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

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon

Freeman Law is a tax, white-collar, and litigation boutique law firm. We offer unique and valued counsel, insight, and experience. Our firm is where clients turn when the stakes are high and the issues are complex.

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.


Probate Trust & Fiduciary Litigation Attorneys 

Need assistance managing probate proceedings, will contests, trust, and fiduciary litigation, or disputes involving the administration of estates and trusts. Freeman Law represents executors, administrators, trustees, beneficiaries, and heirs. Our Firm offers a unique blend of legal skills and an accounting background. This combination positions our Firm to represent clients in even the most complex probate, trust, and fiduciary litigation. Schedule a consultation or call (214) 984-3000 to discuss your probate and fiduciary litigation needs.