The Supreme Court has said that Congress could not have written a broader lien than the federal tax lien. In addition to the lien, Congress gave the IRS broad powers to take property through levy in IRC 6331. We can think of these administrative powers as the superpowers bestowed upon the IRS in a Marvel Comics type analogy, yet these powers do not always work against individuals and entities with assets because of the many types of properties owned by taxpayers.
One story that I heard from a colleague when I worked for Chief Counsel that I never could quite believe was the story of a revenue officer (RO) who seized a radio station seriously delinquent in paying its taxes. As the story was told, the day after the RO seized the station he came over the air the next morning with the farm report, because you can’t just seize and shut down a radio station or TV station because they are part of the emergency broadcast network. Other types of property create different types of problems for the IRS. When a nursing home stops paying its taxes and starts to pyramid employment taxes, the IRS faces a difficult choice from a collection perspective because it does not want to seize and operate the facility. Once, many years ago, a pornography shop in Washington DC was seized for delinquent taxes. Does the IRS want to sell the merchandise in that store? There are many ways that the property owned by the taxpayer can create significant problems for the IRS.
In addition to the types of property that can cause problems because of its nature, sometimes taxpayers own a network of property that could have significant value that would be destroyed by a typical IRS sale. In these situations, a question arises of how to preserve value while stopping a taxpayer from pyramiding taxes. Sometimes the calculus is simply that shutting down the business and stopping the continued accumulation of taxes is better than the difficult task of also working to preserve asset value. If the taxpayer is working with the IRS collection officer, usually the RO will allow the taxpayer to sell property in a way that maximizes value. That does not always happen and usually it does not for reasons related to the personalities of the taxpayer and the RO.
If the taxpayer essentially refuses to work with the RO and if the property holdings are complex, a difficult situation arises. The best solution may be the use of a court process to operate and appropriately wind down the property rather than selling off assets at fire sale values. To do this requires a structure that proves an orderly process for dealing with assets. Bankruptcy provides one orderly process, but putting a taxpayer into involuntary bankruptcy to trigger this process and obtain the appointment of a trustee is not easy and arguably is not appropriate action for the IRS. The appointment of a receiver provides another solution but finding an appropriate receiver for the type of business(es) involved, getting the receiver appointed, and managing the receiver are difficult processes and not ones that the average IRS collection employee possesses or the attorneys in Chief Counsel, IRS or the Department of Justice Tax Division. As a result, the IRS rarely uses the remedy of receivership even though it might provide a good solution for maximizing property values or protecting third parties who have entered into contracts with the delinquent taxpayer.
I had a front row seat to the creation and management of a receivership over several years by working in the office next to John McDougal. I know from the case on which he worked the skill that was necessary for him to succeed in obtaining a receiver and maximizing the return from the receiver’s work. I remember the day when tenants in one of the properties taken over by the receiver were calling John because of a serious sewer problem at the apartment complex.
With this background I saw with interest a new case in which a receiver was appointed, United States v. Scherer, No. 2:19-cv-03634 (S.D. Ohio April 5, 2021). The very first line of the case provided a great clue regarding a reason for appointing a receiver:
On December 16, 2005, the United States Government made assessments of federal income taxes against Defendant Ronald E. Scherer for unpaid amounts during tax years 1990, 1991, and 1992. (ECF No. 76 at 10).
The next line provided another great clue in putting together the picture for why the IRS needed a receiver:
At the time, Mr. Scherer owned 100 percent of the stock of Maples Health Care, Inc. (“Maples”) and West Virginia Health Care, Inc. (“WVHI”). (Id. at 10-11). Maples is an operating company that runs an assisted living care and skilled nursing home business in a facility that is owned by WVHI. Together, Maples and WVHI are Mr. Scherer’s most valuable assets.
So, we have an ancient liability the IRS has failed to collect using normal methods and an asset housing elderly residents the IRS does not want to put onto the street. The perfect recipe for bringing in a receiver.
Continuing into the case the liability owed exceeds $5 million and the IRS had brought a suit to collect in 2014. All the elements of huge liability that needs lots of attention, failed efforts to collect through normal administrative and judicial means coupled with the type of property at the core of the business causes the IRS to go to all of the trouble to find someone to serve as a receiver and to seek that person’s appointment. The court goes through the IRS efforts. It also recounts the resume of the person the IRS has identified to serve as the receiver. Then it walks through why a simple sale of the property would not best serve the situation before it gets to the legal issues it must consider in making the decision to appoint a receiver.
The opinion lists the many duties, responsibilities, powers, authority and protections of the receiver. Reading through the list provides a good idea of the complexity of these types of appointments. Following that list of 28 items, the court lists the 11 terms and conditions of marketing and sale. Then it lists additional duties of the trustee and the staff before ending with the notifications of violation of the terms and conditions of the order. When a judge appoints a receiver, the judge knows that the case may create work for the judge for months or years to come. The same is true for the government lawyers.
Here, there is a need to protect the value of the assets but also to protect a place where many people reside to keep the collection of taxes of the owner of the business from negatively impacting their lives. These residents were not the problem and need to be consider in a solution. These situations present complex collection challenges for the IRS. I wish it well as it seeks to accomplish these dual roles in a challenging environment. We don’t often think of the IRS as a nursing home operator or the operator of other types of special businesses but sometimes that’s what it takes to get the job done.