Bankruptcy trust keeps liquidating-trust status during another extension

Plain-English summary

A trust created under a Chapter 11 plan had received several court-approved extensions because it could not finish liquidating the debtor's assets within its original term. Its agreement limited activities to those reasonably necessary for liquidation, restricted cash retention and investments, and required at least annual distributions of net income and sale proceeds. The trust represented that it had consistently operated under the liquidating-trust conditions in Rev. Proc. 94-45 and that developments outside the trustee's control required one more extension. The IRS ruled that the new court-approved term would not jeopardize the trust's classification as a liquidating trust under Treas. Reg. § 301.7701-4(d). It also ruled that the trust would remain a grantor trust, with its beneficiaries treated as owners under IRC §§ 671 and 677.

Ruling snapshot

• Question: Will another Bankruptcy Court extension cause the trust to lose liquidating-trust or grantor-trust status?
• Outcome: Approved
• Key authorities: IRC §§ 671 and 677; Treas. Reg. §§ 1.671-4(a) and 301.7701-4(d); Rev. Proc. 94-45

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201620004                                               Third Party Communication: None
Release Date: 5/13/2016                                         Date of Communication: Not Applicable
Index Number: 7701.00-00, 7701.03-00,
              7701.03-06                                        Person To Contact:
                                                                --------------------------, ID No. ----------------
-----------------------------                                   ----------------
----------------------------------------                        Telephone Number:
------------------------------------                            --------------------
---------------------------------                               Refer Reply To:
------------------------------------                            CC:PSI:B03
                                                                PLR-129833-15
                                                                Date:
                                                                October 05, 2015




LEGEND

Trust             =         ---------------------------------
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Debtor            =         ---------------------------------
                           --------------------
                           ------------------------
                           -------------------------------

Date 1            =        -------------------

Date 2            =        ---------------------

Date 3            =        --------------------------

Date 4            =        -----------------------

Date 5            =        -----------------------

Date 6            =        ------------------------

Date 7            =        -----------------------

Date 8            =        ------------------------

Date 9            =        -----------------------

Date 10           =        -----------------------
                                               2
PLR-129833-15


Date 11         =    -----------------------

Date 12         =    -----------------------

Date 13         =    -----------------------

a               =    ---

m               =    ------

n               =    ----

p               =    ----




Dear ------------:


This is in response to your letter dated September 1, 2015, submitted on behalf of Trust,
requesting a ruling regarding the classification of Trust as a liquidating trust under
§ 301.7701-4(d) of the Procedure and Administration Regulations.

FACTS

The information submitted states that the Debtor filed a voluntary petition under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court on Date 1.
On Date 2, Debtor submitted to the Bankruptcy Court the Plan of Reorganization (the
“Plan”). On Date 3, the Plan was confirmed by the Bankruptcy Court. On Date 4, Trust
was established and approved by the Bankruptcy Court to facilitate the liquidation of the
estate. The initial term of the Trust was for m years, ending Date 5. On Date 6, the
Bankruptcy Court extended the term of the Trust by n years ending on Date 7. On Date
8, the Bankruptcy Court extended the term of the Trust by an additional p years ending
on Date 9. On Date 10, the Bankruptcy Court extended the term of the Trust for a
period ending on Date 11. Most recently, the Bankruptcy Court extended the term of
the Trust to Date 12.

Pursuant to the provisions of the Trust agreement, Trust was created for the purpose of
liquidating the assets of Trust, with no objective to continue or engage in the conduct of
a trade or business except to the extent reasonably necessary to, and consistent with,
the liquidating purpose of Trust. Trust shall not receive or retain cash in excess of a
reasonable amount to meet claims and contingent liabilities (including disputed claims)
or to maintain the value of the assets during liquidation. Cash not available for
PLR-129833-15                                  3

distribution and cash pending distribution will be held in demand and time deposits,
such as short-term certificates of deposit, in banks or other savings institutions, or other
temporary, liquid investments such as Treasury bills. Trust is required, under the terms
of Trust, to distribute to the beneficiaries of Trust at least annually its net income and all
net proceeds from the sale of Trust's assets, except that Trust may retain an amount of
net proceeds or net income reasonably necessary to maintain the value of the property
or to meet claims or contingent liabilities.

Trust provides that the beneficiaries of Trust will be treated as the grantors and deemed
owners of Trust. It further provides that the parties will value all assets transferred to
Trust consistently and use such values for all federal income tax purposes.

Trust provides that the trustee of Trust shall file tax returns as a grantor trust pursuant to
§ 1.671-4(a) of the Income Tax Regulations.

