PLR 201240009: IRS confirms bankruptcy liquidating trust classification after extension

Plain-English summary

A bankruptcy liquidating trust asked whether it would remain a liquidating trust if the bankruptcy court extended its term by another three years. The trust had been formed under a Chapter 11 plan to sell assets, distribute proceeds to beneficiaries, and avoid operating a business except as needed for liquidation. The IRS concluded that the requirements of Revenue Procedure 94-45 were satisfied and that the trust would remain classified as a liquidating trust through the proposed extension. The beneficiaries would be treated as the owners of the grantor trust under sections 671 and 677.

Ruling snapshot

• Question: Will a bankruptcy trust remain a liquidating trust after its liquidation period is extended?
• Outcome: Approved
• Key authorities: IRC §§ 671 and 677; Treas. Reg. § 301.7701-4(d); Rev. Proc. 94-45

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201240009
Third Party Communication: None
Release Date: 10/5/2012
Date of Communication: Not Applicable
Person To Contact:
Index Number: 7701.00-00, 7701.03-00,
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Telephone Number:
7701.03-06
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Refer Reply To:
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PLR-103082-12
-------------------------------------------- Date:
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June 11, 2012
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LEGEND

Trust = ------------------------------------------------------------------
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Debtor = -----------------------------

Date 1 = ------------------------

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

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

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

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

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

Date 7 = ------------------

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

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

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

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

This is in response to your letter dated January 9, 2012, submitted on behalf of Trust, 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 the Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court on Date 1. On Date 2, Debtor submitted to the Bankruptcy Court the Plan of Reorganization (the “Plan”). On Date 3, the Plan was confirmed by the Bankruptcy Court. On Date 4, Trust was established and approved by the Bankruptcy Court to facilitate the liquidation of the estate. The initial term of the Trust was for four years, ending Date 5. On Date 6, the Bankruptcy Court extended the term of the Trust by three years ending on Date 7. On Date 8, the Bankruptcy Court extended the term of the Trust by an additional year ending on Date 9.

Pursuant to the provisions of the Trust agreement, Trust was created for the purpose of liquidating the assets of Trust, with no objective to continue or 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 shall not receive or retain cash in excess of a reasonable amount to meet claims and 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 Trust, 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 the property or to meet claims or contingent liabilities.

Trust 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.

Trust 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.

Trust, consistent with the requirements set out in Rev. Proc. 94-45, 1994-2 C.B. 684, provides that the transfer of Trust assets to Trust will be treated for all federal tax purposes as a deemed transfer by the Debtor to the beneficiaries followed by a deemed transfer by the beneficiaries to Trust.
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As of the date of the request, Trust had distributed amounts comprising approximately a% of the claims in the Trust to its beneficiaries. Trust represents that, from its establishment, Trust has been formed and operated consistent with the conditions set out in Rev. Proc. 94-45. Trust now represents that certain developments, generally beyond the control of the trustee of Trust, have occurred that make it impossible to completely liquidate Trust by Date 9, the end of its three year extension. Trust requests a ruling that it will retain its status as a liquidating trust in compliance with § 301.7701- 4(d) and Rev. Proc 94-45 if Trust's term is extended by the Bankruptcy Court for another three years ending on Date 10.

LAW AND ANALYSIS

Section 671 of the Internal Revenue 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) 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 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 677(a) 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) 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.
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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. (1988), as a liquidating trust under § 301.7701-4(d) if certain specified conditions are met.

CONCLUSIONS

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 that Trust will be classified for federal income tax purposes as a liquidating trust under § 301.7701-4(d) of the regulations. Therefore, Trust will be a grantor trust and the beneficiaries of Trust will be treated as the owners of Trust under §§ 671 and 677.

Additionally, an extension of the Trust's term to Date 10 will not adversely affect the determination that Trust is a liquidating trust under § 301.7701-4(d).

Except as specifically set forth above, we express or imply no opinion 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 requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent to Trust's authorized representatives.

Sincerely,

David R.Haglund
David R. Haglund
Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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

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