5.9.20. Non-Bankruptcy Insolvencies

(1) Internal Revenue Manual (IRM) 5.9, Bankruptcy and Other Insolvencies, contains the Service’s position, procedures, information, instructions, guidance, and references concerning bankruptcy cases, stockbroker insolvencies, receiverships, assignments for the benefit of creditors, corporate dissolutions, and bulk sales.

(2) This IRM specifically addresses the Service’s position, procedures, information, instructions, guidance, and references on the following non-bankruptcy insolvencies: stockbroker insolvencies, receiverships, assignments for the benefit of creditors, corporate dissolutions, and bulk sales.

(1) 11 USC 109(b) with 109(d) & (e)

(2) Securities Investor Protection Act (SIPA) of 1970

(3) 15 USC 78aaa et seq

(4) 11 USC 742

(5) IRC 7403(d)

(6) IRC 6036

(1) The Director, Specialty Collection Insolvency and Director, Specialty Collection Offers, Liens and CEASO are responsible for program oversight.

(2) Territory and Frontline managers are responsible for ensuring reviews are completed as required per IRM 1.4.51.17.2, Operational Review, IRM 1.4.51.16.2, EQ Consistency Reviews, IRM 1.4.51.5.2, Reviews (Overview), and IRM 1.4.53, Advisory and Property Appraisal and Liquidation Specialist Group Manager Operational Aid.

(3) Employees are responsible for following the provided guidance to process cases.

(1) Program Reports. Reports housed on the Business Objects Enterprise system are used to support the insolvency program. The required AIS reports are described in IRM 5.9.12 , Insolvency Automated Processes, IRM 5.9.16 , Insolvency Case Monitoring, and in IRM 1.4.51.8.3 , Case Management Tools.

(2) Program Effectiveness.

1. Operational and Program reviews are conducted on a yearly basis. See IRM 1.4.51.17.2, Operational Review, and IRM 1.4.51.17.5, Program Reviews, for more information. Operational Reviews are conducted within the operation and can be obtained by contacting the Director, Specialty Collection Insolvency or Director Specialty Collection Offers, Liens and CEASO. Program Reviews are conducted within Headquarters Collection and can be obtained by contacting the Director, Collection Policy or Director, Specialty Collection Offers, Liens and CEASO.

2. National quality reviews conducted on a monthly basis. Consistency reviews are conducted at least annually. See IRM 1.4.51.16.1, NQRS and IRM 1.4.51.16.2, EQ Consistency Reviews, for more information.

(1) Insolvency Managers are required to follow program management procedures and controls addressed in IRM 1.4.51.5.2, Reviews (Overview), IRM 1.4.51.15, Controls, and IRM 1.4.51.16, Quality.

(2) CEASO Managers are required to follow program management procedures and controls addressed in IRM 1.4.53, Advisory and Property Appraisal and Liquidation Specialist Group Manager Operational Aid.

(1) A glossary of terms used in this IRM can be found in Exhibit 5.9.1-1, Glossary of Common Insolvency Terms.

(2) Common acronyms acceptable for use in the AIS history are listed in Exhibit 5.9.1-2, Acronyms and Abbreviations.

(3) Additional acceptable acronyms and abbreviations are found in the ReferenceNet Acronym Database, which may be viewed at: http://rnet.web.irs.gov/Resources/Acronymdb.aspx.

(4) Acronyms used specifically in this IRM section are listed below:

(1) Procedural guidance on insolvencies can be found throughout IRM 5.9, Bankruptcy and Other Insolvencies.

(2) The United States Bankruptcy Code and Rules Booklet

(3) Automated Insolvency System - User Guide, Document 13219.

(4) http://www.fdic.gov

(1) SIPA Actions. SIPC is a private, non-profit, non-governmental corporation to which most registered brokers are required to belong. Assessments against members are deposited into a fund designed to protect customers (i.e., investors doing business with the broker or brokerage) in the event of the financial failure of a SIPA member. If SIPC determines that a member has failed or is in danger of failing and other conditions are met, SIPC may seek liquidation of the firm.

1. SIPC files an application for a protective decree with the district court as a civil suit where SIPC is listed as one of the plaintiffs in the matter. If a Chapter 7 bankruptcy has been filed, the bankruptcy proceeding is stayed pending the outcome of the SIPC liquidation. See 11 USC 742.

2. A trustee is appointed to satisfy investors' and other creditors' claims.

3. Once the SIPC liquidation proceeding is completed, if the broker or brokerage had filed a Chapter 7 previously, the Chapter 7 case is dismissed. 11 USC 742.

