Part I. Rulings — Internal Revenue Bulletin 2005-31

Section 179.—Election to Expense Certain Depreciable Business Assets

26 CFR 1.179–2: Limitations on amount subject to section 179 election.

T.D. 9209

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602

Section 179 Elections

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the election to expense the cost of property subject to section 179 of the Internal Revenue Code (Code). The regulations reflect changes to the law made by section 202 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 and section 201 of the American Jobs Creation Act of 2004.

DATES: Effective Date: These regulations are effective July 13, 2005.

Applicability Dates: For dates of applicability, see §1.179–6.

FOR FURTHER INFORMATION CONTACT: Winston H. Douglas, (202) 622–3110 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545–1201. The collections of information in these final regulations are in §§1.179–2 and 1.179–5. This information is required by §1.179–2 to ensure that

married individuals filing separate returns properly allocate the cost of section 179 property elected to be expensed in a taxable year and that the dollar limitation is properly allocated among the component members of a controlled group. Also, this information is required by §1.179–5 to ensure the specific identification of each piece of acquired section 179 property and reflect how and from whom such property was placed in service. This information will be used for audit and examination purposes.

Estimated total annual reporting and/or recordkeeping burden: 3,015,000 hours.

The estimated annual burden per respondent/recordkeeper varies from .50 to 1 hour, depending on individual circumstances, with an estimated average of .75 hour.

Estimated number of respondents and/or recordkeepers: 4,025,000

Estimated frequency of responses: Annually

Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments are specifically requested concerning how the burden of complying with the collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains amendments to 26 CFR parts 1 and 602. On August 4, 2004, the IRS and Treasury Department published temporary regulations (T.D. 9146, 2004–36 I.R.B. 408) in the Federal Register (69 FR 46982) relating to the election to expense the cost of property subject to section 179 of the Code. The temporary regulations reflected changes to the law made by section 202 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), Public Law 108–27 (117 Stat. 752). On the same date, the IRS published a notice of proposed rulemaking (REG–152549–03, 2004–36 I.R.B. 451) cross-referencing the temporary regulations in the Federal Register (69 FR 47043). No comments were received from the public in response to the notice of proposed rulemaking and no public hearing was requested or held. However, section 201 of the American Jobs Creation Act of 2004, Public Law 108–357 (118 Stat. 1418), extended the changes that were made by JGTRRA for an additional two years. The proposed regulations are adopted as amended by this Treasury decision, and the corresponding temporary regulations are removed. The revisions are discussed below.

Explanation of Provisions

Scope

The changes made to section 179 by section 202 of JGTTRA were applicable for section 179 property placed in service by a taxpayer in taxable years beginning after 2002 and before 2006. Section 202 of JGTRRA expanded the definition of section 179 property to include off-the-shelf computer software (a category of intangible property) and increased the $25,000 and $200,000 limitation amounts of section 179(b)(1) and (b)(2), respectively, to $100,000 and $400,000, respectively. In addition, the $100,000 and $400,000 amounts were indexed annually for inflation for taxable years beginning after 2003 and before 2006. JGTRRA also modified section 179 to provide that any election

2005–31 I.R.B. 153 August 1, 2005

The revisions and additions read as follows:

§1.179–0 Table of contents for section 179 expensing rules.

§1.179–2 Limitations on amount subject to section 179 election.

- - - (b) - * (1) In general. (2) Excess section 179 property.

§1.179–4 Definitions.

(a) Section 179 property.

§1.179–5 Time and manner of making election.

- - - (c) Section 179 property placed in service by the taxpayer in a taxable year beginning after 2002 and before 2008.

(d) Election or revocation must not be made in any other manner.

§1.179–6 Effective dates.

(a) In general. (b) Section 179 property placed in service by the taxpayer in a taxable year beginning after 2002 and before 2008.

§1.179–2 [Amended]

Par. 3. Section 1.179–2 is amended by revising paragraphs (b)(1) and (b)(2)(ii) to read as follows:

§1.179–2 Limitations on amount subject to section 179 election.

- - - (b) Dollar limitation —(1) In general . The aggregate cost of section 179 property that a taxpayer may elect to expense under section 179 for any taxable year beginning in 2003 and thereafter is $25,000 ($100,000 in the case of taxable years beginning after 2002 and before 2008 under section 179(b)(1), indexed annually for inflation under section 179(b)(5) for taxable years beginning after 2003 and before

or specification for taxable years beginning after 2002 and before 2006 may be revoked by the taxpayer with respect to any section 179 property, and that such revocation, once made, shall be irrevocable. With respect to a taxable year beginning after 2002 and before 2006, the conference agreement permitted taxpayers to make or revoke an expensing election on an amended Federal tax return without the consent of the Commissioner. The temporary regulations reflected the changes to section 179 made by section 202 of JGTTRA.

Subsequent to the issuance of the proposed regulations and the temporary regulations, the American Jobs Creation Act of 2004 (AJCA) was enacted. Section 201 of AJCA extends the changes that were made by JGTTRA for an additional two years. The final regulations retain the rules relating to the JGTTRA changes contained in the temporary regulations. The final regulations also apply the AJCA’s two-year extension of the JGTTRA changes to section 179 property placed in service by a taxpayer in a taxable year beginning after 2002 and before 2008.

Manner of Making an Election or Revoking an Election Under Section 179

The final regulations provide that for any taxable year beginning after 2002 and before 2008, a section 179 election or a revocation of a section 179 election may be made on an amended Federal tax return for that taxable year to which the election or revocation applies. For any taxable year beginning before 2003, a late section 179 election or a revocation of a section 179 election generally is made by a taxpayer submitting a request for a letter ruling. Accordingly, the final regulations clarify that a section 179 election or a revocation of a section 179 election generally must not be made in any other manner (for example, a section 179 election or revocation of a section 179 election cannot be made through a request under section 446(e) to change the taxpayer’s method of accounting).

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment

is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the amount of time necessary to record and retain the required information will be minimal for those taxpayers electing to expense the cost of section 179 property. The estimated annual burden for each such taxpayer varies from .50 to 1 hour, depending on individual circumstances, with an estimated average of .75 hour. Therefore, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these final regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Winston H. Douglas, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

- - - - *.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.179–0 is amended as follows:

The entries for §1.179–2(b)(1) and (b)(2), §1.179–4(a), and §1.179–5(c) are revised.
The entries for §1.179–5(d) and §1.179–6(a), (b), and (c) are added.
Sections 1.179–2T, 1.179–4T, 1.179–5T, and 1.179–6T are removed.

August 1, 2005 154 2005–31 I.R.B.

expense any portion of the cost basis of the item of section 179 property if no prior election was made) without the consent of the Commissioner. Any such increase in the amount expensed under section 179 is not deemed to be a revocation of the prior election for that particular taxable year.

