Final Basis Consistency Regulations, Like Earlier GST Election Regulations, Are Very Responsive to Public Comments

Capital Letter No. 62

October 4, 2024

By Ronald D. Aucutt and Beth Shapiro Kaufman

The final basis consistency regulations, released September 16, 2024, show significant improvements over the proposed regulations and continue to illustrate the seriousness with which Treasury and the IRS view comments from the public.

Preface (by Ron): In October 2006, at the suggestion of ACTEC Vice President Bjarne Johnson and with the assistance of Webmaster Bill Crawford, I posted my first Capital Letter. It reviewed how the Senate had scheduled a vote for just after Labor Day in 2005 to take up a House-passed bill that would permanently repeal the federal estate tax, and then abruptly postponed the vote in the wake of the damage done to the Gulf Coast by Hurricane Katrina just before Labor Day. It would have been very awkward for the Senate to consider huge tax cuts for the nation’s wealthiest families when multitudes on the Gulf Coast had been left with nothing. The rescheduled vote on June 8, 2006, fell three votes short, thus likely ending serious prospects for estate tax repeal for at least a generation.

Meanwhile, I promised future Capital Letters, focusing on other developments and projects in the nation’s capital of interest to estate planners. Sixty such Capital Letters followed, as opportunities were presented by actions or proposals of Congress, Treasury, and the IRS. Now, in view of my retirement (albeit not from ACTEC) earlier this year, I have decided that this Capital Letter should be my last. I am pleased that recent actions by Treasury and the IRS have provided good news to write about, confirming their responsiveness to public comments on proposed regulations.

I am even more pleased that Beth Shapiro Kaufman has agreed to join me in writing this Capital Letter and then to continue to write more Capital Letters on her own. As I did for many years, Beth practices law in Washington, D.C. More significantly, she served for over six years in the Treasury Department’s Office of Tax Policy, first as Attorney Advisor and then as Associate Tax Legislative Counsel, with principal responsibility for tax policy matters involving the estate, gift, and GST taxes and the income taxation of trusts and estates. She has been an ACTEC Fellow since 2004 (shortly after she left Treasury and returned to private practice), is currently completing a three-year term as chair of the Estate and Gift Tax Committee, and has chaired the Washington Affairs Committee and the Tax Policy Study Committee. Capital Letters 63 and following will be very meaningful, and readers will not want to miss them.

Preface (by Beth): I am honored to join Ron on this Capital Letter. I want to take this opportunity to thank Ron for his 62 Capital Letters and everything else he has done to educate and inform ACTEC Fellows. While I will never be able to fill Ron’s shoes, I will do my best to bring you insights from “inside the beltway.”

BASIS CONSISTENCY REGULATIONS: BACKGROUND

Section 1014(a)(1) states that the basis of property acquired from a decedent is generally “the fair market value of the property at the date of the decedent’s death,” the same as the estate tax value. That naturally creates a tension between the desires for the estate tax value to be as low as possible and for the basis to be as high as possible. That tension is aggravated when the asset in question is not part of the residue or other source for paying the estate tax. It is possible for the recipient of property from a decedent to claim, for income tax purposes, that the executor somehow just got the estate tax value too low, and that the heir’s basis should be greater than the estate tax value. Usually, of course, such claims would be made after the statute of limitations has run on the estate tax return. Such claims can be accompanied by appraisals and other evidence of the “real” date-of-death value that, long after death, is hard to refute. Invoking principles of “privity,” the IRS has usually been able to insist on using the lower estate tax value when the recipient was one of the executors who signed the estate tax return, but otherwise it had no tool to enforce such consistency.

Van Alen v. Commissioner, T.C. Memo. 2013-235, however, created confusion about the role of a duty of consistency in determining the basis of property in the hands of heirs. In Van Alen, a brother and sister had inherited a cattle ranch from their father in 1994, with a low “special use” estate tax value under section 2032A. They were not executors; their stepmother was. The heirs sold a conservation easement on the land in 2007 and argued that their basis for determining capital gain should be higher than the estate tax value. The court held their basis to the low estate tax value.

A key to the outcome in Van Alen was that section 1014(a)(3) describes the basis of property acquired from a decedent to be, “in the case of an election under section 2032A, its value determined under such section.” This contrasts with the general rule of section 1014(a)(1), which describes the basis as merely “the fair market value of the property at the date of the decedent’s death,” without using the word “determined.” In addition, the court pointed to the special use valuation agreement, which the two heirs (one, a minor, by his mother as his guardian ad litem) had signed. Consistently with this rationale for its holding, the court cited Rev. Rul. 54-97, 1954-1 C.B. 113 (“the value of the property as determined for the purpose of the Federal estate tax … is not conclusive but is a presumptive value which may be rebutted by clear and convincing evidence”), and observed that “it might be reasonable for taxpayers to rely on this revenue ruling if they were calculating their basis under section 1014(a)(1).”

