Builders' Retroactive Tax Refunds Must Be Protected From Current Creditors
I read an article in the N.Y. Time Week in Review section about the government's expansion of tax breaks to home builders. The government is permitting builders to amend tax returns and use losses incurred during the past two years to offset income reported as far back as 2004. The Times characterized this policy as a "gift.". I have had builder clients over the past few months who have told me they expect huge tax rebates coming from the government's retroactive tax loss program.
My clients who expect a large income tax rebate usually have current creditor problems. Usually the problems concern commercial loans which have been called or may be called in the near future. In most cases, the tax refund from the retroactive loss program is not enough to pay off the problem bank loans.
I explain to these clients that these prospective tax refunds, even though not receivable until the client files his next return or amends prior returns, is an asset today. When the law passes, the client/debtor is immediately entitled to claim the money from the government. Today's creditor can levy upon the tax refund and collect the refund when claimed. This happens every day in bankruptcy court. The Chapter 7 bankruptcy trustees typically gets debtors to provide their 2009 tax return when filed. The trustee may take any refund due to the debtor for his income prior to filing bankruptcy in 2009, when the debtor files his income tax return in April, 2010.
If you are a builder or developer with potential retroactive tax refunds you need to consider how you can protect these tax refunds from current creditors. Or, you will need to protect the cash you ultimately receive from your potential future creditors.
