Bankruptcy trust remains a liquidating trust during an extended term

Plain-English summary

Two Chapter 11 debtors transferred their remaining assets to a trust formed to liquidate those assets and distribute the proceeds to creditors and other beneficiaries. The trust had already received one three-year extension, but disputed employee claims and tax-refund litigation could not be resolved before that extended term expired. The trust represented that it held no operating business assets and had operated consistently with the conditions in Revenue Procedure 94-45. The IRS ruled that the trust qualified as a liquidating trust and, apart from its disputed-claims reserve, had been a grantor trust owned by its beneficiaries since inception. It also ruled that another extension to the requested finite date would not impair the trust's liquidating-trust status.

Ruling snapshot

• Question: Does the bankruptcy trust qualify as a liquidating trust, and will another court-approved term extension affect that classification?
• Outcome: Approved, including continued liquidating-trust status through the requested extension.
• Key authorities: Treas. Reg. §§ 301.7701-4(d), 1.671-4(a), and 1.468B-9; Rev. Proc. 94-45

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

                                                             Third Party Communication: None

Number: 201808004 Date of Communication: Not Applicable
Release Date: 2/23/2018
Person To Contact:
Index Number: 7701.00-00, 7701.03-00, -------------------------, ID No. ------------------
7701.03-06 -----------------------------------------------------
Telephone Number:
------------------------------ ----------------------
--------------------------- Refer Reply To:

---------------------------------------- CC:PSI:B03
------------------------------------- PLR-117155-17
Date:
-------------------------------------------------------- November 21, 2017

LEGEND

Trust = -------------------------------------

W = ---------------------------------

X = -------------------------------

Y = -----------------------------------

Z = ----------------------------------------------------------

Date1 = ----------------------------

Date2 = ---------------------------

Date3 = --------------------------

Date4 = ----------------------

Date5 = --------------------

Date6 = ----------------------

Date7 = ----------------------

Date8 = ------------------------
PLR-117155-17 2

Date9 = ----------------------

Date10 = ----------------------

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

  This responds to a letter dated May 26, 2017, and subsequent correspondence,

submitted on behalf of Trust, requesting a ruling under § 301.7701-4(d) of the
Procedure and Administration Regulations.

FACTS

   The information submitted states that W and X (collectively, “Debtors”) each filed

a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court on Date1. On Date2, Debtors submitted to the Bankruptcy
Court the Seventh Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of
the United States Bankruptcy Code (“Plan”) and a related disclosure statement
(“Disclosure Statement”). On Date3, the Plan was confirmed by the Bankruptcy Court.
On Date4 (“Effective Date”), the transactions contemplated by the Plan were
consummated. Trust was formed pursuant to the Plan, and is governed by the Plan and
the Trust Agreement dated Date5.

     On the Effective Date, Trust was funded with all of the assets of Debtors other

than: (1) cash to be distributed by Debtors, as reorganized, on and from the Effective
Date, to holders of certain claims for costs or expenses of administration of the Chapter
11 case, certain claims entitled to priority under the Bankruptcy Code, certain claims for
de minimis amounts, vendor claims with respect to services, software licenses or goods
provided to or for the benefit of Y (W’s subsidiary) or Y’s subsidiaries, and claims by
certain notes trustees for indemnification and reasonable fees and expenses, (ii) cash
necessary to pay the fees and expenses owed to certain creditors’ professionals, (iii)
cash necessary to reimburse Debtors for fees and expenses incurred in connection with
initial distributions made by Debtors as disbursing agent, (iv) excess cash held by the
disbursing agent after making disbursements in accordance with the Plan, and (v)
equity interests in X (all assets of which were contributed to Trust), Y and Z. Trust
represents that Trust has not, and will not, hold any operating assets of a going
business, a partnership interest in a partnership that holds operating assets, or fifty
percent or more of stock of a corporation with operating assets.

    The initial term of Trust was for three years ending on Date6. On Date7, Trust

filed a motion with the Bankruptcy Court requesting a three-year extension of the term
of Trust on the basis that the extension was necessary to analyze and pursue or defend
various causes of action (including claims for disputed tax refunds and potential actions
PLR-117155-17 3

against certain former directors and officers of Debtors) and to investigate, prosecute
and/or resolve outstanding disputed claims against Debtors. By order dated Date8,
Bankruptcy Court granted the request and extended Trust’s term until Date9.

