The local Insolvency Unit is the point of contact for Field Counsel. That Unit in each territory protects the Government’s interests with respect to the collection of any federal taxes that the Government may claim in non-bankruptcy insolvencies. The Unit may request assistance from or refer a case to Field Counsel.

SB/SE should open a legal file in connection with non-bankruptcy insolvency proceedings when the Insolvency Unit requests legal assistance or refers the case for action of a legal nature. For specific rules regarding the opening of receivership cases (for example, reviewing a Form 1005(DO) letter) or cases involving decedents’ or incompetents’ estates, see CCDM 34.4.1.10.

Advisory assistance in a case ordinarily will be jacketed as to the type of insolvency involved. If the case involves a general referral, such as where the Unit refers all receiverships to Field Counsel, it should be counted as post-filing legal advice, not as a Non-Bankruptcy Insolvency.

Field Counsel ordinarily should close a file when the issues for which the Unit referred the case to SB/SE have been disposed of. Field Counsel does not need to wait until the proceeding is closed.

The Unit may ask Field Counsel for advice concerning a number of insolvency issues. Some of these issues may arise concerning matters currently independent of a pending adversary action in court. For example, during a proof of claim review Field Counsel might be asked whether:

Questions may arise concerning what action, if any, the Government should take to collect federal taxes due from third persons who are not parties to the insolvency proceedings. For example, issues may arise concerning transferee liability or liability for Trust Fund Recovery Penalties under section 6672.

Insolvency proceedings often involve federal tax controversies that require affirmative action. Some of these controversies relate to the merits of claimed federal taxes. Others relate to a multitude of additional questions involving creditors’ rights that may be tried in the proceeding. Some controversies may require the United States:

When a party objects to the merits of claimed federal taxes before the court, or where some other controversy has arisen that affects the interests of the United States in the collection of federal taxes, Field Counsel should consider the questions at issue, examine the pertinent statutes and court decisions, and inform the Department of Justice of Field Counsel’s determinations.

If Field Counsel determines that the Government should take affirmative action in connection with the federal taxes or federal tax liens involved in a proceeding, and that the exercise of such affirmative action requires authorization under section 7401 or section 7403, Field Counsel should prepare and send a suit letter under normal case referral procedures to the Assistant Attorney General, Tax Division, Department of Justice. See CCDM 34.6.

Decisions adverse to the Government in whole or in part should be brought to the immediate attention of the Office of the Assistant Chief Counsel (Collection, Bankruptcy and Summonses). See CCDM Part 36.

CCDM 34.3.1.3 contains special rules for handling significant bankruptcy cases. The procedural rules therein are the same as those to be used for significant insolvency cases, defined generally as insolvencies having significant tax liabilities, significant or sensitive issues, or significant audit impact. If one of these cases arises, Field Counsel should refer to the special rules.

A case is opened by Field Counsel when a problem is referred from the Area Director’s office or there is a need to provide legal advice in a proceeding.

The case will usually be closed when review of the Form 1005(DO) letter has been completed. The receipt of an information copy of a Form 1005(DO) letter is not by itself sufficient basis to jacket a case. See CCDM 34.4.1.8.5 for a general discussion of the Form 1005 letter procedures.

Receiverships are generally filed in state courts pursuant to the court’s general equity jurisdiction. See IRM 5.17.13.11(Receiverships).

In jurisdictions where formal intervention is required by local court rules, the filing of a proof of claim may not suffice. In those jurisdictions, Technical Services should refer the matter to Field Counsel so that action may be taken to have a Petition for Intervention filed. A suit letter to the Tax Division requesting and authorizing intervention is required.

If the receivership is in federal court, the Government is to intervene to assert its rights. Mere reliance on the filing of a claim will not provide the Government with standing to challenge any action taken in the court proceeding. A suit letter to the Tax Division requesting and authorizing intervention is required. See CCDM 34.6.1 for suit letter preparation instructions and guidelines.

