In a recent case before the Fifth Circuit Court of Appeals, the court was faced with the following question: Whether a business owner could be held personally liable for his corporation’s failure to pay taxes. Its answer? Yes.
Let’s look a little closer at the background facts, the court’s analysis, and the so-called alter ego doctrine’s application in the federal tax context.
Just The Facts, Ma’am
Lothringer, the taxpayer, formed Pick-Ups, Inc., an entity that ran used-car lots. Lothringer was the sole director, officer, and shareholder and had complete dominion and control over Pick-Ups. The company owned more than $1.5 million in federal taxes to the IRS and the United States sued Pick-Ups, along with Lothringer individually, to collect the federal taxes.
The district court determined that Pick-Ups was Lothringer’s alter ego, and held him personally liable for the more than $1.5 million in federal taxes that it owed to the IRS.
Alter Ego
Texas law permits courts to “disregard the corporate fiction … when the corporate form has been used as part of a basically unfair device to achieve an inequitable result.” Our Freeman Law Insights Blog has covered this topic in great depth. See, e.g., Piercing the Corporate Veil and The IRS, Fraudulent Transfers, and Transferee Liability.
Texas courts will apply the alter ego doctrine to a corporation that is an alter ego of an individual. Under Texas law, alter ego applies when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice. An alter ego relationship may be shown from the total dealings of the corporation and the individual.
The undisputed facts in the case established several unhelpful factors, leading to the lower court’s determination that the corporation was Lothringer’s alter ego:
- Lothringer was the sole shareholder, officer, director;
- He was the owner of Pick-Ups;
- He exercised complete dominion and control over Pick-Ups;
- He failed to observe certain corporate formalities;
- He loaned substantial money to Pick-Ups; and
- He made payments from the corporate bank account to service personal loans.
Under the facts set forth above, the Fifth Circuit affirmed the lower court’s determination that the taxpayer’s business was his alter ego, allowing the IRS to collect the business’s taxes directly from the individual owner. A scary proposition indeed.
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