   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. The Plan provides that the beneficial
interests in Trust would be distributed to certain holders of senior notes claims,
subordinated notes claims, general unsecured claims, guarantees claims, preferred
income equity redeemable securities claims, and holders of certain debt of Y. In
addition, the Plan provides that, in the event such claims are fully paid, the interests in
Trust would be redistributed to certain holders of subordinated claims, and after such
subordinated claims are paid in full, certain holders of preferred equity interests, Dime
Warrants, and common equity interests.

    Pursuant to the provisions of the Trust Agreement, 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 assets 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.

     The Plan and Trust Agreement require all parties, including Debtors, Trust and

Trust beneficiaries, to treat the transfer of Trust assets to Trust as (i) a transfer of Trust
assets (subject to any obligations relating to those assets) directly to Trust beneficiaries
and, to the extent Trust assets are allocable to disputed claims, to the reserve
established to hold Trust assets allocable to, or retained on account of, disputed general
unsecured claims (“Disputed Claims Reserve”), followed by (ii) the transfer by such
beneficiaries to Trust of Trust assets (other than Trust assets allocable to the Disputed
Claims Reserve) in exchange for Trust interests. Accordingly, the Plan, Disclosure
Statement and Trust Agreement provide that Trust beneficiaries shall be treated for U.S.
federal income tax purposes as the grantors and owners of their respective share of
Trust assets (other than such Trust assets that are allocable to the Disputed Claims
Reserve), consistent with the requirements set out in Rev. Proc. 94-45, 1994-2 C.B.

684. Trust represents that, in accordance with the Plan, the Disclosure Statement, and
     the Trust Agreement, Trust has filed, and will continue to file, returns for Trust treating it
     (but not the Disputed Claims Reserve) as a grantor trust pursuant to § 1.671-4(a) of the
     Income Tax Regulations.
     PLR-117155-17 4

     Trust further represents that, from its establishment, Trust has been formed and
     operated consistent with the conditions set forth in Rev. Proc. 94-45. In addition, Trust
     elected to treat the Disputed Claims Reserve as a disputed ownership fund under
     § 1.468B-9 and has reported consistently in that regard.

     Trust represents that the trustee and the trust advisory board have been working
     in an expeditious, commercially reasonable manner to monetize assets, to analyze and
     pursue any valid causes of action (including, without limitation, tax refund claims,
     preference actions, and potential causes of action against former directors and officers
     of W) and to investigate, prosecute and/or resolve disputed claims against Debtors.
     However, two principal outstanding matters have not concluded and are not expected to
     conclude by Date9, including the reconciliation of disputed claims filed against Debtors
     by former employees of Debtors and two claims pending in litigation with respect to
     federal and state income tax refunds. Accordingly, Trust represents that it is impossible
     for Trust to completely liquidate by Date9.

     Under Article III of Trust Agreement, multiple extensions of Trust’s term may be
     

     obtained so long as Bankruptcy Court approval is obtained on a date within the period
     six months prior to the expiration of each extended term, and the extension is necessary
     to facilitate or complete the recovery and liquidation of Trust assets.

LAW AND ANALYSIS

    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 if it is
formed with the objective of liquidating particular assets and not as an organization
having as its purposes the carrying on 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 obscure 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).

   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 creation of the trust and that is reasonable based on all the facts and
PLR-117155-17 5

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.

CONCLUSIONS

    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. 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). As such, since inception, Trust (exclusive of the
Disputed Claims Reserve) has been a grantor trust for federal income tax purposes, of
which the Trust beneficiaries are treated as the owners.

  Additionally, based on the facts and circumstances of this case and on the

representations made, we rule that an extension of time of Trust’s term to Date10 will
not adversely affect the determination that Trust is a liquidating trust under § 301.7701-
4(d).

  Except as expressly set forth above, no opinion is expressed or implied

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-117155-17 6

  In accordance with the power of attorney on file with this office, we are sending

copies of this letter to your authorized representatives.

                                 Sincerely,



                                 James A. Quinn
                                 Senior Counsel, Branch 3
                                 Office of the Associate Chief Counsel
                                 (Passthroughs & Special Industries)

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