MY PARTNER IS A CROOK.

Ben Barnacle owned Ben’s Bakery along with Sam Shademan. Ben was the operations guy. He was known as the Wedding Cake Artist of Bellaire. The company was Cakes, Incorporated. His cakes were so tasty that people from surrounding areas came to buy his cakes for birthdays, holidays, and of course weddings. So many in fact that Ben was unable to keep up with all the cooking. Sam was the bookkeeper and in charge of the finances, but Ben could and would write checks to pay for COD purchases, deliveries, and if Sam was out of town, other checks that Sam would leave for him. The business grew and Ben hired people to help man the storefront, make deliveries and to help Ben with the baking.

As the years went by they needed to expand and were able to lease more space in the same shopping center. Their business appeared to be booming. The landlord seemed happy, the employees were getting a decent wage and Ben and Sam were enjoying a nice middle class lifestyle. Ben wondered why Sam seemed to afford things that Ben couldn’t like a late model sports car and a country club membership. But Ben figured that Sam just had different priorities for his money, or was going into debt, not a huge issue.

One day, an unsmiling man came walking into the store, he produced a badge and ID card showing his name was Maximillian Sorbe, Revenue Agent for the Internal Revenue Service. “May I see the owner, please”, he asked the cheerful young person behind the counter. “Mr. Barnacle, there’s a man from the IRS to see you”. Ben came out wiping his hands on his apron. “May I help you,” Ben asked. The agent showed Barnacle his badge again and started into his script. “I’m here to find out why your company has fallen behind on paying your employment taxes”. Ben looked perplexed. “What do you mean by employment taxes?” The agent, stared at him for a second, “Don’t give me that, I know for a fact you’ve signed employment tax returns for the company”.

Ben’s blank expression indicated that he was totally clueless as to what the agent was talking about. Ben then said, “Perhaps you need to talk to my business partner, Mr. Shademan. He is the treasurer and could answer your questions, better than I”. The agent continued, “Is he in?”

Ben responded, “let me check” and he went into the cramped back office of the business. He looked no Sam there, so he asked one of the employees, “have you seen, Sam?” “He just went out the back saying he had to run some errands”, one of flour covered workers exclaimed. Ben returned to the front of the store, “you just missed him. Can he call you to set up a meeting?” “Sure”, answered the agent, “here’s my card. Have him call me in the next 24 hours, please”.

I am going to take a break from 2010 and Estate Tax Stories and devote my next tale to the 100% penalty under Section 6672 of the Internal Revenue Code of 1986. A similar penalty is also present in almost every state tax statute. Usually a corporation affords its owners, employees, and officers complete immunity for corporate debts and acts. However, once the Federal Government started having employers withhold taxes at the source and State Governments started collecting taxes on sales and also having income taxes withheld, they noticed that corporations would simply not pay the taxes and then go bankrupt leaving everyone holding the bag but the officers and directors of the Corporation who diverted the funds. So they put in statutes which hold personally responsible employees, officers and directors responsible for INTENTIONALLY failing to pay over withholding taxes. The key word is of course intentionally. In this case ignorance of the law or ignorance of the facts is an excuse. Therefore, an owner who has an employee or a partner embezzle money or lie about paying the taxes, may and I emphasize may, get off the hook. An owner who didn’t know about the rule (the common law of stupid) might be relieved of personal liability. The rule is that a conscious choice must be made to prefer another over paying the withholding taxes. This leads to some rather interesting results as some tax tales will show.