Liquidating trust receives 45 days for disputed-ownership-fund election

Plain-English summary

A bankruptcy liquidating trust held all of its assets in reserve while higher-priority disputed claims were being resolved. Its accountants filed the first-year return as a complex trust because beneficiary information needed for grantor-trust reporting was unavailable, but they did not advise the trustee that eligible reserves could be treated as a disputed ownership fund. Later tax advisers identified the missed election under Treasury Regulation section 1.468B-9(c)(2)(ii), and the trustee requested relief before the next year's return was due. The IRS found that the trustee acted reasonably and in good faith and that a late election would not prejudice the government. It granted 45 days from the ruling date to file any necessary election statements effective for the trust's first taxable year. The ruling addressed only timeliness and did not remove any penalty arising from a late federal return.

Ruling snapshot

• Question: Could the trustee make a late election to treat eligible disputed-claim reserves as a disputed ownership fund?
• Outcome: Approved. The trustee received 45 days to file the election statements for the first taxable year.
• Key authorities: IRC § 468B(g); Treas. Reg. §§ 1.468B-9(c)(2)(ii) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201922023                                            Third Party Communication: None
Release Date: 5/31/2019                                      Date of Communication: Not Applicable
Index Number: 9100.00-00, 468B.06-00
                                                             Person To Contact:
---------------------------------                            --------------------, ID No. -----------
---------------------------                                  Telephone Number:
------------------------------                               ----------------------
-------------------------------------------------            Refer Reply To:
--------------------------------------                       CC:ITA:B06
                                                             PLR-122932-18
                                                             Date:
                                                             February 26, 2019




                                                     LEGEND

Debtors                       = -----------------------------------------------------------------------------------
                                --------------------------------------------------
Court                         = -----------------------------------------------------------------------------------
                                -----------------------
Plan                          = -----------------------------------------------------------------------------------
                                -----------------------
Trust Agreement               = -----------------------------------------------------------------------------------
                                ----------------------------------------------------------------------
Liquidating Trust             = --------------------------------------------------------
Trustee                       = -------------------------------------------------------
Accountants                   = ------------------
Trust’s Tax Advisors          = ----------------------------------------------
Date 1                        = ------------------
Date 2                        = -------------------
Date 3                        = ---------------------------------------------
Date 4                        = ----------------------
Year 1                        = -------------------------------------------------------
Year 2                        = -------------------------------------------------------



Dear ---------------------:
PLR-122932-18                                 2

This letter responds to your request dated July 24, 2018, and subsequent
correspondence, requesting a ruling on behalf of the Liquidating Trust. Specifically, you
requested an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations to make an election under § 1.468B-9(c)(2)(ii) of the Income Tax
Regulations for Year 1.

                                          FACTS

On Date 1, the Debtors filed voluntary petitions in the Court seeking relief under
Chapter 11 of the Bankruptcy Code. On Date 2, the Court confirmed the Plan, including
the proposed Trust Agreement, and appointed Trustee to serve in the subject capacity.

Under the terms of the Plan, all of the assets and liabilities of the Debtors were
transferred to the Liquidating Trust for the Trustee to administer for the benefit of the
holders of various impaired classes of claims and equity interests (collectively, “Trust
Beneficiaries”) in full satisfaction of those claims. The Liquidating Trustee was to
liquidate trust assets and distribute the net proceeds to the Trust Beneficiaries after the
funding of reserves for the various classes of higher priority claims.

The intent of the Plan and Trust Agreement was that the Liquidating Trust qualify as a
grantor trust and that the Liquidating Trustee would file tax returns for the Liquidating
Trust as a grantor trust pursuant to § 1.671-4(a). Instead of taxing any reserves
established for disputed claims as part of the Liquidating Trust, the Plan and Trust
Agreement also empowered the Liquidating Trustee to use his discretion to determine
the best way to report for tax purposes any reserves, including the ability to file an
election to treat them as a disputed ownership fund (“DOF”) within the meaning of
§ 1.468B-9.

