Two-year extension preserves bankruptcy liquidating trust status

Plain-English summary

A trust created under a Chapter 11 bankruptcy plan was established solely to liquidate estate assets and distribute the proceeds to beneficiaries. Its agreement limited business activity and cash retention, required at least annual distributions, and treated the beneficiaries as its grantors and owners. Developments generally outside the trustee's control prevented completion of the liquidation before the end of an existing extension, so the trust sought another two years. The IRS ruled that the trust continued to satisfy Revenue Procedure 94-45 and that the additional extension would not end its classification as a liquidating trust. It would remain a grantor trust, with its beneficiaries treated as owners under Sections 671 and 677.

Ruling snapshot

• Question: Would another two-year court-approved extension cause the bankruptcy liquidating trust to lose its tax classification?
• Outcome: Approved, the extension did not affect liquidating-trust or grantor-trust status.
• Key authorities: IRC §§ 671, 677; Treas. Reg. §§ 1.671-4(a), 301.7701-4(d); Rev. Proc. 94-45

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201830002 Third Party Communication: None
Release Date: 7/27/2018 Date of Communication: Not Applicable
Index Number: 7701.00-00, 7701.03-00,
7701.03-06 Person To Contact:
-----------------------, ID No. -------------------
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------------------------------------------ Telephone Number:
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-------------------------------- Refer Reply To:
CC:PSI:B03
PLR-104881-18
Date:
April 23, 2018

Trust = ----------------------------------------------------------------------------------------
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Debtor = -------------------------
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Date 1 = ---------------------------------

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

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

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

Date 5 = -----------------
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Date 6 = ----------------------------------------------------------------------------------------
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Date 7 = ----------------------------------------------------------------------------------------
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Date 8 = ----------------------------------------------------------------------------------------
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Date 9 = ----------------------------------------------------------------------------------------
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Dear -----------------

This is in response to your letter dated November 6, 2017, 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.

PLR-104881-18 2

FACTS

The information submitted states that, on Date 2, Debtor consented to an involuntary
petition under Chapter 11 of the Bankruptcy Code that had been filed in the United
States Bankruptcy Court on Date 1. On Date 3, the Court entered an order for relief.
On Date 4, a Plan of Reorganization (the “Plan”) was confirmed by the Bankruptcy
Court, establishing Trust to facilitate the liquidation of the estate. The initial term of
Trust was for three years. On Date 5, the Bankruptcy Court extended the term of Trust
by two years ending on Date 6. On Date 7, the Bankruptcy Court again extended the
term of Trust by two years ending on Date 8.

Pursuant to the provisions of 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
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,
indicates that the transfer of Trust assets to Trust have been 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 has distributed amounts 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 8, the
end of its two year extension. This office previously ruled that Trust is a liquidating trust

PLR-104881-18 3

under § 301.7701-4(d) and that a previous extension of Trust term would not adversely
affect that determination. (PLR 201704002, October 2016). 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 for another two years
ending on Date 9.

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 § 1.671-5,
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
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.

PLR-104881-18 4

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 tax purposes as a liquidating trust under § 301.7701-4(d) and
the extension of Trust's term to Date 9 will not affect that determination. Therefore,
Trust will continue to be treated as a grantor trust and the beneficiaries of Trust will
continue to be treated as the owners of Trust under §§ 671 and 677.

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 representative.

                                    Sincerely,




                                    James A. Quinn
                                    Senior Counsel, Branch 3
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)

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