Lawyers with experience in these matters were occasionally able to draft trust instruments to make a business trust taxable as a partnership. Given that many lawyers considered it prudent for the trust instrument to grant the trustee the broadest possible powers to deal with trust property on behalf of the beneficiaries, the presence or absence of associates may be critical to the classification issue.
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.
Assets are distributed based on the priority of various parties’ claims, with a trustee appointed by the Department of Justice overseeing the process.
The most senior claims belong to secured creditors, who have collateral on loans to the business.
These lenders will seize the collateral and sell it—often at a significant discount, due to the short time frames involved.