Pooled Accounts Are Single Disputed Ownership Fund

UILC: 468B.01-00

LEGEND:

The court registry items consist of cash deposited by court orders in the registries of B courts pending the resolution of litigation. The court registry items are subject to conflicting claims of ownership of various parties. The ownership of the court registry items is considered undefined pending the court's determination of ownership. The court registry items are held in the name and to the credit of the court. Clerks of the court are required to invest those court registry items in interest-bearing accounts or court-approved interest bearing instruments pursuant to Law1. A court order is required for any disbursement from a court registry item pursuant to Law2.

Maintaining court registry items that qualify as DOFs on an item-by-item basis will create administrative burdens on the courts and impose costs that are larger than the amounts of interest earned.

Taxpayer requests that the B courts be able to treat Fund as a single DOF using a single employer identification number for purposes of filing a single federal income tax return rather than file multiple returns on an individual basis for each court registry item invested in Fund.

Section 1.468B-9 provides for the current taxation of income of a DOF. A DOF is an escrow account, trust, or fund that (1) is established to hold money or property subject to conflicting claims of ownership, (2) is subject to the continuing jurisdiction of a court, (3) requires the approval of the court to pay or distribute money or property to, or on behalf of, a claimant, transferor, or transferor-claimant, and (4) is not a qualified settlement fund under §1.468B-1, a bankruptcy estate (or part thereof) resulting from the commencement of a case under title 11 of the United States Code, or a liquidating trust under §301.7701-4(d) (except as provided in §1.468B-9(c)(2)(ii)). Section 1.468B-9(b)(1).

A DOF is taxable as a qualified settlement fund under the rules of §1.468B-2 (with certain exceptions) if all the assets transferred to the DOF by or on behalf of transferors are passive investment assets. Section 1.468B-9(c)(1)(ii). The administrator of the DOF must obtain an employer identification number for the fund, make all required income tax and information returns, and deposit all tax payments. Section 1.468B-9(c)(1). The administrator is the person designated by the court having jurisdiction over the DOF; if no person is designated, the administrator is the escrow agent, escrow holder, trustee, receiver, or other person responsible for administering the DOF. Section 1.468B-9(b)(2).

A court registry item that qualifies as a DOF is subject to current income taxation. Section 468B(g)(1). As an initial matter, a DOF must be "an escrow account, trust, or fund". Section 1.468B-9(b)(1). The term "fund" used throughout §468B and accompanying regulations is not defined. The statute, regulations, and legislative history do not preclude a "fund" from being an aggregation of items. Prior to the enactment of § 468B(g), it was unclear how items deposited pursuant to a court order and held on behalf of litigants should be reported for federal tax purposes. See Rev. Rul. 64-131, 1964-1 C.B. 485. The enactment of § 468B(g) clearly reflects Congressional intent that such items are subject to current taxation. See Rev. Rul. 92-51, 1992-2 C.B. 102; H.R. Report No. 841, 99^th Cong., 2d Sess. (1986), 1986-3 C.B. 844 (obsoleting Rev. Rul. 71-119, 1971-1 C.B. 163 legislatively). This legislative intent is not thwarted by, or inconsistent with, treating an aggregation of court registry items as a "fund" under the statute. Even though each court registry item included in Fund could perhaps be a separate DOF if set up that way, that fact does not preclude Fund from qualifying as a DOF itself. Current taxation under § 468B(g)(1) is achieved with either the item-by-item or aggregated arrangement. Therefore, under the facts of this case, Fund is a "fund" under § 468B.

We conclude that the aggregation of court registry items into Fund is a DOF pursuant to §1.468B-9(b)(1) because: (1) it is established to hold cash subject to conflicting claims of ownership, (2) it is subject to the continuing jurisdiction of B courts, (3) it requires the approval of a B court to distribute cash to, or on behalf of, a claimant, transferor, or transferor claimant, and (4) it is not a qualified settlement fund, bankruptcy estate, or liquidating trust. As a result, Fund may follow the rules contained in §1.468B-9 as applicable to a single DOF.

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