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The Government Can Pierce Your Veil FOLLOW THE CORPORATE FORMALITIES TO STAY PROTECTED.
by Garrett Sutton
of factors bearing upon the issue of responsibility, which included whether a person: 1. Has power to compel or prohibit the allocation of funds. 2. Has authority to sign checks. 3. Had authority to make decisions as to disbursement of funds and payment of creditors. 4. Was an officer or director of the corporation. 5. Had control over the company’s payroll. 6. Prepared and signed payroll tax returns. 7. Actively participated in the day-to-day management of the corporation. 8. Hired and fired employees. The court found enough
ou set up your LLC or corporation to protect your other personal
your receptionist. But a president who delegates financial activities and authority to others can certainly be personally liable for someone else’s failure to transmit payroll taxes to the government. Consider the following case. Cooper and Barry ran an oil drilling company in Louisiana. Cooper, a CPA by training, handled the financial matters and Barry dealt with the day to day of oil rigs and drilling jobs. Barry relied on Cooper’s oral assurance that all was fine in their financial house. Until one day it wasn’t. When Barry finally confronted Cooper, it was learned that over $600,000 in withheld payroll taxes had not been forwarded to the IRS. Cooper had put it to other uses within the company. The IRS sued both Cooper and Barry personally for the money. Cooper had a summary judgment entered against him, but since he didn’t have any money, the IRS continued against Barry as a second responsible person. At trial, the jury did not agree with the IRS’s case. They found that Cooper” hid everything from everybody else” and ”was totally in control.” They could not characterize Barry as a responsible person and did not find him personally liable for the $600,000. The IRS didn’t like the verdict and appealed. The next court noted a list
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assets. But, be sure to follow all the corporate formalities, including keeping annual minutes and separate banks accounts; otherwise, you can lose it all to a claimant. In my newest book, “Veil Not Fail,” we discuss the risk of having your LLC or corporate veil pierced and being held personally responsible for a business claim. But do you know the government can also pierce your veil? As with any of us, the government likes to be paid. And they like to promptly receive those payroll taxes employers withhold from their employees. The IRS considers that their money, which is needed to fund Uncle Sam’s massive Social Security obligations. PAYROLL Employers who deduct payroll taxes but, because they need the money elsewhere in the business, don’t forward them on to the IRS receive special attention. Broad, negative, and piercing attention. The IRS will pierce the corporate veil and hold individuals personally liable for unpaid payroll taxes. The question becomes: Who is a ”reasonable person” in the eyes of the IRS, and thus subject to personal liability? A worker on the line is clearly not responsible. Neither is
factors present in the case to hold Barry personally liable as a responsible person.
But not all courts see the issue so broadly. In Godfrey v. U.S., the court found that in the absence of any evidence that the chairman of the board had or exercised control of the collection, accounting for, and payment over taxes, he could not be held liable for the failure to pay withholding taxes.
56 | think realty magazine :: november – december 2022
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