In certain circumstances, a receivership may create a new and separate entity for income tax purposes called a qualified settlement fund (QSF). QSFs typically arise in criminal cases such as fraudulent investment schemes and other cases involving fraudulent and tortious conduct.1 The assets in the receivership are deemed transferred to the newly created QSF, resulting in a host of unique income tax reporting requirements and consequences.

A QSF is a fund, account, or trust that is 1) established pursuant to an order by a government entity or agency or court of law and subject to the continuing jurisdiction of such entity, agency or court of law, 2) established to resolve or satisfy one or more contested or uncontested claims (except for certain excluded liabilities) that arose either a) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), b) out of a tort, breach of contract, or violation of law, or c) under circumstances designated in an Internal Revenue Service revenue ruling or procedure, and 3) a trust under applicable state law or its assets are segregated from the transferor’s other assets.2 Excluded liabilities under the second element include payments to general trade creditors and debtholders in a bankruptcy or similar case or workout.3 A receivership may constitute a similar case for these purposes,4 and thus a receivership involving payments of such claims might not constitute a QSF.

A QSF is not elective but arises when the requirements are met. Although a QSF is typically a separate taxable entity, when there is only one transferor, an election may be made to treat the QSF as a grantor trust (a pass-through tax entity) for income tax purposes.5

When a QSF is a separate taxable entity, the assets in the receivership are deemed transferred by their owner(s) to the QSF in a taxable sale or exchange.6 The transferor(s) could have a gain or loss on the deemed asset sale or exchange7 and may be entitled to a deduction for the amount deemed transferred to the QSF.8

A QSF that is a separate taxable entity will receive the receivership assets tax free and have fair market value tax basis in the assets.9 A taxable QSF is taxed at the maximum rate applicable to trusts and treated as a corporation for certain other purposes.10 It also is subject to special rules for calculating its gross income and deductions11 and may incur gain or loss on any distribution of assets.12

When the QSF is a separate taxable entity, the transferor must include in its income tax return and provide to the receiver, as the QSF administrator, a statement of the cash and assets it transferred to the QSF.13 This statement must include the dates on which the entity transferred its cash and assets to the QSF, the amount of cash transferred to the QSF, and the fair market values of assets transferred to the QSF.

Depending on the circumstances, the receiver may have to prepare and file the income tax returns for both the QSF and the entity in receivership.14 In some cases it may take years to investigate, discover and recover assets, and the additional time necessary to search for assets and/or conduct forensic accounting work may delay the preparation and filing of the returns. Depending on the facts, such delays could constitute reasonable cause for relief from any late filing penalties.

For the QSF returns, the receiver may request the federal 18-month prompt assessment which applies to a dissolving corporation and a decedent’s estate.15 Unfortunately, this 18 month wait may be of little consolation for those eager to receive distributions, especially in cases where it is difficult to determine a reasonable reserve for taxes so partial distributions may be made. 16

Given the unique tax treatment of a QSF, a receiver who suspects that a receivership may constitute a QSF should seek tax guidance at the beginning of the case. This should help the receiver to take the proper steps and avoid going down the wrong road.

1 See, e.g., United States v. Brown, et al., 348 F. 3d 1200 (10th Cir. 2003); Treas. Reg. Section 1.468B‐1(l), examples 1 and 4; IRS Priv. Ltr. Ruls. 201718018 and 202139004.
2 Treas. Reg. Section 1.468B‐1(c); United States v. Brown, et al., 348 F. 3d 1200 (10th Cir. 2003).

3 Treas. Reg. Section 1.468B‐1(g)(3). See also United States v. Brown, et al., 348 F. 3d 1200 (10th Cir. 2003) (describing general trade creditors are those who are owed for providing goods or services and debtholders as only those who hold a debt instrument).

4 See Treas. Reg. Section 1.468B‐1(g)(3) and Internal Revenue Code Section 368(a)(3)(A) which defines a title 11 (bankruptcy) and similar case to include a receivership.

5 Treas. Reg. Section 1.468B‐1(k).

6 Treas. Reg. Section 1.468B‐3(a).

7 Id.

8 Treas. Reg. Section 1.468B‐3(c). See also IRS Priv. Ltr. Rul. 202139004.

9 Treas. Reg. Sections 1.468B‐2(b)(1) and (e).

10 Treas. Reg. Section 1.468B‐2(a) and (k). A QSF treated as a taxable entity files a Form 1120‐SF.

11 Treas. Reg. Section 1.468B‐2(b) and (d). See also IRS Chief Counsel Advice 201347019 (addressing treatment of expenses and losses incurred in a receivership treated as a QSF) and Coombs, CARES Act Changes to NOLs, Receivership News, Issue 79 at p. 18 (Fall/Winter 2020) (regarding net operating loss issues).

12 Treas. Reg. Section 1.468B‐2(f). 13 Treas. Reg. Section 1.468B‐3(e).

14 A receiver is responsible for filing the returns of entities for which the receiver has possession of all or substantially all of the entity’s assets. See Internal Revenue Code Section 6012(b) and Treas. Reg. Section 1.6012‐3 regarding the filing obligations for receivers of corporations and individuals. The IRS also takes this position for partnerships. See IRS Gen. Counsel Mem. 36811 (1976) and IRS Gen. Counsel Mem. 38781 (1981).

15 Treas. Reg. Section 1.468B‐2(m). For this purpose, a QSF is treated as dissolving on the date it has no assets (other than a reasonable reserve for potential tax liabilities and professional fees) and will not receive any further transfers.

16 See also Coombs, Prompt Assessment, Receivership News, Issue 71 at p. 18 (Spring 2021),

*Chad Coombs is chief tax counsel at Thomas Seaman Company in Irvine, CA and an expert in insolvency tax law.