Because a significant number of claims that were higher in priority to the claims and
equity interests held by the Trust Beneficiaries were disputed and the total amount of
disputed claims was in excess of the value of the Liquidating Trust’s assets, the trust’s
assets were completely held in reserve pending the Trustee’s ongoing process of
reconciling and resolving the disputed claims. As a result, no distribution or other
satisfaction has been made on account of the claims held by the Trust Beneficiaries.

The Trustee engaged the Accountants to prepare the Year 1 Federal income tax returns
for the Liquidating Trust. The Accountants had previously prepared the Debtors’ pre-
bankruptcy income tax returns for the prior tax year, and had experience preparing tax
returns for liquidating trusts. When preparing the Liquidating Trust’s Year 1 tax returns,
the Accountants advised the Trustee that it was necessary to file as a complex trust
because the information necessary to issue information statements to the beneficiaries
that was required for the trust to be treated as a grantor trust was not available.
PLR-122932-18                                    3

Neither the Accountants nor any other adviser informed the Trustee that he had the
option to file an election to treat any reserve for disputed claims as a DOF. The Trustee
concluded that he had no reason to question the Accountants’ recommendation and
accepted their advice that the trust should file its Federal income tax return as a
complex trust.

On Date 3, the trust timely filed its Federal income tax return for Year 1 as a complex
trust and did not file any DOF election for any portion of the trust. The Accountants
included Form 8275 Disclosure Statement with the Year 1 return noting that the trust
was unable to file as a grantor trust and that it was filing as a complex trust.

On Date 4, the Accountants raised the issue with the Trustee as to whether the trust
could issue information statements to the Trust Beneficiaries for the upcoming Year 2
return for the trust. In response, the Trustee asked the Trust’s Tax Advisors to assist
the Accountants on the proper preparation of the Year 2 tax return. During this process,
the Trust’s Tax Advisors learned that the trust had filed its Year 1 return as a complex
trust and had not made an election to be treated as a DOF. The Trust’s Tax Advisors
advised the Trustee that more explicit legal authority is available regarding how the trust
should report its taxable income if it were treated as a DOF instead of as a complex
trust. The Trustee accordingly filed this ruling request before the due date for the Year
2 tax return.

                                    RULING REQUESTED

Trustee requests an extension of time under §§ 301.9100-1 and 301.9100-3 to file any
necessary elections under § 1.468B-9(c)(2)(ii) to treat the eligible portion of the
Liquidating Trust as a disputed ownership fund effective for Year 1.

                                    LAW AND ANALYSIS

Section 468B(g)(1) provides that “[n]othing in any provision of law shall be construed as
providing that an escrow account, settlement fund, or similar fund is not subject to
current income tax.” Section 468B(g)(1) authorizes the issuance of regulations
providing for the taxation of any such account or fund whether as a grantor trust or
otherwise. Section 1.468B-9 regarding disputed ownership funds was issued pursuant
to section 468B(g).

Section 1.468B-9(b)(1) provides that a disputed ownership fund means an escrow
account, trust, or fund that (i) is established to hold money or property subject to
conflicting claims of ownership, (ii) is subject to the continuing jurisdiction of a court, (iii)
requires the approval of the court to pay or distribute money or property to, or on behalf
of, a claimant, transferor, or transferor-claimant, and (iv) is not a qualified settlement
fund under § 1.468B-1, a bankruptcy estate (or part thereof) resulting from the
PLR-122932-18                                 4

commencement of a case under title 11 of the United States Code, or a liquidating trust
under § 301.7701-4(d) of this chapter (except as provided in §1.468B-9(c)(2)(ii)).

Under § 1.468B-9(c)(2)(ii), the trustee of a liquidating trust established pursuant to a
plan confirmed by the court in a case under title 11 of the United States Code may, in
the liquidating trust’s first taxable year, elect to treat an escrow account, trust, or fund
that holds assets of the liquidating trust that are subject to disputed claims as a disputed
ownership fund. Pursuant to this election, creditors holding disputed claims are not
treated as transferors of the money or property transferred to the disputed ownership
fund. A trustee makes the election by attaching a statement to the timely filed Federal
income tax return of the disputed ownership fund for the taxable year for which the
election becomes effective. The election statement must include a statement that the
trustee will treat the escrow account, trust, or fund as a disputed ownership fund and
must include a legend, “§ 1.468B-9(c) Election,” at the top of the page. The election
may be revoked only upon consent of the Commissioner by private letter ruling.

