IRS Finalizes Proposed Generation-Skipping Transfer Tax Regulations Proposed in 2008

(Parker Tax Publishing May 2024)

The IRS issued final regulations that provide guidance describing the circumstances and procedures under which an extension of time will be granted to make certain allocations and elections related to the generation-skipping transfer (GST) tax. The guidance affects individuals (or their estates) who failed to make a timely allocation of GST exemption, a timely election out of the GST automatic allocation rules, or certain other timely GST elections. T.D. 9996.

Background

Code Sec. 2642(g)(1) describes the circumstances and procedures under which an extension of time will be granted to make certain allocations and elections related to the generation-skipping transfer (GST) tax. Congress added Code Sec. 2642(g)(1) to the Code by enacting Section 564 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. 107-16).

Code Sec. 2642(g)(1) directs the Treasury Secretary to issue regulations prescribing the circumstances and procedures under which an extension of time will be granted to make an allocation of GST exemption, as described in Code Sec. 2631, to a transfer, and the following three elections under Code Sec. 2632:

(1) an election under Code Sec. 2632(b)(3) not to have the deemed (automatic) allocation of GST exemption apply to a direct skip (generally, a transfer subject to gift or estate tax made to a person more than one generation below the transferor);

(2) an election under Code Sec. 2632(c)(5)(A)(i) not to have the deemed (automatic) allocation of GST exemption apply to an indirect skip or to transfers made to a particular trust; and

(3) an election under Code Sec. 2632(c)(5)(A)(ii) to treat any trust as a GST trust for purposes of

Code Sec. 2632(c).

In determining whether to grant relief, Code Sec. 2642(g)(1) directs that all relevant circumstances be considered, including evidence of intent contained in the trust instrument or the instrument of transfer. According to the IRS, the legislative history accompanying Code Sec. 2642(g)(1) indicates that Congress believed that, in appropriate circumstances, an individual should be granted an extension of time to allocate GST exemption regardless of whether any period of limitations had expired. Those circumstances include situations in which the taxpayer intended to allocate GST exemption and the failure to allocate the exemption was inadvertent.

After the enactment of Code Sec. 2642(g)(1), the IRS issued Notice 2001-50, which provided guidance for transferors seeking an extension of time to make an allocation of GST exemption or an election described in Code Sec. 2632(b)(3) or (c)(5). Notice 2001-50 provides, generally, that relief will be granted under Reg. Sec. 301.9100-3 (regarding requests of extensions of time for certain regulatory elections) if the taxpayer satisfies the requirements of those regulations and establishes to the satisfaction of the IRS that the taxpayer acted reasonably and in good faith and that a grant of the requested relief will not prejudice the interests of the government. If relief is granted under Reg. Sec. 301.9100-3 and the allocation is made, the amount of GST exemption allocated to the transfer is the federal gift or estate tax value of the property as of the date of the transfer and the allocation is effective as of the date of the transfer.

In Rev. Proc. 2004-46, the IRS provided a simplified alternate method to obtain an extension of time to allocate GST exemption in certain situations. Generally, this method is available only with respect to an inter vivos transfer to a trust from which a GST may be made and only if certain requirements are met. In Rev. Proc. 2004-47, the IRS provided alternative relief for taxpayers who failed to make a reverse qualified terminable interest property (QTIP) election on an estate tax return.

In April of 2008, the IRS issued proposed regulations (REG-147775-06) that provide guidance on the application of Code Sec. 2642(g)(1) by identifying the standards that the IRS will apply in determining whether to grant a transferor or a transferor's estate an extension of time to make an allocation of GST exemption, as described in Code Sec. 2631, to property transferred by the transferor and the following three elections under Code Sec. 2632: (1) an election under Code Sec. 2632(b)(3) not to have the automatic allocation of GST exemption apply to a direct skip; (2) an election under Code Sec. 2632(c)(5)(A)(i) not to have the automatic allocation of GST exemption apply to an indirect skip or to transfers made to a particular trust; and (3) an election under Code Sec. 2632(c)(5)(A)(ii) to treat any trust as a GST trust for purposes of Code Sec. 2632(c). In addition to proposing these standards, the proposed regulations included procedural requirements for establishing eligibility for the requested relief, including identification of the various persons from whom affidavits would be required.

T.D. 9996

On May 6, the IRS published final regulations in T.D. 9996 that adopt the proposed regulations with clarifying changes and additional modifications in response to practitioners' comments.

The relief provided under Code Sec. 2642(g)(1) will be granted through the IRS private letter ruling program. On and after May 6, 2024, relief under Code Sec. 2642(g)(1) no longer will be granted under Reg. Sec. 301.9100-3. Thus, Notice 2001-50 is obsolete upon the publication of T.D. 9996. In addition, because the final regulations provide a replacement for the automatic six-month extension under Reg. Sec. 301.9100-2(b) without substantive difference, the extension under Reg. Sec. 301.9100-2(b) no longer will be available to transferors or transferor's estates qualifying for relief under Prop. Reg. Sec. 26.2642-7(h)(1) (redesignated in the final regulations as Reg. Sec. 26.2642-7(i)(1)) on and after May 6, 2024.

Accordingly, the final regulations amend Reg. Sec. 301.9100-2(b) and Reg. Sec. 301.9100-3 to provide that relief under Code Sec. 2642(g)(1) cannot be obtained through the provision of Reg. Sec. 301.9100-2(b) and Reg. Sec. 301.9100-3. However, requests that are pending with the IRS on May 6, 2024, will continue to be processed under the Code Sec. 9100 provisions unless the taxpayer requesting relief opts to withdraw the request and instead seek relief under the final regulations. In that case, the taxpayer's user fee will be refunded and a new user fee will be required with the new request. Furthermore, the procedures contained in Rev. Proc. 2004-46 and Rev. Proc. 2004-47 will remain effective for transferors within the scope of those revenue procedures.

The IRS stated that it is mindful that the proposed regulations were issued 16 years ago on April 17, 2008. Insofar as there have been no intervening legislative or regulatory changes regarding allocations of GST exemption or GST elections and because the issues addressed by the commenters on the proposed regulations continue to remain relevant, the IRS has determined that a new notice of proposed rulemaking or a further opportunity for public comment would be unlikely to generate different comments and, moreover, would unnecessarily delay further this rulemaking to the continued detriment of taxpayers seeking relief. In addition, the IRS has a ruling position that, because of the provisions of the 2008 proposed regulations, relief cannot be granted in certain otherwise appropriate situations until the 2008 proposed regulations have been superseded by the issuance of the final regulations. For such situations, the IRS stated that issuance of a new notice of proposed rulemaking or a reopening of the comment period would further delay, and in some cases prevent, the grant of needed relief to taxpayers.

The IRS added that it is currently developing a new rulemaking that will complement the final regulations issued in T.D. 9996. In contrast to the final regulations, which address the standards for granting relief under Code Sec. 2642(g)(1) for a failure to make a timely allocation or election, the forthcoming proposed regulations would address the practical effect of a grant of relief and would clarify the interplay between affirmative allocations and automatic allocations. Paragraphs in the final regulations have been reserved to accommodate the forthcoming proposed regulations.

For a discussion of the relief provided under Code Sec. 2642(g)(1), see Parker Tax ¶229,520.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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