Examples of non-bankruptcy insolvency proceedings include insolvent decedent estates, receiverships, assignments for the benefit of creditors, and corporate dissolutions. These distinct proceedings have a significant similarity. In each one, a fiduciary takes control of property of a debtor or decedent. The fiduciary then has the duty of administering and distributing the property.

Non-bankruptcy insolvency proceedings are usually under the jurisdiction of state courts (except for federal receiverships).

In the case of an insolvency, the IRS may be entitled to payment of federal taxes ahead of other creditors under the Federal Priority Statute, 31 USC 3713(a), Priority of Government claims. If a fiduciary pays other claimants ahead of the IRS in violation of the Federal Priority Statute, then the fiduciary might be personally liable under 31 USC 3713(b).

Delegation orders that are specific to the Small Business/Self Employed Collection organization are in IRM 1.2.65.3, SB/SE Functional Delegation Orders - Collection.

The Federal Priority Statute is located in 31 USC 3713, Priority of Government claims.

Internal Revenue Code and Treasury Regulations related to this IRM section include the following:

Field Collection employees are responsible for investigating and collecting on assigned collection cases. In a collection investigation, Field Collection employees may encounter an insolvent decedent estate, an assignment for the benefit of creditors, a receivership, or a corporate dissolution.

Director, Field Collection, is the executive responsible for all Field Collection programs.

Director, Collection Policy, is the executive responsible for the policies and procedures followed by Field Collection employees.

Field Collection Area Directors, Territory Managers, and Group Managers are responsible for ensuring Field Collection employees comply with these procedures.

Field Collection revenue officers are responsible for following the procedures in this IRM.

Field Collection CEASO employees and Counsel provide advice and may review some of the Field Collection revenue officer collection activities.

IRM 1.4.50, Collection Group Manager, Territory Manager and Area Director Operational Aid, addresses responsibilities of managers for Field Collection case work.

IRM 1.4.53, Advisory and Property Appraisal and Liquidation Specialist Group Manager Operational Aid, addresses responsibilities for Civil Enforcement Advice and Support Operations (CEASO) group managers.

National quality and program reviews are conducted to ensure that program delivery and case actions are in accordance with procedural requirements. See IRM 5.13.1, Embedded Quality Collection Field Organizations Administrative Guidelines.

The Integrated Collection System (ICS) is used to control tax accounts on a decedent’s tax liability and to document case work.

The ENTITY Case Management System generates reports to assist in managing assigned inventory on ICS. See IRM 5.3.1, ENTITY Case Management System (ENTITY), for information on Field Collection Case Assignment and Workload Management.

Caseworkers and managers utilize the Automated Insolvency System (AIS) for case management, assignment, and documentation of non-bankruptcy insolvency cases. See IRM 5.9.3.2, Automated Insolvency System (AIS). Also, see IRM 5.9.12, Insolvency Automated Processes, for information on reports for non-bankruptcy insolvency cases.

The term insolvency proceedings in this IRM is not referring to bankruptcy cases. The Bankruptcy Code (Title 11 of the United States Code (USC)) governs bankruptcy cases, which are addressed in IRM 5.17.8, General Provisions of Bankruptcy, IRM 5.17.9, Chapter 7 Bankruptcy (Liquidation), IRM 5.17.10, Chapter 11 Bankruptcy (Reorganization), IRM 5.17.11, Chapter 13 Bankruptcy (Individuals with Regular Income) and Chapter 12 Bankruptcy (Family Farmers or Fisherman with Regular Income), and IRM 5.9, Bankruptcy and Other Insolvencies.

The following table includes common acronyms used in insolvent decedent and non-bankruptcy insolvency proceedings:

Related resources include the following:

"Insolvent" under 31 USC 3713(a) refers to "balance sheet" insolvency. This occurs when the debtor’s liabilities exceed the debtor’s assets. SeeLakeshore Apartments, Inc. v. United States, 351 F.2d 349 (9th Cir.1965); United States v. Golden Acres, 684 F.Supp. 96 (D.Del. 1988); United States v. Blumenfield, 128 B.R. 918 (E.D. Pa. 1991).

The inability or failure to pay debts as they become due does not, by itself, constitute insolvency under 31 USC 3713(a). See United States v. Oklahoma, 261 U.S. 253 (1923). For example, the debtor might have far more assets than liabilities, but may not be able to liquidate the assets to pay off the debts on time.

