Liquidating trust

28-May-2017 20:53

The check-the-box regulations carried forward the Kintner regulations theme that ordinary trusts were classified and taxed like trusts. These authorities analyze the trust instrument and the specific nature of the trust to determine whether the trustee has the broad power to conduct a business regardless of whether that power is exercised and regardless of the settlor's intent that the trust not be used to carry on a business. Unfortunately, as discussed below, once the business purpose standard is met, the associates standard is also very easy to satisfy.

However, once a trust is considered a business trust, the classification results are dramatically different. Lewis & Co trust, the Wyman trust was created with a single property and the trustee was not authorized to deal with any other property. Morrissey again played a central role in the early formulation of this standard by indicating that the term "associates" implies persons entering into a joint business enterprise for the purpose of sharing the gains of that business. 803 (1981), determined that a trust created with a business purpose was not a business trust because it lacked associates.

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.

The classification consequences above only occur when a trust is first considered a business trust rather than an ordinary trust. As with other, more general purpose trusts possessing a business purpose and associates, a special purpose trust classified as a business trust will be considered either a disregarded entity (grantor trust with a single owner) or a partnership (trust with multiple beneficiaries) under the check-the-box regulations (unless the trust elects to be taxed like a corporation).

While the check-the-box regulations dramatically converted the Kintner regulations' ordinary corporate classification into disregarded entity (grantor trust) and partnership status, those same regulations did nothing to affect when an ordinary trust will be considered a business trust. The Kintner regulations most often classified special purpose business trusts as corporations because they possessed at least three of the relevant resemblance criteria, including (1) continuity of life (trust continues with provision for succession even though a particular trustee ceases; notwithstanding the death of a beneficiary; and even though a beneficiary transfers their interest in the trust), (2) centralized management (trustees act much in the same function and manner as corporate directors), and (3) limited liability (liability normally limited to the trust property under state trust law).

This generally means trust income is taxed to the beneficiaries when trust income is actually distributed.

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Bishop Is that trust an ordinary trust or a business trust? Business lawyers commonly assume that trusts formed for their clients will be taxed as "ordinary trusts" under federal income tax rules.

Partnership tax rules are different from normative taxation and some of the differences may create concerns. When the beneficiaries do not create the trust but receive their interests by gift (rather than by purchase, see Howard v. To apply this analysis, the Tax Court examined the trust instrument searching for a power of beneficiaries to share or influence the trustee's duties under the trust. 1207 (1986) and Field Service Advisory, 1993 Westlaw 1470195).

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