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Appointing Receivers for Foreign Assets

APR. 9, 1990

LGM INTL-3

DATED APR. 9, 1990
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Citations: LGM INTL-3

 

April 9, 1990

 

Brl: WEWilliams INTL-3

 

 

LITIGATION GUIDELINE MEMORANDUM

 

 

In re: Appointment of Receiver for Foreign Assets

 

 

Introduction

 

 

[1] In situations where a taxpayer has insufficient assets in the United States from which a federal tax liability can be satisfied but does have assets located outside of the United States, consideration should be given to seeking the appointment of a receiver for the foreign assets combined with an order from the court directing the taxpayer to transfer assets to the receiver sufficient to satisfy the outstanding tax liability. A suit for appointment of a receiver should also be considered where a tax liability is being contested and there is evidence that the taxpayer is dissipating his assets from which a liability would be satisfied. A suit for appointment of a receiver may be used as an adjunct to ordinary collection litigation (e.g., a suit to enforce federal tax liens) or in conjunction with extraordinary collection measures such as a writ ne exeat republica.

Technical Discussion

[2] Section 7402(a) of Title 26 of the United States Code sets forth the jurisdiction of United States district courts and authorizes such courts

 

to make and issue in civil actions, writs and orders of injunction, and of NE EXEAT REPUBLICA, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. [Emphasis added.]

 

[3] Section 1651 of Title 28 of the United States Code provides that

 

[t]he Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdiction and agreeable to the usages and principles of law.

 

[4] The Government obtained appointment of a receiver and a court order requiring repatriation of assets in United States v. Ross, 196 F. Supp. 243 (S.D. N.Y. 1961), aff'd 302 F.2d 821 (2dCir. 1962). In the Ross case, the IRS made jeopardy assessments against a United States citizen who was a resident of the Bahamas; subsequently, the United States brought an action under I.R.C. section 7403 to enforce federal tax liens arising from the jeopardy assessments. The United States requested the court to enjoin the taxpayer from removing or transferring any of his assets because it appeared that the taxpayer was removing substantial assets from the United States. The United States also sought the appointment of a receiver pursuant to section 7403(d) for Ross's assets "wherever located" and an order directing Ross to transfer to the receiver foreign corporate stock certificates which were physically located in the Bahamas. Although the court held that it did not have the power to transfer to a receiver, by judicial fiat, title to property located in the Bahamas; it did find that it had the power to direct the taxpayer over whom the court had personal jurisdiction to make such a transfer to a receiver appointed with respect to property located in the United States.

[5] The opinions of the district court and the Second Circuit in Ross deal with most of the issues which may arise in attempting to employ this procedure. The most important of these issues relates to the power of the Court to order the defendant to transfer to a receiver property which is located outside of the court's jurisdiction. The district court drew an analogy between an action to enforce a federal tax lien and a judgment creditor's action to reach assets which are not subject to levy or distraint. The court noted that as an incident to a judgment creditor's action the defendant frequently has been required to convey to a representative of the court property not within the court's jurisdiction. Ross, 196 F. Supp., at page 245, and cases cited therein. In considering this issue, the Second Circuit did not deal explicitly with the lower court's analogy between the tax lien enforcement action and a judgment creditor's action. However, it explicitly upheld the district court's power to take the action in question when it stated that "[p]ersonal jurisdiction gave the court power to order Ross to transfer property whether that property was within or without the limits of the court's territorial jurisdiction." See Ross, 302 F.2d, at page 834. See also United States v. McNulty, 446 F. Supp. 90 (N.D. Calif. 1978).

[6] A second issue which may arise, where an attempt is made by the IRS to employ the receivership procedure, is whether appointment of a receiver is justified. It should be noted at the outset that a taxpayer over whom the court has personal jurisdiction can be ordered to repatriate assets without there being a receiver appointed. United States v. Clough, 33 A.F.T.R.2d 74-650 (N.D. Calif. 1974); and McNulty, supra. Typically, however, the appointment of a receiver can be justified in any case in which it becomes necessary for the United States to seek repatriation of assets in order to obtain satisfaction of a tax liability. The Government is required to make only a prima facie showing that (1) a substantial tax liability "probably" exists, and (2) that the collection of the tax may be jeopardized if a receiver is not appointed. United States v. O'Connor, 291 F.2d 520 (2d Cir. 1961); United States v. Florida, 285 F.2d 596, 602 (8th Cir. 1960); 14 Mertens, Law of Federal Income Taxation section 49E.48. See also United States v. Foster, 293 F. Supp. 1088 (D. Canal Zone 1968) (the court allowed appointment of a receiver where the IRS showed that a corporation, controlled by the taxpayer, had movable assets from which taxpayer's unproven tax liability could be satisfied and that these assets could easily be moved from the Canal Zone into Panama); and CCDM (34)752.2 et seq.

[7] In O'Connor, supra, the Second Circuit observed, at page 252, that

 

the appointment of a receiver does not depend on the Government's having already proved its claim and its lien; that is one of 'the matters' which the court is to 'adjudicate . . . and finally determine.' It is sufficient if the Government makes a prima facie showing, [citation omitted]; . . . 'where the record shows that a substantial tax liability probably exists, and that the Government's collection of the tax may be jeopardized if a receiver is not appointed, the appointment will be made,' [citations omitted].

 

Appointment of a receiver is not appropriate, however, where payment of a probable or actual liability is otherwise fully secured. See, e.g., Goldfine v. United States, 300 F.2d 260 (1st Cir. 1962).

[8] A third issue which may be encountered is whether the action ordered by the United States court (i.e., transferring assets from a foreign country, violates a foreign country's laws). United States courts generally are unwilling to require an action which would be an infringement on a foreign country's sovereignty or a violation of its laws. See Ross, 302 F.2d, at page 834; and In re Chase Manhattan Bank, 297 F.2d 611 (2d Cir. 1962), in which the court refused to enforce a subpoena duces tecum requiring a United States bank to produce records from a Panamanian branch in violation of Panamanian law. However, the court left the subpoena outstanding and required the bank to cooperate with the Government in applying for permission, through the Panamanian courts, to produce the records. But see United States v. Field, 532 F.2d 404 (5th Cir. 1976), in which the court affirmed a district court's holding that a nonresident alien was in contempt for refusing to testify before a grand jury on the ground that the fact of testifying, regardless of the content of the testimony, would subject him to criminal prosecution in the Cayman Islands.

[9] In Ross, supra, the Second Circuit was presented with the argument that the transfer of the shares in question without the consent of the Controller of Exchange would be a violation of Bahamian law. The court's response was to modify the order to require that Ross apply for the required consent before transferring the stock certificates. See Ross, 302 F.2d, at page 834. See also SEC v. Minas De Artimisa, S.A., 150 F.2d 215 (9th Cir. 1945). In any case in which the Government contemplates using the Ross procedure an attempt should be made to determine if this problem is likely to arise and whether the Second Circuit's approach should be recommended. In these cases, where the United States court has personal jurisdiction over the taxpayer who owns the assets, there should usually be a method, as in Ross, for the court to require that the assets be transferred to the receiver without violating the law of the jurisdiction in which the assets are located.

[10] Since questions of foreign law and relations with other governments could arise in this type of case, proposed actions should be coordinated with Branch 1, Associate Chief Counsel (International) (telephone FTS 287-4851), as early as possible.

John T. Lyons

 

Assistant Chief Counsel

 

(International)
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