Other factors to consider are tax and securities law implications. As noted above, most liquidation trusts for tax purposes are structured as grantor trusts and the IRS has set standards in accordance with Treas. Reg. 301.7701-4 (d) that apply to the liquidation of trusts that, if followed, should ensure that they are not subject to income tax at the corporate level. If the term of the trust is longer than a few years, it may be advisable to request a letter of assessment from the IRS that the trust qualifies for the grantor Trust`s tax treatment. If a public limited company with assets in excess of $10,000,000 has at least one registered class of securities of at least 500 shareholders, it should also be verified whether the units of the liquid trust will be ”equity securities,” so the trust must register the interest with the Securities and Exchange Commission. For these and other reasons, it is important to attract experienced professionals who help in the creation of a liquidation trust. According to Rev. Proc. 94-45 the disclosure plan and statement must explain how the bankruptcy estate will deal with the transfer of its assets to the trust for federal income tax purposes. The transfer to a liquid trust in favour of the creditors must be considered a transfer to the creditors for all purposes of the Revenue Code, to the extent that the creditors are beneficiaries of the trust. The transfer is considered an alleged transfer to the beneficiary creditors, followed by an alleged transfer by the beneficiary creditors to the trust. The plan, publication statement and trust agreement must provide that the beneficiaries of the trust are treated as the givers and owners of the trust and that the trust instrument (or plan, in the absence of a separate fiduciary agreement) requires the agent to file trust declarations as a trust under section 1.671-4(a) of the income tax rules.
26 CFR § 1.671-4 (a). The plan, disclosure statement and any separate fiduciary instrument must provide for consistent assessments of the ownership transferred by the trustee and creditors, and these valuations must be used for all federal income tax purposes. Finally, a liquid trust may lose its grantor trust status ”if the liquidation is inappropriately prolonged or if the object of the liquidation is concealed by commercial activities in such a way that the stated purpose of the liquidation can be qualified as lost or abandoned”. 26 CFR § 301.7701-4 (d). The liquidation of trusts created under insolvency plans often gives its agents the power to pursue avoidance measures and related actions against creditors and third parties. Agents may take these actions against parties who have little or no connection to the United States and who raise unresolved jurisdictional issues. See z.B. Weitz v.
Ascot (In re Waste2Energy Holdings, Inc.), Case No. 12-50819-KJC (Bankr. D. Del.). As the volume of cross-border cases 11 continues to increase, the liquidation of trustees pursuing estate actions may face more personal jurisdictional issues. . . .