(2) SIPC Trustee. After the district court grants the protective decree, it appoints a trustee and the case is removed to the bankruptcy court. SIPA contains special provisions protecting investment customers, but the general provisions of the bankruptcy code also apply to SIPA liquidations. Since the case is opened in the district court and assigned a case number there, the case is not assigned a bankruptcy case number; however, the Bankruptcy Court gives it an adversary number. Insolvency will use the adversary number to load the case onto the Automated Insolvency System (AIS). The duties of the SIPC trustee are similar to those of a Chapter 7 trustee with the additional duties to:

1. Be responsible for all noticing issues on the case;

2. Hire any necessary personnel, such as an accountant, to assist in the liquidation process;

3. Use any member of SIPC to assist in the liquidation proceeding;

4. Maintain and control customer accounts;

5. Investigate the debtor and condition of the estate; and

6. Report any and all findings to the court.

   Note: These additional duties do not require approval of the bankruptcy court. (15 USC 78fff-1.)

   Note: The SIPC trustee may submit a request to the Service seeking exemption from filing the returns of a brokerage company in a SIPA proceeding, in appropriate circumstances, under the procedures discussed in IRM 5.9.6.14.1(2), Relief from Filing Requirement.

(3) Assigned Offices. All SIPA cases are handled by the New York Field Insolvency office. When notices pertaining to SIPA proceedings are received by any other Field Insolvency office or by the CIO, those notices must be forwarded to the New York Field Insolvency office as time sensitive mail according to procedures established in IRM 5.9.11.3(4), Specialty Mail Received by the Field.

(4) Initial Insolvency Questions. Usually the Service will not receive any notification of a stockbroker insolvency until SIPC files an application for a protective decree and the case is transferred to the bankruptcy court as an adversarial proceeding. The caseworker must contact the trustee to obtain information such as:

• The taxpayer identification number (EIN/SSN)

• Other entities involved and their corresponding TINs

• Date of the 341 meeting of creditors

• If the IRS is named as a creditor

• The last date to file a claim

• How to be added to creditor matrices, if necessary

• Other relevant information or special procedures required by the trustee

(5) Adding the Case to AIS. Field Insolvency will be responsible for loading SIPA cases on to AIS. Because AIS has no database for SIPA cases, they will be added as "RC" (receivership) in the "Chapter" field of the AIS entity screen. The caseworker will use the adversary number with the letters "-AD" following the last digit of the number or following the judge's initials. The "-AD" will identify the case as a SIPA proceeding. The trustee information can be loaded to the AIS Attorney screen.

(6) Manual Processing. The Insolvency Interface Program (IIP) will not process SIPA cases. Field Insolvency caseworkers will be responsible for verifying TINs, reviewing status codes, addressing pending Exam actions (TC 420 ), taking necessary actions to avoid or correct stay violations, and inputting TC 520 cc 84 manually on all periods. If any periods are estimated, a dummy may be required.

(7) TFRP Investigation. TFRP investigations will be conducted and assertions will be made as if the case were a Chapter 7 bankruptcy.

(8) Claims. Claims are filed with the trustee rather than with the court. The typical deadline to file a claim is six months from the date of notice. The Automated Proof of Claim (APOC) system will not process SIPA cases. The caseworker will prepare the Service's claim as if it were for a Chapter 7 bankruptcy. When a claim is printed from the AIS claim screen, it will be annotated as a "receivership." The caseworker must white out the "receivership" designation and replace it with "SIPA."

(9) Payment Preference. Customer creditors (see Exhibit 5.9.1-1, Glossary of Common Insolvency Terms) always receive full preference in these liquidation proceedings. The IRS will never be a customer creditor. After distribution is made to customer creditors, distribution toward non-customer claims is treated as if the broker or brokerage had filed a Chapter 7 Asset case (11 USC 726; see 15 USC 78fff(e)).

(10) Payment Posting. The SIPA trustee should be instructed to mail payments to the New York Field Insolvency office to be posted through AIS and sent to the serving Campuses. Payments received by the CIO in error will be posted to the period with the most imminent CSED by the CIO. The CIO will advise the New York Field Insolvency office of payment receipt by phone or secure e-mail. Designated payment code "03" should be used on the payment vouchers.

(11) Stay. Upon SIPC's filing of an application for a protective decree under SIPA, all tax proceedings concerning the broker or brokerage are stayed until the application is dismissed or until the liquidation proceedings are finished. 11 USC 362(a). However, in the case of an individual broker, the stay applies to the commencement or continuation of a proceeding in United States Tax Court for a taxable period ending before the filing of an application for a protective decree under SIPA. Thus, all normal bankruptcy stay procedures must be followed. For instance, receipt of levy payments must be refunded to the SIPC trustee; Notices of Federal Tax Liens filed in violation of the stay must be withdrawn.

