Past Due Taxes
In March 2007 we purchased 67% of an existing corporation (the remaining 33% is owned by additional business partners). Under the sales agreement, we included a stipulation that all existing liabilities and IRS issues remain with the previous majority owner. We received a letter from the IRS about past due taxes (under the corporation's EIN which we continued to use when we took over) for liabilties that existed prior to us taking over ownership. When we contacted the IRS we found out that there has been an ongoing case with the previous owner for tens of thousands of dollars owed from 2005 and 2006.
Will the IRS be able to separate our tax liability (which for us is current and paid) from the unpaid amounts of the previous owner under this same EIN?
3 Answers from Attorneys
Re: Past Due Taxes
I agree with the prior answers. This is why it is good idea to obtain tax counsel prior to purchasing a business.
Tax counsel may have had you request tax transcripts from the IRS as part of the due diligence process prior to purchasing the ongoing business.
Tax counsel may have also requested that you consider purchasing the business assets, rather than the stock or an interest in the business entity. As a purchaser, you might have obtained additional tax benefits from purchasing the business assets (e.g., being able to start depreciating the assets for tax purposes).
A good business-tax attorney can probably help you enforce any rights that you may have with regard to the undisclosed liability.
Re: Past Due Taxes
To understand this situation, you first have to understand that the corporation is a separate legal and taxpaying entity, separate and apart from the stockholders. Any agreement amongst the stockholders, whether or not in connection with a transfer of some of the stock, has no impact on the corporation itself, nor on the corporation's obligations to the IRS. If the corporation owes money to the IRS, it doesn't matter whether ownership of the stock changes -- the corporation still owes the money. And the change in ownership does not cause a break or partitioning of the corporation's tax debts to the IRS.
If the taxes which the corporation is forced to pay are covered by your agreement with the previous stockholder, your recourse is an action against him. The IRS was not a party to that agreement, and is not bound by it in any way.
Re: Past Due Taxes
No. When you purchased the STOCK rather than the ASSETS of the business, you inherited all of the liabilities exisiting in the corporation. A good Agreement to Purchase Stock would include representations and warranties where the seller would promise to pay taxes and indemnify you from losses. You may be stuck paying the taxes and attempting to recover from the seller.
I hope this helps!
Ron Cappuccio
http://TaxEsq.com
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