Q: I was appointed receiver over a manufacturing facility. I operated it for a short time and then obtained court authority to sell it. I netted $1.4 million from the sale. The landlord agreed I could pay it the rent I owed from the net proceeds and is owed $600,000. All good, except I just learned the IRS is owed $1 million. I know receivers can incur personal liability if they pay creditors ahead of owed taxes. Do I have to pay the IRS ahead of my cooperative landlord?
A: No. What is known as the Federal Priority Act (31 U.S.C. §3713) mandates that representatives of insolvent estates, including receivers, who have knowledge of federal government claims have personal liability if they disburse estate assets to anyone ahead of the government. The priority of the government’s claims and this distribution requirement “is almost as old as the Constitution, and is roots reach back even further into the English common law; the Crown exercised a sovereign prerogative to require that debts owed it be paid before the debts owed other creditors.” U.S. v. Moore, 423 U.S. 77, 80 (1975). Despite this centuries old mandate, courts early on ruled that costs of administration take precedence over the government’s priority. Abrams v. U.S., 274 F.2d 8,12 (8th Cir. 1960); Matter of Receivership of Hollingsworth, 386 N.W. 2d 93,97 (Iowa 1986) ( “The government’s priority is subject to proper receivership expenses.”). Indeed, the IRS has conceded this. The Internal Revenue Manual, ¶ 34.4.1.7 (2016), which discusses 31 U.S.C. §3713(a), provides: “Exceptions to 31 U.S.C. § 3713(a) include:…(2) Administrative Expenses. These are expenses incurred to collect and preserve assets…Administrative expenses may be subject to a standard of reasonableness…”
Therefore, you should be safe paying the rent owed to your cooperative landlord (and your fees) ahead of the government’s claim. It would be good practice, however, to tell the IRS what you propose to do and why, to make sure it has no issues and to have the court approve the payment of the administrative expenses, including that the expenses are “reasonable”.
