Liquidating assets bankruptcy
A liquidating trust may also be an effective method for a fund manager to wind down a fund without having a significant role in the liquidation.At the end of the fund's life cycle or term, the fund manager may have certain assets that are not easily liquidated and convertible into cash for distribution to the owners of the fund.It may take several years for such assets to be converted into cash.Such assets may consist of securities that are illiquid or have certain restrictions or monies held in escrow where it will take several years for the conditions to be met for release of such funds.The remaining assets and liabilities are transferred into the newly formed trust and the former owners of the liquidating fund become unit holders or beneficiaries of the trust.The newly formed trust is governed by a trust agreement executed between the former fund and the trustees before liquidation of the fund.Generally, a partner recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership.
Such gain or loss is measured by the difference between the fair value of the liquidating distribution and the owner's adjusted basis in the corporation.
A business trust is either treated as a corporation or partnership for federal income tax purposes.
Since the business assets are deemed to have been distributed to the owners and then transferred to the liquidating trust, there will be an immediate recognition of a gain or loss from liquidation of the former business by the owners.
Also, if the time period is unreasonably prolonged, the status of the entity may change from a liquidating trust.
If a trust is created outside of Chapter 11 of the Bankruptcy Code, a private letter ruling may be requested if conditions of Revenue Procedure 82-58 are met.