Trust, consistent with the requirements set out in Rev. Proc. 94-45, 1994-2 C.B. 684,
provides that the transfer of Trust assets to Trust will be treated for all federal tax
purposes as a deemed transfer by the Debtor to the beneficiaries followed by a deemed
transfer by the beneficiaries to Trust.

As of the date of the request, Trust had distributed approximately a% of the assets in
the Trust to its beneficiaries. Trust represents that, from its establishment, Trust has
been formed and operated consistent with the conditions set out in Rev. Proc. 94-45.
Trust now represents that certain developments, generally beyond the control of the
trustee of Trust, have occurred that make it impossible to completely liquidate Trust by
Date 12, the end of its current extension. Trust requests a ruling that it will retain its
status as a liquidating trust in compliance with § 301.7701-4(d) and Rev. Proc 94-45 if
Trust’s term is extended by the Bankruptcy Court until Date 13 (the New Extension).

LAW AND ANALYSIS

Section 671 of the Internal Revenue Code provides that where it is specified in
subpart E that the grantor or another person shall be treated as the owner of any portion
of a trust, there then shall be included in computing the taxable income and credits of
the grantor or the other person those items of income, deductions, and credits against
tax of the trust that are attributable to that portion of the trust to the extent that such
items would be taken into account under chapter 1 of the Code in computing taxable
income or credits against the tax of an individual.

Section 1.671-4(a) provides that, except as provided in § 1.671-4(b)(1) and (2), items of
income, deduction, and credit attributable to any portion of a trust which, under the
provisions of subpart E (§ 671 and following), part I, subchapter J, chapter 1 of the
Code, are treated as owned by the grantor or another person should not be reported by
PLR-129833-15                                  4

the trust on Form 1041, U.S. Income Tax Return for Estates & Trusts, but should be
shown on a separate statement attached to that form.

Section 677(a) provides, in part, that the grantor shall be treated as the owner of any
portion of a trust, whether or not the grantor is treated as such owner under § 674,
whose income without the approval or consent of any adverse party is, or, in the
discretion of the grantor or a non-adverse party, or both, may be (1) distributed to the
grantor or the grantor’s spouse; or (2) held or accumulated for future distribution to the
grantor or the grantor’s spouse.

Section 301.7701-4(d) provides that certain organizations which are commonly known
as liquidating trusts are treated as trusts for purposes of the Internal Revenue Code. An
organization will be considered a liquidating trust if it is organized for the primary
purpose of liquidating and distributing the assets transferred to it, and if its activities are
all reasonably necessary to, and consistent with, the accomplishment of that purpose.
A liquidating trust is treated as a trust for purposes of the Code because it is formed
with the objective of liquidating particular assets and not as an organization having as
its purpose the carrying on of a profit-making business which normally would be
conducted through business organizations classified as corporations or partnerships.
However, if the liquidation is unreasonably prolonged or if the liquidation purpose
becomes so obscured by business activities that the declared purpose of liquidation can
be said to be lost or abandoned, the status of the organization will no longer be that of a
liquidating trust.

Rev. Proc. 94-45 provides the conditions under which the Service will consider issuing
advance rulings classifying certain trusts as liquidating trusts under § 301.7701-4(d).
Rev. Proc. 94-45 states that the Service will issue a ruling classifying an entity created
pursuant to a bankruptcy plan under Chapter 11 of the Bankruptcy Code, 11 U.S.C.
§ 1101, et. seq. (1988), as a liquidating trust under § 301.7701-4(d) if certain specified
conditions are met.

CONCLUSIONS

Based on the information submitted and the representations made, we conclude that
the conditions of Rev. Proc. 94-45 have been satisfied. Accordingly, based on the
representations made and the information submitted, we rule that Trust will continue to
be classified for federal income tax purposes as a liquidating trust under § 301.7701-
4(d) of the regulations, and the New Extension will not adversely affect the classification
of Trust as a liquidating trust. Furthermore, we rule that Trust will continue to be treated
for federal income tax purposes as a grantor trust and the beneficiaries of Trust will be
treated as the owners of Trust under §§ 671 and 677. We rule that the New Extension
will not adversely affect the classification of Trust as a grantor trust for federal income
tax purposes.
PLR-129833-15                                    5

Except as specifically set forth above, we express or imply no opinion concerning the
federal tax consequences of the facts described above under any other provision of the
Code.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent
to Trust’s authorized representatives.

                                    Sincerely,



                                    Bradford R. Poston
                                    Senior Counsel, Branch 3
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)


Enclosures (2)
      Copy for § 6110 purposes
      Copy of this letter