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Tuesday April 16, 2024

Private Letter Ruling

Extension Permitted to Opt Out of GSTT Exemption Allocation

GiftLaw Note:
Taxpayer established an irrevocable grantor retained annuity trust (Trust 1) for a three-year term. At the end of the three years, the trustees of Trust 1 are to take the remaining principal to fund Trust 2 for the benefit of Taxpayer's descendants. Taxpayer and Spouse hired Accountant to prepare Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns and each indicated their consent to treat all gifts made by Taxpayer and Spouse as being made one-half by each spouse under Sec. 2513. Accountant reported the transfer made to Trust 1 on Taxpayer's Form 709 but failed to opt out of automatic allocation of GST. As such, Taxpayer requests an extension of time under Section 2642(g) and Section 301.9100-3 to elect out of the automatic allocation of GST exemption to transfers made by Taxpayer to Trust 1.

Section 2601 imposes a tax on every GST made by a transferor to a skip person. Section 2611(a) defines a GST as a taxable distribution, a taxable termination or a direct skip. Under Sec. 2602, the amount of the GST tax equals the taxable amount multiplied by the applicable rate. The applicable rate is defined in Sec. 2641(a) as the product of the maximum federal estate tax rate and the inclusion ratio. Section 2631(a) allows each individual to allocate a GST exemption to property transferred by the individual. Under Sec. 2631(b), the Sec. 2631(a) exemption allocation is irrevocable. Section 2632(c)(1) provides that the automatic allocation will be to the extent necessary to make the inclusion ratio zero, if the individual has any unused portion of GST exemption. An individual may elect out of the automatic allocation rule. Sec. 2632(c)(5)(A)(i). If the election to prevent the automatic allocation of GST is not made on a timely-filed Form 709, the Service may grant relief. Sec. 2642(g)(1)(A). Under Sec. 2642(g)(1)(B), all relevant circumstances shall be considered, including evidence of intent contained in the trust instrument. Regulation 301.9100-3 allows an extension of time to be granted if the taxpayer acted reasonably and in good faith and the relief granted will not prejudice the interests of the government. Regulation 301.9100-3(b)(1)(v) states that a taxpayer will be deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional and the tax professional failed to make or advise the taxpayer to make the election. Here, the Service determined that the requirements of Reg. 301.9100-3(b) were met and granted an extension of 120 days to elect out of the automatic allocation rules with respect to the transfer to Trust 1.
PLR 202403008 Extension Permitted to Opt Out of GSTT Exemption Allocation

1/19/2024 (10/19/2023)

Dear * * *:

This letter responds to your authorized representative's letter dated May 18, 2023, 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 under 2632(c)(5) with respect to certain transfers to a trust.

The facts and representations submitted are summarized as follows:

On Date 1, Taxpayer established and funded Trust 1, a grantor retained annuity trust. The terms of Trust 1 provide, in relevant part, for Taxpayer to receive an annuity for a three-year term at specified percentages of the original Trust 1 value. At the conclusion of the three-year term, the trustees of Trust 1 are to distribute the remaining principal to Trust 2, a trust for the benefit of Taxpayer's descendants. Taxpayer represents that no additional gifts were made to Trust 1 after Date 1.

Trust 2 provides, in relevant part, that the trustees may pay to any one or more of Taxpayer's descendants any of the net income and/or principal, in the discretion of the trustees, as may be necessary or advisable for such person's health, education, maintenance, and/or support. Upon the death of Taxpayer's spouse, Spouse, the trustees shall distribute to such qualified charities and descendants of Taxpayer as Spouse appoints. Any unappointed portion of the trust is to be divided per stirpes to the descendants of Taxpayer in further trust.

Taxpayer and Spouse retained Accountant to prepare their Year Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns. On their respective Forms 709, Taxpayer and Spouse signified their consent to treat all gifts made by Taxpayer and Spouse in Year as having been made one-half by each spouse under 2513. Accountant reported the transfer to Trust 1 on Taxpayer's Form 709. However, Accountant failed to elect out of the automatic GST allocation pursuant to 2632(c)(5)(A)(i). Taxpayer and Spouse timely filed their Forms 709 (with extensions) on Date 2.

Taxpayer requests an extension of time under 2642(g) and 301.9100-3 to elect out of the automatic allocation of GST exemption under 2632(c)(5)(A)(i) with respect to Taxpayer's Date 1 transfer to Trust 1.

LAW AND ANALYSIS


Section 2513(a)(1) provides that a gift made by one spouse to any person other than his spouse shall, for the purposes of this chapter, be considered as made one-half by him and one-half by his spouse, but only if at the time of the gift each spouse is a citizen or resident of the United States.

Section 2513(a)(2) provides that 2513(a)(1) shall apply only if both spouses have signified (under the regulations provided for in 2513(b)) their consent to the application of 2513(a)(1) in the case of all such gifts made during the calendar year by either while married to the other.

Section 26.2652-1(a)(4) of the Generation-Skipping Transfer Tax Regulations provides that in the case of a transfer with respect to which the donor's spouse makes an election under 2513 to treat the gift as made one-half by the spouse, the electing spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor, regardless of the interest the electing spouse is actually deemed to have transferred under 2513. The donor is treated as the transferor of one-half of the value of the entire property.

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 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(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 relevant part, that the term "GST trust" means a trust that could have a GST with respect to the transferor unless an exception listed in 2632(c)(3)(B)(i)-(vi) applies.

Section 2632(c)(4) provides that an indirect skip to which 2642(f) applies is deemed to have been made only at the close of the estate tax inclusion period (ETIP) and the fair market value of any such transfer shall be the value of the property at the close of the ETIP.

Section 2632(c)(5)(A)(i) provides, in relevant part, that an individual may elect to have the automatic allocation rules of 2632(c)(1) not apply to — (I) an indirect skip, or (II) any or all transfers made by such individual to a particular trust. Section 2632(c)(5)(B)(ii) provides, in relevant part, that the 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) provides, in relevant 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).

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 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 301.9100-1(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)(A)(i) for the transfer made during Year to Trust 1. This ruling is only applicable with respect to Trust 1. The election should be made on an amended Form 709 for Year. The amended Form 709 should be filed with the Internal Revenue Service Center at the following address: Internal Revenue Service Center, Attn: E & G, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915. You should attach a copy of this letter to the amended Form 709.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives.

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.

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

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

Enclosure:
Copy for 6110 purposes

cc:
* * *

Published January 26, 2024
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