Branch got a check from Ben to the US Treasury, he noted on the check what it was for and he put the same information on the back of the check and in a cover letter. After the check cleared, he filled out Form 830 Request for Refund. He noted that Ben had paid the trust fund taxes for one Pedro Gonzales a bakery assistant and that he did not owe the taxes because he did not intentionally fail to withhold the taxes. The check was for the first quarter of 2007 and for $28.70. The refund request was sent to the IRS. Ben got a letter from the Service demanding payment of the trust fund taxes. Branch responded to the letter by sending a letter back to the IRS noting that it was Ben’s position that the IRS owed him money. This seemed to stop the letters. A few months later, Branch received a letter noting that the refund was denied. This was Ben’s ticket to the US Claims Court. /

Branch filed suit for Ben in the United States Court of Federal Claims in Washington, D.C. He claimed that Ben was not intentionally responsible for the failure to collect and pay over taxes. He alleged that the responsible party was the evil Sam Shadewell. About sixty days later the government responded denying everything and countersuing for the full amount. After some discussion between counsel depositions were agreed to. There was one problem for everyone, no what knew where Sam had disappeared to. Without a live witness to rebut Ben’s testimony and those of his co-workers the Government had little choice but to settle. It was agreed that Ben would pick up one quarter of taxes for a total of $10,000. This was far less than he would have spent pursuing the matter to trial and risking perhaps that the Government would find Sam on the eve of trial. Ben was happy that he was in the clear.

Then of course came the certified letter from the State Department of Taxation assessing its substitution tax on Ben personally for unpaid sales taxes and unpaid employment taxes. Ben notified the state that he was appealing the assessment and after a few months a meeting was held with the State Tax Commissioner. The Commissioner did not understand the law very well and was loathe to grant any relief in the matter and challenged Ben to go to Court. Ben then appealled the assessment to the local Circuit Court. As trial neared the state figured out that it didn’t have the witness it needed, namely Sam, and Ben’s attorney produced affidavits from employees and Ben stating that he was not intentionally responsible. At that point the State agreed withdraw the assessment.

That afternoon Ben called Branch Jazzwell a noted tax attorney about his need for a consultation. After a fee was agreed to, he appeared at the lawyers office. Ben explained the facts of the case to Branch and brought the payroll statements that he had for the taxes involved. Branch reviewed them thoroughly. Branch explained to Ben that these trust fund taxes are assessed against officers responsible for paying over and withholding taxes. “However, there is only liability if the failure to pay is intentional, not merely negligent. It appears that in your case, you have a defense, it’s the other guys fault, the other guy who split, the other guy, who had the secret bank account, the other guy who was stealing money from the company.” “How do I fight this, I got a bill from the IRS for $43,000 and I”m sure one will follow from the state?” asked Ben.

“You could pay the whole tax and ask for a refund, but that’s not necessary. Your trust fund obligations are called divisible taxes. That means that your obligation is determined on an employee by employee basis. Thus, you merely need to pay the tax for one employee for one quarter, and apply for refund. After six months, you can take the IRS to court and seek a refund. There is a risk to this strategy. The IRS can and will countersue you and if you lose, you have to wait at least 20 years and up to 40 years to be cleared of this liability instead of ten years. But there is no guarantee that they wouldn’t sue you anyway to get that kind of judgment (even though to date they rarely do so). If what you are telling me is true, you have a good case, but nothing’s a guarantee”, Branch answered. “And if you win, you might get your attorney’s fees”, he added. Branch then went on to discuss the cost of the litigation.

“I guess we should go for it, we have nothing to lose” said Ben.

A few days letter the bank records came in and Ben and the accountant prepared all of the back tax returns that had not been filed for employment, income, sales and unemployment taxes. Ben had no money in the business at that point to pay the taxes, so he just filed the returns without payment. The total due without penalties and interest was $50,000 to IRS, $50,000 to the state for sales taxes and unemployment taxes, $10,000 for state withholding taxes, and $10,000 for county taxes.

A few weeks later, Mr. Sorbe returned to the business and asked to see Ben. Ben came out wiping his hands on his apron. “What can I do for you, Sir”. The agent then informed Ben that he needed to interview Ben to see if he was a responsible party under the Internal Revenue Code Section 6672. If he was, then Ben would be responsible for the taxes. The questionnaire asked a ton of questions and Ben answered that he didn’t know the taxes were owing and that his partner handled the finances, but he was generally aware that these taxes needed to be filed and that he signed checks occasionally and hired and fired personnel and negotiated their wages. At the close of the interview Mr. Sorbe asked Ben to check his answers and sign the form, which Ben did.

A few weeks later, Ben personally received a bill from the IRS for $33,000 plus interest of $10,000 for a total of $43,000. Ben was aghast. He called Sorbe, “what is the meaning of this bill? he asked. “Its for the trust fund monies that you diverted from the IRS that should have gone to pay for your employees taxes. You’re responsible personally for that”, the agent replied matter of factly. Ben let fly a torrent of expletives and hung up. That afternoon Ben called his lawyer. “How come the IRS is now hitting me personally. I thought that when I got incorporated that I wouldn’t have any liabilities to creditors, what’s going on?” The lawyer cleared his throat, “well that’s not entirely true. You are liable to the Federal government and the states personally for trust fund taxes that are not paid to them such as withholding taxes, sales taxes, and corporate income taxes to some states. And its worse, those taxes are not dischargeable in bankruptcy, so they stay with you for at least 10 years” “You mean to say, that I’m personally liable for $100,000 in taxes to the states and feds. I haven’t got that kind of money?” “I think you should see a tax specialist who can advise you on this”.

The next day, the bank called. “Mr. Barnacle, the Internal Revenue Service has levied on your bank account, so we are going to be dishonoring all checks that come in after today.” Ben picked up the phone and called the agent and got a recording that the agent was out of the office. “Probably to levy on my money”, sputtered Ben. Ben then picked up the telephone and called his lawyer. Barney Scrupples. “Barney, I need your help, the IRS is levying on my assets, they say we owe employment taxes, and at this point, I’m sure that we probably owe sales taxes, income taxes, county taxes, and who knows what else.” “Calm down, Ben, can you come to my office this afternoon?” “Yes”, said Ben. “Bring a list of your creditors, you know the people you owe money to, with you”, Barney replied.

That afternoon, Ben met with Barney and he suggested that Ben speak with his Chapter 11 Bankruptcy partner, Bob Ramino. Bob explained to Ben what to expect in Chapter 11 and that it doesn’t make debts go away, but buys you time to move forward with your business while you try and come up with a plan to work out your debts. Sooner or later the IRS would have to be paid out of the business, just not that day. Ben gave the attorney a list of creditors and the cash he had in the register at the business to cover the retainer and some of his own money as well.

Later that afternoon, Cakes, Inc. was officially in Chapter 11 with still running the business. The lawyer sent a copy of the filing as a matter of course to Mr. Sorbe at the IRS as well as to the District Director and to the bank. Now, Cakes could operate without hassles as long as it followed the rules and Ben sat down with an accountant to be sure he stayed current in the future on his employment tax filings.