Is a receiver liable for federal income taxes?
A receiver's obligations with respect to federal income taxes can be very complicated, especially given the different circumstances in which a receivership may arise. While a receivership generally does not create a separate taxable entity, the receiver may be required to notify the Internal Revenue Service of the receivership and file income tax returns for the entity or owner of the property in receivership.
Federal court-appointed receivers must comply with Judicial Code Section 960, 28 U.S.C. § 960, which unambiguously requires anyone conducting a business under the jurisdiction or authority of any United States court to file all tax returns and pay all taxes as they become due under applicable tax law. For receivers of individuals unable to file their own returns, the receiver must file the individual's returns unless the receiver is in possession of only a part of the individual's assets. See, Treasury Regulation §1.6012-3(b)(5). For receivers of corporations, the receiver must file the corporation's returns when in control of all or substantially all of the corporation's assets. See, Treasury Regulation §1.6012-3(b)(4), which states in pertinent part:
A receiver, trustee in dissolution, trustee in bankruptcy, or assignee, who, by order of a court of competent jurisdiction, by operation of law or otherwise, has possession of or holds title to all or substantially all the property or business of a corporation, shall make the return of income for such corporation in the same manner and form as corporations are required to make such returns. Such return shall be filed whether or not the receiver, trustee, or assignee is operating the property or business of the corporation. A receiver in charge of only a small part of the property of a corporation, such as a receiver in mortgage foreclosure proceedings involving merely a small portion of its property, need not make the return of income.
For partnerships, there is no express duty under the Internal Revenue Code for a receiver to file the partnerships' returns though the IRS takes the position that a receiver in control of the partnership must do so. When the receiver is not required to file returns, the receiver generally should provide the owner with the information necessary so that it can file its own returns.
A court-appointed receiver is responsible for complying with any reporting obligations to the federal, state, and local taxing authorities. In addition, under 31 U.S.C. § 3713(b), subject to certain exceptions, a receiver may be personally liable for debts owing to the United States to the extent that a receiver pays the claims of another person before payment is made to the United States. Generally, a receiver may pay necessary and reasonable administrative expenses before payment of unsecured federal claims, and the IRS states in its Internal Revenue Manual that administrative expenses should be paid ahead of a federal tax lien. Furthermore, perfected secured claims retain priority over unsecured federal claims as the federal priority statute does not create a lien or provide priority over other perfected liens. Consequently, a receiver must attempt to learn of any potential unpaid governmental claims before obtaining and executing on a distribution order.
If the property within the custody and control of the receiver meets the statutory definition of a “qualified settlement fund” pursuant to Treasury Regulation §1.468B-1(c), then the receiver must file a tax return for the qualified settlement fund and, if required, pay taxes. Treasury Regulation § 1.468B-1(c) provides:
A fund, account, or trust satisfies the requirements of this paragraph (c) if—
(1) It is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
(2) It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability—(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended,42 U.S.C. 9601 et seq.; or(ii) Arising out of a tort, breach of contract, or violation of law; or(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and
(3) The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).
A qualified settlement fund must account for income and expenses on a calendar year basis.
In addition to the duty to file tax returns as set forth above, a receiver may have to provide notice to the IRS of his or her appointment. Treasury Regulation § 301.6036-1(a)(3) provides:
A receiver in a receivership proceeding or a similar fiduciary in any proceeding (including a fiduciary in aid of foreclosure), designated by order of any court of the United States or of any State or Territory or of the District of Columbia as in control of all or substantially all the assets of a debtor or other party to such proceeding shall, on, or within 10 days of, the date of his appointment or authorization to act, give notice thereof in writing to the district director for the internal revenue district in which the debtor, or such other party, is or was required to make returns.
Click here to access the form of notice on the IRS website.
Receivers must understand and comply with applicable Treasury Regulations and the Internal Revenue Code in order to avoid potential personal liability under 31 U.S.C. § 3713(b).