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GST tax exemption allocation election that didn’t meet all requirements was still effective

PLR 201731005

In a private letter ruling, IRS has ruled that, where a taxpayer allocated his generation-skipping transfer (GST) tax exemption on the proper schedule of Form 709, but didn’t attach the required Notice of Allocation, he nonetheless made a proper election out of the automatic GST exemption allocation rules.

Background. Code Sec. 2601 imposes a tax on every generation-skipping transfer. A generation-skipping transfer is defined under Code Sec. 2611(a) as: (1) a taxable distribution, (2) a taxable termination, and (3) a direct skip.Code Sec. 2602 provides that the amount of the tax imposed by Code Sec. 2601 is the taxable amount multiplied by the applicable rate.Code Sec. 2641(a) defines applicable rate as the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

Code Sec. 2631(a) provides that, for purposes of determining the inclusion ratio, every individual is 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.

Under Code Sec. 2632(c)(1), if any individual makes an indirect skip during such individual’s lifetime, any unused portion of such individual’s GST exemption is allocated to the property transferred to the extent necessary to make the inclusion ratio for such property zero. The term “indirect skip” means any transfer of property (other than a direct skip) that is subject to the gift tax and is made to a GST trust. (Code Sec. 2632(c)(3)(A))

With exceptions not relevant here, that, in the case of an indirect skip, the transferor’s unused GST exemption is automatically allocated to the property transferred. (Reg. § 26.2632-1(b)(2)(i)) The automatic allocation is effective whether or not a Form 709 is filed reporting the transfer, and is effective as of the date of the transfer to which it relates.

An individual may elect under Code Sec. 2632(c)(5)(A)(i)(I) to have Code Sec. 2632(c) not apply to an indirect skip. An election under Code Sec. 2632(c)(5)(A)(i)(I) is deemed to be timely if filed on a timely filed gift tax return for the calendar year in which the transfer was made. (Code Sec. 2632(c)(5)(B)(i))

Under Reg. § 26.2632-1(b)(2)(ii), except as otherwise provided in forms or other guidance published by IRS, the transferor may prevent the automatic allocation of GST exemption with regard to an indirect skip by making an election, as provided in Reg. § 26.2632-1(b)(2)(iii). The transferor may also prevent the automatic allocation of GST exemption with regard to an indirect skip by making an affirmative allocation of GST exemption on a Form 709 filed at any time on or before the due date for timely filing, of an amount that is less than the value of the property transferred as reported on that return.

Reg. § 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 set out in Reg. § 26.2632-1(b)(2)(iii)(C). Under Reg. § 26.2632-1(b)(2)(iii)(C), to elect out, the Form 709 with the attached election out statement must, with exceptions not relevant here, 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.

Facts. Taxpayer created Trust. Trust is an irrevocable trust for the benefit of Taxpayer’s descendants. In Year 1, Taxpayer funded Trust with $a. On his Year 1 Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, Taxpayer elected out of the automatic allocation rules with respect to the gift to Trust in Year 1. He correctly reported the transfer to Trust as an indirect skip on Schedule A, Part 3. He also allocated his GST exemption to the transfer on Schedule D, Part 2, Line 6. However, he failed to attach a Notice of Allocation for this transfer.

Election was proper. Noting that elections may be treated as effective where the taxpayer complied with the essential requirements of a reg (or the instructions to the applicable form), even though the taxpayer failed to comply with certain procedural directions therein, IRS held that Taxpayer’s election was proper.

An election that does not strictly comply with the instructions on Form 709, or the applicable regs, will be deemed valid if the information on the return is sufficient to indicate that the personal representative intended to make the election.

Taxpayer elected out of the automatic allocation rules for Year 1. Taxpayer could allocate his GST exemption to the Year 1 transfer by properly reporting the allocation on a timely filed Form 709. Taxpayer properly reported the allocation of GST exemption on Schedule D, Part 2, Line 6. However, Taxpayer failed to attach a Notice of Allocation in accordance with the instructions for Form 709 and thus did not literally comply with the instructions to Form 709 or the requirements in the regs for allocating GST exemption to an indirect skip in accordance with Code Sec. 2632(c).

IRS concluded that the Form 709 contained sufficient information to constitute substantial compliance with the requirements of Code Sec. 2632(c) to allocate GST exemption to an indirect skip, and therefore Taxpayer properly allocated his GST exemption to the transfer to Trust.

References: For election out of the automatic allocation rules for GST tax purposes, see FTC 2d/FIN ¶  R-9553.4  ; United States Tax Reporter Estate & Gift ¶  26,324  .