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  1. #1
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    Apr 2018
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    Cool Are the Shareholders of an S-Corporation Personally Liable for Late Filing Penalties

    My question involves business law in the state of: New York

    If an S-Corporation files its 1120S late for several years in a row, and owes a large sum of late filing penalties ($10,000) plus interest, if the S-Corp were to be dissolved, would the shareholders be personally liable to pay those late filing penalties?

  2. #2
    Join Date
    Mar 2013
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    18,031

    Default Re: Are the Shareholders of an S-Corporation Personally Liable for Late Filing Penalt

    I think that there is a good possibility of the shareholders being individually liable.

    The following website lists the exceptions to the limited liability protection of a corporation.

    Note that taxes could be an individual liability and fees to the state may be in the same category.

    Also note the repeated use of the phrase "piercing the corporate veil."

    https://www.expertlaw.com/library/bu...rate_veil.html

    I'd say that there is a good possibility that the state will come after the individual shareholders if they try to stiff the state out of $10,000.

    You can pay an attorney for an opinion or you can ask the state's corporation regulatory agency.

  3. #3
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    Oct 2014
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    Default Re: Are the Shareholders of an S-Corporation Personally Liable for Late Filing Penalt

    Quote Quoting PHD_4_U_N_Me
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    My question involves business law in the state of: New York

    If an S-Corporation files its 1120S late for several years in a row, and owes a large sum of late filing penalties ($10,000) plus interest, if the S-Corp were to be dissolved, would the shareholders be personally liable to pay those late filing penalties?
    That depends on the details of what happens. The shareholders are not liable for that penalty automatically under federal tax law. If the S-corporation is broke, dissolves, and the shareholders get nothing, then the shareholders will not be liable for the penalty. But if the shareholders receive assets of the corporation in the liquidation and the penalties are not paid before that distribution the IRS may assess a transferree liability for the amount the S-corporation owes, limited to the value of the assets the shareholder receives. In short, the shareholders cannot both have the corporation avoid the penalty and also take the assets out of it.

  4. #4
    Join Date
    Apr 2018
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    Default Re: Are the Shareholders of an S-Corporation Personally Liable for Late Filing Penalt

    Thank you very much for the advice, do you have the citations of any of that information for reference. Again thank you for your time, greatly appreciated!

  5. #5
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    Oct 2014
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    Default Re: Are the Shareholders of an S-Corporation Personally Liable for Late Filing Penalt

    Quote Quoting PHD_4_U_N_Me
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    Thank you very much for the advice, do you have the citations of any of that information for reference. Again thank you for your time, greatly appreciated!
    Internal Revenue Code (IRC) section 6901(a) provides for the transferee assessment:

    (a) Method of collection.--The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred:
    (1) Income, estate, and gift taxes.--
    (A) Transferees.--The liability, at law or in equity, of a transferee of property--
    (i) of a taxpayer in the case of a tax imposed by subtitle A (relating to income taxes),
    (ii) of a decedent in the case of a tax imposed by chapter 11 (relating to estate taxes), or
    (iii) of a donor in the case of a tax imposed by chapter 12 (relating to gift taxes),

    in respect of the tax imposed by subtitle A or B.

    (B) Fiduciaries.--The liability of a fiduciary under section 3713(b) of title 31, United States Code1 in respect of the payment of any tax described in subparagraph (A) from the estate of the taxpayer, the decedent, or the donor, as the case may be.

    (2) Other taxes.--The liability, at law or in equity of a transferee of property of any person liable in respect of any tax imposed by this title (other than a tax imposed by subtitle A or B), but only if such liability arises on the liquidation of a partnership or corporation, or on a reorganization within the meaning of section 368(a).

    The late filing penalty for a S-corporation is imposed under IRC § 6699. That section is in subchapter B of Chapter 68. That subchapter provides for all the assessable penalties. The rule for these penalties is that they are treated the same as tax. Specifically, IRC § 6671(a) states:

    (a) Penalty assessed as tax.--The penalties and liabilities provided by this subchapter shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as taxes. Except as otherwise provided, any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.

    (Bolding in original.) Thus, where you see the word “tax” in IRC § 6671 it also includes reference to the assessable penalties, including the penalty under IRC § 6699. But as the penalty is not a tax imposed under Subtitle A (income tax) or Subtitle B (estate and gift taxes) but rather arises under Subtitle F, the transferee rule that applies is IRC § 6671(b), which provides for a transferee assessment in the case of assets transferred by a corporation or partnership in liquidation or reorganization.

    Moreover, the IRS is not limited to relying on IRC § 6901 for transferee liability. It may also rely on state laws and other laws of equity that provide for such liability. “Under section 6901 and applicable State law or equity, respondent may be allowed to collect from a transferee of assets unpaid Federal taxes owed by a transferor of the assets. Commissioner v. Stern, 357 U.S. 39, 45, 78 S.Ct. 1047, 2 L.Ed.2d 1126 (1958); Bresson v. Commissioner, 111 T.C. 172, 1998 WL 485464 (1998), affd. 213 F.3d 1173 (9th Cir.2000).” Suchar v. Commissioner, T.C.M. (RIA) 2005-023 (T.C. 2005). Thus, if there would be liability under a state law (like a bulk transfer act) that provides for transferee liability the IRS may utilize that as well.

    Thus, the bottom line is, as I said, that the owners may be held liable if they take the assets of the corporation but leave the penalty unpaid when the liquidation is done. They can't both keep the corporate assets and not pay the penalty.

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