Winter 2003 • Issue 12, page 7

Federal Tax Liens & the Receiver Part II

By Rosen, Charles*

(In Part 1 in the last issue of Receivership News Mr. Rosen discussed the creation of the federal tax lien, and tips for investigating and resolving attendant issues. In his conclusion, Mr. Rosen addresses dealing with a recalcitrant IRS, and the basis for potential personal liability for a receiver who doesn’t honor a proper government lien.)

What If The IRS Is Uncooperative?
If all else fails because a lien discharge or subordination cannot be secured from the Service and the sale will not fully pay the tax lien, the receiver may have to resort to a civil suit in order to remove the tax lien from the property. This is most easily done with a suit to quiet title. Such suit is best filed in the local U.S. District Court since the United States of America is an indispensable party where the I.R.S. has a tax lien. Permission to file the suit in district court should first be secured from the state court judge assigned to the receivership. Though such suit could be filed in state court, the U.S. Judicial Code (Title 28 U.S.C.) permits the government to remove the case to Federal court, in most instances, where the Federal government is a party. The Office of the United States Attorney probably will remove such an action since it is most familiar with - and comfortable in - the district court, and believes Federal judges generally have a better understanding of Federal law.

How Does Potential Personal Liability of the Receiver Arise?
Aside from the issue of a filed and perfected Notice of Federal Tax Lien, the receiver should be aware of the following. Where a taxpayer is determined to be insolvent, a burden may fall on a receiver if he does not honor and pay Federal claims in the proper manner. This arises from a statute not found in the Internal Revenue Code but rather a statute whose ancestors date from 1789. This potential liability of a receivership estate or receiver stems from 31 United States Code Section 3713 – Priority of Government Claims (commonly referred to as the “Insolvency Statute”), which states:

(a)(1) A claim of the United States Government shall be paid first when -

(A) a person indebted to the Government is insolvent and -

(i) the debtor without enough property to pay all debts makes a voluntary assignment of property;
(ii) property of the debtor, if absent, is attached; or
(iii) an act of bankruptcy is committed; or

(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.

(2) This subsection does not apply to a case under title 11.

(b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.

Payments by a person in control of a corporation – including a receiver – or in control of and administering assets of an individual are encompassed by this statute. See, Lakeshore Apartments, Inc. v. U.S., 351 F2d 349 (9th Circuit, 1965); U.S. v. Spitzer, 261 F.Supp. 754 (S.D.N.Y. 1966).

A divestiture of the insolvent taxpayer’s property in a legal proceeding is required to create this priority. U.S. v. Oklahoma, 361 US 253 (1923). However, A Federal tax lien may be subordinate to a perfected judgment lien creditor on certain (real) property. U.S. v. Estate of Romani, 523 US 517 (1998). This case resolved an apparent conflict between 31 USC sec. 3713(a) and IRC sec. 6323(a) and the case would appear to protect a receiver from personal liability where the receiver has paid senior perfected lien creditors.

The statute is keyed to the insolvency of the debtor. A debtor usually falls into insolvency when its liabilities exceed its assets. See Lakeshore Apartments, Inc., v. U.S., 351 F2d 349, 353 (9th Cir 1965). The government may exercise this statutorily created priority even though taxes have not yet been assessed . . . let alone a tax lien created. The claim for taxes constitutes the “debt.” U.S. v. Moore, 423 US 77, 96 SCt 310 (1975); Viles v. Commissioner, 233 F2d 376 (6th Cir 1956).

There is personal liability to those in control of a corporation’s affairs at a time when preferential payments are made and the corporation is insolvent. See Lakeshore Apartments, Inc. v. U.S., 351 F2d 349 (9th Cir 1965). (This can include officers, directors, or shareholders [or a receiver or cases involving individuals rather than a corporation].) In U.S. v. Spitzer, 261 F.Supp 754 (DC SD NY 1966), the court held liable officers, directors and stockholders who either directed or controlled wrongful payments, or know of the payments from the corporation and failed to stop them. The court also stated that no statute of limitations applied to a claim under § 3713. This could just as likely be applied to a receiver who made such payments absent a court order and absent notice, including adequate and complete notice and information - to the United States and the I.R.S.

*CHARLES F. ROSEN, ESQ. of the Law Offices of A. Lavar Taylor has substantial tax expertise involving receiverships and bankruptcy. For more than twenty years Mr. Rosen served as a bankruptcy advisor for the Special Procedures branch of the Internal Revenue Service.