Corporate income taxes are generally the responsibility of the corporation and not the individuals that own the corporation. However, there are circumstances where the Internal Revenue Service (IRS) can pursue an assessment of those obligations against the individuals. One of those methods of assessment is an alter ego and it is pursued when the IRS believes that there is no distinction between the corporation and the individual owners. Essentially, the alter ego principle applies when the unity between the corporation and individual owners is such that to hold only the corporation liable would be unjust.
In a recent District Court decision, United States v. Lothringer, 2020 BL 304358, 2 (W.D. Tex. Aug. 11, 2020), the IRS prevailed in pursuing an individual taxpayer for the assessment of the corporation’s income tax obligations.
Arthur Lothringer formed Pick-Ups, Inc. as a corporation to sell and finance used pickup trucks. He was the sole officer, director, and shareholder of the corporation.
In 2006, Pick-Ups, Inc. failed to file a corporate income tax return and the IRS prepared a substitute return on its behalf. The IRS assessed Pick-Ups, Inc. for $611,000.00 for the 2006 tax year. When Pick-Ups, Inc. failed to dispute the underlying obligations, the IRS pursued an alter ego assessment against Arthur, individually. Most notably, the IRS was interested in filing a notice of federal tax lien against Arthur’s principle residence.
Following the filing of that notice of federal tax lien, the IRS filed the complaint at issue in the above-referenced decision to reduce that federal tax lien to a judgment. In support of the IRS’s alter ego assessment, the District Court focused in on the following:
- Arthur was the only shareholder, officer, director, and owner of Pick-Ups, Inc.
- Arthur exercised complete dominion and control over Pick-Ups, Inc.
- Arthur failed to observe certain corporate formalities, including failing to file federal income tax returns and state tax reports.
- Arthur assumed a $52,000.00 debt of Pick-Ups, Inc. that was owed to an individual.
- There were multiple checks written from Pick-Ups, Inc. to Arthur’s wife, despite the fact that she was not an employee of the company.
Ultimately, the District Court held that the unity between Arthur and the corporation was such that the corporation ceased and Arthur should be responsible for its income tax obligations. The IRS has detailed a number of factors to support an alter ego assessment here and those factors are not that different from what the District Court identified. Essentially, taxpayers that ignore corporate form, run the risk of being assessed as an alter ego. While there is no dispositive fact, the more that form is ignored, the more likely the IRS would prevail in an assessment. Furthermore, like with other situations involving the IRS, compliance is important in terms of timely filing tax returns.