A receiver does not fall within one of the protected classes of section 6323. Accordingly, the Service’s lien priority rights in receivership cases will be governed by comparing the assessment date with the date the receivership proceeding was commenced. Thus, if federal taxes were assessed prior to the receivership, the Service can simply rely on its lien rights. If taxes were not assessed prior to the receivership, the Government must rely on its priority rights under 31 U.S.C. § 3713(a) as discussed in CCDM 34.4.1.7. See also IRM 5.17.13.2 (Priority of Government Claims under 31 U.S.C. section 3713(1)).

Problems may arise as to whether or not the court has taken sufficient jurisdiction of all the taxpayer’s assets to bar administrative or other collection activities on the part of the United States during the proceeding. Ordinarily, the United States will not administratively seek collection from assets within the control of the court (in custodia legis) but will take any necessary collection action against property not taken over either in the general receivership or the limited receivership. See IRM 5.17.3.1.3.6. Field Counsel will be called upon to advise the area director as to the permissible limits of collection action in receivership cases.

Receiverships are dramatically different from bankruptcy proceedings in that there are no discharge provisions. Thus, any claim filed in the receivership proceeding and not paid would not be subject to discharge, but rather can be collected thereafter from the taxpayer, either by levy or by proceeding in court, to the same extent as if the receivership had not taken place. Taxes not claimed, of course, would be similarly collectible. The normal ten-year period for collection of the tax after assessment under section 6502 would also be suspended by section 6503(b) for the period during which the assets of the taxpayer were under the control or custody of the court in the receivership proceeding, and for six months thereafter. See IRM 5.17.3.

For a discussion of the Government’s priority under 31 U.S.C. § 3713(a) and general information regarding the Government’s rights against a receiver under 31 U.S.C. § 3713(b), see CCDM 34.4.1.7.

The Service can seek the appointment of a general receiver for all of the taxpayer’s assets by filing a suit to foreclose the tax lien pursuant to section 7403. Section 7403(d) provides that a court may appoint a receiver upon request by the Government. See IRM 5.17.13.10(4) (Receiverships).

The Government’s suit letter in a section 7403 proceeding should request the appointment of a receiver when necessary for the collection, preservation, and orderly liquidation of assets.

A request to appoint a receiver must be approved by the Division Counsel (Small Business/Self-Employed).

General Information. Section 6871 requires immediate assessment of any deficiency in income, estate, or gift taxes at the time a receivership proceeding is commenced. This is an exception to the usual procedure requiring the issuance of a statutory notice of deficiency prior to the assessment of certain taxes. See sections 6212 and 6213. The regulations provide that whenever an immediate assessment is made, the fiduciary shall be advised of the assessment and the basis upon which the assessment is made. Treas. Reg. § 301.6871(b)-1(c). Thus, when a receiver is appointed, the Area Director issues a Form 1005(DO) letter for open years if deficiencies have been determined but not assessed. The Form 1005(DO) letter is similar in content to the 90-day letter, even though it is not a document required to be issued by statute. See Exhibit 35.11.1-6.

Under Section 6871(c) the Tax Court has no jurisdiction in these cases unless jurisdiction already exists at the time of the appointment of a receiver. See CCDM 35.4.1.5.3.1.

State law should be consulted to determine whether a valid assignment has been made. Generally, contract law is applied to determine if the assignment is valid. A fatal defect to an assignment is fraud on the part of the assignor or an intent to defraud creditors. Fraud must be proven and cannot be presumed.

Because these are rather infrequent types of proceedings, the Area Director’s office may not be familiar with the consideration that must be given any possible claim of the United States. Accordingly, whenever Field Counsel is advised of any such proceedings where there is a tax claim, the jurisdiction of the court should be determined, and the Area Director advised as to how to proceed. It is likely most Field Counsel offices have advised Technical Services how to handle assignments in their respective localities.

An assignee does not fall within one of the protected classes of section 6323. The date of assessment will therefore determine whether the Government has a lien effective against the assignee.

Property passes to an assignee subject to existing encumbrances. Therefore, if an assessment was made prior to an assignment, the Government can rely on its lien rights.