Surprisingly, however, the court also seemed to view heirs who were not executors as bound by a “duty of consistency” to use the value determined for estate tax purposes as their basis for income tax purposes. The court spoke of a “sufficient identity of interests” between the heirs and the executor and concluded that “we rest our holding on the unequivocal language of section 1014(a)(3) …. And we rest it as well on a duty of consistency that is by now a background principle of tax law.”

While “consistency” is superficially an appealing objective, the notion that it might apply generally to the basis of an heir who was not an executor may be more novel and more troubling than the court seems to have realized. The court acknowledged that “there are lots of cases that hold that the duty of consistency binds an estate’s beneficiary to a representation made on an estate-tax return if that beneficiary was a fiduciary of the estate.” But the court then went on to say: “But the cases don’t limit us to that situation and instead say that the question of whether there is sufficient identity of interests between the parties making the first and second representation depends on the facts and circumstances of each case.” The problem is that the court cited the same three cases for both propositions, and all three cases involved the basis of an heir who was a co-executor. Thus, Van Alen appears to stand alone for applying a duty of consistency to the basis of an heir who was not an executor, although the Van Alen holding does have the alternative ground of the word “determined” in section 1014(a)(3), applicable only in special use valuation cases.

Then, on July 31, 2015, the day that funding for the Highway Trust Fund was scheduled to expire, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (Public Law 114-41), extending that infrastructure funding for three months, with the $8 billion cost funded by various tax compliance measures. One of those was section 2004 of the Act, labelled “Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent,” which of course has nothing to do with highways or veterans’ health care other than it was estimated to raise just the right amount of money, when combined with the other revenue raisers in the bill, to fund that desired extension of the Highway Trust Fund. Such legislation (then applicable to gifts as well as transfers at death) had been called for by the Obama Administration’s annual budget revenue proposals (popularly called “Greenbooks”), and statutory language for such proposals had appeared in bills introduced in each Congress since 2010. The proposal (then limited to transfers at death) was adopted by Ways and Means Committee Chair Dave Camp’s “Discussion Draft” released February 26, 2014, and then as a “pay-for” endorsed by then Ways and Means Committee Chair Paul Ryan on July 13, 2015, for the bill that became law 18 days later on July 31.

Interestingly, Representative Camp’s “Discussion Draft” stated that this “pay-for” was estimated by the staff of the Joint Committee on Taxation to increase revenue over ten fiscal years by $1.6 billion. That seems high, for at least two reasons. First, the basis consistency rule will result in additional tax only in a case where there is a death, the estate is subject to estate tax, then there is appreciation in value, and then there is, for example, a sale, all within the roughly nine years that would result in tax being paid within the next ten fiscal years. Second, it does not impose any new or higher tax in that case, but (aside from the effect of penalties) raises revenue only to the extent that persons receiving property from estates subject to estate tax (as described below) would have otherwise overstated the basis of that property during that time by several billions of dollars (in order to evade the payment of $1.6 billion of tax) when they have a realization event such as a sale – a prediction that many might view as unduly cynical. In any event, it is ironic that this estimated ten-year revenue increase was reportedly intended to offset just a three-month extension of the Highway Trust Fund.

Under the legislation, new section 1014(f) requires in general that the basis of property “whose inclusion in the decedent’s estate increased the liability for the [estate] tax” may not exceed the value as finally determined for estate tax purposes, or, if there is no final determination (as in the case of property that is sold while an estate tax audit is still in progress, or is sold within the statutory period of limitations before an estate tax audit has begun) the value reported on the estate tax return. New section 6035 requires every executor (or person in possession of property with the statutory duties of an executor) who is required to file an estate tax return – that is, in general, if the gross estate plus adjusted taxable gifts exceeds the applicable filing threshold, even if there is no estate tax because of charitable or marital deductions – to “furnish to the Secretary [that is, the IRS] and to each person acquiring any interest in property included in the decedent’s gross estate for Federal estate tax purposes a statement identifying the value of each interest in such property interests as reported on such return and such other information with respect to such interest as the Secretary may prescribe.” Under section 6035(a)(3), this statement appears to be due 30 days after the estate tax return is filed or, if the return is filed after its due date (including extensions), 30 days after that due date, and every such statement must be supplemented if a value is adjusted, for example on audit. The legislation also added penalties for failure to file a required statement and for reporting basis inconsistently with such a statement.

