Beware of Entering into Business with your Spouse

by Pessin Katz Law, P.A.
Contact

The U.S. Fourth Circuit Court of Appeals, which covers Maryland, recently rendered a tax decision noteworthy to all married couples who participate in their business together.  The case, Johnson v. U.S., decided November 5, 2013, is significant because a wife, who participated in a company with her husband on a limited basis, was held liable for unpaid payroll taxes in spite of the fact that she had only limited involvement with the operation of the company and did not learn of the failure to pay the payroll taxes until she was notified by the IRS.

Internal Revenue Code Sec. 6672 imposes what is known as the Trust Fund Recovery Penalty on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform that responsibility.  This penalty imposes personal liability for failure to pay certain employment taxes.  The wife in this case argued that she did not act willfully in failing to pay the tax, but her argument was rejected due to the fact that she paid other creditors after receiving a notice from the IRS.  In analyzing the issue of willfulness, courts focus on whether the person being charged with the penalty had “actual knowledge” of the failure to pay or acted with “reckless disregard” toward the lack of payment.

In Johnson, the husband closed a not-for-profit business which he operated due to a lien for unpaid payroll taxes filed by the IRS against him as its owner.  He then approached his wife to engage in a restructuring of the company.  As a result, the non-profit was converted to a “for profit” with the wife as the sole stockholder, which allowed it to conduct business unfettered by the lien against Mr. Johnson, to which his wife was not subject.

Mrs. Johnson was caring for the couple’s children while her husband “ran the business”.  However, in her capacity as sole stockholder she conducted the formalities of the corporation as sole stockholder and a corporate officer.  Each of she and her husband had authority over the business’ bank accounts.  Although her participation and authority was limited, she received a salary and other corporate “perks”.

Mrs. Johnson received a notice from IRS that the corporation had not paid its payroll taxes for several quarters from 2001 through 2004, a fact of which she was unaware before receiving the notice.  At that point, she took measures to see to it that payroll taxes were timely paid, but she did nothing to ameliorate the issue of the “past due” payments to the IRS.  She continued to pay creditors of the business, including wages and her own compensation.  As a result, the IRS assessed “The Trust Fund Recovery Penalty” penalties against each of Mrs. Johnson and her husband.

Mrs. Johnson made a payment of $351 toward the assessed penalty and subsequently filed suit in the U.S. District Court seeking a refund of the amount she paid as erroneous.  The IRS counterclaimed for penalties, interest and costs in an amount exceeding $304,000 from Mrs. Johnson and exceeding $240,000 from her husband.

The couple lost all their arguments.  The District Court granted summary judgment to the government, finding that Mrs. Johnson had acted “willfully” as required by the statute, a point which she had contested.

On appeal the Court of Appeals looked to the following facts in deciding that Mrs. Johnson was a “responsible person” (Mr. Johnson failed to advance any significant argument against his status as a responsible person):

  • Her signature authority gave her “effective power” to pay the taxes e.g. the ability to do so.
  • She could change officers and directors as sole stockholder; and, therefore, she had “actual” authority to act.
  • Entrusting her “authority” to her husband did not relieve her of the authority to act.
  • Finally, it made no difference that she learned of the past due payroll taxes until IRS issued its notice of deficiency.  Once she learned of the past due amounts, it was her responsibility to use all available funds of the business to pay those taxes.  It is improper for a responsible person to pay other debts while ignoring the payroll tax deficiency.

The lesson to be learned from the Johnson case is that love does not conquer all, and that spouses, even those who are trusting and happily married, must familiarize themselves with businesses in which they are asked to participate.  It is not enough to hear those all too familiar words:  “Don’t you trust me?”; “You won’t understand!” Make a wise choice and seek counsel from your PK Law attorney before signing on as a “responsible person”.  There could be economic consequences if you are not careful.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pessin Katz Law, P.A. | Attorney Advertising

Written by:

Pessin Katz Law, P.A.
Contact
more
less

Pessin Katz Law, P.A. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!