Tax Penalties For LLC Mismanagement

(Hackl v. Commissioner of Internal Revenue) Mr. and Mrs. Hackl created an LLC for a tree farming business. They gave ownership in the LLC as gifts to their children and other family members. The Hackls identified these transfers as tax excludable gifts in their tax return, which they would normally be. But because the Hackls had not properly structured and governed their LLC, the IRS and the Tax Court charged them hundreds of thousands of dollars of gift tax penalties.

The $6 Million Veil Piercing

(Coleman v. Coleman) An owner of four successful businesses lost $6 million in a family dispute when his corporate veils were pierced by the court. He had ignored corporate formalities and had commingled personal and business funds. His reasoning? He "preferred to conduct corporate business personally rather than in the corporate name, because it was more convenient than observing appropriate corporate procedures."

Govern Your FLP Correctly Or Pay The Estate Tax

(Strangi v. Commissioner of Internal Revenue) An individual formed a family limited partnership (FLP) under the guidance of a lawyer and transferred virtually all of his assets into it. His objective was to achieve a $4.4 million estate valuation discount. The IRS challenged the validity of the FLP, claiming it had not been created and managed as a bona fide business entity. The individual's estate had to pay several million dollars in tax penalties because key governance requirements had been ignored.

Even Attorneys Can Get It Wrong

(Falcone v. Night Watchman, Inc.) An attorney had a law firm and was also sole stockholder of a restaurant. His restaurant was sued by a supplier for non-payment. The corporate veil was pierced and the attorney held personally responsible for the debt. He had failed to maintain proper records, officers, and compliance requirements for either his restaurant or his law firm. The veil piercing risk didn't hit his radar screen until after he was sued Ð and he was a practicing attorney!

No Good Deed Goes Unpunished

(McCord v. Commissioner of Internal Revenue) A family owned a limited partnership containing marketable securities and real estate interests. They gave ownership in the partnership to charities and other beneficiaries in a charitable giving and estate planning effort. While the fact of the gifts was upheld by the IRS, the family suffered significant tax penalties because they had incorrectly applied rules for valuation of the business entity.

Piercing Trusts, Corporations, And LLCs

(Northern Tankers (Cyprus) Ltd. v. Backstrom) A plaintiff sued a shipping company. He also sued the owners personally, successfully asking the court to pierce the veils of several of their entities. These included trusts, corporations and two LLCs, which were not directly related to the shipping company. They were investment and estate planning vehicles. Why were they pierced? Company funds had been commingled, no loans were documented, compliance formalities had not been followed, and officers and directors were not functioning.

How A CPA "Helped" Pierce His Client's Corporate Veil

(Zisblatt v. Zisblatt) In a divorce action, the viability of the defendant's business entity was in question. Zisblatt's CPA appears to have prepared the corporate documents and then offered himself and his wife to be two additional shareholders. At trial, the CPA admitted that he and his wife owned the stock for 10 years but "never believed that he owned the stock" and that his sole purpose in allowing himself to be listed as a shareholder was "as an accommodation for a client." The CPA's "accommodation" helped the court determine that the corporation was never a separate entity.