IMPROVEMENTS MADE IN THE FINAL REGULATIONS

Proposed regulations regarding this new legislation were released rather promptly, on March 2, 2016. Proposed Reg. §§1.1014-10 & 1.6035-1 (REG-127923-15), 81 Fed. Reg. 11486-11496 (March 4, 2016). Treasury and the IRS received approximately 30 written comments and held a public hearing on June 27, 2016. The comments, including ACTEC’s comments, and statements at the hearing identified some issues with the proposed regulations, including three issues (discussed in detail below) that were seen as most troublesome:

a 30-day deadline for furnishing the required statements,
a zero-basis rule for after-discovered and other omitted assets, and
a requirement for recipients of assets to report further transfers with similar statements.

Meanwhile, the IRS had developed Form 8971 (January 2016) for reporting the required information to the IRS, including a Schedule A that is to be provided both to the IRS and to each respective estate beneficiary, and Instructions (revised in September 2016) that affirm the 30-day deadline.

Treasury-IRS Priority Guidance Plans in the Trump Administration included a new part titled “Burden Reduction” (“Near-Term Burden Reduction” in the 2017-2018 Plan), and the publication of final basis consistency regulations was placed in that part. That provided at least tentative encouragement that some or all of those three troublesome elements of the proposed regulations would be relaxed in final regulations. Although the Biden Administration’s Priority Guidance Plans have not included a separate “Burden Reduction” part and have placed the basis consistency regulations under the more traditional heading of “Gifts and Estates and Trusts” (as Item 2 in the 2023-2024 Plan) there has been no reason to think that the Treasury and IRS personnel involved would have changed their expectation of “burden reduction.” And indeed, the final basis consistency regulations released September 16 (T.D. 9991, 89 Fed. Reg. 76356-76387 (Sept. 17, 2024)) provide very welcome, burden-reducing, relief.

The 30-Day Reporting Deadline

Proposed Reg. §1.6035-1(d)(1) affirmed the due date for reporting that is suggested in section 6035(a)(3) – generally 30 days after the due date (including any extensions) or the filing of the estate tax return. The chief concern with that due date, of course, is that for many estates (particularly estates large enough to be required to file a federal estate tax return) one month after filing the return is way too soon for an executor to know which beneficiaries will receive which assets. With respect to that problem, the Instructions to Form 8971 candidly acknowledge (emphasis added): “All property acquired (or expected to be acquired) by a beneficiary must be listed on that beneficiary’s Schedule A. If the executor hasn’t determined which beneficiary is to receive an item of property as of the due date of the Form 8971 and Schedule(s) A, the executor must list all items of property that could be used, in whole or in part, to fund the beneficiary’s distribution on that beneficiary’s Schedule A. (This means that the same property may be reflected on more than one Schedule A.) A supplemental Form 8971 and corresponding Schedule(s) A may, but aren’t required to, be filed once the distribution to each such beneficiary has been made.”

Ironically, Schedule A of Form 8971 itself prominently includes what it calls a “Notice to Beneficiaries,” stating (italic emphasis added): “You have received this schedule to inform you of the value of property you received from the estate of the decedent named above. Retain this schedule for tax reporting purposes. If the property increased the estate tax liability, Internal Revenue Code section 1014(f) applies, requiring the consistent reporting of basis information. For more information on determining basis, see IRC section 1014 and/or consult a tax professional.”

It is striking that the Instructions refer to property “expected to be acquired” while the Schedule A itself refers to “property you received.” This perhaps unintended interchangeability of “received” and “to be acquired” provoked a theme that was seen in the comments on the proposed regulations – namely, that a beneficiary who has not yet received (and may never receive) a particular asset has no need for basis information regarding that asset, and providing such information serves no discernable purpose of section 1014(f). Moreover, furnishing such information to a beneficiary or prospective beneficiary would have the troubling potential of appearing to promise receipt of an asset that will never be received or, at a minimum, creating confusion and tension among beneficiaries when they see what they might have received but other beneficiaries receive instead.

In the final regulations, Treasury and the IRS demonstrate agreement with those concerns and, in Reg. §1.6035-1(c)(3)(i), they retain the 30-days-after-filing-the-estate-tax-return due date only for property that is distributed or otherwise received by beneficiaries before that due date, including property received upon the decedent’s death under a contract (such as life insurance) or governing law (such as property held as joint tenants with right of survivorship). For property subsequently acquired by a beneficiary, Reg. §1.6035-1(c)(3)(ii) extends the due date to January 31 of the year following that acquisition. The preamble to the final regulations notes that this approach follows from the conclusion that “it is appropriate to interpret the term acquiring consistent with its most common meaning and consistent with the discretionary authority granted in section 6035(b) to provide a due date” and agrees that a January 31 due date “would minimize those burdens while nevertheless ensuring that every beneficiary acquiring property from the decedent would have the information necessary for filing a timely income tax return reporting a sale or other relevant event regarding this property.” Reg. §1.6035-1(c)(4) adds a description, dependent on local law, of when property is “acquired” for this purpose. Reg. §1.6035-1(c)(5) gives the executor the option of furnishing the information to a beneficiary on a Schedule A before the beneficiary’s acquisition of the property, “provided that the executor has reason to believe that the beneficiary will acquire that property,” subject to a requirement to correct that information in a supplemental Schedule A if a different beneficiary ultimately acquires the property. And, with some clarification and elaboration, Reg. §1.6035-1(d) retains guidance on the need in general to supplement a Schedule A, particularly if there is a change in value for estate tax purposes or a change or addition of property subject to reporting.

