Further term extension preserves bankruptcy liquidating trust status

Plain-English summary

A liquidating trust was created under a confirmed Chapter 11 plan to sell assets and distribute the proceeds to beneficiaries. Its agreement prohibited an ongoing business, limited retained cash to amounts needed for claims and asset preservation, and required at least annual distributions. After an initial five-year term and three one-year extensions, developments largely outside the trustee's control made complete liquidation impossible by the current expiration date. The IRS concluded that the trust continued to satisfy Revenue Procedure 94-45 and that another extension to the represented date would not jeopardize its liquidating-trust classification. The beneficiaries would remain the grantors and deemed owners of the trust under sections 671 and 677.

Ruling snapshot

• Question: Will an additional term extension cause the bankruptcy trust to lose its liquidating-trust and grantor-trust treatment?
• Outcome: approved, the extension will not change the trust's federal tax classification
• Key authorities: IRC §§ 671 and 677; Treas. Reg. §§ 1.671-4 and 301.7701-4(d); Rev. Proc. 94-45

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201942009                                              Third Party Communication: None
Release Date: 10/18/2019                                       Date of Communication: Not Applicable
Index Number: 7701.03-06
                                                               Person To Contact:
---------------------------------                              -----------------------, ID No. --------------
------------------------------------------------------------   Telephone Number:
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-------------------------------                                Refer Reply To:
                                                               CC:PSI:B01
                                                               PLR-133168-18
                                                               Date:
                                                               June 06, 2019




Trust        = -----------------------------------------------------------
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Debtors      = -----------------------------------------------------------
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Date 1       = ---------------------
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Date 2       = -------------------------
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Date 3       = ---------------------------
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Date 4         ---------------------------
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Date 5       = ---------------------------

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

This responds to a letter dated November 7, 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
PLR-133168-18                                  2

The information submitted states that, on Date 1, Debtors each filed voluntary petitions
for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court. The bankruptcy cases of the Debtors were consolidated for procedural purposes
and were jointly administered. On Date 2, the Bankruptcy Court entered a confirmation
order (“Order”) confirming an amended Plan of Reorganization (“Plan”). In accordance
with the Plan and the Order, Trust was established and funded on Date 3 (“Trust
Effective Date”). The initial term of Trust was set to expire five years from the Trust
Effective Date. The Bankruptcy Court approved three one-year term extensions of
Trust, with the last one ending on Date 4 unless the term is further extended.

Pursuant to the provisions of the Plan and 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 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,
indicates that the transfer of Trust assets to Trust have been 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.

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 4, the end of its
current 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
PLR-133168-18                                  3

the status of Trust as a liquidating trust under § 301.7701-4(d) for federal income tax
purposes.

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 § 1.671-5,
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.

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
PLR-133168-18                                  4

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 is classified for
federal tax purposes as a liquidating trust under § 301.7701-4(d) and the extension of
Trust's term to Date 5 will not affect that determination. Therefore, Trust will continue to
be treated as a grantor trust and the beneficiaries of Trust will continue to be treated as
the owners of Trust under §§ 671 and 677.

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.

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 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to Trust’s authorized representatives.




                                       Sincerely,


                                       Laura C. Fields
                                       Laura C. Fields
                                       Senior Technician Reviewer, Branch 1
                                       (Passthroughs & Special Industries)


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