Q: I have a client who owes money to the IRS. While I know the IRS likely has a tax lien, my understanding was it just waits until a taxpayer’s property is sold and then gets paid out of escrow. Instead, here, the IRS has filed suit and is asking the court to appoint a receiver to take my client’s property and sell it. I thought receivers can’t be appointed if there is an adequate remedy at law, which would be the case here, since the IRS could get a judgement for what it contends it is owed and then attempt to collect on its money judgment. The US Attorney on the case disputes this, saying the IRS has a statutory right to have a receiver appointed. Why don’t the general rules concerning a receiver’s appointment apply?
A: The general equitable rules concerning the need for a receiver don’t apply because there are specific statutory provisions allowing the IRS to obtain a receiver to enforce its lien or protect its interests. A federal tax lien arises when any “person” liable for any federal tax fails to pay the tax after demand by the government. 26 U.S.C. §6321. The lien is automatic and “silent” and is effective from the date the tax is assessed. The IRS often records a Notice of Federal Tax Lien, but that is not needed for the lien to attach. The Notice is only to notify possible purchasers or transferees and to obtain priority over later secured creditors. Tax liens are not self executing. The IRS must either bring suit to foreclose the lien under 26 U.S.C. § 7403 or assert administrative levy under 26 U.S.C. § 6331.
26 U.S.C. § 7402(a) gives “district courts…such jurisdiction to make and issue in civil actions…orders appointing receivers…and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue law.” In cases brought to enforce federal tax liens “the court may appoint a receiver to enforce the lien, or, upon certification by the Secretary during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity.” 26 U.S.C. § 7403(d).
US v. Newman, 699 F. Supp. 3d 81 (D. Maine 2023) highlights a situation where a receiver was appointed to protect and foreclose an IRS tax lien. The IRS asserted the taxpayer owed substantial personal income tax and was the responsible party for unpaid employment trust fund taxes. The taxpayer’s principle asset was his home, which had two mortgages senior the the IRS lien, both of which were in default. The government filed suit to foreclose its lien and moved to have a receiver appointed to take possession of the home and sell it. It claimed a receiver was needed because the mortgage holders were seeking to foreclose, which would wipe out the tax lien and, because of accruing interest on the mortgages, the equity securing its lien was shrinking every day. The court granted the motion and appointed a receiver to list and sell the home. It cited a number of circuit court decisions that: “ When a request is made for an appointment of a receiver under [26 U.S.C. § 7403(d)], the Government needs only to make a prima facie showing that a substantial tax liability probably exists and that the Government’s collection efforts may be jeopardized if a receiver is not appointed. Together, 26 U.S.C. §7402(a) and 7402(d) provide courts with ‘broad discretion to appoint a receiver to liquidate property subject to federal tax liens to assist the United States in collection of taxes’.” (citations omitted) Id. at 88.
While the court stated there is no definition of what “substantial” tax liability in the statute means, because the taxpayer owed at least $325,000 that would be “substantial” under any definition. It did note the distinction between “nominal” and “substantial” damages. “Nominal damages” being symbolic and “substantial damages” being compensatory. id.at 96, fn.3. The court found the pending foreclosure was sufficient evidence that the IRS’s collection efforts could be jeopardized, justifying a receiver’s appointment. Id. at 90.
These IRS Code provisions are not the only federal statutes authoring the appointment of receivers. For example, where the United States files a civil action on a claim for a debt there are specific prejudgment remedies available to the government which differ from state court remedies courts would otherwise look to under Federal Rule of Civil Procedure 64. 28 U.S.C. §3101 sets forth the grounds that must be met to use these remedies and contains a special “Notice” that must be give the defendant. The available remedies include: attachment, receivership, garnishment and sequestration. The government has its own attachment statute, 28 U.S.C. § 3102, which is broader then California’s attachment statute. It allows attachments not only on contact claims, as in the California statute, but also “(b)(2) in an action against a debtor for damages in tort” and “(b)(4) in an action to recover a fine, penalty or tax.” There is also a separate receivership statue, 28 U.S.C. § 3103. Interestingly, that statute limits a receiver’s compensation to “not exceeding 5 percent of the sums received and disbursed by him…unless the court otherwise directs.” 28 U.S.C. § 3103(g).