(3) Revocation —(i) In general . Section 179(c)(2) permits the revocation of an entire election or specification, or a portion of the selected dollar amount of a specification. The term specification in section 179(c)(2) refers to both the selected specific item of section 179 property subject to a section 179 election and the selected dollar amount allocable to the specific item of section 179 property. Any portion of the cost basis of an item of section 179 property subject to an election under section 179 for a taxable year beginning after 2002 and before 2008 may be revoked by the taxpayer without the consent of the Commissioner by filing an amended Federal tax return for that particular taxable year. The amended Federal tax return must include the adjustment to taxable income for the section 179 revocation and any collateral adjustments to taxable income or to the tax liability (for example, allowable depreciation in that taxable year for the item of section 179 property to which the revocation pertains). Such adjustments must also be made on amended Federal tax returns for any affected succeeding taxable years. Reducing or eliminating a specified dollar amount for any item of section 179 property with respect to any taxable year beginning after 2002 and before 2008 results in a revocation of that specified dollar amount.

(ii) Effect of revocation . Such revocation, once made, shall be irrevocable. If the selected dollar amount reflects the entire cost of the item of section 179 property subject to the section 179 election, a revocation of the entire selected dollar amount is treated as a revocation of the section 179 election for that item of section 179 property and the taxpayer is unable to make a new section 179 election with respect to that item of property. If the selected dollar amount is a portion of the cost of the item of section 179 property, revocation of a selected dollar amount shall be treated as a revocation of only that selected dollar amount. The revoked dollars cannot be the subject of a new section 179 election for the same item of property.

2008), reduced (but not below zero) by the amount of any excess section 179 property (described in paragraph (b)(2) of this section) placed in service during the taxable year.

(b) - - (2) - - (ii) $200,000 ($400,000 in the case of taxable years beginning after 2002 and before 2008 under section 179(b)(2), indexed annually for inflation under section 179(b)(5) for taxable years beginning after 2003 and before 2008).

§1.179–2T [Removed]

Par. 4. Section 1.179–2T is removed.

§1.179–4 [Amended]

Par. 5. Section 1.179–4 is amended by revising the introductory text and paragraph (a) to read as follows:

§1.179–4 Definitions.

The following definitions apply for purposes of section 179 and §§1.179–1 through 1.179–6:

(a) Section 179 property . The term sec- tion 179 property means any tangible property described in section 179(d)(1) that is acquired by purchase for use in the active conduct of the taxpayer’s trade or business (as described in §1.179–2(c)(6)). For taxable years beginning after 2002 and before 2008, the term section 179 property includes computer software described in section 179(d)(1) that is placed in service by the taxpayer in a taxable year beginning after 2002 and before 2008 and is acquired by purchase for use in the active conduct of the taxpayer’s trade or business (as described in §1.179–2(c)(6)). For purposes of this paragraph (a), the term trade or business has the same meaning as in section 162 and the regulations under section 162.

§1.179–4T [Removed]

Par. 6. Section 1.179–4T is removed.

§1.179–5 [Amended]

Par. 7. Section 1.179–5 is amended by revising paragraph (c) and adding paragraph (d) to read as follows:

§1.179–5 Time and manner of making election.

- - - (c) Section 179 property placed in ser- vice by the taxpayer in a taxable year be- ginning after 2002 and before 2008 —(1) In general . For any taxable year beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an election under section 179 without the consent of the Commissioner on an amended Federal tax return for that taxable year. This amended return must be filed within the time prescribed by law for filing an amended return for such taxable year.

(2) Election —(i) In general . For any taxable year beginning after 2002 and before 2008, a taxpayer is permitted to make an election under section 179 on an amended Federal tax return for that taxable year without the consent of the Commissioner. Thus, the election under section 179 and §1.179–1 to claim a section 179 expense deduction for section 179 property may be made on an amended Federal tax return for the taxable year to which the election applies. The amended Federal tax return must include the adjustment to taxable income for the section 179 election and any collateral adjustments to taxable income or to the tax liability (for example, the amount of depreciation allowed or allowable in that taxable year for the item of section 179 property to which the election pertains). Such adjustments must also be made on amended Federal tax returns for any affected succeeding taxable years.

(ii) Specifications of elections . Any election under section 179 must specify the items of section 179 property and the portion of the cost of each such item to be taken into account under section 179(a). Any election under section 179 must comply with the specification requirements of section 179(c)(1)(A), §1.179–1(b), and §1.179–5(a). If a taxpayer elects to expense only a portion of the cost basis of an item of section 179 property for a taxable year beginning after 2002 and before 2008 (or did not elect to expense any portion of the cost basis of the item of section 179 property), the taxpayer is permitted to file an amended Federal tax return for that particular taxable year and increase the portion of the cost of the item of section 179 property to be taken into account under section 179(a) (or elect to

2005–31 I.R.B. 155 August 1, 2005

(4) Examples . The following examples illustrate the rules of this paragraph (c):

Example 1 . Taxpayer, a sole proprietor, owns and operates a jewelry store. During 2003, Taxpayer purchased and placed in service two items of section 179 property - a cash register costing $4,000 (5-year MACRS property) and office furniture costing $10,000 (7-year MACRS property). On his 2003 Federal tax return filed on April 15, 2004, Taxpayer elected to expense under section 179 the full cost of the cash register and, with respect to the office furniture, claimed the depreciation allowable. In November 2004, Taxpayer determines it would have been more advantageous to have made an election under section 179 to expense the full cost of the office furniture rather than the cash register. Pursuant to paragraph (c)(1) of this section, Taxpayer is permitted to file an amended Federal tax return for 2003 revoking the section 179 election for the cash register, claiming the depreciation allowable in 2003 for the cash register, and making an election to expense under section 179 the cost of the office furniture. The amended return must include an adjustment for the depreciation previously claimed in 2003 for the office furniture, an adjustment for the depreciation allowable in 2003 for the cash register, and any other collateral adjustments to taxable income or to the tax liability. In addition, once Taxpayer revokes the section 179 election for the entire cost basis of the cash register, Taxpayer can no longer expense under section 179 any portion of the cost of the cash register.

Example 2 . Taxpayer, a sole proprietor, owns and operates a machine shop that does specialized repair work on industrial equipment. During 2003, Taxpayer purchased and placed in service one item of section 179 property - a milling machine costing $135,000. On Taxpayer’s 2003 Federal tax return filed on April 15, 2004, Taxpayer elected to expense under section 179 $5,000 of the cost of the milling machine and claimed allowable depreciation on the remaining cost. Subsequently, Taxpayer determines it would have been to Taxpayer’s advantage to have elected to expense $100,000 of the cost of the milling machine on Taxpayer’s 2003 Federal tax return. In November 2004, Taxpayer files an amended Federal tax return for 2003, increasing the amount of the cost of the milling machine that is to be taken into account under section 179(a) to $100,000, decreasing the depreciation allowable in 2003 for the milling machine, and making any other collateral adjustments to taxable income or to the tax liability. Pursuant to paragraph (c)(2)(ii) of this section, increasing the amount of the cost of the milling machine to be taken into account under section 179(a) supplements the portion of the cost of the milling machine that was already taken into account by the original section 179 election made on the 2003 Federal tax return and no revocation of any specification with respect to the milling machine has occurred.

