Winter 2007 • Issue 27, page 1

Does the IRS Want to Know About Your Appointment as a Receiver? Absolutely!

By Rosen, Charles*

CHUCK DOES TAXES

I have been asked many times whether a receiver (or other fiduciary) is required to notify the I.R.S. of his or her appointment. Unfortunately the question is almost always asked after the receiver is under audit by an I.R.S. agent who would like to know why the receiver didn’t register his or her appointment with the Service. This kind of puts the receiver on the defensive. No fun.

Internal Revenue Code § 6036 and regulations promulgated thereunder at Rev. Reg. 301.6036.1 require the receiver to notify the Service within 10 days of being appointed. This is also required of any other fiduciary — including assignees for the benefit of creditors, conservators, executors, guardians — and any other individual, trust, estate, partnership association, company or corporation who or which enters into a fiduciary relationship to act on behalf of another entity.

Don’t feel alone if you haven’t filed the required notice in the past. My experience is that receivers occasionally file the required notice, but I cannot remember the last time I heard of an assignee for benefit of creditors who gave any notice to the Service, and I have been involved with the processing of these forms since the 1970’s. This is not a new procedure, yet I know of no case where the Service has attempted to penalize a fiduciary for failing to file the required notice. Nonetheless, the requirement to file is the law.

Ever helpful, the Service has provided a form for this purpose: Form 56, Notice Concerning Fiduciary Relationship. This form was last revised in 2004 and is available via the I.R.S. website.

FORM 56: USE IT
Once you bring up the form you will be able to complete it online, but you must then print out the completed document and mail it to the Service. Instructions for completion of the form are on the back (which is extremely inconvenient if you are attempting to fill in the blanks while online).

The form must be filed with the IRS service center in most cases. However, under applicable regulations as misinterpreted on the back of the form, receivers are required to file the form with either the local Special Procedures Staff or the IRS area office with jurisdiction over the entity over whom the receiver has been appointed. Rev. Reg. 301.6036-1(a) (2) actually states that the notice is to be filed with the “District Director.” This is interesting since the IRS no longer has a Special Procedures Staff, or area offices, or district directors. All were done away after passage of a 1998 congressional act that reorganized the Service.

The IRS continues to maintain “Insolvency Groups” in the same places it used to have Special Procedures Staffs as part of the districts over which the former district directors presided, however. I recommend that receivers (and similar fiduciaries) mail the notice – via certified mail – to these local Insolvency Groups. The regulations also allow the receiver to mail the form to the IRS service center, but this is in addition to – not in lieu of – providing the local notice.

Note that a copy of the appointing order must be attached to Form 56. Arguably, but not practically, this should put the Service on notice of the receiver’s inherent power of attorney and thus not require the filing of additional Form 2848, “Power of Attorney,” but this would be too much to hope for.

Changes in status must also be communicated to the IRS. If a receivership is terminated or a successor receiver is appointed a new Form 56 must be filed with the Service advising the IRS of the termination or change. Again, send the form via certified mail.

Can a receiver send the IRS a letter with the required information rather than use the form? While the answer is “probably,” a letter most likely will not reach the appropriate employee(s) at the Service, may get misinterpreted, or it may be delayed in processing. Bottom line: Don’t mess with the system. Use the form.

Another question I’ve been asked is whether the filing of the form exposes the receiver to any personal liability? It is a tenet of basic receivership law that every receiver has certain obligations placed on him or her upon appointment — by the court making the appointment, by provisions of the Internal Revenue Code and, possibly, by state statutes if the appointment is made by a state court. These obligations must be complied with, as all receivers know. And, just like any other taxpayer who fails to follow tax laws, a receiver can be exposed to criminal liabilities contained in the Internal Revenue Code if he or she doesn’t comply. Fortunately, simply failing to file Form 56 with the Service does not expose a receiver to any new or additional potential liabilities.

USE IT TO REDUCE YOUR LIABILITY
One potential benefit of filing Form 56 to announce to the Service the receiver’s appointment (and filing again to announce termination of the appointment) may be to reduce the potential liability of the receivership estate arising from the new and amazing interpretation by the Service of a special tax liability to be levied on the estate solely because it is a receivership and has funds passing through it.

An in-depth discussion of this quixotic tax liability application appeared in two articles in prior issues of the Receivership News. The first is an article I wrote for the Fall 2006 issue entitled “IRS Says All Receivership Estates are Qualified Settlement Funds and Receivers Must File Form 120-SF [sic - should have read Form 1120-SF] Returns or Face Personal Tax Liability.” The second is a retort written by Peter A. Davidson titled “An Analysis of United States v. Brown and Its Probable Impact on Receiverships Within the Ninth Circuit” appearing in the Spring 2007 issue of the Receivership News (an article with which I do not completely disagree). Both these issues of the Receivership News should be available on the “Newsletters” sub-page of the California Receivers Forum’s website.

*Charles F. Rosen is an attorney with the firm Law Offices of A. Lavar Taylor and is an expert in receivership and bankruptcy tax law. Mr. Rosen served as bankruptcy advisor for the Special Procedures Branch of the Internal Revenue Service for more than twenty years.