Relieving the executor of the stress of providing beneficiaries information about property before that property is allocated and distributed to a beneficiary is a very significant, logical, and welcome “burden reduction” in the final regulations.

The “Zero-Basis” Rule

Proposed Reg. §1.1014-10(c)(3)(i)(B) would have required that after-discovered and otherwise omitted property that is not reported on an initial or supplemental estate tax return before the estate tax statute of limitations runs (thus including all omissions discovered after the statute runs) would be given a value, and therefore a basis, of zero. Moreover, if the after-discovered or otherwise omitted property would have increased the gross estate enough to cause an estate tax return to be required, but no estate tax return was filed, Proposed Reg. §1.1014-10(c)(3)(ii) would have mandated that the estate tax value of all property subject to the consistency rule would be considered to be zero. Thus, a very innocent omission by the executor could result in a very harsh penalty for beneficiaries.

Many observers, including ACTEC and others who commented on the proposed regulations, viewed the statutory support for these zero basis rules as very questionable. Section 1014(f)(1) states (emphasis added): “The basis of any property to which subsection (a) applies shall not exceed (A) in the case of property the final value of which has been determined for purposes of the tax imposed by chapter 11 on the estate of such decedent, such value, and (B) in the case of property not described in subparagraph (A) and with respect to which a statement [Schedule A] has been furnished under section 6035(a) identifying the value of such property, such value.” For after-discovered and omitted property, there appears to be neither a determination of final value nor a Schedule A furnished, and section 1014 (f) therefore does not apply, leaving the statutory rule of section 1014(a)(1) that the basis of property acquired from a decedent is generally “the fair market value of the property at the date of the decedent’s death.” And, ironically, the only explicit delegation of regulatory authority in section 1014(f) is the provision in section 1014(f)(4) that “the Secretary may by regulations provide exceptions to the application of this subsection” (emphasis added). Adding a zero-basis rule for assets not described in section 1014(f)(1) would not seem to qualify as an “exception.”

The preamble to the final regulations states that Treasury and the IRS do not agree that the proposed zero-basis rule is beyond their regulatory authority. (The preamble cites the authority in section 1014(f)(3)(B) for the IRS to specify the value of property not reported on an estate tax return, although the addition to section 1014(f)(3)(B) of the words “not timely contested by the executor” strongly suggests that Congress anticipated that this would occur case-by-case in an audit context, not in a regulation.) Nevertheless, the preamble agrees that the zero-basis rule “primarily impacts the recipients of unreported property, who may have had no knowledge of or involvement in the failure to report the property for Federal estate tax purposes, but, nevertheless, have an increased tax burden under the rule.” Accordingly, the final regulations achieve burden reduction by abandoning the zero-basis rule.

The Ongoing Reporting by Recipients of Assets

Proposed Reg. §1.6035-1(f) would have imposed a seemingly open-ended requirement on a recipient of a Schedule A to in turn furnish a Schedule A when making any gift or other retransfer of the property to a “related transferee” that results wholly or partly in a carryover basis for that transferee. The preamble to the proposed regulations cited the authority granted in section 6035(b)(2) to “prescribe such regulations as necessary to carry out this section” and also expressed a concern “that opportunities may exist in some circumstances for the recipient of such reporting to circumvent the purpose of the statute (for example, by making a gift of the property to a complex trust for the benefit of the transferor’s family).” But, while such property does indeed continue to have a basis determined in part with reference to the value at the time of someone’s death in the past, section 6035(a)(1) imposes the reporting requirement only on an “executor,” and section 1014(a) itself (which is incorporated by section 1014(f)(1)) applies only to property acquired “from a decedent,” again creating doubt about the statutory authority for applying the reporting requirement to future donors who are not “executors.”

