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Receivers and Taxes By Rosen, Charles* Let’s answer a few tax questions that have come my way concerning receivership tax issues. Q: When filing returns or other forms with taxing agencies, should the receiver use the defendant’s, the plaintiff’s or the receiver’s own tax ID numbers? A: The easy answer is that the receiver should never use his or her own tax ID number. The rest of the answers are a little more cloudy. In many instances, a new taxpayer entity is created by the receivership, thus a new Federal Employer Identification Number (EIN) should be secured from the IRS. In some instances, such as a ‘rents and profits’ receivership, a new entity is not created, but a receiver may still need a new EIN with which to open new bank accounts needed by the receiver in which to deposit the rents and pay expenses. Be certain that when requesting the new number that the top line of the application for the number contains only the name of the receivership and not the name of the receiver, i.e. Bank vs. Smith and Jones, Receivership. The second name line should contain the receiver’s name, but in a format that makes it clear that the receiver is merely the conduit and not the new taxpayer entity, i.e. “John Doe, Receiver” or “c/o John Doe, Receiver. “Placing the receiver’s name on the first line of the application for the new EIN may result in federal tax liens being filed in the name of the receiver, thus possibly affecting the receiver’s personal credit. A receiver should consult with his or her accountant to determine if a new tax ID number is appropriate for the particular receivership situation. Q: What should a receiver do if the defendant refuses to disclose its tax ID number? A: The easiest solution is normally to secure a court order compelling the number to be produced. Failure to provide it could result in a defendant receiving a contempt of court citation, leading to jail time or a fine to coerce disclosure of the information. However, the receiver may also write a letter to the Disclosure Officer at the IRS Service Center citing the Freedom of Information Act as authority, and ask for the number. In that instance, a certified copy of the receiver’s appointment order should be included with the written request. (Having a CPA or tax attorney request it for you under their power of attorney to represent you can greatly speed the response as they can fax the request to the Practitioner’s Hotline and have an answer in as little as a day or two.) Q: A receiver sells a building and is about to distribute the proceeds to the parties who owned the building. Does the receiver have a duty to withhold on the distributions? If so, how much? A: Technically, the buyer of the property has the obligation to withhold, not the seller or receiver. The Internal Revenue Code (and state tax laws for that matter) were amended several years ago to require the buyer to withhold part of the sale proceeds and pay it over to the IRS unless the ‘seller’ meets certain criteria and executes and delivers the proper taxpayer information form to the buyer. Normally the buyer will be purchasing through an escrow and the escrow officer will know to ask for the executed form from the seller. The escrow agent should then withhold the proper amount from the sale proceeds, if applicable, and pay it over to the government at the close of escrow. Quite often the buyer’s title company will withhold the title guarantee unless this issue is resolved. The type of property being sold and the value of that property will
determine whether a seller is subject to withholding, and in what amount.
If at all possible, the taxpayer information form should be secured and
used. The amount of money required to be withheld is draconian and may
kill a sale if the taxpayer information form is not executed by the
seller. Generally, the Federal tax is ten percent (10%) of the gross sales
price (plus three percent for California tax). If the property was subject
to substantial deeds of trust or other liens and the net funds for
distribution to the seller are relatively small, there may not be enough
cash coming out of the escrow to meet the withholding requirement. The
seller’s tax basis in the property is not relevant. A buyer could become
liable for the tax and a substantial penalty if the rules are violated.
The receiver should consult with his or her tax professional if a problem
materializes. |