We All Make Mistakes

We All Make Mistakes

IRS lets taxpayer’s GST exemption allocation error slide


Even the Internal Revenue Service is embracing the holiday spirit of giving.  In Private Letter Ruling 201250005, released on Dec. 12, 2012, the IRS showed some leniency in voiding a taxpayer’s mistaken allocation of a portion of his generation-skipping-transfer (GST) tax exemption to a trust.

The taxpayer made a transfer to a trust whose beneficiaries were all skip-persons in 2010.  He retained an accountant to draft and file the required Form 709, United States Gift (and Generation-Skipping-Transfer) Tax Return associated with the transfer.  The accountant mistakenly allocated a portion of the taxpayer’s GST exemption on this form. The taxpayer subsequently sought to have the allocation voided.

Internal Revenue Code Section 2601 imposes a tax on every GST equal to the taxable amount multiplied by the applicable rate (which is the most important factor for the purposes of this PLR).  Since the taxpayer’s transfer was to a trust whose beneficiaries were all skip-persons, it’s classified as a “direct skip” under IRC Section 2612(c) and is subject to GST tax.           

Like the estate tax, the GST tax was repealed in 2010 and, as such, wasn’t in effect on the date of the transfer in question.  Why then did the taxpayer file the Form 709 at all? Because, Section 301(a) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) retroactively reinstated the GST tax on all transfers made after Dec. 31, 2009.  However, TRUIRJCA also decreed that the applicable rate for any GST made after Dec. 31, 2009 and before Jan. 1, 2011 would be zero.  Thus, the taxpayer wouldn’t owe any GST tax on this transfer, thereby wasting any allocated GST exemption amount.

Notice 2011-66, 2011-35 IRB 184 Section II.B addresses this very issue.  It provides:


Because it is clear that a 2010 transfer not in trust to a skip person is a direct skip to which the donor would never want to allocate GST exemption, the IRS will interpret the reporting of an inter vivos direct skip not in trust occurring in 2010 on a timely filed Form 709 as constituting the payment of tax (at the rate of zero percent) and therefore as an election out of the automatic allocation of GST exemption to that direct skip… However, a donor may or may not want to allocate GST exemption to a 2010 direct skip made to a trust. Therefore, this interpretation will not apply to any transfer in trust that is a direct skip or that occurs at the end of an ETIP.



Under this standard, that of IRC Section 2612(c) and in light of representations the taxpayer made, the IRS defined this transfer as an inter vivos direct skip and granted the taxpayer’s request to void the mistaken GST exemption allocation.

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