An order appointing a receiver should authorize the receiver to meet tax reporting and payment obligations that could potentially occur in the receivership. Broad authority is typically necessary since the receiver’s specific tax duties and obligations may not be known or even fully knowable until the receiver can determine the full nature and extent of the receivership. In some cases, especially those involving fraud, this may require extensive investigation of the entity, person or property in receivership and the review and even reconstruction of the pertinent books and records.

For example, it might appear at the outset that the receiver will not have any income tax return filing requirements or payment obligations, yet facts may come to light upon the receiver’s investigation that change the dynamic of the receivership. The receiver may discover and take possession of assets that become part of the receivership estate that give rise to income tax filing requirements on behalf of the owner of such assets, such as when the receiver takes possession of all or substantially all of the assets or business of an entity.1 Or the receiver may find that even a single property in receivership constitutes all or substantially all of the assets or business of its owner, triggering income tax obligations.

The goal in drafting the appointment order is to authorize the receiver to take actions necessary to comply with applicable tax laws to the extent possible without having to seek further orders from the appointing court. The drafter of the appointment order should, at a minimum, consider granting the receiver the authority and complete discretion and the power to:

While appointment orders often authorize the receiver to investigate assets and prepare an accounting of assets for the court, the duties of a receiver for tax purposes may extend well beyond these actions. A receiver may be held personally liable for failing to pay federal taxes and claims about which the receiver knew or should have known.6 As such, a receiver may need to investigate activities and actions taken prior to the receivership, as well as review prior year tax returns and transcripts, to determine the proper tax treatment and attributes of various assets and transactions and potential tax claims against the receivership. Failure to conduct proper tax diligence might not spare the receiver from personal liability for unpaid federal tax claims if the receiver had sufficient funds to pay such claims.

Even with broad authority granted to the receiver in the appointment order to meet tax obligations, the receiver may want to seek further orders of the court related to tax issues. For example, a receiver may wish to obtain a court order approving an agreement with a taxing authority to give any parties in interest the opportunity to object, thereby protecting the receiver from later accusations that the agreement was not in the best interests of the receivership estate or certain parties in interest. A receiver may also wish to seek an order subordinating tax claims pursuant to a constructive trust or as otherwise may be appropriate.7 In some cases, a receiver may desire to eliminate certain entities from the receivership estate that were initially included if the receiver was unable to locate or recover from such entities sufficient assets of value to possess and administer. This should help establish that the receiver does not have any tax 8 obligations for those entities.

The importance of a well-drafted appointment order highlights that a receiver’s duties and obligations with respect to federal, state and local income taxes, while perhaps appearing simple on the surface, can in fact be quite complex, especially given the different circumstances in which a receivership may arise. If possible, the parties seeking appointment of the receiver may wish to have a tax advisor review the background of the proposed receivership and a draft of the appointment order before the appointment order is finalized and filed with the court.

1 See Coombs, Filing Tax Returns, Receivership News, Issue 77, p.26 (Spring 2023).

2 Id.

3 See Coombs, Tax Closure, Receivership News, Issue 76, p.22 (Winter 2022).

4 For example, California Rev. & Tax Code Section 6829 provides for personal liability for failure to pay sales tax, and California Rev. & Tax Code Section 19253 provides for priority payment of California franchise and income taxes but does not specifically provide personal liability. In addition, a receiver who fails to pay state taxes may be found to breach his duty as receiver and have his bond surcharged. See Stewart v. California, 272 Cal. App. 2d 345 (Ct. App. 4th Dist. 1969) (California sales tax and a state disability liability insurance claim). See also California Unemp. Ins. Code Section 1736.

5 See Coombs, Tax Closure, Receivership News, Issue 76, p.22 (Winter 6 2022).

7 Id. 8 Id.

See Coombs, Filing Tax Returns, Receivership News, Issue 77, p.26 (Spring 2023).

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