The U.S. Court of Appeals for the 5th Circuit rejected an attempt to stay an I.R.S. assessment under Section 6672 against the sole shareholder of a corporation in a Chapter 11 bankruptcy.
The I.R.S. was attempting to assert the so-called “100%” penalty against the sole shareholder on the basis that he was the person responsible to collect and pay over employee withholding taxes and that he willfully failed to discharge that obligation. The shareholder argued that the proposed $250,000 assessment would interfere with his ability to operate the corporation. He testified that the assessment would be “a dark cloud hanging over me and . . .it's very distracting to realize that being a single parent of two, an 11- and 13-year-old, both girls, it's a lot of responsibility on my shoulders to make sure that I am successful in paying back the I.R.S. and without, you know, being able to get into the housing market.” This argument was accepted by the bankruptcy court and the district court, both of which concluded that an assessment against the shareholder would jeopardize the possibility that the corporate reorganization would be successful.
The appellate court vacated the injunction that stopped the Service from proceeding with the assessment. The court concluded that the proposed assessment was, in essence, a tax against the shareholder, individually. Since the bankruptcy court proceeding concerned the corporation, the shareholder’s dispute with the I.R.S. over the proposed assessment was not even before that court.
It is worthy of some note that the bankruptcy plan that had been approved by the bankruptcy court also provided that payments to the Service under the plan “would be applied to the trust fund portion” of the unpaid employment taxes until that portion of the liability had been paid in full.
The case is entitled In the Matter Of: Prescription Home Health Care, Inc.