Two-year extension preserves bankruptcy liquidating-trust status

Plain-English summary

A trust created under a Chapter 11 bankruptcy plan held and pursued litigation claims for the benefit of creditors and distributed liquidation proceeds. Its original five-year term had already been extended several times, but ongoing adversary proceedings prevented complete liquidation. The trust represented that it continued to operate solely to liquidate and distribute assets, made timely distributions, and did not conduct a trade or business. The IRS concluded that the conditions of Revenue Procedure 94-45 were satisfied. It ruled that an additional two-year extension would not harm the trust's classification as a liquidating trust, provided it otherwise continued to qualify.

Ruling snapshot

• Question: Will extending the bankruptcy liquidating trust for two more years cause it to lose liquidating-trust status?
• Outcome: approved
• 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: 202009023
Release Date: 2/28/2020

                                                               Third Party Communication: None
Index Number: 7701.03-06
                                                               Date of Communication: Not Applicable

--------------------------------------------                   Person To Contact:
----------------------------------                             --------------------, ID No. -----------------
--------------------                                           Telephone Number:
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                                                               Refer Reply To:
                                                               CC:PSI:B03
                                                               PLR-121197-19
                                                               Date:
                                                               November 25, 2019


LEGEND

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

Plan              =         ------------------------------------------------------------------------------------
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Date1             =        -------------------------

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

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

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


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

        This responds to a letter dated September 5, 2019, and subsequent
correspondence, 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-121197-19                                 2

        The information submitted states that, beginning on Date1, and various dates
thereafter, Debtors each filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court. On Date2, Plan was
confirmed by the Bankruptcy Court and became effective Date3. Plan established Trust
to facilitate the liquidation of the bankruptcy 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 four successive one-year
extensions of Trust, with the last extension ending on Date4.

       Pursuant to the provisions of Plan and the trust agreement governing Trust, Trust
was created for the purpose of prosecuting bankruptcy estate litigation claims on behalf
of the holders of claims against Debtors. Pursuant to Plan, Trust was established to
hold, prosecute, and liquidate the bankruptcy estate’s causes of action and any
objection right that is pending on the effective date and that relates to a common set of
facts or legal issues also implicated by a bankruptcy estate cause of action, all for the
sole purpose of liquidating and distributing the assets of Trust 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 governing Trust, 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 agreement governing
Trust, to distribute to the beneficiaries of Trust at least annually its net income and all
net proceeds from the sale of the assets of Trust, except that Trust may retain an
amount of net proceeds or net income reasonably necessary to (i) maintain reserves for
distributions to holder 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 or assumed by Trust.

       The trust agreement governing Trust 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, 1994-2 C.B.

684. 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 of 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, Trust represents
that the transfer of Trust assets to Trust has been treated for all federal tax purposes as
PLR-121197-19                                3

a deemed transfer by Debtors to the beneficiaries of Trust, 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 assets of Trust, make
timely distributions, and not unduly prolong the duration of Trust. Trust also represents
that certain continuing adversary proceedings have made it impossible to completely
liquidate by Date4, the end of its fourth period of extension. The trust agreement
governing Trust 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 (“Service”) that any further extensions would not adversely affect the status of
Trust as a liquidating trust under § 301.7701-4(d). Therefore, Trust requests a ruling
that an extension of the term of Trust by an additional two years ending on Date5 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 purposes 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., as a liquidating trust under § 301.7701-4(d) if certain conditions
are met.

        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 the creation of the trust and that is reasonable based on all of 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
PLR-121197-19                                 4

liquidating purpose of the trust, the term of the trust may be extended for a finite time
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 on 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 an
extension of time for the term of Trust to Date5 will not adversely affect the classification
of Trust as a liquidating trust under § 301.7701-4(d) to the extent Trust otherwise
qualifies as such.

       Except as expressly set forth above, we express or imply no opinion 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.

      In accordance with the power of attorney on file with this office, we are sending a
copy of this letter to Trust’s authorized representatives.

                                       Sincerely,



                                       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


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