Question #3: What is the income tax treatment of the initial transfers to the Liquidating Trust?
For U.S. federal income tax purposes, all parties with respect to each Liquidating Trust must treat the initial transfer of assets to the Liquidating Trust as (i) a taxable transfer of the assets to the beneficiaries of the Liquidating Trust followed by (ii) a non-taxable transfer of the assets by such beneficiaries to the Liquidating Trust, with the beneficiaries being treated as the grantors and owners of the Liquidating Trust. Each beneficiary of a Liquidating Trust will generally recognize gain or loss as of October 29, 2010 (the Effective Date of the Plan) in an amount equal to the difference between the amount realized in respect of its claim (the dollar interest in the Trust assets from page 1 of the beneficiary letter) and its adjusted tax basis in the claim. The amount realized should generally equal the fair market value of the assets deemed received for U.S. federal income tax purposes under the Plan in respect of each beneficiary’s claim. A beneficiary should generally then have a tax basis in its interest in the Liquidating Trust in an amount equal to the beneficiary’s beneficial interest in the fair market value of the assets on the Effective Date.

With respect to beneficiaries of the DBSI Liquidating Trust, because the bankruptcy claims challenge process in ongoing, each beneficiary’s interest in the assets of the DBSI Liquidating Trust may change depending upon the resolution of disputed claims. Beneficiaries may be prevented from recognizing for tax purposes all of their losses from the consummation of the Plan until all disputed claims have been resolved.