Congress Strengthens Laws for Court-Appointed Officers to Promptly File Tax Returns & Pay Taxes for Court-Supervised Businesses
By Rosen, Charles*
The Bankruptcy Code’s recent amendments became effective on October 17, 2005, as many of you know. But many of you may not know that a key addition in the amending law affects receivers. This provision is not in the Bankruptcy Code, but rather in the Judicial Code at Section 960 [28 U.S.C. § 960]. This statute unambiguously requires anyone conducting a business under the jurisdiction or authority of any United States court to file all tax returns and pay all taxes as they become due under applicable tax law.
While this basic provision has been on the books for eons, the amendment strengthens the language to emphasize that timely payment is mandatory and not discretionary, as many receivers and bankruptcy trustees had interpreted the requirement in the past. Often a receiver or trustee would think: “Oh, well. I’ll file the returns and pay the tax at the end of the case when I reconcile all of the accounting.” Don’t fall into this trap!
If you are operating a business as a receiver, be sure to file and pay all state and Federal taxes that are applicable as they become due. These normally include withholding and unemployment taxes, the employer’s matching portions of tax such as social security (FICA tax), state disability insurance, personal property tax, and sales and use taxes. It could also include excise taxes applicable to a particular type of business.
It is true that receivers have a degree of quasi-judicial immunity from many potential threats, but this is not one of them. Not paying taxes as you go could result in a receiver’s removal and/or a surcharge on a receiver’s bond for payment of the taxes should tax become due during the term of the case but the receivership estate winds up insolvent. Quite obviously this would make it more difficult and expensive for a receiver to secure a bond for future cases. It could also mean disgorgement of fees already received.
Having said this, there will still be cases where the filing of returns is best delayed until the end of the case for practical reasons. Please see my Summer, 2004 Receivership News column to see if income tax returns are required for particular receiverships. While receivers are required to pay the businesses’ taxes as they become due, it is certainly conceivable that, after all of the numbers are crunched, income tax returns delayed to the end of the case will be more accurate. Delaying preparation may also eliminate the need to amend earlier income tax returns where calculation of amortized expenses, costs, and applicable fees later in the case would mandate adjustment of returns filed for prior tax years. But keep in mind that if income tax is found to have been due for earlier years of the receivership’s operation, the estate may be tagged for penalties for late filing or late payments absent any ‘reasonable cause’ to abate such penalties.
Your Personal Tax Hygiene
In brief summary, Mr. George served as a receiver and was paid his receiver fees from time to time as matters progressed. However, Mr. George did not report receipt of these fees on his annual income tax returns. He argued that the law was ambiguous, that fees paid to him were subject to possible disgorgement orders, and that he was not required to report receiver fees until his final accounting was approved and the case was ended. He claimed “uncertainty” as to whether the payments were “received” until the final approvals and case termination.
The trial judge did not find the claimed ambiguity, however, and held that
the tax laws required Mr. George, a cash basis taxpayer, to report the
fees in the years he received them.** Incidentally, the court also found
that the government presented over-whelming evidence that the vast
In all fairness it should be stated here that the Ninth Circuit did remand the case to the district court, but only for a re-determination of whether the sentence was properly calculated.
Moral of the story: The first rule of business is to take care of business.
**As an aside, being an accrual basis taxpayer wouldn’t have
helped Mr. George, since he periodically received and spent the cash. Had
the funds been only constructively earned and not received, the outcome
might have been different. As always, the best advice I can give is for
each receiver to huddle with her/his own accountant in light of that
receiver’s actual situation to insure income is properly booked, reported