Defunct corp owes tax

[michaelmars]

Corp out of business for a few years got audited and received an assessment of $100,000. I am wondering if they can go after officer/stockholder under a constructive receipt theory or any other reason. Corp has no assets left. We didn't prepare the return but got stuck handling the audit. We agree with 1/3 of the assessment but we aren't sure if the client has any exposure for anything. The tax attorney we use for these off the cuff questions is on vacation and i don't want to have to retain one yet if i don't have to.

[RoyDaleOne]

If it is income tax and a C Corporation the term is transferee liability, if I recall correctly.

Research on the to get an idea of the concept.

A shareholder does not have an inherent personal liability for C Corporation income taxes, only a fiduciary liability.

[michaelmars]

i have been researching transferee liability and i find court cases both ways but i am honestly don'tunderstand all that i am reading. Some say they are liable up to any assets they took out at dissolution and some say no. There was no fraud here. the company honestly closed. On audit an accounting error was found and also the agent questioned some travel expenses. The client didn't really cooperate since he felt there was no liability - we will most likely appeal if we can because the travel is legit but we need grounds to appeal and the fact that the client now wants to cooperate and produce record isn't good enough. Also we are inNY and the client moved to Hawaii so that makes it harder too.

[RoyDaleOne]

Now you know why a yes or no was not possible.

[jainen]

>>the company honestly closed<<

Since honesty is the controlling factor, then of course the owner wouldn't want to take any assets personally while leaving legitimate debts unpaid, or even favor certain creditors over others. And plainly an honest person wouldn't want to hide behind an accounting error. I don't know what the problem about travel is, but the regs for that are so specific that it is generally easy to prove. (Obviously if one chose NOT to follow the regs, e.g., keep good contemporaneous records, then an honest person would not wish to have it both ways.)

There are undoubtedly situations when an honest person would refuse to cooperate with the IRS, but they are always a matter of principle for which one must sacrifice the financial position.

So I honestly think it best for your client to pay the tax bill.

[michaelmars]

gotta defend the poor guy, not often i really think a client is being honest. he ended business then 2 yrs later the irs decides to audit. He moved to Hawaii, didn't keep much in records from Ny, previous cpa died, blah blah blah. His business requires travel around the world and his portfolio [photography] proves he did his shoots there, most other exact records just aren't available bu obviously he had to go to japan to shoot scenes of japan, right?. anyway thats where we stand. company ended when he moved, with just some cash and his camers, etc. going to him.

[jainen]

>>obviously he had to go to japan to shoot scenes of japan, right?<<

Ah, the "Cohen" rule--a reasonable estimate should be used if he proves that some expense was incurred. Unfortunately, it isn't allowed for travel expenses because the tax code calls for specific documentation.

I presume you tried to reconstruct records from available information. That sometimes works, but usually not if the taxpayer is otherwise uncooperative.

[michaelmars]

actually we didn't try to reconstruct anything, the agent understood that the company was closed and the only shareholder figured he was off the hook. the only item we really discussed and agreed on was the accounting error made in the %of completion computations. Travel was never discussed beyond him asking once if we had any documentation available.

[jainen]

>>asking once if we had any documentation<<

If you answered anything other than "certainly!' then there wouldn't be anything else to discuss on the matter. Look at Bulldog Tom's post this morning, "Gomez Case." When the law requires specific documentation, it is not enough to merely have a bona fide expense.

On the other hand, I would be hopeful that Appeals can accept reconstructed records even this late, as long as they are not obviously bogus.

[michaelmars]

Which brings me back to original issue, do we have to bother with appeals etc or is the shareholder judgement proof and we can let the irs assess all they want?

[jainen]

>>is the shareholder judgement proof<<

According to Wikipedia, http://en.wikipedia.org/wiki/Judgment_proof , the term means that collection is impossible even with a judgment because the person is flat broke. It doesn't mean they are not liable.

You still haven't explained whether the owner took any assets out of the closed business, or chose to pay off other creditors instead of taxes. The IRS doesn't like either of those scenarios.

[michaelmars]

paid a few creditors but remember he did that and closed the corp 2 years before the irs made this assessment. At the time he paid the calculated taxes per the return. He did take aprox 30k from the company and some equipment. The assessment is for over 100k.

[jainen]

>>remember he did that and closed the corp 2 years before the irs made this assessment<<

I didn't forget that. Nor the fact that one reason he was able to score thirty grand plus equipment was that his OWN books did not correctly reflect income and expense. Nor the fact that another reason is that he filed his tax return claiming deductions he knew or should have known he could not support. Nor the fact that even he agreed with the IRS on the first point and offered no evidence against the second.

Take it to Appeals, and good luck.