If you have trouble reading this e-mail, go to http://www.statetaxalert.us/v1-03
Previous issues of the State Tax Alert Newsletter are available at:http://www.statetaxalert.us


Personal Liability of
‘Responsible Persons’
for Their Business’s
Unpaid Taxes
 
   
     
 

"If a person was responsible for paying
the corporation's taxes, it is irrelevant
that other individuals were equally or even
more responsible for the taxes."


O. Hugh Campbell v. State of Alabama Department of Revenue
(November 10, 2005).

 
     
  Of the many varieties of taxes imposed by American state and local tax jurisdictions, several are characterized as “trust fund” taxes. These taxes (which include sales taxes, use taxes and payroll taxes) are different from other taxes, as they are collected by businesses for the benefit of the states. The taxes are periodically remitted by the businesses to the states, but for a period of time are held by businesses and are susceptible to misuse. The states protect their interest in these taxes by imposing liability for their remittance on business owners, directors, officers and certain employees. Failure by a business to remit the proper amount of tax can cause the business’s “responsible persons” to be held personally liable for the payment of the business’s taxes. Thus, in addition to the Alabama decision quoted above, during 2005 responsible person decisions were published by the states of New York, Illinois, Ohio, Wisconsin, Indiana, Minnesota, North Carolina, Utah, Oklahoma and West Virginia. It is certain that many other responsible person rulings were handed down but not published.
         
         
Who is a responsible person?
Whether one is a responsible person must be determined on a case by case basis. Factors to be analyzed include: authorization to sign a business’s checks, ability to hire and fire employees, management of day-to-day business activities, the degree of responsibility for the maintenance of the business’s books, authorization to sign tax returns, and ownership of the business’s stock. Further, in some states responsible person liability can apply without any showing of the person’s willfulness or intention to shortchange the state on its taxes. Even in states where a showing of willfulness is required, it can be made merely by showing that the business paid other liabilities while the responsible person knew or should have known that the taxes were owed. No showing of bad faith is required.

What is the potential tax exposure?
Once one is determined to be a responsible person, he or she can be held liable for the business’s taxes, sometimes without having an opportunity to challenge the amount of the alleged tax liability. In addition, the liability is not extinguished even if the business goes out of existence. Also, a business’s failure to collect sales and use taxes on its taxable sales can cause a responsible person to be liable for a business’s uncollected taxes as well as taxes that were collected but not remitted.   

Reducing Exposure.
Managing responsible person liability requires, first and foremost, establishing good internal controls for the collection and remittance of taxes. In addition, showing that some sales are nontaxable should lead to a direct reduction in the amount of responsible person liability. Thus, for example, the purchasers might be exempt from tax, the type of goods sold may qualify for an exemption, or the sales might be properly characterized as a nontaxable sale of a service or intangible property. Assistance of a state tax professional can help to identify potentially nontaxable sales and can establish, to the state’s satisfaction, that no tax is owed on such sales.

Finally, if a business determines on its own that it has or might have a liability for uncollected taxes, it often is possible to negotiate an arrangement with the relevant state and local tax jurisdictions excusing liability for some back years’ taxes, as well as excusing otherwise applicable penalties. Such an agreement benefits both a business and its responsible persons. Negotiations for such an agreement should be conducted by a tax professional without disclosing the taxpayer’s identity.

Conclusion. 
This Alert provides an introduction to responsible person liability for certain American state and local taxes. For further information and assistance with state and local tax issues anywhere in the United States, please contact David A. Fruchtman at 04-629-0520 or
312-281-1111.

 
      Previous issues of the State Tax Alert Newsletter are available at:
www.statetaxalert.us/
 
     


*David A. Fruchtman is an attorney in the United States. He is not admitted to the Israeli Bar. He is Of Counsel to Horwood Marcus & Berk Chartered, located at 180 N. LaSalle Street, Suite 3700, Chicago, Illinois 60601. He is a Harvard Law School graduate and is chairman of the American Bar Association’s Income and Franchise Taxes subcommittee. He has been named by his peers as one of Chicago’s Leading Tax Lawyers. Horwood Marcus & Berk Chartered has one of the largest state and local tax law practices in the United States. The firm provides tax planning advice to clients of all sizes and has successfully represented clients before courts and administrative tribunals throughout the country, including at the United States Supreme Court.

 
         
  This Alert is for discussion purposes only and does not constitute tax advice; consequently, it is not subject to the attorney-client privilege and does not constitute attorney work product. This Alert may be disclosed to any and all persons, without limitation of any kind, including any potential tax treatment or tax structure of any transaction described hereon. This Alert does not provide federal tax advice and was not prepared in a form to comply with the requirements of an opinion upon which a taxpayer can rely to avoid certain penalties under the Internal Revenue Code of 1986, as amended. No fee was received in connection with producing this Alert. Copyright © 2005