Rev. Rul. 80-150

ISSUE

Under the circumstances described below, will an arrangement be classified as a liquidating trust?

FACTS

M, a corporation, has been in the business of owning and managing real property and interests in real property for a number of years. In 1979, the board of directors of M adopted a plan of complete liquidation for M. Within the 12-month period beginning on the date of adoption of the plan of liquidation, M was able to sell all of its assets except land on which is located a heating plant, a related right of way to that plant and certain mining claims. These assets represent less than 20 percent of M's total net assets as of the date of adoption of the plan of liquidation.

The heating plant is substantially landlocked except for a narrow right-of-way. This significantly restricts the marketability of the property primarily to those owners of adjoining parcels. The heating plant had been used to provide heat to tenants of M; however, the users of the heating plant found alternative energy sources and the plant has not been used for some time. Although one offer has been made for the heating plant, it was unreasonably low. The mining claims are inactive and were contributed to the company many years ago. Because of this inactivity questions have arisen as to the value of these properties as well as factual and legal questions as to the nature and extent of the claims. No offers have been made for these properties.

Within the 12-month period beginning on the date of adoption of the plan of liquidation, the board of directors called a meeting of the shareholders of M to amend the plan of liquidation to provide for distribution of the land, heating plant, right-of-way, and mining claims to a trust, established under state law, together with a sum not exceeding 500x dollars. This amount is anticipated to be necessary to pay for taxes, insurance, and costs related to the maintenance and sale of the properties transferred to the trust. The shareholders approved the amendment of the plan, selected a trustee of the trust and transferred the land, heating plant, right of way, mining claim and cash to the trust.

The trust instrument provides that the trust is organized for the primary purpose of liquidating the assets transferred to it with no objective to continue or engage in the conduct of a trade or business. The trust will terminate three years from the date of its creation or, if sooner, within 30 days after sale of the last of the property transferred to it. The investment powers of the trustee are limited to demand and time deposits in federally insured banks and savings institutions, and short-term certificates of deposit. Under the terms of the trust instrument the trustee is required to distribute at least semi-annually to known shareholders any proceeds from the sale of assets and income from investments. The trustee is to make continuing efforts to dispose of the trust assets, make timely distributions, and not unduly prolong the duration of the trust.

LAW AND ANALYSIS

Section 301.7701-4(d) of the Procedure and Administration Regulations provides, in part, that certain organizations that 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 Internal Revenue Code because it is formed with the objective of liquidating particular assets and not as an organization having as its purpose 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.

In this case, because of the landlocked nature of the land and heating plant, it was not possible for M to sell that property other than under distress conditions within the 12-month period following the adoption of the plan of liquidation. Because of the factual and legal questions relating to the mining claims, they also could not be sold other than under distress conditions within the 12-month period. The transfer of the heating plant, right-of-way, mining claims, and cash to the trust does not evidence an objective to carry on a profit-making business. The primary purpose of the trust is the liquidation and distribution of the assets transferred to it.

HOLDING

The trust is classified as a liquidating trust for federal income tax purposes.

In addition, the shareholders of M will be considered the owners of the trust and will be taxable on the income therefrom under subpart E of subchapter J, chapter 1 of the Internal Revenue Code (section 671-687). See Rev. Rul. 72-137, 1972-1 C.B. 101.

Also under the circumstances described, the land, the heating plant, the related right-of-way to that plant and the mining claims will not be considered "readily marketable assets" within the meaning of section 3.05 of Rev. Proc. 79-1, 1979-1 C.B. 481.