(12) Case Closure. After completion of a liquidation proceeding, corporations, limited liability companies, and limited partnerships should be closed as TC 530 cc 10 upon reversal of the TC 520. Individual brokers' cases should be closed as if they were Chapter 7 discharges.

(13) Counsel Guidance. Issues arising from SIPA proceedings that have not been covered in this IRM should be discussed with Counsel.

(1) Overview. When a financial institution encounters economic distress, the financial institution can be placed into a receivership proceeding pursuant to 12 USC 1821. The receivership proceeding is much like a bankruptcy case. Prior to January 1, 1996, the Resolution Trust Corporation (RTC) was the fiduciary of the insolvent financial institutions. On January 1, 1996, the FDIC took over the responsibility of serving as the fiduciary of failing financial institutions. The FDIC also assumed the responsibility of closing the cases of financial institutions previously administered by the RTC that remained open as of close of business on December 31, 1995. The FDIC has the authority to wind up the financial institution's operations, liquidate the assets, and to pay the claims of creditors from the funds secured from the liquidation of the assets.

(2) Court Jurisdiction. The FDIC receivership is an administrative proceeding. The financial institution's assets are not under the direct control of a court. Therefore, the CSED for the financial institution is not extended during the period that the FDIC is the receiver for the insolvent financial institution.

(3) Notification. Form 56-F, Notice Concerning Fiduciary Relationship of Financial Institution, is the only form the IRS should accept as notice of the FDIC Receivership. In reference toIRC 6402(k) and IRC 6903 , send Form 56-F to the Internal Revenue Service Center where the financial institution for whom the fiduciary is acting files its income tax return. For purposes of IRC 6036, send Form 56-F to the Advisory Group Manager of the area office of the IRS having jurisdiction over the person for whom you are acting. Until the Form 56-F is revised, the Advisory Group Manager should forward the form to:

Internal Revenue Service

Insolvency,

Attn: FDIC

MS 5024 DAL

Dallas, TX 75242

(4) Adding the case to AIS. Caseworkers must add the FDIC receivership cases to AIS, inputting "RC" in the chapter field on the Taxpayer Screen on AIS. For easy identification of the FDIC cases, the caseworker must select "FDIC" from the drop down menu in the "Classification" field on the Taxpayer Screen when adding the case to AIS. The name of the failed financial institution should be added in the "Last Name" field on the Taxpayer Screen. The" First Name" field should show c/o FDIC. The address should be the address of the FDIC location administering the case. The FDIC information may be found using cc ENMOD on IDRS or from lines 9 through 13 of the Form 56-F.

(5) Creating a Case Number. The FDIC administers these cases by the EIN of the insolvent financial institution and does not assign a case number to the proceeding. To add a case to AIS, a case number is required and must be created. Create a case number using the year of failure, the first 5 digits of the EIN of the insolvent financial institution, and FDIC. Enter the number in the court case number field on AIS in "YY-EINEI-FDIC" format. Do not include FDIC in the AIS case number field.

(6) Manual Processing. IIP does not process receivership FDIC cases. The caseworker will be responsible for verifying TINs, reviewing status codes, addressing pending Exam actions (TC 420), and inputting the TC 520 cc 84 manually on all balance due modules or on any module with a potential balance due. If there is no liability (actual or potential), the case should be closed as NL. No TC 520 cc 84 input will be required on the cases closed as NL.

(7) TFRP Investigation. TFRP investigations will be conducted and assertions made as if the case were a Chapter 7 bankruptcy.

(8) Unfiled Returns. Unfiled returns should be requested from the FDIC. The Service should make IRC 6020(b) returns for returns not received by the deadline given to the FDIC. This may require issuing a summons for the 6020(b) information.

(9) Bar Date. The deadline for filing a proof of claim is set by the FDIC and can be found on the FDIC website, http://www.fdic.gov. Use the hyperlink of the failed financial institution to obtain the deadline information as well as a copy of the FDIC proof of claim. The claim must be filed by the established deadline or the claim may be disallowed.

(10) Proof of Claim. The proof of claim should be filed on Form RLS7214 found on the FDIC website. APOC will not compute the proof of claim in these cases. The caseworker must manually compute the claim. Penalties and interest should be computed to the date of the failure of the financial institution. Secured claims should be filed at full value. Instructions for completing and filing the proof of claim can be found on http://www.fdic.gov.

(11) Case Files. In addition to AIS documentation, paper files must be kept for the FDIC cases. The files should contain notices, copies of claims, correspondence sent to or received from the receiver, and any other information pertinent to the case that cannot be maintained on AIS.

