Alter ego is liable for corporate employment taxes.

When a corporation falls behind in its employment tax liabilities, it has several alternatives. It can attempt to work out a payment plan with the IRS while at the same time maintaining its other liabilities. As an alternative, the shareholders can close down the corporation and go out of business. In the latter case, the Service is permitted to assess a civil penalty under Sec. 6672(a) against the responsible persons for the trust fund portion of employment tax liabilities. The balance of the liability (i.e., the employer's share of the FICA tax and any interest and penalties) usually disappears when the corporation shuts down.

Taxpayers sometimes think that by shutting down the corporation and forming a second corporation to conduct the same business, they can avoid the original corporation's employment tax liabilities. A recent district court case illustrates that this strategy will not usually be successful.

W, a Pennsylvania corporation that operated a day care center, fell behind on its employment tax and other liabilities. The shareholders of W formed T, a second corporation, which assumed the operations of W.T operated out of the same premises and hired the teachers and workers formerly employed by W. Many of the children who were enrolled at W continued with T. Funds payable to T were deposited in W's bank account. After W closed down, the IRS successfully levied funds oft in satisfaction of W's obligations. T brought a refund suit, arguing that the Service's actions constituted a wrongful levy and that, as a new corporation, it was not liable for W's obligations.

The district court denied T's refund claim, holding that T was the successor in interest and alter ego of W. The court noted that T had the same shareholders and officers as W, it was in the same business, providing the same services at the same location to the same students and its assets, premises and employees were the same as W'S. As a result, the court upheld the IRS levy (Today's Child Learning Center, DC Pa., 3/6/98).

Comment: The action brought by T was under Sec. 7426, which permits third parties to recover property seized by the IRS under a wrongful levy. Sec. 7426 also allows junior lienholders to bring an action to enforce their interests in surplus proceeds realized from the sale of a taxpayer's property by the IRS. An action under Sec. 7426 must be brought no more than nine months after the date of the original levy against the third party. However, if the third party makes a request to the Service for a return of the levied property, the nine-month period is extended for 12 months from the date of filing such request or for six months from the date the IRS mails the third party a notice of disallowance, whichever is shorter (Sec. 6532(c)(2)).