Example 3 . Taxpayer, a sole proprietor, owns and operates a real estate brokerage business located in a rented storefront office. During 2003, Taxpayer purchases and places in service two items of section 179 property - a laptop computer costing $2,500 and a desktop computer costing $1,500. On Taxpayer’s 2003 Federal tax return filed on April 15, 2004, Taxpayer elected to expense under section 179 the full cost of the laptop computer and the full cost of the desktop computer. Subsequently, Taxpayer de

termines it would have been to Taxpayer’s advantage to have originally elected to expense under section 179 only $1,500 of the cost of the laptop computer on Taxpayer’s 2003 Federal tax return. In November 2004, Taxpayer files an amended Federal tax return for 2003 reducing the amount of the cost of the laptop computer that was taken into account under section 179(a) to $1,500, claiming the depreciation allowable in 2003 on the remaining cost of $1,000 for that item, and making any other collateral adjustments to taxable income or to the tax liability. Pursuant to paragraph (c)(3)(ii) of this section, the $1,000 reduction represents a revocation of a portion of the selected dollar amount and no portion of those revoked dollars may be the subject of a new section 179 election for the laptop computer.

Example 4 . Taxpayer, a sole proprietor, owns and operates a furniture making business. During 2003, Taxpayer purchases and places in service one item of section 179 property - an industrial-grade cabinet table saw costing $5,000. On Taxpayer’s 2003 Federal tax return filed on April 15, 2004, Taxpayer elected to expense under section 179 $3,000 of the cost of the saw and, with respect to the remaining $2,000 of the cost of the saw, claimed the depreciation allowable. In November 2004, Taxpayer files an amended Federal tax return for 2003 revoking the selected $3,000 amount for the saw, claiming the depreciation allowable in 2003 on the $3,000 cost of the saw, and making any other collateral adjustments to taxable income or to the tax liability. Subsequently, in December 2004, Taxpayer files a second amended Federal tax return for 2003 selecting a new dollar amount of $2,000 for the saw, including an adjustment for the depreciation previously claimed in 2003 on the $2,000, and making any other collateral adjustments to taxable income or to the tax liability. Pursuant to paragraph (c)(2)(ii) of this section, Taxpayer is permitted to select a new selected dollar amount to expense under section 179 encompassing all or a part of the initially non-elected portion of the cost of the elected item of section 179 property. However, no portion of the revoked $3,000 may be the subject of a new section 179 dollar amount selection for the saw. In December 2005, Taxpayer files a third amended Federal tax return for 2003 revoking the entire selected $2,000 amount with respect to the saw, claiming the depreciation allowable in 2003 for the $2,000, and making any other collateral adjustments to taxable income or to the tax liability. Because Taxpayer elected to expense, and subsequently revoke, the entire cost basis of the saw, the section 179 election for the saw has been revoked and Taxpayer is unable to make a new section 179 election with respect to the saw.

(d) Election or revocation must not be made in any other manner . Any election or revocation specified in this section must be made in the manner prescribed in paragraphs (a), (b), and (c) of this section. Thus, this election or revocation must not be made by the taxpayer in any other manner (for example, an election or a revocation of an election cannot be made through a request under section 446(e) to change the taxpayer’s method of accounting), except as otherwise expressly provided by

the Internal Revenue Code, the regulations under the Code, or other guidance published in the Internal Revenue Bulletin.

§1.179–5T [Removed]

Par. 8. Section 1.179–5T is removed.

§1.179–6 [Removed]

Par. 9. Section 1.179–6 is removed.

§1.179–6T [Amended]

Par. 10. Section 1.179–6T is redesignated as §1.179–6 and amended as follows:

The first sentence of paragraph (a) is revised.
Paragraph (b) is revised.
Paragraph (c) is added. The revisions and addition read as follows:

§1.179–6 Effective dates.

(a) - - - Except as provided in paragraphs (b) and (c) of this section, the provisions of §§1.179–1 through 1.179–5 apply for property placed in service by the taxpayer in taxable years ending after January 25, 1993. - - * (b) Section 179 property placed in service by the taxpayer in a taxable year beginning after 2002 and before 2008 . The provisions of §1.179–2(b)(1) and (b)(2)(ii), the second sentence of §1.179–4(a), and the provisions of §1.179–5(c), reflecting changes made to section 179 by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (117 Stat. 752) and the American Jobs Creation Act of 2004 (118 Stat. 1418), apply for property placed in service in taxable years beginning after 2002 and before 2008.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 11. The authority citation for part 602 continues to read, in part, as follows: Authority: 26 U.S.C. 7805. Par. 12. In §602.101, paragraph (b) is amended by removing the entries for “1.179–2T” and “1.179–5T” and adding

August 1, 2005 156 2005–31 I.R.B.

a new entry for “1.179–5” in numerical order to the table to read as follows:

CFR part or section where identified and described

§602.101 OMB Control numbers.

(b) - *

Current OMB control No.

1.179–5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1201

revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains amendments to 26 CFR Part 26 under section 2632–1 pertaining to the election under section 2632(c)(5)(A)(i) of the Internal Revenue Code to not have the deemed allocation of unused generation-skipping transfer (GST) tax exemption under section 2632(c)(1) apply with regard to certain transfers to a GST trust, as defined in section 2632(c)(3)(B) and the election under section 2632(c)(5)(A)(ii) to treat a trust as a GST trust.

On July 13, 2004, the IRS published (REG–153841–02, 2004–31 I.R.B. 145) in the Federal Register a notice of proposed rulemaking (69 FR 42000). The IRS received written and oral comments responding to the notice of proposed rulemaking. No public hearing was requested or held. After consideration of all the comments, the proposed regulations are adopted as amended by this Treasury decision, and the corresponding proposed regulations are removed. The comments and revisions to the proposed regulations are discussed below.

Summary of Comments

The proposed regulations generally permitted transferors only two options for electing out of the automatic allocation rules. Transferors could elect out with respect to a current transfer only, or with respect to a current-year transfer and all future transfers to the same trust. Several commentators suggested that the final regulations provide transferors additional options. In response to these comments, the final regulations include the options

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

Approved June 23, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on July 12, 2005, 8:45 a.m., and published in the issue of the Federal Register for July 13, 2005, 70 F.R. 40189)

Section 2632.—Special Rules for Allocation of GST Exemption

26 CFR 26.2632–1: Allocation of GST exemption.

T.D. 9208

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 26 and 602

Election Out of GST Deemed Allocations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final regulations providing guidance for making the election under section 2632(c)(5)(A)(i) of the Internal Revenue Code to not have the deemed allocation of unused generation-skipping transfer (GST) tax exemption under section 2632(c)(1) apply with regard to certain transfers to a GST trust, as defined in section 2632(c)(3)(B). The final regulations also provide guidance for making the election under section

2632(c)(5)(A)(ii) to treat a trust as a GST trust. The regulations primarily affect individuals.

DATES: Effective Date: The regulations are effective June 29, 2005.

Applicability Date: For dates of applicability, see §26.2632–1(e).

