IRS issues guidance on relief from late allocation of GST exemption. (Estates, Trusts & Gifts).

Sec. 2601 imposes a tax on every generation-skipping transfer (GST). Each individual is allowed a GST exemption for transfers that would be subject to the GST tax. In general, an individual may allocate a GST exemption to transfers at any time on or before the due date for filing a Federal estate tax return for his estate under Sec. 2632(a)(1).

For lifetime transfers, an available GST exemption is automatically allocated to a direct skip under Sec. 2632(b) and to indirect skips made after 2000 under Sec. 2632(c), unless the individual elects to opt out of the automatic allocation under Secs. 2632(b)(3) and 2632(c)(5), respectively. Under Sec. 2632(c)(3)(A), an indirect skip is a transfer of property, subject to gift tax, to a GST trust (as defined in Sec. 2632(c)(3)(B)). An individual may elect to treat any trust as a GST trust under Sec. 2632(c)(5)(A)(ii).

Under Regs. Sec. 26.2632-1(b)(1)(i), a taxpayer can elect to opt out of an automatic allocation for direct skips on a timely filed Federal gift tax return. The IRS will issue regulations under which taxpayers who opt to elect out of the automatic allocation for indirect skips and elect instead to treat any trust as a GST trust must also do so on a timely filed Federal gift tax return.

Under Sec. 2642(b)(1) and Regs. Sec. 26.2642-2(a)(1), for lifetime transfers, the value of the property to which the taxpayer allocates the GST exemption is its value at the transfer date, if the GST exemption is automatically allocated (or is allocated) on a timely filed Federal gift tax return. Under Sec. 2642(b)(3), if the allocation is not made on a timely filed gift tax return, the value of the property to which the taxpayer allocates the exemption is its value on the effective date of the allocation (as described in Regs. Sec. 26.2642-2(a) (2)).

Sec. 2642(b) (2) describes allocations for transfers at death and provides that the value of property to which a taxpayer allocates a GST exemption is its value as determined for estate tax purposes. Under Regs. Sec. 26.2632-1(a), an executor may make the allocation of the GST exemption to transfers at death at any time prior to the due date of the Federal estate tax return. When an unused GST exemption has not been allocated by an executor, it is automatically allocated to transfers at death and lifetime transfers for which no previous allocations were made (as prescribed in Sec. 2632(e)(1)).

Sec. 2642(g)(1)(A), added by the Economic Growth and Tax Relief Reconciliation Act of 2001, authorizes Treasury to issue regulations prescribing the circumstances and procedures under which it will grant extensions for making an allocation of the GST exemption described in Sec. 2642(b)(1) and (2), or an election under Sec. 2632(b)(3) and (c)(5).

Sec. 2642(g)(1)(B) provides that, in determining whether to grant relief, taxpayers can treat the time for making the allocation or election as if not expressly prescribed by statute. If the Service grants an extension of time to make the" allocation, the taxpayer uses the gift or estate tax value of the transfer to the trust to determine the allocation of the GST exemption. Sec. 2642(g)(1) applies to requests for relief pending on or filed after 2000.

Requests for Relief Under Sec. 2642(g)(1)

Regs. Sec. 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 Regs. Sec. 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 Sec. 2642(g)(1)(B), taxpayers should treat the time for allocating the GST exemption to lifetime transfers and transfers at death, the time for electing to opt out of the automatic allocation rules, and the time for electing to treat any trust as a GST trust as if not expressly prescribed by statute. Therefore, taxpayers may seek an extension of time to make an allocation described in Sec. 2642(b)(1) or (b) (2) or an election described in Sec. 2632(b)(3) or (c)(5) under the provisions of Regs. Sec. 301.9100-3.

In general, under Regs. Sec. 301.9100-3, the IRS will grant relief if a taxpayer establishes to the Service's satisfaction that it acted reasonably and in good faith, and that the grant of relief will not prejudice the government's interests. Taxpayers requesting relief should follow the procedures for requesting a letter ruling under Regs. Sec. 301.9100 found in section 5.02 of Rev. Proc. 2001-1 (or its successor).

NOTICE 2001-50, IRB 2001-34