e- NEWSLETTER

December 2006 / January 2007

Jessica M. Kirsch
Editor-in-Chief

    Generally, the Trust Fund recovery Penalty is assessed for the Trust Funds not paid by a business taxpayer relating to 941 employment tax deposits. Trust funds are the money you withhold from an employee’s paycheck, which includes federal income tax and the employees’ share of FICA and Medicare. This money is held "in trust" until you pay it to the Internal Revenue Service. The assessment of the Trust Fund Recovery Penalty (a/k/a the "100% penalty" or "Civil Penalty") is authorized under section 6672 of the Internal Revenue Code, and permits the IRS to pierce the corporate veil and collect those taxes from you personally. IRC Section 6672(a) provides the general rule:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

    Thus, in determining whether to proceed with assertion of the Trust Fund Recovery Penalty, the IRS must determine: (a) Responsibility; and (b) Willfulness. In light of these facts, am common question is what are a taxpayer’s odds of successfully challenging the assessment (having the trust fund tax abated) if he or she believes the assessment is improper (i.e, you were not a responsible party and did not willfully fail to pay or collect the tax)?

    According to the IRS, in 2005, the IRS abated 29.5%, or $771.4 million of the over $3.49 billion worth of trust fund tax assessed against taxpayers relating to employment taxes as a result of taxpayers’ request for abatement of the trust fund penalty. Thus, it may just be worth your while to contact a tax attorney to determine if a request for an abatement is right for you. If you have a proposed trust fund recovery penalty assessment lurking, or if you have already been assessed and do not believe the assessment was proper, please contact Cameron at cmonti@lavellelaw.com.

    The "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005", will be one year old next month. The Bankruptcy Reform Act had created a dramatic run for the courthouse just prior to it taking effect last October 17^th. After a year of being in effect courts are still working to interpret the Act creating interesting cases on the exact meaning of the Act. Even with the "new" hurdles and uncertain interpretations bankruptcy can still be a very good vehicle to give debtors a "fresh start".

  The "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" seems to have changed the attitude toward those who are in debt. In the past consumers who filed bankruptcy were viewed as being in need of relief from the burden of debt, and were usually treated with empathy. The bankruptcy process reflected an attitude that Debtors deserved help from overreaching creditors or unfortunate circumstances. The Reform Act’s mandates can be viewed as discouraging a party from seeking relief.

    The "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" provisions increase the cost (to prohibit) filings. The Act after increasing filing fees requires pre-petition credit counseling and financial management courses to obtain a discharge. Further the additional documentation requirements on debt relief agencies (attorneys) has also led to an increase in professional fees charged for assisting a party to file for bankruptcy.

    The Act’s heavy reliance on economic formulas to determine if there can be a finding of abuse also burdens many individuals in need of financial relief. The means test of viewing a case severely eliminates the judicial discretion in reviewing a case to determine whether an abuse of the system has occurred. As such some interesting and unexpected results have occurred (i.e. high income couple with no rent or mortgage allowed housing expense per IRS standards incorporated into the Act). If you have any questions in this matter, please do not hesitate to contact me at thughes@lavellelaw.com for further information.

    When creating and operating your business, it is critical for an entrepreneur to be mindful of an exit strategy. A succession plan leading this business to the children of the entrepreneur is not always practical, as children become more and more independent from their parents. Another alternative that should be considered is readying the business for an eventual outright sale. Three major assets that must be developed are the organizational structure, intellectual property rights, and the business model.

    The strategy to build the organizational structure of the business includes maintaining complete and current records regarding the business activities. This would include basic financial state ments such as income statement, balance sheet, and statement of cash flows. In addition, you should maintain ongoing minutes of shareholders and or directors as well as stock certificates and organizational documents. Any purchaser interested in acquiring your business will undoubtedly wish to review these records. The more organized you are, the easier it is for you to cooperate with such due diligence process and ultimately make your business a more attractive asset.

    An asset that many businesses overlook is its intellectual property. Over the course of the life of a business, relationships with industry and customers that are not generally available in the community are established. In addition, a business may develop a trademark that has value. Protecting such intellectual property will create additional value for a potential purchaser. Steps that a company should take is registration of its trademarks, requiring employees in sensitive areas to execute non compete and confidential agreements, and requiring all employees to execute agreements maintaining ownership of all intellectual property.

    Finally, developing a fundamental business model that supports the creation of income is critical. Any potential purchaser or investor will only be interested in acquiring your business if they conclude that the business will generate profits for them in the future. This business model must be constantly revisited and adjusted as the business environment dictates. Retirement age is not the time to ignore the importance of the business model and continuing making profits. Furthermore, a future purchaser will want to see operating results of the business in order to evaluate whether or not its purchase would be a good investment. If the entrepreneur has not maintained the profitability over the recent years, such business will no longer be an attractive purchase.

Aside from the obvious of operating a successful business, there are other steps that an entrepreneur needs to take in order to maximize the value it may receive on the sale of any business. These steps are critical to formulating an effective exit strategy.

    If you have any questions about operating your business or need more information about creating an exit strategy, please contact me at tmcginn@lavellelaw.com.

For past e-newsletter articles of interest, please visit the Lavelle LAW, Ltd. website at:  http://www.lavellelaw.com/newsletters/newsletter.htm.