FOR FURTHER INFORMATION CONTACT: Mayer R. Samuels, (202) 622–3090 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545–1892. The collection of information in these final regulations is in §26.2632–1(b)(2)(iii) and (b)(3). This information is required by the IRS for taxpayers who elect to have the automatic allocation rules not apply to the current transfer and/or to future transfers to the trust or to terminate such election. This information is also required by the IRS for taxpayers who elect to treat trusts described in section 2632(c)(3)(B)(i) through (vi) as GST trusts or to terminate such election.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal

2005–31 I.R.B. 157 August 1, 2005

apply with respect to any previous transfer to a trust subject to an ETIP that is to close in the future. To apply the election out to prior-year transfers that are subject to an ETIP, the election out statement must specifically describe the prior-year transfers to be covered by the election out, state that those transfers are subject to an ETIP, and state that the transferor wishes to elect out of the automatic allocation to those prior-year transfers. Except in that limited circumstance, the final regulations provide that an election out does not apply to any prior-year transfer to a trust, including a transfer subject to an ETIP, even if the ETIP closes after the election has been made. It should be noted also that, once an affirmative allocation of GST exemption has been made (including to a transfer subject to an ETIP), the allocation may not be revoked.

One commentator recommended that transferors who made indirect skips after December 31, 2000, and before the proposed regulations become final, should be allowed to elect out of the automatic allocation rules on or before April 15th of the calendar year after the year in which the final regulations are published. The Treasury Department and the IRS believe, however, that this extension of the time to elect out of the automatic allocation rules is unnecessary. Notice 2001–50, 2001–2 C.B. 189, (see §601.601(d)(2)(ii)( b ) of this chapter) alerted transferors that regulations would provide that an election under section 2632(c)(5) is to be made on a timely filed Federal gift tax return reporting the transfer. Further, the preamble to the proposed regulations provided that any election made on or before the date of publication of the proposed regulations will be recognized if the election was made on a timely filed Federal gift tax return in a manner that provided adequate notice to the Commissioner that the transferor made the election. Accordingly, this suggestion was not adopted.

Commentators suggested that the regulations include an example addressing the application of the automatic allocation rules for indirect skips in a situation in which a trust subject to an ETIP terminates upon the expiration of the ETIP, at which time the trust assets are distributed to other trusts that may be GST trusts. The Treasury Department and the IRS believe, however, that this issue is outside the

provided in the proposed regulations and, in addition, give transferors the option of electing out with respect to (1) only certain designated future transfers to a trust, or (2) all future transfers made by the transferor to any trust (regardless of whether the trust exists at the time of the election out). Under the final regulations, the transferor may elect out with respect to future transfers even if the transferor has not made a current-year transfer and is not otherwise required to file a Federal gift tax return. Examples have been added illustrating language that may be used in the election out statement to satisfy the requirements for the various election out options.

One commentator suggested that the statements required by the regulations to elect out of the automatic GST allocation or to treat a trust as a GST trust should not require a citation to the specific regulation section that authorizes the election. The final regulations adopt this suggestion.

In response to comments, the final regulations have been clarified to specifically confirm that an election out of the automatic allocation rules for future years is limited to automatic allocations under section 2632(c) (automatic allocations to indirect skips made during the transferor’s lifetime) and has no effect on the automatic allocation rules that apply after the transferor’s death under section 2632(e).

One commentator recommended that the IRS clarify whether the effective date of an automatic allocation is changed if the transfer is reported on a late filed Federal gift tax return. For indirect skips made after December 31, 2000, to which section 2642(f) does not apply, the transferor’s unused GST exemption is automatically allocated to the property transferred. Section 26.2632–1(b)(1)(ii) generally provides that in the case of direct skips, unless the transferor elects out of the automatic allocation rules, the automatic allocation becomes irrevocable on the due date for filing the Federal gift tax return, and the allocation is effective as of the date of the transfer. Thus, even if the Federal gift tax return reporting the transfer is filed late, or no Federal gift tax return is filed, the automatic allocation nevertheless is irrevocable on the due date of that return and takes effect as of the date of the transfer. The final regulations clarify that the same rules apply in the case of an automatic

allocation to an indirect skip under section 2632(c). The automatic allocation is effective as of the date of the transfer, and becomes irrevocable on the due date for filing the Form 709 for the calendar year in which the transfer is made, whether or not a gift tax return is filed reporting the transfer.

Commentators suggested that, if a transferor makes an indirect skip and affirmatively allocates GST exemption in an amount that is less than the value of the property transferred, the transaction should be treated as an allocation of the amount that was affirmatively allocated and an election out of the automatic allocation rules for the value of the property not covered by the exemption amount affirmatively allocated. Treasury and the IRS agree with the commentators that this treatment would give effect to the transferor’s most likely intent to limit the allocation of exemption to the amount that was affirmatively allocated. Accordingly, under the final regulations, an affirmative partial allocation of GST exemption is treated as an election out of the automatic allocation rules with regard to the balance of that specific transfer.

In response to comments, the rules regarding the automatic allocation to an indirect skip subject to an estate tax inclusion period (ETIP) have been revised in conformance with section 2632(c)(4) to provide that the automatic allocation to a direct skip or an indirect skip is deemed to be made at the close of the ETIP. Therefore, under the final regulations, a transferor may elect out of the automatic allocation rules for transfers subject to an ETIP that are either direct skips or indirect skips at any time prior to the due date of the Federal gift tax return for the calendar year during which the ETIP closes. Thus, transferors may elect out of the automatic allocation rules on the gift tax return reporting the transfer to the trust, or on a gift tax return filed for any calendar year subsequent to the year of the transfer up to and including the calendar year in which the ETIP closes. It should be noted that an election out of the automatic allocation for “all current transfers” or for “all transfers in the current year” includes an election out for a transfer subject to an ETIP that was made during that year, but an election out of the automatic allocation rules for “all future transfers” to a trust will not

August 1, 2005 158 2005–31 I.R.B.

(b) - * (2) Automatic allocation to indirect skips made after December 31, 2000 —(i) In general . An indirect skip is a transfer of property to a GST trust as defined in section 2632(c)(3)(B) provided that the transfer is subject to gift tax and does not qualify as a direct skip. In the case of an indirect skip made after December 31, 2000, to which section 2642(f) (relating to transfers subject to an estate tax inclusion period (ETIP)) does not apply, the transferor’s unused GST exemption is automatically allocated to the property transferred (but not in excess of the fair market value of the property on the date of the transfer). The automatic allocation pursuant to this paragraph 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 automatic allocation is irrevocable after the due date of the Form 709 for the calendar year in which the transfer is made. In the case of an indirect skip to which section 2642(f) does apply, the indirect skip is deemed to be made at the close of the ETIP and the GST exemption is deemed to be allocated at that time. In either case, except as otherwise provided in paragraph (b)(2)(ii) of this section, the automatic allocation of exemption applies even if an allocation of exemption is made to the indirect skip in accordance with section 2632(a). (ii) Prevention of automatic allocation . Except as otherwise provided in forms or other guidance published by the Service, the transferor may prevent the automatic allocation of GST exemption with regard to an indirect skip (including indirect skips to which section 2642(f) may apply) by making an election, as provided in paragraph (b)(2)(iii) of this section. Notwithstanding paragraph (b)(2)(iii)(B) of this section, 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 (within the meaning of paragraph (b)(1)(ii) of this section) of an amount that is less than (but not equal to) the value of the property transferred as reported on that return, in accordance with the provisions of paragraph (b)(4) of this section. See

scope of this regulation, and will consider whether to address the issue in separate guidance.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because these regulations do not impose on small entities, a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6), does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the Notice of Proposed Rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these final regulations is Mayer R. Samuels, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury Department also participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 26 and 602 are amended as follows:

PART 26—GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1986

Paragraph 1. The authority citation for part 26 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. In §26.2600–1, the entries for §26.2632–1 are amended by revising the entry for paragraph (b)(2) and adding entries for paragraphs (b)(3), (b)(4) and (e) to read as follows:

§26.2600–1 Table of contents.

