PLR 200034022: Bankruptcy liquidating trust classified as a grantor trust

Plain-English summary

A company in Chapter 11 proposed a trust to liquidate remaining assets and distribute the proceeds to beneficiaries. The trust would hold only reasonable cash reserves, make distributions at least annually, and generally end within five years. The beneficiaries would be treated as grantors and owners under the trust agreement. The IRS found that the arrangement met Revenue Procedure 94-45's conditions and ruled that it was a liquidating trust under the entity classification regulation. It also ruled that the beneficiaries would be treated as owners of a grantor trust under sections 671 and 677.

Ruling snapshot

• Question: Would the bankruptcy trust be classified as a liquidating trust and grantor trust for federal tax purposes?
• Outcome: Approved on the submitted facts and representations.
• 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
Index Nos.: 7701.03-06
671.00-00
Number: 200034022
Release Date: 8/25/2000

CC:DOM:P&SI:2 - PLR-102570-00

May 26,2000

Debtor
=

Trust
=

D1
=

D2
=

D3
=

Dear :

This is in reply to your letter dated January 21, 2000, and subsequent correspondence, requesting a ruling on the classification of Trust as a liquidating trust under § 301.7701-4(d) of the Procedure and Administration Regulations.

Debtor and its affiliates ("Debtors") filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court on D1. On D2, the Debtors consummated the sale of substantially all of their assets and businesses. On D3, the Official Committee of Unsecured Creditors of Debtors (the "Committee") filed the latest version of the Plan for Debtor and affiliates (the "Plan") in Debtors’ bankruptcy proceedings.

Pursuant to the Plan, Trust will be created to provide a mechanism for the liquidation and distribution of the assets of Debtors. Under the Trust Agreement (the "Agreement") the liquidating trustee is authorized and directed to take all reasonable and necessary action to hold, conserve, and protect Trust’s assets and to collect on, sell, or otherwise liquidate or dispose of Trust’s assets, and to distribute the net proceeds of such disposition to the Trust beneficiaries as provided in the Plan in as prompt, efficient and orderly a fashion as possible.

Debtor represents that Trust shall not receive or retain cash in excess of a reasonable amount to meet claims and

• 2 -

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 the Agreement, to distribute to the Beneficiaries, 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.

The Agreement generally provides that Trust will terminate no later than five years after its formation.
The Agreement provides that the Beneficiaries will be treated as the grantors and deemed owners of Trust. It further provides that the parties agree to value all assets transferred to Trust consistently and to use such values for all federal income tax purposes.

The Agreement provides that the trustee shall file returns as a grantor trust pursuant to § 1.671-4(a) of the Income Tax Regulations.

The Agreement, consistent with the requirements set out in Rev. Proc. 94-45, 1994-2 C.B. 684, provides that the transfer of the liquidating trust assets to the liquidating trust will be treated for all federal tax purposes (e.g., §§ 61(a)(12), 483, 1001, 1012, and 1274) as a transfer from the bankruptcy estate to the Beneficiaries followed by a deemed transfer by the Beneficiaries to the liquidating trust.

Section 671 of the 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) of the regulations provides that except as provided in § 1.671-4(b)(1) and (2), 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

• 3 -

trust on Form 1041, but should be shown on a separate statement attached to that form.

Section 677(a) of the Code 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) of the regulations 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.

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) of the regulations if certain specified conditions are met. 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 as follows:

1. Trust will be classified for federal income tax purposes as a liquidating trust under § 301.7701-4(d) of the regulations.

2. Trust will be a grantor trust and the Beneficiaries of Trust will be treated as the owners of Trust under §§ 671 and 677 of the Code.

• 4 -

Except as specifically set forth above, no opinion is expressed 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 who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with a power of attorney on file with this office, a copy of this letter is being sent to Debtor.

Sincerely yours,

J. THOMAS HINES
Acting Branch Chief, Branch 2
Office of the Assistant
Chief Counsel
(Passthroughs and
Special Industries)

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