PLR 1109007: The IRS granted a liquidating trust more time to elect disputed ownership fund treatment

Plain-English summary

A reserve within a bankruptcy liquidating trust asked for more time to elect treatment as a disputed ownership fund under Treas. Reg. § 1.468B-9(c)(2)(ii). The election had to be attached to the reserve's timely filed federal income tax return, but the trustee and accountant did not complete the filing on time. The IRS found that the taxpayer acted reasonably and in good faith and that the extension would not prejudice the government's interests. It granted 45 days from the ruling date to file the required election statement, while explaining that the ruling did not remove any penalty for the late income tax return.

Ruling snapshot

• Question: May the reserve receive more time to file its disputed ownership fund election statement?
• Outcome: Approved.
• Key authorities: Treas. Reg. §§ 1.468B-9(c)(2)(ii), 301.9100-1, and 301.9100-3; IRC §§ 6501(a) and 6662.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201109007 Third Party Communication: None
Release Date: 3/4/2011 Date of Communication: Not Applicable
Index Number: 9100.00-00, 468B.06-00
Person To Contact:
------------------------------------------------------------ ---------------------------, ID No. ----------
---------------------- Telephone Number:
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---------------------------- Refer Reply To:
--------------------------------- CC:ITA:B06
PLR-123861-10
----------------------------------------------- Date: November 30, 2010

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Legend:

Taxpayer =----------------------------------------------------------------------
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Debtor =------------------------------------

Liquidation Trust =------------------------------

Trustee =--------------------------------

Accountant =---------------------------------

Reserves =----------------------------------------------------------------------
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----------------------

Plan =----------------------------------------------------------------------
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Trust Agreement =----------------------------------------------------------------------
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--------------

Court =----------------------------------------------------------------------
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Date 1 =-------------------
PLR-123861-10 2

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

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

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

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

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

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

This letter responds to your request dated June 8, 2010, requesting a ruling on behalf of
Taxpayer. Specifically, you request 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.

                                       FACTS

On Date 1, Debtor filed for bankruptcy under Chapter 11 of the Bankruptcy Code. The
Liquidation Trust was established to administer the Plan by Court’s order confirming the
Plan on Date 2. The Liquidation Trust was established for the sole purpose of holding,
liquidating, and distributing its assets. As part of the Plan and Trust Agreement, Trustee
was required to establish the Reserves to hold cash. Each of the Reserves is treated
as a separate taxpayer. The Taxpayer is one of these Reserves.

In accordance with the Plan and Trust Agreement, Trustee was required to elect to treat
each Reserve as a separate disputed ownership fund as defined in § 1.468B-9. This
election is required to be made on a taxpayer’s timely filed income tax return. Trustee is
experienced in bankruptcy and restructuring matters, but has never been named as a
trustee for a liquidating trust. On or about Date 3, Trustee contacted Accountant
regarding the election and disputed ownership funds in general. Accountant provided
general information, but did not consider Taxpayer to be its client. In between Date 4
and Date 5, Trustee contacted Accountant regarding filing income tax returns for
Taxpayer. Accountant informed Trustee that it was unaware that it had been retained to
file the tax returns. As a result, Taxpayer’s income tax return was not timely filed on its
due date, Date 4. Taxpayer submitted this request for § 301.9100-3 relief on Date 6.

                                         LAW

Treasury Regulation § 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
PLR-123861-10 3

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 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 paragraph (c)(2)(ii) of
§ 1.468B-9).

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.

Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable
extension of the time to make a regulatory election under all subtitles of the Code
except subtitles E, G, H, and I, provided that the taxpayer acted reasonably and in good
faith and granting relief will not prejudice the interests of the Government. 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 a revenue ruling, revenue
procedure, notice, or announcement published in the Internal Revenue Bulletin. Section
301.9100-1(b) also defines an election to include an application for relief in respect to
tax, or a request to adopt, change, or retain an accounting method or accounting period.

Section 301.9100-2 sets forth rules governing automatic extensions for regulatory
elections. If the provisions of § 301.9100-2 do not apply to a taxpayer’s situation, the
provisions of § 301.9100-3 may apply.

Section 301.9100-3 sets forth the standards that the Commissioner will use in
determining whether to grant an extension of time to make a regulatory election that
does not meet the standards of § 301.9100-2. It also sets forth information and
representations that the taxpayer must furnish to enable the Service to determine
whether the taxpayer has satisfied these standards. The applicable standards are
whether the taxpayer acted reasonably and in good faith and whether granting relief
would prejudice the interests of the Government.
PLR-123861-10 4

Under § 301.9100-1(b)(1)(i), a taxpayer that applies for relief for failure to make an
election before the failure is discovered by the Service ordinarily will be deemed to have
acted reasonably and in good faith. However, the taxpayer will not be considered to
have acted reasonably and in good faith if the taxpayer seeks to alter a return position
for which an accuracy-related penalty has been or could be imposed under section
6662 at the time the taxpayer requests relief and the new position requires or permits a
regulatory election for which relief is requested. Additionally, if the taxpayer was
informed in all material respects of the required election and related tax consequences
but chose not to file the election, or uses hindsight in requesting relief, the taxpayer
ordinarily will not be considered to have acted reasonably and in good faith. Section
301.9100-3(b)(3).

Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced
if granting relief would result in a taxpayer having a lower tax liability in the aggregate
for all tax years affected by the regulatory election than the taxpayer would have had if
the election had been timely made (taking into account the time value of money).
Likewise, when 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 an
election may result in the affected taxpayers, in the aggregate, having a lower tax
liability than if the election had been timely made.

Further, the interests of the Government are ordinarily prejudiced if the tax year in which
the regulatory election should have been made or any tax 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 § 301.9100-3. Section 301.9100-3(c)(1)(ii).

The information and representations furnished by Taxpayer establish that it has acted
reasonably and in good faith in 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 Taxpayer to file the necessary § 1.468B-9(c) election
statement. 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.

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 § 1.468B-9(c) Election. This
ruling does not relieve Taxpayer from any penalty that it may owe as a result of the
failure to timely file its income tax return.

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.
PLR-123861-10 5

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

A copy of this letter must be attached to any 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,



                                   Martin Scully, Jr.
                                   Senior Counsel, Branch 6
                                   (Income Tax & Accounting)