Corporation liquidating trust


Those business trusts interested in being classified as a corporation for federal tax purposes may do so by filing an election to be taxed as a corporation. It's important to note that the trust is disregarded only for federal income tax purposes and not other state law purposes. 385 (1937), did the court determine that a trust lacked a business purpose. The land was transferred to the trust subject to a contract granting others the right to subdivide and sell. The Tax Court noted that the Morrissey standard requires that the beneficiaries be joined together in a common business effort.Although disregarded entity status is not typical for a trust, the reporting status of such a trust is essentially that of a grantor trust where trust income is taxed directly to the sole beneficiary as if received directly by the beneficiary (see Treas. For example, the trust liability shield should apply to beneficiaries who do not improperly participate in the management of trust affairs and the trust would continue to be a separate legal entity for contract law purposes. The trust instrument specifically provided that the trustee was to have no management power over the affairs of the trust but was merely to hold title to the real estate transferred to it, and to collect and distribute proceeds from the sale of the lots. This in turn requires some concerted, purposeful and voluntary effort on the part of the beneficiaries to either "plan or join" a pre- existing business activity for the "purpose of sharing the fruits" of its business activities. 334 (1984)), some further act on their part is necessary to satisfy the "associates" requirement.

For trusts that desire to be taxed as an ordinary trust, the business purpose and associates test will be difficult to meet.

Business trusts are no longer classified as other business entities on the basis of their corporate resemblance. considered a trust created to receive a large tract of land that was to be subdivided into lots to be sold. 155 (1941), the Tax Court applied the standards enunciated by the Supreme Court to determine that a trust lacked a business purpose. The only change in trust beneficiaries occurred through death and the trust property was rented to the same tenant with no changes in the lease. Under this definition, simply becoming a beneficiary in a trust created with a business or commercial purpose may be adequate to label the beneficiaries as associates. Two businessmen created the trust by transferring property to the trust subject to an 11-year net lease.

Rather, under a default rule, all business trusts are considered either disregarded entities (one beneficiary) or partnerships (two or more beneficiaries). However, the trustee had no right to subdivide the tract or sell the lots. The Internal Revenue Service generally follows these distinctions (see Revenue Ruling 78-371, 1978-2 C. Later and more recent developments negate this impression and provide planning opportunities. The two settlors were also the initial beneficiaries but they soon gratuitously transferred the beneficial interests to other family members.

Since the regulations require that all trust contributors be its beneficiaries, the associates standard will most always be present if the business purpose standard is also present.

Thus, the critical analysis is whether the trust instrument properly confines the trustee's powers to merely collecting, preserving, protecting and disbursing environmental remediation funds rather than using those funds as an investment vehicle or to conduct an environmental remediation business. Investment trusts with fixed asset bases and a single class of ownership are considered ordinary trusts provided that the trust instrument does not reflect a power to vary the interests of the certificated beneficiaries.

The article concludes with a discussion of three "special purpose trusts" and how their unique structure and purpose affects their particular classification as a business trust (investment trusts, liquidating trusts and environmental remediation trusts). The term "trust" as used in the classification regulations therefore refers to an arrangement whereby trustees accept title to property for the sole or primary purpose of protecting or conserving it for the trust beneficiaries. Business trusts, on the other hand, often involve trusts created by beneficiaries as a device to carry on a profit- making business and thus do not involve a trust created by a settlor to simply protect or conserve property for beneficiaries (Treas. The presence of a business purpose gives trusts their "business trust" moniker and often is the most important of the two tests because it is not possible for a trust to have "associates" when the trust does not also have a business purpose. 344 (1935) and its three companion cases, Swanson v. In these cases, the issue becomes whether the business activities are merely "incidental and necessary" to the declared liquidation purpose or are rather dominant to that purpose. The tax regulations define an environmental remediation trust as one created for the primary purpose of collecting and disbursing amounts for environmental remediation of an existing waste site in order to address the potential liability of persons with a reasonable expectation of liability under state or federal law and those persons are the only contributors to the trust (Treas. As with liquidating trusts, if the initial remediation purpose becomes later obscured by business or investment purposes, the trust will "become" a business trust.

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