In the preamble to the final regulations, Treasury and the IRS note the potential enforcement benefits of such an ongoing reporting requirement, but, in response to comments, also concede (in language echoing their observation about the proposed zero-basis rule) that “the burden of the proposed subsequent reporting requirement, including the potential penalties for noncompliance, is too heavy a burden to impose on individual beneficiaries who, as a practical matter, may have no way of knowing of the existence of, or of how to comply with, this subsequent reporting requirement.” (Indeed, it seemed that the reporting requirement would have applied even in cases where no gift tax return was required, such as an annual exclusion gift or a like-kind exchange.) The preamble continues: “Accordingly, the final regulations retain a reporting requirement for subsequent transfers, but this requirement is narrowed significantly.” Under Reg. §1.6035-1(h)(1), that requirement is limited to trustees of trusts that acquire property from a decedent or by reason of the decedent’s death, referred to in the regulations as “beneficiary trusts.” Although such trustees are technically not “executors” either, it could be rationalized that until the property vests in an individual or individuals it is still being transferred, in effect, from the decedent’s estate via the trustee. Moreover, unlike the typical individual beneficiary, who, as the preamble observes, “may have no way of knowing of the existence of, or of how to comply with, this subsequent reporting requirement,” trustees are fiduciaries that often will have experience with these rules. Even an individual who is a trustee of just one trust will often realize that the trust requires special care in administration, and will have an idea whom to ask for advice and help. Thus, in this case too, significant “burden reduction” has been achieved, although the regulations applicable to trusts are a bit complicated and may need to be further refined.

Other Changes

There are other changes in the final regulations that respond to comments Treasury and the IRS received. Reg. §1.6035-1(f)(2) provides clarifications and expansions of the exceptions from the reporting requirements, including

limiting the reference to “cash” to “United States dollars” but expanding it to include certain deposits, life insurance proceeds payable in one lump sum, and tax and other refunds,
adding notes that are forgiven in full at the decedent’s death, whether or not denominated in United States dollars,
changing “tangible personal property” to “household and personal effects” to conform more closely with Reg. §20.2031-6(b),
elaborating the types of excepted sales, exchanges, or other dispositions prior to distribution from the estate or revocable trust,
enumerating property that under other provisions of the Internal Revenue Code has a basis that is not in any way determined with regard to or derived from the property’s fair marker value for estate tax purposes, and
authorizing the addition of other exceptions, including by guidance published in the Internal Revenue Bulletin (sometimes called “subregulatory guidance”), thus allowing the IRS to respond to further suggestions more efficiently.

In addition, Reg. §1.1014-10(e) clarifies and expands the examples in the regulations. These all appear to be helpful changes.

THE FINAL GST TAX ELECTION REGULATIONS

The “Burden Reduction” part of the Treasury-IRS Priority Guidance Plans in the Trump Administration included just one other project related to estate planning beside the final basis consistency regulations. That project (in the 2023-2024 Plan also under the heading of “Gifts and Estates and Trusts” as Item 8) is “Final regulations under §2642(g) describing the circumstances and procedures under which an extension of time will be granted to allocate GST exemption.” Those proposed regulations were published in 2008. Interestingly, the final regulations were published on May 6, 2024, only a little over four months before the basis consistency regulations with which they shared this “burden reduction” history. And, again interestingly, those GST tax final regulations likewise delivered on the implicit promise of “burden reduction” and provide confirmation of the attention Treasury and the IRS give to comments from the public.

Background

Section 564(a) of the 2001 Tax Act added subsection (g)(1) to section 2642, directing Treasury to publish regulations providing for extensions of time to allocate GST exemption, to elect out of statutory automatic allocations of GST exemption under section 2632(b)(3), or to treat a trust as a GST trust as defined in section 2632(c)(3)(B) (when those actions are missed on the applicable return or a return is not filed). Before the 2001 Tax Act, similar extensions of time under Reg. §301.9100-3 (so-called “9100 relief”) were not available, because the deadlines for taking such actions were prescribed by the Code, not by the regulations, and Reg. §301.9100-3(a) limits 9100 relief to “regulatory elections.”

Section 2642(g)(1)(B) adds: “In determining whether to grant relief under this paragraph, 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 under this paragraph, the time for making the allocation (or election) shall be treated as if not expressly prescribed by statute.”

Section 2642(g)(1), having been enacted by the 2001 Tax Act, was once scheduled to “sunset” on January 1, 2011, and then on January 1, 2013, but since then has been permanent.

Shortly after the enactment of the 2001 Tax Act, Notice 2001-50, 2001-2 C.B. 189, acknowledged the recently enacted legislation and stated that in view of the deemed nonstatutory character of the relevant deadlines conferred by section 2642(g)(1)(B) taxpayers may seek extensions of time to take those actions under Reg. §301.9100-3. The IRS has received and granted hundreds if not thousands of requests for such relief over the years since the publication of Notice 2001-50. Thus, although it took seven years after the legislation to publish proposed regulations and 16 more years to issue final regulations, the objectives of section 2642(g) were being served in the meantime by Reg. §301.9100-3 and Notice 2001-50.

