The Tax Man Cometh: Paying Taxes in Receivership

CRE Finance World, Winter 2014

The Tax Man Cometh: Paying Taxes in Receivership “’In this world nothing can be said to be certain, except death and taxes.” —Benjamin Franklin hile this rather fatalistic adage has been in existence hundreds of years, sometimes life is not always that simple — especially when an institution or enterprise is in receivership. Many people — including receivers — believe it is not necessary to pay pre-receivership taxes. However, this is a dangerous and often expensive assumption. In today’s environment, a receiver must approach tax issues very carefully, especially since tax collection agencies have grown savvier and more aggressive in getting paid a defunct borrower’s taxes — no matter who the succeeding party in interest may be. While a receivership is not a separate taxable entity, a receiver is responsible for paying taxes incurred during pendency of the receivership. Given the varying circumstances under which receivership may arise, a receiver’s tax obligations can be quite complicated — but generally a receiver is responsible for complying with any reporting obligations to the federal, state, and local taxing authorities. Complications can arise for a receiver who is required to file returns and discovers that the owner either failed to file prior year returns or filed incorrect returns Receivership Overview At this point in the real estate cycle, legal and lending industry professionals are familiar with the general notion of receivership. While there are many types of receiverships, most courts distinguish between receivers appointed to take over an entire business entity — often called a general assets receiver, and one appointed to take possession of specific assets which secure the loan and any income generated by those assets — usually called a rents-andprofits receiver. While there are many forms of receivership, most commercial lenders and servicers deal particularly with these two. In most cases, receiverships arise when a lender initiates a foreclosure lawsuit to reclaim an asset that was secured by a loan which has gone into default — as a result of the borrower’s failure to make debt service payments or uphold a material covenant of the loan documents. In order to ensure stability and protect the value of the asset during litigation, the lender will request that the court appoint a fiduciary to take control of the asset and all rents CRE Finance World Winter 2014 70 of income associated with the asset. In this scenario, the receiver does not take over the borrower’s entire business, but simply takes possession of the assets named as security for the loan that is in default. This means that the receiver does not step into the shoes of the borrower entirely. Instead, the receiver is only responsible for the payment of expenses and liabilities that arise after the receivership appointment — not for any obligations or liabilities of the borrower. With this in mind, one might assume that pre-receivership tax liabilities are handled in the same manner — but that is not always the case. If a receiver treats all tax liabilities as pre receivership liabilities, they can most certainly be inadvertently neglected. Many orders appointing receivers include language that waives the receiver’s responsibility related to any pre-receivership tax liabilities of the borrower. This often causes receivers to fail to address the borrower’s tax liabilities, which can prove to be devastating — and costly. Unnecessary Tax Problems A receiver who ignores tax liabilities can create unnecessary problem — the most common complications include liens, permitting issues, increased interference from other government departments and the inability to close a sale based on outstanding liabilities. Examples of commonly neglected taxes during receivership include gross receipts tax, sales tax, business privilege tax, state income tax, tax withholding, use tax, transient occupancy tax, and resort tax – just to name a few. Some taxes can attach in a priority position above the foreclosing lender’s deed/mortgage, further decreasing the value of the creditor’s interest in the assets. While some taxes may not be eligible to attach to a property at all, some can attach in a subordinate position to the creditor’s interest and could be wiped out in foreclosure. However, the priority of tax debt and each tax type’s ability to attach to property are almost irrelevant at this level of analysis, because the mere existence of an outstanding tax liability can dramatically affect the receivers’ ability to operate a property. Even tax liabilities wiped out at a foreclosure or that cannot attach to the property can derail the sale of an asset through receivership. Although the attachment of a tax debt to a property under receivership is a significant problem for both the receiver and the lender, before the tax issues even reach that level, they can easily become an obstruction to the very fundamental purpose of the receivership. W Kelley McLaren Chief Administrative Officer Trigild


CRE Finance World, Winter 2014
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