§26.2632–1 Allocation of GST exemption.

- - - (b) - - (2) Automatic allocation to indirect skips made after December 31, 2000.

(3) Election to treat trust as GST trust. (4) Allocation to other transfers.

- - - (e) Effective date.
- - - Par. 3. Section 26.2632–1 is amended as follows:

Paragraph (b)(2) is redesignated as paragraph (b)(4).
Paragraphs (b)(2) and (b)(3) are added.
In newly designated paragraph (b)(4)(i), the third sentence is revised.
In newly designated paragraph (b)(4)(ii)(A)( 1 ), the fourth sentence is revised.
In newly designated paragraph (b)(4)(ii)(B):

a. All references to paragraph “(b)(2)(ii)(A)( 1 )( i )” are removed and “(b)(4)(ii)(A)( 1 )( i )” is added in its place.

b. All references to paragraph “(b)(2)(ii)(A)( 1 )( ii )” are removed and “(b)(4)(ii)(A)( 1 )( ii )” is added in its place.

c. All references to paragraph “(b)(2)(ii)(A)( 1 )( iii )” are removed and “(b)(4)(ii)(A)( 1 )( iii )” is added in its place.

Examples 1 through 5 in newly designated paragraph (b)(4)(iii) are revised.
Example 6 in newly designated paragraph (b)(4)(iii) is added.
Paragraph (b)(4)(iv) is added.
Paragraph (c)(1) is redesignated as paragraph (c)(1)(i) and revised.
Paragraphs (c)(1)(ii) and (c)(1)(iii) are added.
Example 5 in paragraph (c)(5) is added.
In paragraph (d)(1), the fourth sentence is revised.
Paragraph (e) is added. The additions and revisions read as follows:

§26.2632–1 Allocation of GST exemption.

2005–31 I.R.B. 159 August 1, 2005

tion out may be terminated as described in this paragraph (b)(2)(iii)(E). Pursuant to this section, a transferor may terminate an election out made on a Form 709 for a prior year, to the extent that election out applied to future transfers or to a transfer subject to section 2642(f). To terminate an election out, the transferor must attach a statement (termination statement) to a Form 709 filed on or before the due date of the Form 709 for the calendar year in which is made the first transfer to which the election out is not to apply (whether or not any transfer was made in the calendar year for which the Form 709 was filed, and whether or not a Form 709 otherwise would be required to be filed for that year). The termination statement must identify the trust (if applicable), describe the prior election out that is being terminated, specifically provide that the prior election out is being terminated, and either describe the extent to which the prior election out is being terminated or describe any current-year transfers to which the election out is not to apply. Consequently, the automatic allocation rules contained in section 2632(c)(1) will apply to any current-year transfer described on the termination statement and, except as otherwise provided in this paragraph, to all future transfers that otherwise would have been covered by the election out. The termination of an election out does not affect any transfer, or any election out, that is not described in the termination statement. The termination of an election out will not revoke the election out for any prior-year transfer, except for a prior-year transfer subject to section 2642(f) for which the election out is revoked on a timely filed Form 709 for the calendar year in which the ETIP closes or for any prior calendar year. The termination of an election out does not preclude the transferor from making another election out in the same or any subsequent year.

(3) Election to treat trust as a GST trust —(i) In general . A transferor may elect to treat any trust as a GST trust (GST trust election), without regard to whether the trust is subject to section 2642(f), with respect to—

(A) Any current-year transfer (or any or all current-year transfers) by the electing transferor to the trust;

(B) Any selected future transfers by the electing transferor to the trust;

paragraph (b)(4)(iii) Example 6 of this section. Any election out of the automatic allocation rules under this section has no effect on the application of the automatic allocation rules applicable after the transferor’s death under section 2632(e) and paragraph (d) of this section.

(iii) Election to have automatic alloca- tion rules not apply —(A) In general . A transferor may prevent the automatic allocation of GST exemption (elect out) with respect to any transfer or transfers constituting an indirect skip made to a trust or to one or more separate shares that are treated as separate trusts under §26.2654–1(a)(1) (collectively referred to hereinafter as a trust). In the case of a transfer treated under section 2513 as made one-half by the transferor and one-half by the transferor’s spouse, each spouse shall be treated as a separate transferor who must satisfy separately the requirements of paragraph (b)(2)(iii)(B) to elect out with respect to the transfer. A transferor may elect out with respect to—

( 1 ) One or more prior-year transfers subject to section 2642(f) (regarding ETIPs) made by the transferor to a specified trust or trusts;

( 2 ) One or more (or all) current-year transfers made by the transferor to a specified trust or trusts;

( 3 ) One or more (or all) future transfers made by the transferor to a specified trust or trusts;

( 4 ) All future transfers made by the transferor to all trusts (whether or not in existence at the time of the election out); or

( 5 ) Any combination of paragraphs (b)(2)(iii)(A)( 1 ) through ( 4 ) of this section.

(B) Manner of making an election out . Except as otherwise provided in forms or other guidance published by the IRS, an election out is made as described in this paragraph (b)(2)(iii)(B). To elect out, the transferor must attach a statement (election out statement) to a Form 709 filed within the time period provided in paragraph (b)(2)(iii)(C) of this section (whether or not any transfer was made in the calendar year for which the Form 709 was filed, and whether or not a Form 709 otherwise would be required to be filed for that year). See paragraph (b)(4)(iv) Example 1 of this section. The election out statement must identify the trust (except for an election

out under paragraph (b)(2)(iii)(A)( 4 ) of this section), and specifically must provide that the transferor is electing out of the automatic allocation of GST exemption with respect to the described transfer or transfers. Prior-year transfers that are subject to section 2642(f), and to which the election out is to apply, must be specifically described or otherwise identified in the election out statement. Further, unless the election out is made for all transfers made to the trust in the current year and/or in all future years, the current-year transfers and/or future transfers to which the election out is to apply must be specifically described or otherwise identified in the election out statement.

(C) Time for making an election out . To elect out, the Form 709 with the attached election out statement must be filed on or before the due date for timely filing (within the meaning of paragraph (b)(1)(ii) of this section) of the Form 709 for the calendar year in which—

( 1 ) For a transfer subject to section 2642(f), the ETIP closes; or ( 2 ) For all other elections out, the first transfer to be covered by the election out was made.