In addition, Rev. Proc. 2004-46, 2004-2 C.B. 142, provides a simplified method of dealing with pre-2001 gifts that meet the requirements of the annual gift tax exclusion under section 2503(b) but not the special tax-vesting requirements applicable for GST tax purposes to gifts in trust under section 2642(c)(2). Gifts subject to Crummey powers are an example. In such cases, GST exemption may be allocated on a Form 709 labeled “FILED PURSUANT TO REV. PROC. 2004-46,” whether or not a Form 709 had previously been filed for that year. Post-2000 gifts are addressed by the expanded deemed allocation rules of section 2632(c), also enacted by the 2001 Tax Act. Rev. Proc. 2004-47, 2004-2 C.B. 169, provides similar simplified relief from the failure to make a timely reverse QTIP election under section 2652(a)(3).

Reg. §26.2642-7 was published, in proposed form, in April 2008 (REG-147775-06, 73 Fed. Reg. 20870-20877 (April 17, 2008)) and, as a final regulation, in May 2024 (T.D. 9996, 89 Fed. Reg. 37116-37127 (May 6, 2024)).

The regulations include a new Reg. §301.9100-3(g)(1), stating: “The procedures set forth in this section are not applicable for requests for relief under section 2642(g)(1). For requests for relief under section 2642(g)(1), see §26.2642-7 of this chapter.” In other words, Reg. §26.2642-7 supersedes Reg. §301.9100-3 in situations to which it applies and is now the exclusive basis for seeking the extensions of time Congress mandated in section 2642(g)(1), except that the simplified procedures for dealing with pre-2001 annual exclusion gifts under Rev. Proc. 2004-46 and reverse QTIP elections under Rev. Proc. 2004-47 are retained. In addition, a request for relief under Reg. §301.9100-3 pursuant to Notice 2001-50 that had been filed before May 6, 2024, would continue to be processed unless the applicant elected to withdraw it and resubmit a request under the new regulations.

The regulations apply to

allocations of GST exemption under section 2632(a) (as the Priority Guidance Plans have cited),
elections out of automatic allocations of GST exemption under section 2632(b)(3) for direct skips,
elections out of automatic allocations of GST exemption under section 2632(c)(5)(A)(i) for indirect skip transfers to a GST trust defined in section 2632(c)(3)(B), and
elections under section 2632(c)(5)(A)(ii) to treat any trust as a GST trust for purposes of section 2632(c).

The regulations resemble Reg. §301.9100-3, but with some important differences that will now be analyzed from the perspective of “burden reduction.”

Substantive Tests

Under Reg. §26.2642-7(d)(1), the general basis for relief, similar to Reg. §301.9100-3(a), is still “that the transferor or the executor of the transferor’s estate provides evidence (including the affidavits described in paragraph (i) of this section) establishing to the satisfaction of the IRS that the transferor or the executor of the transferor’s estate acted reasonably and in good faith, and that the grant of relief will not prejudice the interests of the government” (emphasis added).

Reg. §26.2642-7(d)(2) sets forth “a nonexclusive list of factors that will be considered in determining whether the transferor or the executor of the transferor’s estate acted reasonably and in good faith for purposes of this[regulation].” Those five factors are

(i) the intent of the transferor to make a timely allocation or election, which could include “evidence of the intended GST tax status of the transfer or the trust” (discussed below),

(ii) intervening events beyond the control of the transferor or executor,

(iii) lack of awareness by the transferor or executor of the need to allocate GST exemption to the transfer, despite the exercise of reasonable diligence,

(iv) consistency by the transferor, including a “consistent pattern of allocation of GST exemption” or of making related elections, and

(v) reasonable reliance by the transferor or executor on the advice of a qualified tax professional.

Reg. §26.2642-7(d)(3) sets forth “a nonexclusive list of factors that will be considered to determine whether the interests of the government would be prejudiced for purposes of this [regulation].” Those three factors are

(i) the extent to which the request for relief is “an attempt to benefit from hindsight” (discussed below),

(ii) the timing of the request for relief, and

(iii) any intervening taxable termination or taxable distribution.

