Most people set up corporations at least partly to protect themselves from being liable for liabilities incurred in the business. And it usually works that way. But not always, as a case out of Colorado reminds us.
Colorado Gas Compression, Inc. ceased operations in 1998 and was administratively dissolved in 2005. In 1998 the IRS assessed taxes on the company for 1994 through 1996, and eventually won in Tax Court. But the company was gone by then. So what happened? The IRS went after the corporation’s shareholder:
Mr. Holmes was the sole shareholder of Colorado Gas until it was dissolved by the Colorado Secretary of State in 2005, by which time it had ceased operations…
Colorado Gas made a series of distributions to Mr. Holmes in the years from 1995 to 2002, transfers which totaled over $3.6 million. As will be explained infra, it is significant that Colorado Gas was in the process of winding up its active operations at this time.
Cutting to the ending, the appeals court ruled that Mr. Holmes was liable as a “transferee” of corporate assets.
If the corporation had died owing taxes, but had not distributed funds to Mr. Holmes, the answer likely would have been different. But if a corporation dies owing taxes while the owners withdrew funds, they might be on the hook. The same idea can apply to estates when the IRS assesses tax to either the estate or the decedent.
Cite: Holmes, CA-10, Nos. 12-1164, 12-1220
Kay Bell, Remembering Martin Luther King’s legacy and tax trial:
King was indicted in February 1960 by an Alabama grand jury on two counts of felony perjury. The state charged that King had signed fraudulent tax returns for 1956 and 1958.
A state audit of King’s returns the previous month claimed that he had not reported funds he received on behalf of the Montgomery Improvement Association (MIA) and the Southern Christian Leadership Conference (SCLC), and still owed Alabama tax collectors more than $1,700.
Tax law can be politicized very easily. That’s why the IRS Tea Party scandal is serious business, and why Presidents shouldn’t joke about auditing their enemies.
Paul Neiffer, The Power of Installment Sales:
Assuming our farmer had other ordinary farm income of $150,000, his total capital gains tax bill if sold for cash would be 15% on the first $100,000 of gain, 18.8% on the next $200,000 of gain and finally 23.8% on the last $100,000 of gain for total tax owed of $76,400 (the actual tax would be slightly higher due to phaseout of itemized deductions and exemptions). However, if he spreads the gain over the next ten years and keeps his net gain in the 15% bracket (staying under $250,000 of adjusted gross income), the total tax owed on the gain would only be $60,000 for a net tax savings of $16,400. Plus, the farmer may have received an interest rate on the installment note greater than current interest rates.
By spreading the income over a longer time, the taxpayer kept his AGI below the $250,000 threshold for the Obamacare Net Investment Income Tax.
Jason Dinesen, Evaluating the Cost of Working:
What we found was, the difference between me staying home with the kids (thus eliminating all of the above costs) and me continuing to work was: $200/month.
I could stay home with the kids, contribute $2,400 a year to our family’s bottom line from my side business, and we’d be in the exact same financial situation as we would be in if I continued to work at my day job.
It was a simple decision.
I quit my day job, and have been part accountant, part stay-at-home dad for the last two years.
But, he notes, it’s not for everyone.
Peter Reilly, S Corporation SE Avoidance Still A Solid Strategy Just remember, hogs get slaughtered.
Phil Hodgen, Relinquishing U.S. citizenship and expatriation
Brian Mahany, Offshore Tax Evasion Update – By The Numbers
Jack Townsend, Swiss IT Specialist Sentenced for Disclosing Bank Client Data to German Tax Authorities. He got paid over 1 million Euros by the German tax authorities.
Russ Fox, Have I Got a Fixer-Upper for You. It sounds a little like Iowa’s Wallace Building, but bigger.
William McBride, Repatriated Foreign Earnings Do Not Mainly Go To Shareholder Payouts
Because they think we’re pockets to be picked. Polk County expands use of speed cameras (Des Moines Register)
I’ve been interviewed: Interview with Joe Kristan, Author of the Roth CPA Tax Update Blog
Moving beyond straw man arguments:
Clay men face federal tax fraud charges
Cobb Man Charged in ID Theft Scheme