(D) Effect of election out . An election out does not affect the automatic allocation of GST exemption to any transfer not covered by the election out statement. Except for elections out for transfers described in paragraph (b)(2)(iii)(A)( 1 ) of this section that are specifically described in an election out statement, an election out does not apply to any prior-year transfer to a trust, including any transfer subject to an ETIP (even if the ETIP closes after the election is made). An election out does not prevent the transferor from allocating the transferor’s available GST exemption to any transfer covered by the election out, either on a timely filed Form 709 reporting the transfer or at a later date in accordance with the provisions of paragraph (b)(4) of this section. An election out with respect to future transfers remains in effect unless and until terminated. Once an election out with respect to future transfers is made, a transferor need not file a Form 709 in future years solely to prevent the automatic allocation of the GST exemption to any future transfer covered by the election out.

(E) Termination of election out . Except as otherwise provided in forms or other guidance published by the IRS, an elec

August 1, 2005 160 2005–31 I.R.B.

as of December 1, 2003. The result would be the same if the amended Form 709 decreased the amount of the GST exemption allocated to the trust.

Example 2 . Modification of allocation of GST ex- emption . The facts are the same as in Example 1 except, on July 8, 2004, T files a Form 709 attempting to reduce the earlier allocation. The return filed on July 8, 2004, is not a timely filed return. The $100,000 GST exemption allocated to the trust, as amended on April 13, 2004, remains in effect because an allocation, once made, is irrevocable and may not be modified after the last date on which a timely filed Form 709 may be filed. Example 3 . Effective date of late allocation of GST exemption . On November 15, 2003, T transfers $100,000 to an irrevocable GST trust described in section 2632(c)(3)(B). The transfer to the trust is not a direct skip. The date prescribed for filing the gift tax return reporting the taxable gift is April 15, 2004. On February 10, 2004, T files a Form 709 on which T properly elects out of the automatic allocation rules contained in section 2632(c)(1) in accordance with paragraph (b)(2)(iii) of this section with respect to that transfer. On December 1, 2004, T files a Form 709 and allocates $50,000 to the trust. The allocation is effective as of December 1, 2004.

Example 4 . Effective date of late allocation of GST exemption . T transfers $100,000 to an irrevocable GST trust on December 1, 2003, in a transfer that is not a direct skip. On April 15, 2004, T files a Form 709 on which T properly elects out of the automatic allocation rules contained in section 2632(c)(1) with respect to the entire transfer in accordance with paragraph (b)(2)(iii) of this section and T does not make an allocation of any GST exemption on the Form 709. On September 1, 2004, the trustee makes a taxable distribution from the trust to T’s grandchild in the amount of $30,000. Immediately prior to the distribution, the value of the trust assets was $150,000. On the same date, T allocates GST exemption to the trust in the amount of $50,000. The allocation of GST exemption on the date of the transfer is treated as preceding in point of time the taxable distribution. At the time of the GST, the trust has an inclusion ratio of .6667 (1 - (50,000/150,000)).

Example 5 . Automatic allocation to split-gift . On December 1, 2003, T transfers $50,000 to an irrevocable GST Trust described in section 2632(c)(3)(B). The transfer to the trust is not a direct skip. On April 30, 2004, T and T’s spouse, S, each files an initial gift tax return for 2003, on which they consent, pursuant to section 2513, to have the gift treated as if one-half had been made by each. In spite of being made on a late-filed gift tax return for 2003, the election under section 2513 is valid because neither spouse had filed a timely gift tax return for that year. Previously, neither T nor S filed a timely gift tax return electing out of the automatic allocation rules contained in section 2632(c)(1). As a result of the election under section 2513, which is retroactive to the date of T’s transfer, T and S are each treated as the transferor of one-half of the property transferred in the indirect skip. Thus, $25,000 of T’s unused GST exemption and $25,000 of S’s unused GST exemption is automatically allocated to the trust. Both allocations are effective on and after the date that T made the transfer. The result would be the same if T’s transfer constituted a direct skip subject to the automatic allocation rules contained in section 2632(b).

(D) Any combination of paragraphs (b)(3)(i)(A) through (C) of this section.

(ii) Time and Manner of making GST trust election . Except as otherwise provided in forms or other guidance published by the Internal Revenue Service, a GST trust election is made as described in this paragraph (b)(3)(ii). To make a GST trust election, the transferor must attach a statement (GST trust election statement) to a Form 709 filed on or before the due date for timely filing (within the meaning of paragraph (b)(1)(ii) of this section) of the Form 709 for the calendar year in which the first transfer to be covered by the GST trust election is made (whether or not any transfer was made in the calendar year for which the Form 709 was filed, and whether or not a Form 709 otherwise would be required to be filed for that year). The GST trust election statement must identify the trust, specifically describe or otherwise clearly identify the transfers to be covered by the election, and specifically provide that the transferor is electing to have the trust treated as a GST trust with respect to the covered transfers.

(iii) Effect of GST trust election . Except as otherwise provided in this paragraph, a GST trust election will cause all transfers made by the electing transferor to the trust that are subject to the election to be deemed to be made to a GST trust as defined in section 2632(c)(3)(B). Thus, the electing transferor’s unused GST exemption may be allocated automatically to such transfers in accordance with paragraph (b)(2) of this section. A transferor may prevent the automatic allocation of GST exemption to future transfers to the trust either by terminating the GST trust election in accordance with paragraph (b)(3)(iv) of this section (in the case of trusts that would not otherwise be treated as GST trusts) or by electing out of the automatic allocation of GST exemption in accordance with paragraph (b)(2) of this section.

(iv) Termination of GST trust election . Except as otherwise provided in forms or other guidance published by the Service, a GST trust election may be terminated as described in this paragraph (b)(3)(iv). A transferor may terminate a GST trust election made on a Form 709 for a prior year, to the extent that election applied to future

transfers or to a transfer subject to section 2642(f). To terminate a GST trust election, the transferor must attach a statement (termination statement) to a Form 709 filed on or before the due date for timely filing (within the meaning of paragraph (b)(1)(ii) of this section) a Form 709 for the calendar year: in which is made the electing transferor’s first transfer to which the GST trust election is not to apply; or that is the first calendar year for which the GST trust election is not to apply, even if no transfer is made to the trust during that year. The termination statement must identify the trust, describe the current-year transfer (if any), and provide that the prior GST trust election is terminated. Accordingly, if the trust otherwise does not satisfy the definition of a GST trust, the automatic allocation rules contained in section 2632(c)(1) will not apply to the described current-year transfer or to any future transfers made by the transferor to the trust, unless and until another election under this paragraph (b)(3) is made.

