Corporate Tax Liability for non-Officer Investor

Discussion in 'Accounting and Taxes' started by Taylor Kirkland, Apr 25, 2012.

  1. Taylor Kirkland

    Taylor Kirkland
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    Apr 25, 2012
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    A former bookkeeping client of mine came to me asking for advice on a tax issue with a restaurant he used to invest in. Here are the need-to-knows:

    The company, a restaurant, was incorporated in November 2006 by one individual. In 2007, my client agreed to invest & become a partner in the company. He took out a loan from a bank by putting up land he owned as collateral. Within a little more than a year, the business was doing horribly, losing money every day. As the only Officer, my client's partner did not let my client know how bad things were and how close they were to bankruptcy. The partner also would not let my client have access to the financial records. One day, my client's partner decided to clean out what was left in the company's bank accounts and filed for bankruptcy (middle of 2008). The bank who loaned the Officer money to start the company took the restaurant itself and every thing the business owned. The restaurant shut down and was never re-opened. Since my client was unable to keep making payments on his loan, his bank took the land he had put up for collateral.

    My client recently recieved a Notice of Proposed Assesment from the Department of Revenue stating that the company owed money for sales taxes and employer withholding taxes for the third and fourth quarter of 2008, as well as the first quarter of 2009. The document listed both partners and the company as liable for the roughly $24,000 tax bill.

    Since my client never became an official officer in the company, he was only an investor, is he personally liable for any of this money? Also, the restaurant had closed before the third quarter of 2008 so technically sales tax and employer withholding taxes were not collected, therefore, we believe we can show that the money isn't owed to the government from anyone. But if the outstanding tax liability isn't overturned, would my client be personally liable for any money owed by the company?

    Obviously my client made bad decisions by partnering with this guy and should never make that mistake again but we're trying to find out if an investor is at all liable for anything.

    Any advice or information about the issue would be greatly appreciated.

  2. ArcSine

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    Jun 2, 2010
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    In most cases of this type, it's simply a matter of showing the state's revenue dept. that the biz discontinued its operations completely as of (specific date in mid-'08), and had no activity during the three quarters in question (3rd & 4th '08; 1st '09).

    State revenue departments are great at expecting to receive taxes until and unless they've received an official "out of business" notification from a discontinued business. If no sales tax was received and no payroll tax was withheld during this period, then none is due. But until you notify the state of the biz's termination, they'll assume you remained as an active business and hence owe them something; typically they'll guess at an amount (maybe based on history) and send a past due notice.

    Depending on what documentation has been filed already, you might have to submit certain forms to both the Secretary of State and the Department of Revenue, for the state in which the company was incorporated. Both the SOS's office and the Dept of Rev's office will have websites; go to both for more info on the forms you need to submit.

    In addition, the notice probably provides a contact telephone number. You could start the process with a call, and explain that the business completely and permanently discontinued all operations as of (date). Hopefully the individual you speak with can guide you as to what form(s) you'll need to submit in order to have the company's sales tax and payroll tax accounts deleted from the state's books.

    It also wouldn't hurt to prepare a letter to the Revenue Department informing them of the company's termination. Send the letter along with a copy of the notice, immediately after submitting the official form(s) to the SOS and/or Dept of Rev. Include in the letter a statement that the appropriate out-of-business forms have now been filed.

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