S-corporation Penalties Directors liability?

[equinecpa]

An S-corp client was assessed a late filing penalty. Sole shareholder/director is in the midst of a chapter 13 bankruptcy. Client asked me today if she can be held personally liable for the penalty? I can't find anything about directors liability for anything other than trust funds....can they be held personally liable for corporate tax penalties?

[erchess]

I don't think so

I believe that with the twin exceptions of the trust funds and anything an owner has signed up to be personally liable for obligations of the corporation can go unpaid if the corporation is insolvent or goes out of business.

But wait I revisited this - it's the shareholder not the corp that is in bankruptcy. I would think that if the corp is not insolvent it could be made to pay its debts. However there's nothing to keep the director from removing all assets if a court judgment has not come down.

Also if this is the first time the S Corp has filed late the penalty will be waived on request.

[rgtaxservice]

...

Just out of curiosity...how late was the corporate return before the penalty was assessed?

[equinecpa]

2008 return was filed October 2010. Client filed 2007 late so the penalty was not waived on request. I have written a hardship letter and we'll see how that pans out.

[Snaggletooth]

Taxes are Protected

No tax liabilities can be discharged by virtue of a bankruptcy.

The answer may perhaps be focused on whether there is enough distinction and corporate veil to protect the shareholder. I would say not.

[Davc]

No tax liabilities can be discharged by virtue of a bankruptcy.

From TTB 2009 14-12


Dischargeable debts. Bankruptcy does not discharge all types of
debt. Common debts not discharged include claims for alimony,
child support, property settlements from a divorce or separation,
and most student loans.
Taxes predating the bankruptcy petition by more than three years
are generally dischargeable. Taxes not dischargeable include:
• Income, employment and excise taxes on returns due within
three years (including extensions) before the petition is fi led.
• Income tax assessed within 240 days before the petition is fi led.
Income tax not assessed before the petition is fi led but assessable
under the applicable statute of limitations as of the bankruptcy
petition date.
• Taxes for which no return, a late return (fi led within two years
of the fi ling of the bankruptcy petition), or a fraudulent return
was fi led.
• Trust fund taxes.
Taxes incurred during administration by the bankruptcy estate
are assigned a higher priority for payment and are paid fi rst as
administrative expenses.

[JohnH]

It's a penalty, not a tax. I seem to remember reading back when the penalty first came into being that the FTF penalty for S-corps was assessed only against the corp, not against the shareholders. If that's still the case, then I don't think the shareholders can be held liable for the penalty if the corp goes belly up. Even corp taxes such as matching FICA, etc can't be assessed against the shareholders IF trust fund taxes are paid. So I'm coming down on the side of it not being collectible from the shareholders individually unless some of the later changes in the penalty have also changed its nature.