Bankruptcy liquidating trust keeps its status during another one-year extension

Plain-English summary

A Chapter 11 bankruptcy plan created a trust to pursue estate litigation claims, liquidate the resulting assets, and distribute the proceeds to claim holders. The trust had an initial five-year term and received three one-year extensions, but continuing adversary proceedings prevented it from finishing the liquidation. It represented that it had operated under the limits in Revenue Procedure 94-45, including avoiding a trade or business, restricting investments, and making timely distributions. The trust requested one additional year to complete its work. The IRS ruled that the extension would not adversely affect its treatment as a liquidating trust under Treas. Reg. § 301.7701-4(d).

Ruling snapshot

• Question: Will one more year of operation cause the bankruptcy trust to lose its federal tax classification as a liquidating trust?
• Outcome: Approved (one-year extension will not adversely affect liquidating-trust status)
• Key authorities: 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: 201849011                                            Third Party Communication: None
Release Date: 12/7/2018                                      Date of Communication: Not Applicable
Index Number: 7701.00-00, 7701.03-06
                                                             Person To Contact:
--------------------------------------                       -----------------------, ID # ------------------
--------------------------------------------------------     Telephone Number:
------------------------                                     ----------------------
-----------------------------                                Refer Reply To:
 -----------------------------                               CC:PSI:B03
                                                             PLR-119831-18
                                                             Date:
                                                             September 10, 2018




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

Debtors           = ------------------------------------------

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

Plan              = ----------------------------------------------------------------------------------------------
                    ----------------------------------------------------------------------------------------------
                    -------------------------------------------------------------------------------

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

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

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

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



Dear -----------------

       This letter responds to your letter dated June 18, 2018, 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, beginning on Date 1, Debtors each filed
voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court. On Date 2, the Plan submitted to the Bankruptcy Court
confirmed by Debtors was confirmed and became effective Date 3. The Plan
established Trust to facilitate the liquidation of the estate, along with two other
liquidating trusts the assets of which included Beneficial Interests of Trust. The initial
term of Trust was for five years. The Bankruptcy Court approved three one-year term
extensions of Trust, with the last one ending on Date 4.

        Pursuant to the provisions of the Plan and the trust agreement, Trust was
created for the purpose of prosecuting bankruptcy estate litigation claims on behalf of
the holders of claims against Debtors. Pursuant to the Plan, Trust was established to
hold, prosecute, and liquidate the estate’s causes of action and any obligation right that
is pending on the effective date and that relates to a common set of facts or legal issues
also implicated by an estate cause of action, all for the sole purpose of liquidating and
distributing Trust’s assets in accordance with § 301.7701-4(d), with no objective to
continue or engage in the conduct of a trade or business.

        Under the trust agreement, Trust shall not receive or retain cash in excess of a
reasonable amount to meet claims and contingent liabilities or to maintain the value of
the assets during liquidation. Cash not available for distribution and cash pending
distribution will be held in cash, cash equivalents, U.S. Treasury securities, money
market investments, and similar investments, but limited to those investments permitted
under § 301.7701-4(d).

       In addition, Trust is required, under the terms of the 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 (i) maintain reserves for distributions to holders of Disputed
Claims, (ii) meet contingent liabilities and maintain the value of the assets of Trust, (iii)
pay or reserve for reasonable administrative expenses, or (iv) satisfy other liabilities
incurred of assumed by Trust.

       The trust agreement provides that the beneficiaries of Trust will be treated as the
grantors, deemed owners, and beneficiaries of Trust for federal income tax purposes
consistent with the requirements of Rev. Proc. 94-45. The trust agreement also
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 further provides that
the trustee will determine the fair market value all assets transferred to Trust and use
such values for all federal income tax purposes.

       Consistent with the requirements set out in Rev. Proc. 94-45, 1994-2 C.B. 684,
Trust indicates that the transfer of Trust assets to Trust has been 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.

        Trust represents that, from its establishment, Trust has been formed and
operated consistent with the conditions set out in Rev. Proc. 94-45. Trust further
represents that it will make continuing efforts to liquidate the trust’s assets, make timely
distributions, and not unduly prolong the duration of the trust. Trust also represents that
certain continuing adversary proceedings have made it impossible to completely
liquidate Trust by Date 4, the end of its third period of extension. The trust agreement
provides that the aggregate of all allowed extensions shall not exceed three years,
unless the trustee receives a favorable ruling from the Internal Revenue Service that
any further extension would not adversely affect the status of Trust as a liquidating trust
§ 301.7701-4(d). Therefore, Trust requests a ruling that an extension of time of Trust’s
term by one year ending on Date 5 will not adversely affect its status as a liquidating
trust under § 301.7701-4(d).

                                  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 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 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.

       Section 3.06 of Rev. Proc. 94-45 provides that the trust instrument must contain
a fixed or determinable 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 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 it 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

       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 the extension of time
of Trust's term to Date 5 will not adversely affect the treatment of Trust as 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.

       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 material submitted
in support of the ruling request, it is subject to verification on examination.

       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,



                                        /s/
                                        Adrienne M. Mikolashek
                                        Branch Chief, Branch 3
                                        Office of the Associate Chief Counsel
                                        (Passthroughs & Special Industries)

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