The relevant time for testing insolvency is at the time of distribution of assets. Thus, although an estate might not be insolvent at the commencement of a proceeding, the federal priority will arise if the estate is insolvent when assets are later distributed. See Schwartz v. Commissioner, 560 F.2d 311 (8th Cir. 1977); Hatch v. Morosco Holding Co., 61 F.2d 944 (2d Cir. 1932).

31 USC 3713(a)(1)(A)(i) applies when the debtor’s property is transferred to a fiduciary in a legal proceeding brought to liquidate the insolvent debtor’s property and pay the debtor’s debts. See United States v. Oklahoma, 261 U.S. 253 (1923); Bramwell v. United States Fidelity and Guaranty Co., 269 U.S. 483 (1926). 31 USC 3713(a)(1)(A)(i) applies to the following proceedings:

31 USC 3713(a)(1)(A)(ii) applies when the absent debtor’s property is administered for all of the debtor’s creditors. See United States v. Clover Spinning Mills Co., 373 F.2d 274 (4th Cir. 1966). The term “attachment” in this section “is not the familiar attachment made at the instance of and for the benefit of one creditor, …but to a form which was in use in some states when the federal statute was enacted in the late 18th century, by which the absconder’s property was sequestered and administered for the benefit of all” the creditors. See William T. Plumb, Federal Tax Liens, 195, n. 23 (1981).

31 USC 3713(a)(1)(A)(iii) applies when an act of bankruptcy is committed. In defining “act of bankruptcy,” courts look to the definition in the Bankruptcy Act of 1898, (11 U.S.C. 21a) (repealed 1978), even though the Bankruptcy Reform Act of 1978 (Bankruptcy Code) generally superseded the Bankruptcy Code and the concept of “acts of bankruptcy” is not used in the Bankruptcy Code. The Bankruptcy Act of 1898 stated that: Acts of bankruptcy by a person shall consist of that person having:

Under the definition, an act of bankruptcy may arise even when there has been no transfer of property to a fiduciary, and multiple acts of bankruptcy may exist in one transfer. In United States v. Golden Acres, Inc., 684 F.Supp. 96 (D. Del. 1988), an insolvent corporation owing a debt to the United States paid $466,760.54 to its sole officers and directors. In doing so, it committed three independent acts of bankruptcy: it made a preferential transfer of assets to its sole officers and directors; it conveyed property with the intent to hinder, delay, or defraud any creditor, which was a fraudulent conveyance; and it conveyed property without receiving fair consideration, which also was a fraudulent conveyance. The district court imposed liability on the payees/officers under 31 USC 3713(b) because they were representatives of Golden Acres and were “liable to the extent of the payment for unpaid claims of the government.”

In a lawsuit asserting an act of bankruptcy, care must be taken to ensure that all of the elements for a particular act of bankruptcy are proven. For example, in Jonathan’s Landing, Inc. v. Townsend, 960 F.2d 1538 (11th Cir. 1992), the district court granted the government’s motion for summary judgment, which asserted that the third act of bankruptcy applied to the debtor: the debtor suffered or permitted, while insolvent, any creditor to obtain a lien upon any of their property through legal proceedings or distraint. The Eleventh Circuit reversed the district court, reasoning that summary judgment should not have been granted because the government had failed to prove that the taxpayer-debtor had been insolvent prior to committing an act of bankruptcy.

A 31 USC 3713 claim against the debtor-taxpayer does not preclude the government from also asserting claims under other sections of the Internal Revenue Code, such as IRC 7501 and IRC 6672. In Jonathan's Landing, 960 F.2d at 1546 n.40, the Eleventh Circuit was "puzzled" as to the government's failure to assert additional claims against the debtor under IRC 7501 and 6672.

For the purposes of the Federal Insolvency Statute, taxes are "debts" due the United States. See United States v. Estate of Romani, 523 U.S. 517, 525 n.8 (1998); Massachusetts v. United States, 333 U.S. 611, 625-625(1947).

A statutory lien that arises against property of a taxpayer before a taxpayer’s death continues to attach to the property after the taxpayer’s death. See United States v. Bess, 357 U.S. 51 (1958).

Collection by levy: As a general rule, when property to which the federal tax lien attaches passes into the control or custody of the court, collection by levy is not used because it would interfere with the court's processes. See United States v. Silverman , 621 F.2d 961 (9th Cir. 1980) (Collection is prohibited while the assets are in custody of the court.) Where the proceeding has progressed so far that levy would not interfere or where the court grants permission to levy, levy may proceed. See Treas. Reg. 301.6331-1(a)(3). Consult Counsel before taking any enforced collection action after the claim is filed or notice and demand is made if estate assets are under the control of the court. But, if there are non-probate or other assets not subject to the court's jurisdiction or under the control or custody of the court, then the IRS may levy on those assets.

