Bankruptcy trust remained a liquidating trust despite a further extension

Plain-English summary

A trust created under a Chapter 11 reorganization plan had received several court-approved term extensions because litigation remained unresolved. The trust's agreement limits its activities to liquidating assets, making distributions, maintaining necessary reserves, and holding cash in temporary liquid investments. Its trustee represented that the trust continued to comply with the conditions for liquidating trusts and was not unduly prolonging liquidation. The IRS concluded that the trust satisfied Rev. Proc. 94-45. A further court-approved extension would not change its classification as a liquidating grantor trust or the beneficiaries' treatment as owners.

Ruling snapshot

• Question: Will another term extension cause the bankruptcy trust to lose liquidating-trust status?
• Outcome: Approved
• Key authorities: IRC § 671; Treas. Reg. §§ 1.671-4 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: 202524013 Third Party Communication: None
Release Date: 6/13/2025 Date of Communication: Not Applicable
Index Number: 7701.03-00, 7701.03-06
Person To Contact:
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------------------------------------------------------ Telephone Number:
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---------------------------- Refer Reply To:
CC:PT&E:B01
PLR-122074-24
Date:
March 07, 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 = ------------------

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

Date 9 = ------------------
PLR-122074-24 2

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

This responds to a letter dated November 21, 2024, 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.
On Date 2, the Bankruptcy Court approved the Debtors’ plan of reorganization (the
"Plan") with an effective date of Date 3.

On Date 3, Trust was established as part of the Plan with an initial term ending on Date

4. The Bankruptcy Court, however, subsequently extended the term of Trust to Date 5,
   then to Date 6, and then to Date 7. Because of unresolved litigation, the Bankruptcy
   Court subsequently approved the extension of the term of Trust to Date 8. As the
   litigation claims remain unresolved, the trustee of Trust intends to file a motion with the
   Bankruptcy Court to extend the termination date of Trust to Date 9, and to request
   further term extensions with the Bankruptcy Court, as necessary, until the final
   resolution of all legal claims and 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, converting 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, except to the extent reasonably necessary to, and consistent with the
liquidating purpose of Trust. 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. 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 Trust agreement, 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 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 all federal income tax
purposes.
PLR-122074-24 3

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,
1994-2 C.B. 684, 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 conditions 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 by Date 8. 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 that where it is specified in
subpart E, part I, subchapter J, chapter 1 of the Code 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 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), 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 301.7701-4(d) provides 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
PLR-122074-24 4

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 time 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 any further extension of Trust's term to Date 9 will not adversely affect that
classification. 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.

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-122074-24 5

In accordance with the power of attorney on file with this office, we are sending a copy
of this letter to Trust's authorized representatives.

                                            Sincerely,



                                            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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