Liquidating a fund

A liquidating trust is a new legal entity that becomes successor to the liquidating fund.

The remaining assets and liabilities are transferred into the newly formed trust and the former owners of the liquidating fund become unit holders or beneficiaries of the trust.

Such gain or loss is measured by the difference between the fair value of the liquidating distribution and the owner's adjusted basis in the corporation.

The fair value of the contribution to the liquidating trust would represent the new owner's basis in the liquidating trust.

The factors to be considered by the Oversight Council and the FDIC in assessing risk include: (i) economic conditions, with the intention of having higher assessments during favorable economic conditions and lower assessments during less favorable economic conditions, (ii) other assessments (such as deposit insurance assessments) on the financial company or its affiliates, (iii) the risks presented by the company to the financial system and the likelihood that the company likely would benefit from an orderly liquidation, (iv) any risks presented by the financial company during the 10 years prior to appointment of the FDIC as receiver that contributed to the failure of the institution in receivership, and (v) any other risk-related factors deemed to be appropriate.

Also, if the time period is unreasonably prolonged, the status of the entity may change from a liquidating trust.

The FDIC's issuance of obligations in connection with the liquidation of a covered financial company may not exceed (i) an amount equal to 10 percent of the total consolidated assets of the company, and (ii) an amount that is equal to 90 percent of the fair value of the total consolidated assets of the company that are available for repayment.

The Treasury Secretary may not purchase any obligations unless there is an agreement between the Treasury Secretary and the FDIC that provides a specific plan for repayment of such borrowing and that demonstrates that the FDIC's income from the assets of the covered financial company and assessments on eligible financial companies will be sufficient to amortize the borrowings within a specified time period.

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.

Each owner must recognize a gain or loss on the deemed distribution received in liquidation.

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