After a general assignment, no property remains to which a lien can attach. Therefore, if an assessment has not been made prior to the assignment, the Government must rely on 31 U.S.C. § 3713. For a discussion of the Government’s priority under 31 U.S.C. § 3713(a) and general information regarding the Government’s rights against a receiver under 31 U.S.C. § 3713(b), see CCDM 34.4.1.7.

A legal file is opened by Field Counsel after reference from the Area Director’s office or on Field Counsel’s own initiative. It is not necessary for a court proceeding to be pending in order for Field Counsel to open a file.

An offer in compromise that concerns a decedent’s taxes, with no probate pending, should be jacketed as an Offer in Compromise.

The decedent’s death does not affect tax liens existing at the time of death. Where the assessment is made after death, the tax lien will not attach to property that has already passed to the decedent’s heirs, devisees, or legatees.

Administrative collection can be pursued against the decedent’s property if: (i) the lien arose upon assessment prior to the time title to the property passed to heirs, devisees, or legatees (usually at the time of death); and (ii) the property is not under the control of the court (for example, nonprobate assets such as proceeds from life insurance policies). See sections 6321 and 6322; Treas. Reg. § 301.6331-1(a). Note, however, that certain transferees are protected against the federal tax lien under sections 6323 and 6324. See Treas. Reg. § 301.6331-1(a). The decedent’s heirs, devisees, or legatees do not fall within any of the protected categories of section 6323.

For a discussion of administrative collection against the estate or distributees of a decedent, see IRM 5.17.13.10.1(Administrative Collection). Note also that section 6871 is not applicable to decedent’s estates. If there is an estate tax deficiency, or if income or gift taxes have not been assessed prior to the decedent’s death, the fiduciary for the estate is entitled to receive a statutory notice of deficiency, which can be petitioned to the Tax Court.

For a discussion of the Government’s priority under 31 U.S.C. § 3713(a) and general information regarding the Government’s rights against an executor or administrator under 31 U.S.C. § 3713(b), see CCDM 34.4.1.7.

A "receiver," "liquidator," or other fiduciary is appointed by the court in a judicial dissolution to oversee the winding up of corporate affairs while the court hears and determines any controversies that may arise. A nonjudicial dissolution is usually conducted by the officers of the corporation who are in effect trustees for the creditors and, thus, act in a fiduciary capacity.

Corporate dissolutions are rare, and procedures in each case will depend largely on state law. See IRM 5.5.2.4 4 (Dissolutions) and IRM 5.17.13.13 (State-law Corporate Dissolutions).

A judicial dissolution proceeding may arguably be deemed sufficiently equivalent to a receivership proceeding, under the rationale of Williams v. Commissioner, 44 T.C. 673 (1965), so as to permit the automatic assessment of deficiencies pursuant to section 6871. See CCDM 34.4.1.9.

If at any time it is determined that the interests of the United States are not being protected in a nonjudicial dissolution, a suit to subject corporate properties to payment of tax under section 7403 could be brought, and a receiver can be appointed thereunder. See CCDM 34.4.1.8.4. If this is done, it will probably result in converting the nonjudicial dissolution into a judicial dissolution, after which the proceeding will continue under supervision of the court.

If tangible property is accessible, seizure action might be faster and more appropriate than filing suit.

In a judicial dissolution, a proof of claim is usually filed and normal administrative collection activities are suspended until it is determined that certain collection activities will not interfere with the court’s administration.

In a nonjudicial dissolution, administrative collection activities, including levies, may be appropriate.

Taxes can also be collected through assertion of transferee liability, a suit to set aside a fraudulent conveyance, and Trust Fund Recovery Penalty procedures.

Some states provide that stockholders who have received a distribution are liable for unpaid corporate debts to the extent of the distribution. There are three possible means of collection from stockholders:

For a discussion of the Government’s priority under 31 U.S.C. § 3713(a) and general information regarding the Government’s rights against corporate officers, directors and shareholders as fiduciaries under 31 U.S.C. § 3713(b), see CCDM 34.4.1.7.