Section 4.3 Lurking Personal Liability

• Jurisdiction: United States

4.3 Lurking Personal Liability

"Borrowing" IRS trust fund withholding taxes to keep a business running can subject "responsible officers" to personal liability.⁵³ This potential personal liability, along with the ability to allocate plan payments to minimize or otherwise protect officers and directors, must be analyzed.⁵⁴ A related issue is the inability to enjoin the IRS from bringing assessment and collection actions against the responsible officers.⁵⁵ Provisions should ordinarily be made for payment of these types of tax claims so as to keep management focused on the reorganization efforts and to prevent the possibility that personal liability for such taxes may eventually be asserted against the officers and directors.⁵⁶ The IRS takes the position that the continued pre-petition operation of a business with the continued use of unencumbered funds to pay for critical raw materials, power, etc., constitutes an impermissible preference of other creditors over the accumulated obligation to the IRS for trust fund taxes — even if the continued operation of the business represents the only feasible avenue for payment of accumulated IRS trust fund taxes and the company remains current on current trust fund taxes.⁵⁷ Be sure not to overlook state trust fund taxes, such as sales taxes, which may carry similar consequences for officers and directors of the debtor company.

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Notes:

^[53] A related issue arises under state law where other "trust fund" types of taxes have not been remitted, such as sales taxes.

^[54] See, e.g., United States v. Energy Resources Co. Inc., 495 U.S. 545, 110 S. Ct. 2139 (1990); In re Deer Park Ltd.., 10 F.3d 1478 (9th Cir. 1993).

^[55] See, e.g., In re American Bicycle Ass'n, 895 F.2d 1277 (9th Cir. 1990).

^[56] See, e.g., Begier v. IRS, 496 U.S. 53 (1990) (providing IRS with preference defense when delinquent withholding taxes are paid within 90 days of bankruptcy filing).

^[57] For cases addressing whether there is this impermissible use of unencumbered funds, see, e.g., Kim v. U.S., 111 F.3d 1351 (7th Cir. 1997); Purcell v. U.S., 1 F.3d 932, 938...