Bankruptcy trust remains a liquidating trust during another extension

Plain-English summary

A trust was created under a Chapter 11 liquidation plan to sell assets and distribute the proceeds to beneficiaries. Its agreement prohibited operating a trade or business, limited retained cash, required at least annual distributions, and treated the beneficiaries as grantors and owners. After several court-approved extensions, unresolved legal claims required another finite extension. The IRS concluded that the trust continued to satisfy Revenue Procedure 94-45 and remained a liquidating trust under Treasury Regulation section 301.7701-4(d). Extending its term to the final redacted date would not change that classification.

Ruling snapshot

• Question: Would another court-approved extension cause the bankruptcy trust to lose its liquidating-trust classification?
• Outcome: approved, the trust remains a liquidating trust and the proposed extension does not affect that status
• Key authorities: Treas. Reg. §§ 301.7701-4(d) and 1.671-4(a); Rev. Proc. 94-45

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 202003003                                                 Third Party Communication: None
Release Date: 1/17/2020                                           Date of Communication: Not Applicable
Index Numbers: 7701.00-00, 7701.03-00,
              7701.03-06                                          Person To Contact:
                                                                  ----------------------, ID No. ------------------
-----------------------------------                               Telephone Number:
--------------------------------                                  ----------------------
------------------------------------------------------------      Refer Reply To:

-                                                                 CC:PSI:B03
--------------------------                                        PLR-113124-19
------------------------------                                    Date:
                                                                  October 22, 2019

LEGEND

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

Debtor                    = ----------------------------------------------

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

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

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

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

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

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

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

Date8                     = ---------------------------

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

This responds to a letter dated May 20, 2019, 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 Debtor filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court on Date1.
On Date2, the Bankruptcy Court approved the Fourth Amended Plan of Liquidation with
an effective date of Date3. On Date3, Trust was established as part of the plan with an
initial term ending on Date4. The Bankruptcy Court, however, subsequently extended
the term of Trust to Date 5, then to Date 6 and then to Date 7. Because of unresolved
legal claims, Trustee intends to motion the Bankruptcy Court to extend the termination
date of Trust to Date8.

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. Trust is not permitted to 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 is to 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.

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 Debtor to the beneficiaries followed by a deemed
transfer by the beneficiaries to Trust.

Trust further represents that, from its establishment, Trust has been formed and
operated consistent with the conditions set forth in Rev. Proc. 94-45. As of the date of
this request, Trust has distributed amounts in Trust to its beneficiaries. Trust represents
that certain developments, generally beyond the control of the trustee of Trust, have
occurred that require additional time and effort to facilitate the recovery of certain
remaining trust assets and to complete the liquidation of the Trust.

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 if liquidating particular assets and not as an organization having as its
purposes the carrying 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
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 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

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 as a
liquidating trust under 301.7701-4(d) for income tax purposes. Additionally, based on
the representations made and the information submitted, we also rule that extension of
Trust’s term to Date8 will not adversely affect the classification of Trust as 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. According to § 6110(k)(3) of the
Code, this ruling 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.

Under a power of attorney on file with this office, we are sending a copy of this letter to
X’s authorized representatives.

                                              Sincerely,

                                              Associate Chief Counsel
                                              (Passthroughs & Special Industries)

                                          By: _____________________________
                                              Richard T. Probst
                                              Senior Technician Reviewer, Branch 3
                                              Office of the Associate Chief Counsel
                                              (Passthroughs & Special Industries)

Enclosures: Copy of this letter
            Copy of this letter for § 6110 purposes

cc: