Alter ego is liable for corporate employment taxes.

• Author: Hudson, Boyd D.

When a corporation falls behind in its employment tax liabilities, it has several alternatives. It can attempt to work out a payment plan with the IRS while at the same time maintaining its other liabilities. As an alternative, the shareholders can close down the corporation and go out of business. In the latter case, the Service is permitted to assess a civil penalty under Sec. 6672(a) against the responsible persons for the trust fund portion of employment tax liabilities. The balance of the liability (i.e., the employer's share of the FICA tax and any interest and penalties) usually disappears when the corporation shuts down.

Taxpayers sometimes think that by shutting down the corporation and forming a second corporation to conduct the same business, they can avoid the original corporation's employment tax liabilities. A recent district court case illustrates that this strategy will not usually be successful.

W, a Pennsylvania corporation that operated a day care center, fell behind on its employment tax and other liabilities. The shareholders of W formed T, a second corporation, which assumed the operations of W.T operated out of the same premises and hired the teachers and workers formerly employed by W. Many of the children who were enrolled at W continued with T. Funds payable to T were deposited in W's bank account. After W closed down, the IRS successfully levied funds oft in satisfaction of W's obligations. T brought a refund suit, arguing that the Service's actions constituted...