Bankruptcy liquidating trust keeps its tax classification after another extension

Plain-English summary

A liquidating trust was created under a Chapter 11 plan to turn assets into cash and distribute the proceeds to beneficiaries. Unresolved litigation had already required several court-approved extensions, and the trustee sought another extension so the remaining claims and distributions could be completed. The trust agreement limited investments, required at least annual distributions of net income and sale proceeds except for reasonable reserves, and treated beneficiaries as grantors and owners. The trustee represented that the trust had consistently followed Revenue Procedure 94-45, continued trying to dispose of assets, and was not unduly prolonging liquidation. The IRS concluded that the revenue procedure's conditions were satisfied and that the additional finite extension would not harm the trust's classification under § 301.7701-4(d). The trust therefore would remain a liquidating grantor trust to the extent it otherwise qualified.

Ruling snapshot

• Question: Will another court-approved term extension cause a Chapter 11 liquidating trust to lose its federal tax classification?
• Outcome: Approved. The extension does not adversely affect liquidating-trust status.
• Key authorities: IRC § 671; 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: 202517009 Third Party Communication: None
Release Date: 4/25/2025 Date of Communication: Not Applicable
Index Number: 7701.00-00, 7701.03-00,
7701.03-06 Person To Contact:
--------------------, ID No. -----------------
-------------------------------------------- Telephone Number:
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------------------------------------ Refer Reply To:
-------------------------- CC:PT&E:B01
-------------------------------- PLR-114278-24
Date:
January 30, 2025

                                             LEGEND

Trust = -----------------------------------------------------------------------------------------------------
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Debtors = -----------------------------------------------------------------------------------------------------
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Date 1 = -----------------------

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

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

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

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

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

Date 7 = --------------------------
PLR-114278-24 2

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

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

Date 10 = --------------------------

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

This letter responds to a letter dated August 6, 2024, and subsequent correspondence,
submitted on behalf of Trust by Trust’s authorized representative, 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 Debtors filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court on Date 1
and Date 2. On Date 3, the Bankruptcy Court approved Debtors’ plan of reorganization
(the “Plan”) with an effective date of Date 5.

On Date 4, Trust was established as part of the Plan with an initial term ending on Date

6. Because of unresolved litigation, the Bankruptcy Court subsequently approved the
   extension of the term of Trust to Date 7, then Date 8, and then Date 9. As the litigation
   claims remain unresolved, the trustee of the Trust intends to file a motion with the
   Bankruptcy Court to extend the termination date of Trust to Date 10, and to request
   further term extensions with the Bankruptcy Court, as necessary, until the final
   resolution of all legal claims, subsequent distributions, and other actions pursuant to the
   Plan.

Pursuant to the provisions of the Plan and the Trust agreement, Trust was created for
the purpose of liquidating the assets to cash and distributing the assets of Trust in
accordance with § 301.7701-4(d), with no objective to engage in the conduct of a trade
or business. Trust is not permitted to receive or retain cash in excess of a reasonable
amount necessary to make applicable distributions to the beneficiaries, to satisfy any
liabilities of Trust, and to establish and maintain reserves contemplated by the Plan.
The Plan limits the right and power of the trustee of Trust to invest Trust assets to the
right and power that a liquidating trust under § 301.7701-4(d) is permitted to hold under
the regulations or any modifications in the IRS guidelines including Rev. Proc. 94-45,
1994-2 C.B. 684, and to the investment guidelines of section 345 of the Bankruptcy
Code. Section 3.09 of Rev. Proc. 94-45 requires that cash not available for distribution
and cash pending distribution is to be held in demand and time deposits, such as short-
term certificates of deposit, in banks or other savings institutions, or other temporary,
liquid assets such as Treasury bills. Trust is required, under the terms of the
agreement, to distribute to the beneficiaries of Trust at least annually its net income and
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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 Trust’s
assets or to meet claims or contingent liabilities.

The Trust agreement 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 income tax purposes.

The Trust agreement 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.

The Trust agreement, consistent with the requirements set out in Rev. Proc. 94-45,
provides that the transfer of Trust’s assets to Trust will be treated for all federal tax
purposes as a deemed transfer by Debtors to the beneficiaries followed by a deemed
transfer by the beneficiaries to Trust.

The trustee of Trust represents that, from its establishment, Trust has been formed and
operated consistent with the requirements set forth in Rev. Proc. 94-45. The trustee of
Trust further represents that he will make continuing efforts to dispose of the assets of
Trust, make timely distributions, and not unduly prolong the duration of Trust. The
trustee of Trust also represents that certain continuing adversary proceedings have
made it impossible to completely liquidate the Trust by Date 9, and Trust requires
additional time to facilitate complete liquidation of Trust. The Trust agreement provides
that the aggregate of all allowed extensions shall not exceed three years unless the
trustee of Trust receives a favorable ruling from the Internal Revenue Service that any
further extensions would not adversely affect the status of Trust as a liquidating trust
under § 301.7701-4(d).

                              LAW AND ANALYSIS

Section 671 of the Internal Revenue Code (Code) provides, in part, that where it is
specified in subpart E of Part I, Subchapter J, Chapter 1, Subtitle A of the Code (subpart
E), that the grantor or another person shall be treated as the owner of any portion of a
trust, there shall then 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 which are attributable to the 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) and 1.671-5,
items of income, deduction, and credit attributable to any portion of a trust which, under
the provisions of subpart E, are treated as owned by the grantor or another person, are
not 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.
PLR-114278-24 4

Section 301.7701-4(d) provides, in part, that certain organizations which are commonly
known as liquidating trusts are treated as trusts for purposes of the 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.

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. as a liquidating trust under § 301.7701-4(d) if certain conditions are
met.

Section 3.06 of Rev. Proc. 94-45 provides that the trust instrument must contain a fixed
or determinable termination date that is generally not more than five years from the date
of the creation of the trust and that is reasonable based on all of the facts and
circumstances. If warranted by the facts and circumstances, provided for in the plan
and trust instrument, and subject to the approval of the Bankruptcy Court with
jurisdiction over the case upon a finding that the extension is necessary to the
liquidating purpose of the trust, the term of the trust may be extended for a finite term
based on its particular facts and circumstances. The trust instrument must require that
each extension be approved by the court within 6 months of the beginning of the
extended term.

                                   CONCLUSION

Based on the information submitted and on the representations made, we conclude that
the conditions of Rev. Proc. 94-45 have been satisfied. Accordingly, we rule that Trust
is classified as a liquidating trust under § 301.7701-4(d) for federal tax purposes and
that the extension of Trust’s term to Date 10 will not adversely affect Trust’s
classification as a liquidating trust under § 301.7701-4(d). 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 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.
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This ruling is directed only to the taxpayer requesting it. According to § 6110(k)(3) of
the Code, this ruling 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 material submitted
in support of the ruling request, it is subject to verification on examination.

Under a power of attorney on file with this office, we are sending a copy of this letter to
Trust’s authorized representatives.

                                                       Sincerely,



                                                       _________/s/___________
                                                       Caroline E. Hay
                                                       Senior Technician Reviewer, Branch 1
                                                       Office of the Associate Chief Counsel
                                                       (Passthroughs, Trusts, and Estates)

Enclosure:
Copy for § 6110 purposes

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