In 1994, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 94-45 (“Rev. 94-45”), which established guidelines applicable to liquidating trusts formed to implement a Chapter 11 plan, which are similar to the considerations applicable to a liquidating trust outside bankruptcy. 94-45 lists twelve conditions which, if met, will generally result in the issuance by the IRS of an advance determination classifying the trust as a liquidating trust under Treas. The plan, disclosure statement, and any separate trust instrument must provide for consistent valuations of the transferred property by the trustee and the creditors, and those valuations must be used for all federal income tax purposes.If followed, these guidelines should ensure that the establishment of the trust will be treated as a transfer from the bankruptcy estate to the beneficiaries followed by a deemed transfer by the beneficiaries to the liquidating trust. Finally, a liquidating trust may lose its grantor trust status “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.” 26 CFR § 301.7701-4(d).
A plan must expressly retain claims to preserve a liquidating trust’s standing to pursue them after plan confirmation.
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