Taxpayer’s Use of Liquidating Trusts Found to Create Grantor Trust

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Taxpayer’s Use of Liquidating Trusts Found to Create Grantor Trust

Sage v. Comm’r, 154 T.C. No. 12 | June2, 2020 | Udra, P. | Dkt. No. 3372-16

Short SummaryPetitioner transferred parcels of land into liquidating trusts for the benefit of the mortgage holders of the parcels.  In years subsequent to the Petitioner’s transfer of the parcels, the liquidating trusts disposed of the parcels.  The Petitioner classified his transfer of the parcels as a loss, which gave him a net operating loss for the year.  The Petitioner carried that net operating loss deduction back and also forward.  The IRS disallowed the loss on the transfer of the parcel and also adjusted Petitioner’s tax returns for the years in which he used the net operating loss deduction.  The Tax Court found in favor of the IRS, ruling that the transfer of the parcels to the liquidating trusts was not effective as Petitioner remained the owner of the trusts, and upholding the disallowing of the loss deduction.

Key Issues:  Whether the Petitioner’s transfer of parcels of land into liquidating trusts for the benefit of the parcels’ mortgage holders transferred ownership of the parcels to the beneficiaries of the trust within the meaning of the “grantor” trust provisions?

Primary Holdings

Key Points of Law:

InsightThe Sage case illustrates the importance and necessity of involving creditors, and seeking their approval, before the creation of a liquidating trust.  As shown in the Tax Court’s ruling, if the debtor unilaterally creates a liquidating trust, the effect is that a grantor trust has been created with debtor as the owner of the trust for federal tax purposes.

 

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