Section 301.9100-1(c) provides that the Commissioner has the discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make certain regulatory elections. Section 301.9100-1(b) defines a regulatory
election as an election whose due date is prescribed by a regulation published in the
Federal Register, or in a revenue ruling, revenue procedure, notice, or announcement
published in the Internal Revenue Bulletin.

Section 301.9100-2 provides automatic extensions of time for making certain elections.
Section 301.9100-3 provides extensions of time for making elections that do not meet
the requirements of § 301.9100-2.

The requested election is a regulatory election as defined under § 301.9100-1(b)
because the due date of the election is prescribed in § 1.468B-9(c)(2)(ii). Trustee’s
request is analyzed under the requirements of § 301.9100-3 because the automatic
provisions of § 301.9100-2 are not applicable.

Requests for relief under § 301.9100-3 will be granted when a taxpayer provides
evidence to establish to the satisfaction of the Commissioner (1) that the taxpayer acted
reasonably and in good faith, and (2) that granting relief will not prejudice the interests
of the Government. See § 301.9100-3(a).

Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer: (i) requests relief before the failure to make the
regulatory election is discovered by the Internal Revenue Service; (ii) failed to make the
election because of intervening events beyond the taxpayer’s control; (iii) failed to make
the election because, after exercising reasonable diligence, the taxpayer was unaware
of the necessity for the election; (iv) reasonably relied on the written advice of the
PLR-122932-18                                  5

Service; or (v) reasonably relied on a qualified tax professional, including a tax
professional employed by the taxpayer, and the tax professional failed to make, or
advise the taxpayer to make, the election.

Section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted
reasonably and in good faith if the taxpayer: (i) seeks to alter a return position for which
an accuracy-related penalty was or could be imposed under § 6662 at the time the
taxpayer requests relief and the new position requires or permits a regulatory election
for which relief is requested; (ii) was informed in all material respects of the required
election and related tax consequences and chose not to file the election; or (iii) uses
hindsight in requesting relief.

Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced
if granting relief would result in the taxpayer having a lower tax liability in the aggregate
for all taxable years affected by the election than the taxpayer would have had if the
election had been timely made (taking into account the time value of money). The
section also provides that, if the tax consequences of more than one taxpayer are
affected by the election, the Government’s interests are prejudiced if extending the time
for making the election may result in the affected taxpayers, in the aggregate, having a
lower tax liability than if the election had been timely made.

Further, § 301.9100-3(c)(1)(ii) provides, in part, that the interests of the Government are
ordinarily prejudiced if the taxable year in which the regulatory election should have
been made, or any taxable years that would have been affected by the election had it
been timely made, are closed by the period of limitations on assessment under
§ 6501(a) before the taxpayer’s receipt of a ruling granting relief under this section.

                                       CONCLUSION

The information and representations furnished by the Trustee have established that the
Trustee has acted reasonably and in good faith in filing this request. Furthermore,
granting an extension will not prejudice the interests of the Government. Accordingly,
an extension of time is hereby granted under § 301.9100-3 for the Trustee to file any
necessary § 1.468B-9(c) election statements for Year 1. This extension shall be for a
period of 45 days from the date of this ruling. Please attach a copy of this ruling to the
election statement when it is filed.

                                PROCEDURAL MATTERS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. This ruling is limited to the timeliness of the filing of any necessary § 1.468B-
9(c) elections. This ruling does not relieve the taxpayer from any penalty that it may
owe as a result of the failure to timely file its Federal income tax return(s).
PLR-122932-18                                    6


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

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

A copy of this letter must be attached to any Federal income tax return to which it is
relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.


                                    Sincerely,



                                    Roy A. Hirschhorn
                                    Branch Chief, Branch 6
                                    Office of Associate Chief Counsel
                                    (Income Tax & Accounting)