The IRS exercised its discretion to allow a taxpayer to make a late allocation of GST exemption. Over a six-year period, the taxpayer made transfers to two irrevocable trusts he created for the benefit of his issue. The transfers occurred sometime prior to the enactment of the automatic allocation rules. The taxpayer engaged a law firm to prepare the gift tax returns reporting these transfers. Although the law firm timely filed the gift tax returns, it failed to allocate any GST exemption to the transfers. A second law firm later discovered this omission.

Currently, there are no Treasury Regulations in effect prescribing the circumstances and procedures under which extensions of time will be granted to make an allocation of GST exemption. In the absence of Treasury Regulations, Notice 2001-50 provides that taxpayers seeking an extension must do so under Treasury Regulations Section 301.9100-3, which requires that the taxpayer establish that he or she acted reasonably and in good faith and that granting relief will not prejudice the interests of the government. Under the 9100 criteria, the IRS determined that the taxpayer reasonably relied on a qualified tax professional, and the interests of the government would not be prejudiced.

The IRS and the Treasury issued Proposed Treasury Regulations Section 26.2642-7 about four years ago to subject late GST exemption allocation elections to a more stringent set of criteria, which, among other things, would require affidavits from the taxpayer, the return preparer and any advisors to the underlying transaction describing the events that led to the failure to allocate GST exemption and the events that led to the discovery of the failure. Although the Proposed Treasury Regulations were never finalized, the project has resurfaced in the IRS's recent 2012-2013 Priority Guidance Plans. If these Proposed Treasury Regulations are finalized, they will replace the 9100 relief provisions for late allocations of GST exemption.