In an alarming decision earlier this year, an Indiana District Court extended personal liability of business owners for their company’s taxes.  The Court ruled in US vs. Sperry that where a business owner exercises discretion to pay salaries or other creditors, instead of paying non-trust fund taxes to the IRS, the owner can be personally liable under 31 U.S.C. § 3713.

It has been well-known in the bankruptcy world that trust fund taxes, such as withholding taxes, are collectible against the business owner or person responsible.  Therefore, these taxes were always top priority for payment when a business needed to be shut down.  Other taxes, however, were not high on the priority list because business owners are typically protected through the corporate, limited liability model.

However, this new ruling changes this priority scheme.  Business owners who are winding down their operation should pay careful attention to what discretionary payments they make.  If credit cards, trade debt, or salaries are paid instead of even non-trust fund taxes, the business owner may find themselves liable to the IRS.  Such a predicament may force the business owner into their own insolvency and needing to file a Chapter 7 or Chapter 13 bankruptcy case.