Notably, the regulations invite more deliberate weighing of all those factors (to the extent they are relevant) than does Reg. §301.9100-3, particularly with respect to acting reasonably and in good faith, for which Reg. §301.9100-3(b)(1) offers five alternative standards set off by the word “or.” The preamble indicates that comments on the proposed regulations recommending that the final regulations allow any one factor to be determinative were not adopted. Reg. §26.2642-7(d)(2), however, adds this clarification: “Not all of these factors may be relevant in a particular situation (and those that are not relevant are not required to be addressed in the request for relief …). Further, it is possible that the evidence relating to any one of these factors, in the context of all of the facts and circumstances of the particular situation, may be sufficient to persuade the IRS that the grant of relief under section 2642(g)(1) would be appropriate. However, as a general rule, no single factor (whether listed or not) will be determinative in all cases.”

This greater rigor required by the regulations compared to the 9100 relief regulations could appear inconsistent with the objective of “burden reduction.” But it is consistent with the mandate of section 2642(g)(1)(B) (quoted in full above) to “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.” And it is consistent with the obvious distinctive feature of the GST tax – a mistake might not be discovered for a long time, even for generations. This contrasts with many income tax “9100 relief” cases, in which the election affects only a current year or a few years, and the failure to make the election on one year’s income tax return might be discovered when preparing the return for the following year or just a few years later.

Moreover, the expansion of relevant factors to include the grantor’s or testator’s intent as shown in the applicable document might actually provide more access to relief. If, for example, “evidence of intent” could include simply the fact that a trust by its terms is designed to last a long time and span several generations, especially if distributions to older generations are governed by strict standards, then it should be easy to argue from those terms that the trust was intended to be exempt from GST tax to the extent available GST exemption might allow. That path to relief could indeed be burden-reducing.

“Hindsight,” which could be both a form of bad faith and a way the interests of the government are prejudiced, is a focus of the regulations. That is also consistent with section 2642(g)(1)(B) and with the nature of the GST tax – there simply is more opportunity for “hindsight” over such a long term. Reg. §26.6242-7(d)(3)(i) offers this example: “For instance, assume that a transferor funds several trusts with different property interests on the same date, and does not allocate GST exemption to any trust. Several years later, the transferor seeks relief to allocate GST exemption to the trust that enjoyed the greatest asset appreciation and thus constitutes the most effective use of the transferor’s GST exemption. Relief will not be granted because the transferor attempted to benefit from hindsight and thereby acquire an economic advantage.” It is hard to argue with that.

Evidentiary Requirements

In contrast, Proposed Reg. §26.2642-7(h)(3)(i)(D) would have required a request for relief to be accompanied by “detailed affidavits” from “each tax professional who advised or was consulted by the transferor or the executor of the transferor’s estate with regard to any aspect of the transfer, the trust, the allocation of GST exemption, and/or the election under section 2632(b)(3) or (c)(5)” (emphasis added). The references to “any aspect of the transfer” and “the trust” appeared to go far beyond the procedural requirement of Reg. §301.9100-3(e)(3) for “detailed affidavits from the individuals having knowledge or information about the events that led to the failure to make a valid regulatory election and to the discovery of the failure.” For example, if the transfer in question (for which the appropriate allocation of exemption or other action was not timely made) was an addition made to a trust that had been created 30 years earlier, a professional who advised only with respect to “the trust” – specifically, only the creation of the trust – would have nothing relevant to contribute, and quite possibly would not even be available.

Thus, it is encouraging (and consistent with the “burden reduction” objective) that in the final regulations this provision, redesignated Reg. §26.2642-7(i)(4)(i)(D), limits the requirement for affidavits to “each tax professional who advised or was consulted by the transferor or the executor of the transferor’s estate with regard to the allocation of GST exemption, the election under section 2632(b)(3) or (c)(5), or the preparation of the relevant Federal estate or gift tax return or returns” (emphasis added). Similarly, Reg. §26.2642-7(i)(4)(i)(A) requires affidavits only from “each agent or legal representative of the transferor who participated in the consideration of, or the decision with regard to, the allocation of GST exemption or the election under section 2632(b)(3) or (c)(5)” (emphasis added), a relaxation of Proposed Reg. §26.2642-7(h)(3)(i)(A), which would have extended that requirement to “each agent or legal representative of the transferor who participated in the transaction” (emphasis added).

The preamble to the final regulations explains these changes as follows (emphasis added): “In response to … comments, the Treasury Department and the IRS have modified the regulations by narrowing the categories of individuals required to submit affidavits…. Specifically, the final regulations do not include in this group of required affiants any tax professional unless that professional participated in or provided advice with regard to the GST tax exemption allocation or election, or with regard to the preparation of the return. As a result, the final regulations reduce the burden the proposed regulations would have imposed.” This relaxation of the need for affidavits is indeed a welcome burden reduction.