(4) * * *(i) * * * See paragraph (b)(4)(ii) of this section. - * *

(ii) * * *(A) * * * ( 1 ) * * * For purposes of this paragraph (b)(4)(ii), the Form 709 is deemed filed on the date it is postmarked to the Internal Revenue Service address as directed in forms or other guidance published by the Service. - * *

- - - (iii) Examples . The following examples illustrate the provisions of this paragraph (b):

Example 1 . Modification of allocation of GST exemption . On December 1, 2003, T transfers $100,000 to an irrevocable GST trust described in section 2632(c)(3)(B). The transfer to the trust is not a direct skip. The date prescribed for filing the gift tax return reporting the taxable gift is April 15, 2004. On February 10, 2004, T files a Form 709 on which T properly elects out of the automatic allocation rules contained in section 2632(c)(1) with respect to the transfer in accordance with paragraph (b)(2)(iii) of this section, and allocates $50,000 of GST exemption to the trust. On April 13th of the same year, T files an additional Form 709 on which T confirms the election out of the automatic allocation rules contained in section 2632(c)(1) and allocates $100,000 of GST exemption to the trust in a manner that clearly indicates the intention to modify and supersede the prior allocation with respect to the 2003 transfer. The allocation made on the April 13 return supersedes the prior allocation because it is made on a timely-filed Form 709 that clearly identifies the trust and the nature and extent of the modification of GST exemption allocation. The allocation of $100,000 of GST exemption to the trust is effective

2005–31 I.R.B. 161 August 1, 2005

Example 6 . Partial allocation of GST exemp- tion . On December 1, 2003, T transfers $100,000 to an irrevocable GST trust described in section 2632(c)(3)(B). The transfer to the trust is not a direct skip. The date prescribed for filing the gift tax return reporting the taxable gift is April 15, 2004. On February 10, 2004, T files a Form 709 on which T allocates $40,000 of GST exemption to the trust. By filing a timely Form 709 on which a partial allocation is made of $40,000, T effectively elected out of the automatic allocation rules for the remaining value of the transfer for which T did not allocate GST exemption.

(iv) Example . The following example illustrates language that may be used in the statement required under paragraph (b)(2)(iii) of this section to elect out of the automatic allocation rules under various scenarios:

Example 1 . On March 1, 2006, T transfers $100,000 to Trust B, a GST trust described in section 2632(c)(3)(B). Subsequently, on September 15, 2006, T transfers an additional $75,000 to Trust B. No other transfers are made to Trust B in 2006. T attaches an election out statement to a timely filed Form 709 for calendar year 2006. Except with regard to paragraph (v) of this Example 1, the election out statement identifies Trust B as required under paragraph (b)(2)(iii)(B) of this section, and contains the following alternative election statements:

(i) “T hereby elects that the automatic allocation rules will not apply to the $100,000 transferred to Trust B on March 1, 2006.” The election out of the automatic allocation rules will be effective only for T’s March 1, 2006, transfer and will not apply to T’s $75,000 transfer made on September 15, 2006.

(ii) “T hereby elects that the automatic allocation rules will not apply to any transfers to Trust B in 2006.” The election out of the automatic allocation rules will be effective for T’s transfers to Trust B made on March 1, 2006, and September 15, 2006.

(iii) “T hereby elects that the automatic allocation rules will not apply to any transfers to Trust B made by T in 2006 or to any additional transfers T may make to Trust B in subsequent years.” The election out of the automatic allocation rules will be effective for T’s transfers to Trust B in 2006 and for all future transfers to be made by T to Trust B, unless and until T terminates the election out of the automatic allocation rules.

(iv) “T hereby elects that the automatic allocation rules will not apply to any transfers T has made or will make to Trust B in the years 2006 through 2008.” The election out of the automatic allocation rules will be effective for T’s transfers to Trust B in 2006 through 2008. T’s transfers to Trust B after 2008 will be subject to the automatic allocation rules, unless T elects out of those rules for one or more years after 2008. T may terminate the election out of the automatic allocation rules for 2007, 2008, or both in accordance with the termination rules of paragraph (b)(2)(iii)(E) of this section. T may terminate the election out for one or more of the transfers made in 2006 only on a later but still timely filed Form 709 for calendar year 2006.

(v) “T hereby elects that the automatic allocation rules will not apply to any current or future transfer that T may make to any trust.” The election out of the automatic allocation rules will be effective for all of T’s transfers (current-year and future) to Trust B and to any and all other trusts (whether such trusts exist in 2006 or are created in a later year), unless and until T terminates the election out of the automatic allocation rules. T may terminate the election out with regard to one or more (or all) of the transfers covered by the election out in accordance with the termination rules of paragraph (b)(2)(iii)(E) of this section.

(c) Special rules during an estate tax inclusion period —(1) In general —(i) Au- tomatic allocations with respect to direct skips and indirect skips . A direct skip or an indirect skip that is subject to an estate tax inclusion period (ETIP) is deemed to have been made only at the close of the ETIP. The transferor may prevent the automatic allocation of GST exemption to a direct skip or an indirect skip by electing out of the automatic allocation rules at any time prior to the due date of the Form 709 for the calendar year in which the close of the ETIP occurs (whether or not any transfer was made in the calendar year for which the Form 709 was filed, and whether or not a Form 709 otherwise would be required to be filed for that year). See paragraph (b)(2)(i) of this section regarding the automatic allocation of GST exemption to an indirect skip subject to an ETIP.

(ii) Other allocations . An affirmative allocation of GST exemption cannot be revoked, but becomes effective as of (and no earlier than) the date of the close of the ETIP with respect to the trust. If an allocation has not been made prior to the close of the ETIP, an allocation of exemption is effective as of the close of the ETIP during the transferor’s lifetime if made by the due date for filing the Form 709 for the calendar year in which the close of the ETIP occurs (timely ETIP return). An allocation of exemption is effective in the case of the close of the ETIP by reason of the death of the transferor as provided in paragraph (d) of this section.

(iii) Portion of trust subject to ETIP . If any part of a trust is subject to an ETIP, the entire trust is subject to the ETIP. See §26.2642–1(b)(2) for rules determining the inclusion ratio applicable in the case of GSTs during an ETIP.

- - - (5) - -

Example 5 . Election out of automatic allocation of GST exemption for trust subject to an ETIP . On December 1, 2003, T transfers $100,000 to Trust A, an irrevocable GST trust described in section 2632(c)(3) that is subject to an estate tax inclusion period (ETIP). T made no other gifts in 2003. The ETIP terminates on December 31, 2008. T timely files a gift tax return (Form 709) reporting the gift on April 15, 2004. On May 15, 2006, T files a Form 709 on which T properly elects out of the automatic allocation rules contained in section 2632(c)(1) with respect to the December 1, 2003, transfer to Trust A in accordance with paragraph (b)(2)(iii) of this section. Because the indirect skip is not deemed to occur until December 31, 2008, T’s election out of automatic GST allocation filed on May 15, 2006, is timely, and will be effective as of December 31, 2008 (unless revoked on a Form 709 filed on or before the due date of a Form 709 for calendar year 2008).

