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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.
The role of the trustee of the liquidating trust is to administer and manage the liquidating trust, sell assets, pay creditors, resolve any claims and distribute any available funds to the beneficiaries of the trust.
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.
The fair value of the contribution to the liquidating trust would represent the new owner's basis in the liquidating trust.
Similarly, in the case of a liquidating distribution from a partnership, the business assets are deemed to have been distributed to the partners and transferred to the liquidating trust.