... Information Regarding The WMILT & WMIH-Corp ...
Just some information regarding the "mechanics" that are possible as we move forward with what I believe will soon be ...
A): A reveal of value from the WMI Liquidating Trust'
B): A semblance of the mechanics which will be utilized between WMIH-Corp, the WMI Liquidating Trust and what they both have in financial commonality' ... WMIH(s) sub ~ WMIIC'
C): The cash distributions available will be an easy function, and the "stock for value" event addressing the return of illiquid assets' ... using the same mechanics that the LT just used when it released the 1.4 million shares
Entities Created Pursuant to Bankruptcy Plans under Chapter 11 of the Bankruptcy Code
"When an entity (debtor) files for bankruptcy under Chapter 11 of the Bankruptcy Code, a trustee is appointed to handle the bankruptcy. The goal is to reorganize the debtor’s business assets and return the debtor to normal operation in a better financial position. In certain situations, such as one in which a portion of the business operation is to be terminated or sold, a liquidating trust may be created. Generally by creating this trust, the debtor is treated as having transferred the assets to the creditors, and the creditors then as transferring the assets to the liquidating trust, with the creditors being treated as the grantors and beneficiaries of the liquidating trust. The beneficiaries must report each item of income, gain, deduction, loss, and credit of the liquidating trust."
"The deemed transfer of the assets to the creditors is likely treated as a satisfaction of the debtor’s obligation to those creditors for the fair market value of the assets transferred. The debtor may recognize cancellation of debt income as a result, as well as gain or loss from the deemed sale or exchange of the property transferred."
"Under certain circumstances, the trustee of the liquidating trust may establish an escrow account or fund to hold assets that are subject to disputed claims and elect to treat this account or fund as a “disputed ownership fund.” See section 1.468B-9(c)(2(ii). If this election is made, the assets in the disputed ownership fund are not treated as transferred to the creditors and the trustee must prepare a separate income tax return for the fund."
Obtaining a Liquidating Trust Classification Private Letter Ruling
"The IRS in Revenue Procedure 94-454 Conditions Needed to Obtain a Ruling provides the procedures for requesting a private letter ruling classifying an entity, created pursuant to bankruptcy plans under Chapter 11 of the Bankruptcy Code, as a liquidating trust, if certain conditions are met. The revenue procedure cautions that it is not to be viewed as defining as a matter of law the circumstances under which an organization will be classified as a liquidating trust. This determination is made only after an examination of all the facts in connection with the operation and activities of the trust. In certain situations, the taxpayer may be required to enter into a “Closing Agreement” as a condition to the issuance of the letter ruling"
Conditions Needed to Obtain a Ruling
"Generally, the IRS will issue a private letter ruling that a trust, created pursuant to a bankruptcy plan under Chapter 11 of the Bankruptcy Code, is a liquidating trust if the following conditions, listed in Revenue Procedure 94-45, are met:"
.01 "the trust is or will be created pursuant to a confirmed plan under Chapter 11 of the Bankruptcy Code 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 . . . ."
.02 "The plan and disclosure statement must explain how the bankruptcy estate will treat the transfer of its assets to the trust for federal income tax purposes . . . ."
.03 "The plan, disclosure statement, and any separate trust instrument must provide that the beneficiaries of the trust will be treated as the grantors and deemed owners of the trust . . . ."
.04 "The plan, disclosure statement, and any separate trust instrument must provide for consistent valuations of the transferred property by the trustee and the creditors (or equity interest holders), and those valuations must be used for all federal income tax purposes."
.05 "Whether or not a reserve is established for disputed claims, all of the trust’s income must be treated as subject to tax on a current basis, and the ruling request must explain, in accordance with the plan, how the trust’s taxable income will be allocated, and who will be responsible for payment of any tax due."
.06 "The trust instrument must contain a fixed or determinable termination date that is generally not more than 5 years from the date of creation of the trust and that is reasonable based on all the facts and circumstances . . . ."
.07 "If the trust is to hold any operating assets of a going business, a partnership interest in a partnership that holds operating assets, or 50% or more of the stock of a corporation with operating assets, the ruling request must explain why it is necessary to retain these assets."
.08 "If the trust is to receive transfers of listed stocks or securities or other readily marketable assets, the ruling request must explain the necessity for doing so. The trust is not permitted to receive or retain cash or cash equivalents in excess of a reasonable amount to meet claims and contingent liabilities (including disputed claims) or to maintain the value of the assets during liquidation."
.09 "The investment powers of the trustee, other than those reasonably necessary to maintain the value of the assets and to further the liquidating purpose of the trust, must be limited to powers to invest in demand and time deposits, such as short-term certificates of deposit, in banks or other savings institutions, or other temporary, liquid investments, such as Treasury bills."
.10 "The trust must be required to distribute at least annually to the beneficiaries its net income plus all net proceeds from the sale of assets, except that the trust may retain an amount of net proceeds or net income reasonably necessary to maintain the value of its assets or to meet claims and contingent liabilities (including disputed claims)."
.11 "The ruling request must contain representations that the trustee will make continuing efforts to dispose of the trust assets, make timely distributions, and not unduly prolong the duration of the trust."
.12 "A trust that is a designated settlement fund under §468B(d) of the Code or a qualified settlement fund under §1.468B-1 of the regulations is governed by § 468B and the regulations thereunder, rather than by this revenue procedure."
The revenue procedure also provides a checklist in Appendix A to be used in assisting taxpayers requesting classification of an entity as a liquidating trust.
As noted above, the trust instrument is required to contain a fixed termination date that is generally not more than five years from the date of creation of the trust. However, in Private Letter Ruling 200938017, the trust was allowed to have a term of up to 11 years. According to the facts of this letter ruling, the original term of the trust was five years, the bankruptcy court subsequently extended the term of the trust by three years, and a later request was made for an additional three-year extension of the trust’s term. The ruling held that an extension of the trust’s term to the extended date would not adversely affect the determination that the trust is a liquidating trust under section 301.7701-4(d).6
It should be noted that the requirement of a fixed termination date of not more than five years from the date of creation of the trust in this revenue procedure differs from the requirement of Revenue Procedure 82-58, which requires a fixed termination date of not more than three years from the date of creation of the trust.
Generally, a liquidating trust will be created in a Chapter 11 Bankruptcy proceeding when the parties have agreed that some of the business operation needs to be disposed of and the remaining portion of the operation will exit bankruptcy in a better financial position. It is not clear whether the IRS would grant an extension of the three-year term under Revenue Procedure 82-58.
Conclusion
"As noted above, the use of a liquidating trust may be an efficient way to either terminate a business or, in the case of a Chapter 11 bankruptcy, dispose of a portion of the business or some of the business assets. In both situations, the liquidating trust is treated as a grantor trust and either the entity’s owners or creditors are the beneficiaries. Additionally, the principal purpose in both situations is to protect and preserve the trust’s property for the beneficiaries during the winding-up period."??
