Tax Tip: Tax Debt and the ‘Alter Ego’

January 29, 2013

In a recent Court of Appeals case (Berkshire Bank vs. Town of Ludlow MA and IRS, 1/11/2013) the Court ruled that an LLC owned by individual behind on his taxes was that individual’s alter ego. That is, the LLC and the individual were deemed to be one and the same, resulting in the assets of the LLC being available to satisfy the IRS tax debt.

Closely held businesses are in particular in danger of being seen as the alter ego of its owners. Common elements the IRS can use to find an alter ego relationship exists include:

• Using business funds to pay personal expenses (this should never, ever be done)
• Using personal funds to pay business expenses on more than an incidental basis
• Personal enjoyment of business property
• Transactions between the business and its owner for which inadequate consideration is paid
• Whether assets used in the business are titled in the owner’s name

This is by no means an exhaustive list, but conveys the general idea that for the owner to take advantage of the insulation provided by a corporate or LLC structure, there must be an arm’s length relationship between the parties, no different than what would exist between an employee and employer.