Extra time to allocate a grantor's GST exemption to a trust after the attorney never filed the gift tax return

Plain-English summary

A grantor set up an irrevocable trust for a son and his descendants and intended the trust to be fully exempt from the generation-skipping transfer (GST) tax, meaning an inclusion ratio of zero. To lock that in, the grantor needed to allocate GST exemption to the year's contribution by filing a Form 709 gift tax return, but the attorney never told the grantor a return was needed and never filed one. In later years the grantor did file timely Forms 709 and allocated exemption for other transfers. The grantor asked the IRS, under section 2642(g) and Treasury Regulation section 301.9100-3, for extra time to allocate exemption to the original transfer. The IRS found the grantor reasonably relied on a tax professional who failed to act, so the good-faith standard was met and relief would not prejudice the government. It granted 120 days to make the allocation on a Form 709, effective as of the original transfer date and using that transfer's gift-tax value. This keeps the trust's intended zero GST inclusion ratio despite the missed filing.

Ruling snapshot

• Question: Should the grantor get more time to allocate GST exemption to the earlier transfer to the trust, when the attorney failed to file the required gift tax return?
• Outcome: Approved (120 days from the ruling to allocate the exemption on a Form 709, effective as of the original transfer).
• Key authorities: IRC § 2642(g); IRC §§ 2631, 2632; Treas. Reg. § 301.9100-3; Notice 2001-50.

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202209006                                            [Third Party Communication:
 Release Date: 3/4/2022                                       Date of Communication: Month DD, YYYY]
 Index Number: 9100.00-00, 2632.01-00
                                                              Person To Contact:
 ------------------                                           ---------------------------, ID No. -------
 ----------------------------                                 Telephone Number:
 -------------------------------                              --------------------
 --------------------------------                             Refer Reply To:
                                                              CC:PSI:B04
                                                              PLR-113395-21
                                                              Date:
                                                              December 03, 2021
          Re: -----------------------------



Legend

Grantor                   = ---------------------------------------------
Trust                     = ----------------------------------------------------------------------
Date                      = -------------------
Year 1                    = -------
Son                       = -----------------
x                         = --------
Accounting Firm           = ----------------------------
Attorney                  = ----------------------
Year 2                    = -------
Year 3                    = -------


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

This letter responds to your representative's letter dated June 23, 2021, requesting an
extension of time under § 2642(g) of the Internal Revenue Code and Treas. Reg.
§ 301.9100-3 of the Procedure and Administration Regulations to allocate Grantor's
GST exemption to the Year 1 transfer to Trust.

The facts and representations are as follows. On Date, Grantor created an irrevocable
trust, Trust, for the benefit of Grantor's son, Son. Date is a date prior to December 31,
2000. Grantor contributed $x to Trust. Trust provides that, during the lifetime of Son,
the trustee has the discretion to distribute income and principal for the benefit of Son
and his descendants for their respective health, education, maintenance, and support.
Article I, section 2(d) of Trust provides that Grantor intends that Trust (and trusts
created under the trust agreement) have an inclusion ratio of zero and that no transfers
to or distributions from Trust (and trusts created under the trust agreement) shall be
subject to federal tax on generation-skipping transfers.
PLR-113395-21                                  2


Grantor engaged Accounting Firm to prepare Grantor's federal and state income tax
returns for Year 1. In a letter from Accounting Firm to Grantor, the firm's representative
stated that it was the firm's understanding that Attorney had also prepared the Form
709, United States Gift (and Generation-Skipping Transfer Tax) Return for Year 1. In
fact, Attorney failed to advise Grantor that it was necessary to file a Year 1 gift tax return
to allocate Grantor's GST exemption to the Year 1 transfer to Trust, and furthermore
Attorney did not prepare or file a Form 709 for Year 1.

In Year 2 and Year 3, Grantor transferred certain assets and cash, respectively, to
Trust. Grantor filed timely Forms 709 and allocated the smallest amount of GST
exemption necessary to produce an inclusion ratio for Trust that was closest to, or if
possible, equal to zero.

LAW AND ANALYSIS

Section 2601 imposes a tax on every generation-skipping transfer (GST) made by a
transferor. A GST is defined under § 2611(a) as a taxable distribution, a taxable
termination, and a direct skip.

Section 2602 provides that the amount of GST tax is the taxable amount, multiplied by
the applicable rate. Section 2641(a) provides that the term "applicable rate" means the
product of the maximum federal estate tax rate and the inclusion ratio with respect to
the transfer.

Under § 2642(a)(1), the inclusion ratio with respect to any property transferred in a GST
transfer is the excess (if any) of 1 over the applicable fraction determined for the trust
from which such transfer is made, or in the case of a direct skip, the applicable fraction
determined for such skip. Section 2642(a)(2) provides that the applicable fraction is a
fraction – (A) the numerator of which is the amount of the GST exemption allocated to
the trust (or in the case of a direct skip, allocated to the property transferred in such
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), as in effect for Year 1, provides that, for purposes of determining the
inclusion ratio, every individual shall be allowed a GST exemption of $1,000,000 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, is irrevocable.

Section 2632(a) provides that any allocation by an individual of his GST exemption
under § 2631(a) may be made at any time on or before the date prescribed for filing the
PLR-113395-21                                 3

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 26.2632-1(b)(4)(i) provides that an allocation of GST exemption to property
transferred during the transferor's lifetime, other than in a direct skip, is made on Form
709.

Section 2642(b)(1)(A) provides, in part, that if the allocation of 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)), and such allocation is
effective on and after the date of such transfer.

Section 2642(g)(1)(A) provides 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 for transfers made before the date of the enactment of
§ 2642(g)(1)(A).

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, in part, that, under § 2642(g)(1)(B), the time
for allocating the GST exemption to lifetime transfers is 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
301.9100-2 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,
a taxpayer 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.
PLR-113395-21                                 4

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 that
granting 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 to 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, Grantor is granted an
extension of time of 120 days from the date of this letter to make the election to allocate
his GST exemption to the Year 1 transfer to Trust. The allocation will be effective as of
the date of the Year 1 transfer to Trust and the value of the transfer for gift tax purposes
will be used in determining the amount of Grantor's GST exemption to be allocated to
Trust. The allocation should be made on a Form 709 and filed with the Internal
Revenue Service at the following address: Department of the Treasury, Internal
Revenue Service, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915. A copy
of this letter should be attached to the Forms 709.

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.

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.
PLR-113395-21                                             5

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



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


Enclosure
      Copy for § 6110 purposes




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