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Pay your creditors – or pay the IRS?

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Business owners who owe the IRS have a duty to pay off that debt before paying other creditors – a hard lesson learned recently by bankrupt business owners.

Salvador Hasbun and Susana Hasbun were the owners and operators of Empire Marble and Granite, Inc. For various reasons Empire Marble was forced to file for bankruptcy. All of the assets and liabilities of Empire Marble were sold to Guillermo Ortiz.

On Feb. 21, 2002, the sale of the assets and liabilities of Empire Marble was finalized. The parties agreed that Ortiz would pay all of the liabilities of Empire Marble, including an unpaid employment tax liability owed to the IRS.

The IRS approved this deal in part because Ortiz had agreed to continue making payments toward Empire Marble’s outstanding employment tax liability. The Hasbuns received no compensation from the sale of Empire Marble.

Ortiz paid approximately $50,000 of the roughly $220,000 owed to the IRS. He stopped making payments, and the IRS filed suit against him on April 30, 2007. The agency obtained a judgment against Ortiz but was unable to collect on it.

Subsequently, the IRS pursued the Hasbuns for the remaining money due. The Hasbuns paid off the remaining debt but then filed suit against the IRS for a refund of a costly trust fund recovery penalty that had been assessed against them.

Internal Revenue Code Section 6672 deals with trust fund recovery penalties and imposes liability upon (1) a responsible person (2) who has willfully failed to perform certain duties. IRC Section 6672 defines a “responsible person” as a person who has a duty to collect, account for, or pay over taxes withheld from the wages of a company’s employees.

As the owners of Empire Marble and Granite, Inc., the Hasbuns were clearly responsible persons, meeting the first component of the two-part test. And, because of financial difficulties, the Hasbuns willfully chose not to remit payroll taxes but instead pay vendors of the business to help keep the business afloat. That decision met the second component.

Because the Hasbuns had met both parts of the two-part test of IRC Section 6672, their only hope to escape the trust fund tax penalty was to have it waived due to reasonable cause.

Prior case law has made it clear that responsible persons who knew withholding taxes were due, but made a conscious decision to use corporate funds to pay other creditors, don’t qualify for reasonable cause. The court ruled in favor of the IRS (Salvador Hasbun and Susana Hasbun v. USA, U.S. District Court, Southern District of Florida, Aug. 24, 2015).