Property will not be in the custody of the court if:

Persons who receive distributions from a decedent’s estate, such as heirs and devisees, generally do not fall within any of the priority categories of IRC 6323. The IRS may collect from such distributed property without the filing of a Notice of Federal Tax Lien (NFTL) if the assets are not under the custody of the court.

If a statutory lien arises after the death of the decedent, it may attach to property in the decedent's estate as of the assessment date. Some property may pass outside of the probate estate; for example, life insurance and property held by joint tenancy. Because a determination of rights to property is dependent upon state law, contact Area Counsel to determine if the federal tax lien will attach to probate property.

The period of limitations for collection is suspended under IRC 6503(b) while a decedent’s assets are under the control or custody of a court and for 6 months thereafter. Collection from the non-probate assets and the assets of the surviving spouse on joint liabilities with the decedent will have the normal 10-year statute for collection. The probate action will extend the collection statute for the decedent's liabilities only with respect to the probate assets in control of the court and then only if the probate assets are substantial in value relative to the entire estate. See United States v. Silverman, 621 F.2d 961, 967 (9th Cir. 1980).

State courts have jurisdiction over a decedents’ estate. Usually, state statutes designate a particular court to supervise the administration of estates. These courts are often known as probate courts. A decedent’s estate is generally administered in the probate court of the county in which the decedent resided at the time of death.

Specific procedures for the probate court vary depending on the law of each state.

Generally, the first step in the judicial probate of a will is to file the will with the probate court. After a party proves a will to be genuine, the court will issue letters of administration to an executor. The executor then has the duty of gathering together and inventorying the estate assets, paying the debts of the decedent, and making distributions of the assets.

If there is no will, a party may file a petition with the probate court to request that the court appoint an administrator. The court will issue letters of administration and charge an administrator to perform the same tasks as the executor.

Both the executor and the administrator are known as personal representatives. The personal representative may be required to post a bond before appointment to act for the estate.

Creditors, including the IRS, can file claims against the estate. The personal representative will approve or disapprove each claim. If the fiduciary disapproves the claim, then the creditor may argue the case before the probate court. The creditor may also appeal an adverse decision to a state appellate court. After all disputes are settled, the personal representative distributes the assets. Heirs and devisees get any remaining assets after creditor’s claims are satisfied.

31 USC 3713(a) priority applies to a decedent’s estate when the assets of the estate in the custody of the executor or administrator are not enough to pay all debts of the decedent.

Assets of the estate do not include certain property passing outside of probate, such as jointly held property. However, the estate does include any claims the executor has against holders of property that can be used to pay the tax liability. For example, under IRC 2206 and 2207, the executor has the right to compel contributions toward the estate tax from life insurance recipients and property subject to a power of appointment.

If the 31 USC 3713(a) priority applies, then the personal representative can be liable under 31 USC 3713(b) for distributions that violate federal priority.

State statutes generally provide the purposes and conditions necessary to appoint a receiver. The party seeking the receivership must show the court that a receivership is necessary. Generally, there is no absolute right to the appointment of a receiver. Instead, the decision rests in the sound judicial discretion of the court. The court may also appoint a receiver on its own motion.

The receiver is usually an independent party without an interest in the case. The receiver must impartially protect the property or interests of the parties to the suit. A party in interest may be appointed receiver because of the nature of the property or special knowledge of the business. Generally, a court will allow a party in interest to serve as a receiver only if all of the parties to the suit agree.

The receiver is a fiduciary who can be personally liable under 31 USC 3713(b) for violating the Federal Priority Statute in 31 USC 3713(a). However, government claims might not have top priority in many receiverships because:

Pursuant to IRC 6036 a receiver in a receivership proceeding (and similar fiduciaries, including assignees for the benefit of creditors) who is in control of all or substantially all of the assets of a debtor must give notice of the appointment to the Area Director within 10 days of the receiver’s appointment. See Treas. Reg. 301.6036-1.

Under IRC 6871(a), assessments for income, estate tax, and gift taxe may be made immediately after the appointment of a receiver in any receivership proceeding before any federal or state court. See Treas. Reg. 301.6871(a)-1. In these instances, the IRS does not issue a notice of deficiency, and the taxpayer is deprived of access to Tax Court. See Treas. Reg. 301.6871(b)-1(a).

