With respect to federal income taxes, the obligations of a receiver can be very complicated, especially given the various circumstances in which a receivership may arise. Whilst a receivership generally does not create a separate taxable entity, it may be required of the receiver to notify the Internal Revenue Service of the receivership, along with filing income tax returns for the owner or entity in the receivership.
For receivers of an individual who is unable to file their own returns, the receiver must file the returns of the individual, unless the receiver is in possession of just a part of the individual’s assets. For receivers of corporations, it is required that the receiver files the returns of the corporation when the receiver is in possession of all of the corporation’s assets.
It can often be difficult to determine when a receiver is required to return files, even for simply a rents-and-profits receiver in possession of a single property, or a single equity receiver in possession of a business. This is often due to a lack of information on the ownership structure of the entity, or other assets belonging to the owner. In a situation where the receiver is not required to file returns, the owner must be provided with the necessary information to file their own returns.
Qualified Settlement Funds
Although a receivership is not usually viewed as a separate taxable entity, if a receivership constitutes a qualified settlement fund (QSF) it will be treated as such. In general, a QSF is a fund, trust or account that is either established by government or court order, a trust under state law, or a trust that is set up in order to segregate its assets from other assets. QSF’s have been found to exist as part of the recovery of fraudulent investment schemes, and are likely to arise in any other cases where the elements for a QSF are satisfied.
Filing and Payment
Exact requirements for payment and filing should be carefully ascertained as the receiver may be held personally liable for any failure to pay federal claims, including tax-related claims. In general the receiver is held responsible for paying any federal income taxes that are incurred during the pendency of the receivership, although this is dependent on the type of receivership that is held, as certain types of receivership – such as those appointed by federal court – expect the court appointed receiver such as the professionals at FedRecevier to be responsible for paying all taxes, not just federal.
For a receiver who is required to file returns, complications may arise if it is discovered that the owner has either failed to file previous returns or has filed returns that are materially incorrect. There is a lack of clear guidance as to when the receiver must amend and/or file previous incorrect returns. Due to this and a number of other traps, a receiver is advised to seek advice from experienced professionals at the commencement of the receivership.
This article is intended to provide general advice – expert advice should always be sought about your specific circumstances.