,

PLR-114730-19 6

KY 41042-2915. You should attach a copy of this letter to each Form 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.

 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

                                    Melissa C. Liquerman
                             By:    Melissa C. Liquerman
                                    Chief, Branch 4
                                    Office of the Associate Chief Counsel
                                    (Passthroughs and Special Industries)

 Enclosures
       Copy for § 6110 purposes
       Copy of this letter

 cc: