Litigation-related extension did not end liquidating trust status

Plain-English summary

A liquidating trust was created under a Chapter 11 reorganization plan to convert assets to cash, resolve claims, and distribute proceeds to beneficiaries. Unresolved litigation had already required several court-approved extensions, and the trustee expected to request another finite extension. The trust represented that it continued to follow the conditions in Revenue Procedure 94-45, made ongoing efforts to dispose of assets and distribute proceeds, and did not conduct a continuing business. The IRS ruled that the trust remained a liquidating trust under Treasury Regulation section 301.7701-4(d) and that the proposed further extension would not change that classification. The trust would continue to be treated as a grantor trust, with its beneficiaries treated as owners under section 671, to the extent it otherwise qualified.

Ruling snapshot

• Question: Would another court-approved extension needed to resolve litigation cause the trust to lose its liquidating trust classification?
• Outcome: approved
• Key authorities: IRC § 671; Treas. Reg. §§ 1.671-4, 301.7701-4(d); Rev. Proc. 94-45

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202402008                                            Third Party Communication: None
Release Date: 1/12/2024                                      Date of Communication: Not Applicable
Index Number: 7701.03-00, 7701.03-06
                                                             Person To Contact:
                                                             -------------------------, ID No. -----------------
-------------------------------------------------------      -----------------------------------------------------
--------------------------                                   Telephone Number:
----------------------------                                 --------------------
-------------------------------                              Refer Reply To:
                                                             CC:PSI:B01
                                                             PLR-110694-23
                                                             Date:
                                                             October 11, 2023




LEGEND

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

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

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

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

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

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

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

Date 6       = -----------------------

Date 7       = -----------------------

Date 8       = -----------------------

PLR-110694-23                                 2

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

This responds to a letter dated May 15, 2023, 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

The information submitted states that Debtors filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court on Date 1.
On Date 2, the Bankruptcy Court approved Debtors' plan of reorganization (the "Plan")
with an effective date of Date 3.

On Date 3, Trust was established as part of the Plan with an initial term ending on Date

4. Because of unresolved litigation, the Bankruptcy Court subsequently approved the
extension of the term of Trust to Date 5, then to Date 6, and then to Date 7. As the
litigation claims remain unresolved, the trustee of Trust intends to file a motion with the
Bankruptcy Court to extend the termination date of Trust to Date 8, and to request
further term extensions with the Bankruptcy Court, as necessary, until the final
resolution of all legal claims and subsequent distributions and other actions pursuant to
the Plan.

Pursuant to the provisions of the Plan and the Trust agreement, Trust was created for
the purpose of liquidating, converting assets to cash 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. Trust is not permitted to receive or retain cash in
excess of a reasonable amount necessary to make applicable distributions to the
beneficiaries, to satisfy any liabilities of Trust and to establish and maintain reserves
contemplated by the Plan. 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 the Trust agreement, 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 Trust's assets or to meet claims
or contingent liabilities.

The Trust agreement 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.

The Trust agreement 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.

PLR-110694-23                                  3


The Trust agreement, consistent with the requirements set out in Rev. Proc. 94-45,
1994-2 C.B. 684, provides that the transfer of Trust's assets to Trust will be 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.

The trustee of Trust represents that, from its establishment, Trust has been formed and
operated consistent with the conditions set forth in Rev. Proc. 94-45. The trustee of
Trust further represents that he will make continuing efforts to dispose of the assets of
Trust, make timely distributions, and not unduly prolong the duration of Trust. The
trustee of Trust also represents that certain continuing adversary proceedings have
made it impossible to completely liquidate by Date 7. The Trust agreement provides
that the aggregate of all allowed extensions shall not exceed three years, unless the
trustee of Trust receives a favorable ruling from the Internal Revenue Service that any
further extensions would not adversely affect the status of Trust as a liquidating trust
under § 301.7701-4(d).

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 shall then 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 which 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 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

PLR-110694-23                                4

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
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 Trust is classified as a
liquidating trust under § 301.7701-4(d) for federal tax purposes and that any further
extension of Trust's term to Date 8 will not adversely affect that classification.
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 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.

PLR-110694-23                                           5

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,



                                                  Joy C. Spies
                                                  Senior Technician Reviewer, Branch 1
                                                  Office of the Associate Chief Counsel
                                                  (Passthroughs & Special Industries)


Enclosure
      Copy for § 6110 purposes



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