(d) - - *(1) - - - A late allocation of GST exemption by an executor, other than an allocation that is deemed to be made under section 2632(b)(1) or (c)(1), with respect to a lifetime transfer of property is made on Form 706, Form 706NA, or Form 709 (filed on or before the due date of the transferor’s estate tax return) and applies as of the date the allocation is filed. - * *

- - - (e) Effective dates . This section is applicable as provided in §26.2601–1(c), with the following exceptions:

(1) Paragraphs (b)(2) and (b)(3), the third sentence of paragraph (b)(4)(i), the fourth sentence of paragraph (b)(4)(ii)(A)( 1 ), paragraphs (b)(4)(iii) and (b)(4)(iv), and the fourth sentence of paragraph (d)(1) of this section, which will apply to elections made on or after July 13, 2004; and (2) Paragraph (c)(1), and Example 5 of paragraph (c)(5), which will apply to elections made on or after June 29, 2005.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 5. In §602.101, paragraph (b) is amended by adding an entry in numerical order to the table to read as follows:

§602.101 OMB Control numbers.

- - - (b) - *

August 1, 2005 162 2005–31 I.R.B.

CFR part or section where identified and described

Current OMB control No.

26.2632–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1892

taking into account the federal income tax withheld, $616 of tax was unpaid.

LAW AND ANALYSIS

Section 6201(a)(1) authorizes the Secretary to assess all taxes determined by a taxpayer for which a return was made. In both Situation 1 and Situation 2, there is a discrepancy between the amounts reported on the face of the Form 1040 returns and the amounts reported on the attached Forms W–2. If the Forms W–2 are correct, the correct tax exceeds the tax shown on the returns, and there is a deficiency. See I.R.C. § 6211. If the Secretary determines a deficiency based on the information on the Forms W–2 and sends a notice of deficiency to T pursuant to section 6212, section 6213(a) prohibits the Secretary from assessing the deficiency until the period to petition that notice to the Tax Court expires or, if T files a petition, until the Tax Court’s decision becomes final. The restrictions of section 6213(a) do not apply, however, in the case of mathematical or clerical errors appearing on the return, when the Secretary may summarily assess the additional tax due without mailing a notice of deficiency. I.R.C. § 6213(b)(1).

Section 6213(g)(2) defines “mathematical or clerical error” by reference to 13 enumerated situations. Those situations include “an entry on a return of an item which is inconsistent with another entry of the same or another item on such return.” I.R.C. § 6213(g)(2)(C). The Tax Reform Act of 1976, Pub. L. No. 94–455, § 1206, 90 Stat. 1520 (1976) (the Act), clarified the situations in which the Secretary may use the summary assessment authority of section 6213(b) for mathematical or clerical errors arising from inconsistencies. The legislative history of the Act states that the exception for inconsistent entries applies only “where it is apparent which of the inconsistent entries is correct and which is incorrect.” S. Rep. No. 938, 94th Cong., 2d Sess., 376 (1976), 1976–3 (Vol. 3) C.B. 49, 414.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

Approved June 21, 2005.

Eric Solomon, Acting Deputy Assistant Secretary

for Tax Policy.

(Filed by the Office of the Federal Register on June 28, 2005, 8:45 a.m., and published in the issue of the Federal Register for June 29, 2005, 70 F.R. 37258)

Section 6213.—Restrictions Applicable to Deficiencies; Petition to Tax Court

Mathematical or clerical error sum- mary assessment procedures. This ruling clarifies whether the mathematical or clerical error assessment procedures of section 6213(b) of the Code apply when a taxpayer files an income tax return that reports income in an amount different from that reported on a W-2.

Rev. Rul. 2005–51

ISSUE

Whether the mathematical or clerical error summary assessment procedures of section 6213(b) of the Internal Revenue Code apply when a taxpayer files an income tax return that reports income in an amount different from that reported on a Form W–2, Wage and Tax Statement, attached to the return.

FACTS

Situation 1.

T, a single individual, filed a Form 1040, U.S. Individual Income Tax Return, for 2003. The return reported wages of $18,000 on the appropriate line. No other income was reported. The only deductions

claimed by T were the standard deduction under section 63 of $4,750 and the deduction for personal exemption under section 151 of $3,050. The return reported taxable income of $10,200 and a tax liability of $1,184. T claimed federal income tax withheld in the amount of $2,000 and a refund due of $816.

T attached to the Form 1040 return a Form W–2, Wage and Tax Statement, issued by T’s employer. The Form W–2 reported wages of $25,000 and federal income tax withheld of $2,000. T also attached a statement saying that he received only $18,000 in wages during 2003, not the $25,000 reported on the Form W–2. If T’s correct wage income was the entire $25,000 during 2003, T’s correct income tax liability was $2,234 and, after taking into account the federal income tax withheld, $234 of tax was unpaid.

Situation 2.

T, a single individual, filed a Form 1040, U.S. Individual Income Tax Return, for 2003. The return reported wages of $50,000 on the appropriate line. No other income was reported. The only deductions claimed by T were the standard deduction of $4,750 and the deduction for personal exemption of $3,050. The return reported taxable income of $42,200 and a tax liability of $7,366. T claimed federal income tax withheld in the amount of $8,000 and a refund due of $634.

T attached to the return three Forms W–2, Wage and Tax Statement, issued by T’s employers. The Forms W–2 reported wages totaling $55,000 and federal income tax withheld totaling $8,000. One of the Forms W–2 reported wages of $5,000 and federal income tax withheld of $500; T did not attach a statement to the return explaining the discrepancy between the total wages reported on T’s Form 1040 return and the total wages reported on the attached Forms W–2. If T’s correct wage income for 2003 was $55,000, T’s correct income tax liability was $8,616 and, after

2005–31 I.R.B. 163 August 1, 2005

reporting wages from several Forms W–2 and a tax liability, but also attaches a Form W–2 reflecting payment of wages that appear not to be reported on the Form 1040 return. In the circumstances described, the Service must issue a notice of deficiency under section 6212(a) if it determines a deficiency in T’s income tax for 2003.

DRAFTING INFORMATION

The principal author of this revenue ruling is Blaise G. Dusenberry of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Blaise G. Dusenberry at (202) 622–7800 (not a toll-free call).

Under the facts described in Situation 1 and Situation 2, it is not apparent whether the amount reported by the taxpayer on the face of the return or the amount reported on the Form W–2 is correct. In Situation 1, T’s attachment explains the discrepancy between the return and the Form W–2, thereby making clear that T disputes the correctness of the Form W–2. In Situation 2, no attachment or comment explains the discrepancy between the return and the Forms W–2; while it is possible that T made a mathematical or clerical error by failing to include information from one of the three attached Forms W–2, it is also possible that T disputes the information on that form.

In the case of a discrepancy between the income reported by a taxpayer on an income tax return and the income reported on a Form W–2 attached to the return, it is not apparent which entry is correct. Therefore, the Internal Revenue Service may not

use the summary assessment procedures of section 6213(b). Instead, the Service must follow the deficiency procedures prescribed by sections 6212 and 6213(a).

HOLDING(S)

Situation 1.

The Service may not use the summary assessment procedures of section 6213(b) if T filed a Form 1040 return reporting an amount of wages and a tax liability, but attached a Form W–2 reflecting payment of a different amount of wages. In the circumstances described, the Service must issue a notice of deficiency under section 6212(a).

Situation 2.

The Service may not use the summary assessment procedures of section 6213(b) if the taxpayer filed a Form 1040 return

August 1, 2005 164 2005–31 I.R.B.