The IRS may file a proof of claim in the receivership proceeding to collect from the assets in the custody of the court. The IRS may not engage in administrative collection from assets in the custody of the court. Accordingly, the period of limitations for collection is suspended under IRC 6503(b) if all or substantially all of the taxpayer’s assets are in the control or custody of the court.

The receiver takes property subject to prior tax liens. The 6321 lien is not valid against the creditors listed in IRC 6323(a), unless a NFTL was filed before the creditor took an interest in the property. Receivers are not on the IRC 6323(a) list, so the tax lien encumbers the property in the receiver's hands. One or more of the 6323(a) creditors may have an interest in the property when the receiver takes it, however, and that interest will have priority over the 6321 lien if the interest predates the filing of the NFTL.

Unlike bankruptcy cases, receivership proceedings do not provide a discharge. The IRS may collect any tax claim that remains unpaid once the proceeding ends. See IRC 6873.

Like a receiver, an assignee for the benefit of creditors does not fall within one of the protected categories of IRC 6323. Therefore, the assignee is subject to the federal tax lien even though a Notice of Federal Tax Lien has not been filed. If the tax liability is assessed before the assignment, a valid tax lien exists against all the assignor’s property. The effect of the assignee taking the property is that the Government retains its interest in the property to the extent of its lien and the Government is entitled to enforce its lien against the property.

Generally, if the tax liability is assessed after the assignment, the taxpayer no longer has an interest in the property at the time of assessment, so the tax lien does not attach to the assigned property.

The United States can assert a priority claim under 31 USC 3713(a) for voluntary assignments for the benefit of creditors. See United States v. Cole, 733 F.2d 651 (9th Cir. 1984). The assignee is a fiduciary who can be personally liable under 31 USC 3713(b) for using property of the insolvent estate to pay lower priority creditors ahead of known federal tax liabilities. If other creditors have priority over the United States under IRC 6323 (e.g., mortgages and other consensual security interests), however, the federal priority statute will not provide superior priority.

If difficulties arise in the liquidation of assets, payment of claims, or distribution of assets, or if state law requires, dissolution may be conducted in a court proceeding.

If the parties are able to liquidate the corporation without the help of a court and if all parties and creditors are satisfied that justice is being done, there is no reason for court action. The parties may conduct the liquidation entirely out of court if state law permits.

The fiduciary who is charged with liquidating the corporation will first collect all corporate assets, inventory the assets, value, liquidate them and make distributions to creditors and stockholders.

The fiduciary must ordinarily give notice of the dissolution to all who might hold claims against the corporation. This will usually be a public notice such as newspaper publication in addition to specific notice to each known creditor as required by state law. The notice will give the place where claims are to be filed and the date by which they should be filed.

If money or property remains in the hands of the liquidator after satisfaction of claims against the corporation, the balance will be distributed to the stockholders. All valid claims against the corporation must be paid before anything is distributed to stockholders, but after payment of claims all equity remaining in the corporation belongs to the stockholders.

Priority of the United States versus other creditors of the corporation will often be determined by IRC 6323.

However, with respect to persons without priority under IRC 6323, such as state entities and stockholders, the United States can claim priority pursuant to 31 USC 3713(a).

Where the United States has priority under 31 USC 3713(a), it can assert personal liability under 31 USC 3713(b) against fiduciaries who pay claims with lower priority than the federal claim, so long as the fiduciary had knowledge of the tax liability.

If a tax claim against the corporation is not paid, and corporate assets are distributed to stockholders, collection may be effected from such stockholders to the extent of the property received by each. There are three possible grounds for collection from stockholders:

In the event of a corporate merger or consolidation, the successor corporation often takes all the assets and assumes all the liabilities of the old corporation. Collection from the successor corporation can be effected by the same means as discussed with respect to stockholders.

When the tax in question is a withheld employment tax or collected excise tax, the Trust Fund Recovery Penalty under IRC 6672 provides an effective means to collect the unpaid liability from corporate officers who were responsible for payment of the tax.

An offer in compromise may be considered when it is unlikely that the tax liability can be collected in full, and the amount offered reasonably reflects collection potential. An offer in compromise may achieve the goal of collecting what is potentially collectible at the earliest possible time and at the least cost to the government. Refer to IRM 5.5.8, Offer in Compromise