Fall 2005 • Issue 19, page 5

The Possibility of Fee Disorgement Does Not Delay Income Realization for Tax Purposes

By Pasternak, David*

The Ninth Circuit Court of Appeals has ruled on the issue of whether fees paid to a receiver are taxable income to the receiver when received, even if the fees have not yet been confirmed by the appointing court and are subject to possible reduction or disapproval.

The case, United States v. Randolph George (August 23, 2005), 2005 DJDAR 10283, arose in the Northern District of California.

Mr. George was a cash basis taxpayer, like most individuals. He was appointed receiver for five different radio stations in the early 1990’s. His receiver fees were negotiated with the interested parties and approved by the court at the start of the receivership, and were paid periodically (usually monthly) during his administration, the opinion states.

Mr. George did not report this income in the years received, however, and the U.S. ultimately brought criminal proceedings against him for failure to report this income and pay taxes. Mr. George argued in his defense that the potential for the court ordering subsequent disgorgement of his fees meant that interim receiver fees are not received under a claim of right, hence were non-taxable until confirmed.

The Ninth Circuit opinion, written by Justice Donald P. Lay, quickly rejected the authorities cited by Mr. George for this proposition. It held that the possibility of disgorgement of fees by a receiver when the appointing court considers the receiver’s final report and account does not obviate the responsibility of a cash basis taxpayer recipient of such fees from reporting fees as income when received. In short, Mr. George was out of luck.

Mr. George was not the most sympathetic of defendants, since he failed to file some tax returns altogether. But it is highly unlikely that any court addressing this issue would have reached a different conclusion. So the rule is clear: A receiver must report receiver’s fees as taxable income when received, even if they have not yet been approved or confirmed by the court and are subject to possible disgorgement. (See Chuck Rosen’s additional comment on this case in his tax comments column in this issue. Ed.)

*DAVID J. PASTERNAK is a founder of Pasternak, Pasternak & Patton, a law firm in Century City, where he emphasizes serving as a receiver and representing receivers.