Scope of Relief

Proposed Reg. §26.2642-7(e)(1) would have denied relief to “decrease or revoke a timely allocation of GST exemption as described in §26.2632-1(b)(4)(ii)(A)(1), or to revoke an election under section 2632(b)(3) or (c)(5) [the election-out provisions] made on a timely filed Federal gift or estate tax return.” Renumbered as Reg. §26.2642-7(e)(2) in the final regulations, that denial of relief is limited to “an affirmative (but not automatic) allocation of GST exemption under section 2632(a) or 2642(b).” In explaining the deletion of the election-out provisions, the preamble acknowledges that “no statute … provides that an election made under section 2632(b)(3) or (c)(5) is irrevocable.” The regulations add what they call “three exceptions”:

An allocation to the extent the amount allocated exceeds the amount necessary to obtain an inclusion ratio of zero, which is void and does not require a request for relief. (This provision does not apply to charitable lead annuity trusts, nor to allocations made to trusts subject to an estate tax inclusion period before the termination of that period.)
An allocation to a trust that, at the time of the allocation, has no GST potential with respect to the transferor making the allocation, which is also void and does not require a request for relief.
Certain late allocations made before 2001.

User Fee

The current IRS user fee for a letter ruling (except for taxpayers with gross income less than $1 million) is $38,000, but for “9100 relief,” as under Notice 2001-50, the current user fee is only $12,600. Rev. Proc. 2024-1, Appendix A, ¶(A)(3)(c), 2024-1 I.R.B. 1, 86. The new regulations supersede 9100 relief, thus raising the question whether the publication of final regulations will cause the user fee for such taxpayers to be more than three times greater, despite the previous appearance of these regulations under the heading of “Burden Reduction.”

On this point, the preamble to the final regulations adds (emphasis added): “The Treasury Department and the IRS are prepared to issue additional revenue procedures or other guidance when they identify situations for which simplified or automatic relief under section 2642(g)(1) would be appropriate and administrable [similar, it seems, to Rev. Procs. 2004-46 and 2004-47]. Until such guidance is issued, however, the IRS private letter ruling program will continue to allow the IRS to obtain and evaluate the information necessary to identify such situations. The user fee would follow the same schedule and amount as rulings under §301.9100-1. See Appendix A of Rev. Proc. 2024-1, 2024-1 I.R.B. 1, 85.” That is encouraging, but it will be even more encouraging when it is confirmed in a revenue procedure, especially in light of the statement in new Reg. §301.9100-3(g)(1) that “the procedures [does that include the user fees in Rev. Proc. 2024-1?] set forth in this section are not applicable for requests for relief under section 2642(g)(1).” In our experience to date, the IRS has accepted payment of the user fee in pay.gov designated for 9100 relief as appropriate for a request for relief under section 2642(g).

More Coming

Item 7 of the 2023-2024 Priority Guidance Plan is described as “Regulations under §2632 providing guidance governing the allocation of generation-skipping transfer (GST) exemption in the event the IRS grants relief under §2642(g), as well as addressing the definition of a GST trust under §2632(c), and providing ordering rules when GST exemption is allocated in excess of the transferor’s remaining exemption.” This is evidently related to Item 8 (the May 2024 final regulations) and is intended to address not only the consequences of the relief provided by those regulations but also, as the description says, the definition of a “GST trust” for purposes of the deemed allocation rules of section 2632(c) and ordering rules when too much GST exemption is ostensibly allocated, whether affirmatively or automatically or both (including issues left open by the May 2024 final regulations).

The preamble to the May 2024 final regulations states: “The Treasury Department and the IRS currently are developing a new rulemaking that will complement these final regulations. In contrast to these final regulations, which address the standards for granting relief under section 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 these final regulations have been reserved to accommodate the forthcoming proposed regulations.” (Paragraphs (b)(2) and (f) are those “reserved” paragraphs in the new Reg. §26.2642-7.)

CONCLUSION

Clearly both the basis consistency and GST exemption final regulations have lived up to the “burden reduction” label they once were given. Where appropriate, they strike a balance (as in retaining the ongoing reporting requirement of the basis consistency regulations while limiting it to trusts) and explain when they cannot go as far as some comments suggested because of a specific statutory requirement (as in retaining the need to weigh many factors in granting an extension of time under the GST exemption regulations). In our opinion, this responsiveness reflects generally the attitude and approach of those in the Treasury Department and the IRS who draft tax regulations. It is natural to view the IRS as an “adversary,” as in a tax audit, although even there an IRS estate tax attorney or appeals officer is often willing to work with taxpayers and their counsel to find solutions to challenging problems. But in the formation of guidance through regulations, there should be no question that the Treasury and IRS personnel involved recognize the benefit of input from organizations like ACTEC and professionals like ACTEC Fellows in developing rules that will serve the relevant tax policy objectives in the most understandable and efficient ways.

Ronald D. Aucutt and Beth Shapiro Kaufman