Three-year trust extension did not disturb liquidating trust classification

Plain-English summary

A trust was created under a Chapter 11 liquidation plan solely to liquidate and distribute transferred assets, without continuing a trade or business. The bankruptcy court had already extended its original three-year term twice, but events outside the trustee’s control prevented completion of the liquidation. The trust sought another extension of up to three years. Based on the facts and representations, the IRS ruled that the additional extension would not harm the trust’s classification as a liquidating trust, assuming it otherwise continued to qualify.

Ruling snapshot

• Question: Would extending the bankruptcy liquidating trust for up to three more years adversely affect its tax classification?
• Outcome: approved, provided the trust otherwise qualifies as a liquidating trust
• Key authorities: Treas. Reg. § 301.7701-4(d)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

                                                               Third Party Communication: None
Number: 201940004                                              Date of Communication: Not Applicable
Release Date: 10/4/2019
                                                               Person To Contact:
Index Number: 7701.03-06                                       ------------------------, ID No. -------------------
                                                               ---------------------------------------------------
------------------------------------------------------------- Telephone Number:
----------------                                              --------------------
------------------------------------------------              Refer Reply To:

-----------------------------                                 CC:PSI:B03
-------------------------------------                         PLR-106700-19
                                                              Date:
----------------------------------------------------------- July 11, 2019



LEGEND

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Date1             =        -----------------

Date2             =        ----------------------

Date3             =        ------------------------

Date4             =        ------------------------

Date5             =        ---------------------

Date6             =        --------------------------

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Date8             =        ------------------------

Date9             =        --------------------------

Date10            =        ------------------

PLR-106700-19                                           2

Date11          =          --------------------------

Date12          =          --------------------------


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

       This responds to a letter dated March 15, 2019, and subsequent
correspondence, submitted on behalf of Trust, requesting a ruling under § 301.7701-
4(d) of the Procedure and Administration Regulations.

       The information submitted states that Debtors filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court on
Date1. On or about Date2, Debtors submitted a joint plan of liquidation and a disclosure
statement to the Bankruptcy Court. On Date3, Debtors filed an amended plan of
liquidation and disclosure statement. The Bankruptcy Court approved the disclosure
statement on Date4. On or about Date5, the Bankruptcy Court confirmed the plan of
liquidation. Trust was established pursuant to the terms of the plan of liquidation and
approved by the Bankruptcy Court for the purpose of liquidating and distributing its
assets, and such assets were transferred to the Trust on Date6. Pursuant to the
provisions of the trust agreement, Trust was created for the sole purpose of liquidating
and distributing the assets of Trust, with no objective to continue or engage in the
conduct of a trade or business.

        The initial term of Trust was for three years, ending on Date7. On Date8, the
Bankruptcy Court extended the term of Trust by two years ending on Date9. On
Date10, the Bankruptcy Court further extended the term of Trust by three years ending
on Date11. Trust has represented that, from its establishment, Trust has been properly
classified and treated as a liquidating trust within the meaning of § 301.7701-4(d). Trust
further has represented that, due to continuing events outside the control of the trustee
of Trust, it is not possible to completely liquidate Trust by Date11. Trust requests a
ruling that its classification as a liquidating trust under § 301.7701-4(d) will not be
adversely affected if Trust’s term is extended by the Bankruptcy Court for another
period of up to three years ending on Date12.

       Under section 4.1 of the trust agreement for Trust, multiple fixed-period
extensions of Trust’s term may be obtained so long as the Bankruptcy Court determines
that an extension is necessary to facilitate or complete the recovery and liquidation of
Trust assets. In addition, Trust may not extend its term more than 5 years from Date6
without a favorable private letter ruling from the Internal Revenue Service that any
further extension would not adversely affect the status of the Trust as a liquidating trust
for U.S. federal income tax purposes.

PLR-106700-19                                3

        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 purposes 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.

        Based on the facts and circumstances in this case and on the representations
made, we rule that an extension of Trust’s term to Date12 will not adversely affect the
classification of Trust as a liquidating trust under § 301.7701-4(d) to the extent Trust
otherwise qualifies as such.

        Except as expressly set forth above, we express or imply no opinion concerning
the federal income tax consequences of the facts described above under any other
provision of the Code. Specifically, we express or imply no opinion as to whether Trust
qualifies as a liquidating trust within the meaning of § 301.7701-4(d).

      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.

       The ruling contained in this letter is 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 materials submitted
as part of the ruling request, it is subject to verification on examination.

PLR-106700-19                               4

      In accordance with the power of attorney on file with this office, we are sending
copies of this letter to your authorized representatives.

                                     Sincerely,

                                     Adrienne M. Mikolashek
                                     Branch Chief, Branch 3
                                     Office of the Associate Chief Counsel
                                     (Passthroughs & Special Industries)



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