(12) Refund Determination. When a Form 56-F is filed by the FDIC, the BMF Entity Campus is responsible for the input of the TC 971 AC 076 to IDRS. This creates a Savings and Loan Modular Refund Freeze on the MFT 02. LB&I and the campus administer the refunds on these cases. If an application for tentative carryback allowance (TCA) is filed with respect to the insolvent financial institution, Accounts Management follows the procedures in IRM 21.5.9.4.2.1, Carryback Applications/Claims from Financial Institutions in Receivership - Form 56-F Filed.

(13) Payment Application. The distribution of payments to creditors in the FDIC cases is not mandated by statute. Information about the order of distribution of the specific case can be found on the FDIC website. Claims are paid in the order of priority:

1. Administrative expenses of the receiver

2. Deposit liability claims

3. Other general or senior liabilities of the institution

4. Subordinated obligations

5. Shareholder claims

(14) Payment Posting. The FDIC should be instructed to mail payments to the Field Insolvency office where the case is assigned. The CIO will post payments received in error to the period with the most imminent CSED. The CIO will advise the field caseworker of payment receipt by phone or secure email. Designated payment code "03" should be used on the payment vouchers. The payment must be posted using the "Non Plan Payment" option from the "Payment Monitoring Menu" on AIS.

(15) Case Closure. Once any TFRP issues or other IRS activity has been completed and the proof of claim has been acknowledged by the FDIC, the caseworker should initiate closing actions on the case. Balance due modules should be closed as uncollectible using the TC 530.

• If the date the financial institution failed is prior to January 1, 1996, the case was previously administered by the RTC. The modules should be closed with a TC 530 cc 15.

• If the date the financial institution failed is January 1, 1996 or later, the modules should be closed with TC 530 cc 10.

(16) Counsel Guidance. Issues arising from the FDIC receivership proceedings that are not covered in this IRM should be discussed with Counsel. This is especially important when the FDIC is administering the assets of the failed financial institutions and the parent entity or related entity has filed a Chapter 11 or Chapter 7 bankruptcy case.

(1) Judicial Dissolution. If difficulties arise during the liquidation of assets, payment of claims, or distribution of assets, or if state law requires, dissolution may be conducted in a court proceeding.

1. Usually the court appoints a receiver, liquidator, or other fiduciary who is charged with attending to the dissolution under orders of the state court.

2. The state court hears and determines all controversies arising during the course of the dissolution.

(2) Stay from Collection. The Service cannot take collection actions against any property in the custody of the court. The CSED is suspended during the period the corporation's assets are in the control or custody of the court and for six months thereafter. IRC 6503(b).

(3) Manual Processing. Advisors will be responsible for verifying TINs, reviewing status codes, addressing pending Exam actions (TC 420) taking necessary actions to avoid or correct stay violations, and inputting TC 520 cc 84 manually on all periods

(4) TFRP Investigation. TFRP investigations will be conducted and assertions made as if the case were a Chapter 7 bankruptcy. (See IRM 5.9.6.15, Trust Fund Recovery Penalty.)

(5) Unfiled Returns. Unfiled returns should be requested from the receiver or other fiduciary. The Service should make IRC 6020(b) returns for returns not received by the deadline given to the receiver. This may require issuing a summons for the 6020(b) information.

(6) Proof of Claim. The proof of claim should be filed manually on Form 4490, unless the court or fiduciary of the court requests the claim be filed on another form or presented in letter format. APOC will not compute the proof of claim in these cases. The caseworker must manually compute the claim. Penalties and interest should be computed to the date of the court order establishing the dissolution proceeding. Schedules of assets and liabilities are not provided to the court and creditors, so secured claims should be filed at full value. The claim should be filed according to the requirements of the court or the agent of the court.

(7) Counsel Guidance. Issues arising from corporate dissolutions that have not been covered in this IRM should be discussed with Counsel.

(1) Non-Judicial Dissolution. If parties in interest can liquidate a corporation without court intervention, and if all parties and creditors feel they are being treated equitably, no need arises to conduct the dissolution under the guidance of a state court. A non-judicial liquidation is most often found where:

1. Sufficient money exists or can be generated to pay all corporate creditors; and

2. The value and disposition of the assets and the priority among claimants is not disputed.

(2) Dissolution Conducted. The dissolution is usually conducted by the officers of the corporation who act in a fiduciary capacity.

(3) No Stay. In a non-judicial corporate dissolution, a stay against enforced collection is not in force. However, revenue officers should consult Counsel before taking collection actions if they have questions about the Service's legal standing in doing so.