Corporations

By: Bob Poeschl, EA

IN GENERAL A CORPORATION IS DEFINED AS A PERSON OR GROUP OF PEOPLE WHO INCORPORATE BY RECEIVING A CHARTER FROM THEIR SECRETARY OF STATE, THIS INCLUDES JOINT STOCK COMPANIES, INSURANCE COMPANIES (REQUIRED TO BE CORPORATIONS) AND TRUSTS AND PARTNERSHIPS THAT OPERATE AS ASSOCIATIONS OR CORPORATIONS. WE WILL ALSO DISCUSS LLC’S THAT MEET THE DEFINITION OF OR HAVE ELECTED TO BE TAXED AS CORPORATIONS.

CORPORATIONS HAVE TWO MASTERS. THEY ARE

  • THE STATE GOVERNMENT, REGULATED BY THE SECRETARY OF STATE. THIS PART OF THE CORPORATE FUNCTION RELATES TO CIVIL AND CRIMINAL MATTERS AND
  • THE FEDERAL GOVERNMENT, REGULATED BY THE INTERNAL REVENUE SERVICE THIS PART RELATES TO TAX LAW.

FOR A CORPORATION TO BE RECOGNIZED BY BOTH IT MUST:

FOR SET UP PURPOSES AND FOR SECRETARY OF STATE APPROVAL

  1. FILE FOR IT’S NAME RESERVATION
  2. FILE FOR IT’S ARTICLES OF INCORPORATION
  3. OBTAIN AN EIN NUMBER FROM BOTH THE STATE AND FEDERAL GOVERNMENTS
  4. OPEN BANK ACCOUNTS, IF THE BANK ACCOUNT IS OUT OF THE STATE OF INCORPORATION IT MUST FILE FOR FOREIGN STATE STATUS IN THE STATE WHERE THE BANK IS LOCATED.
  5. CONDUCT AN INITIAL BOARD OF DIRECTORS MEETING IN WHICH
    • OFFICERS MUST BE ELECTED
    • STOCK ISSUED AND DISTRIBUTED
    • EMPLOYMENT AGREEMENTS WRITTEN BETWEEN THE CORPORATION AND THE OFFICERS AND DUTIES DESCRIBED
    • PURPOSE AND PLANS FOR THE CORPORATION BE DETERMINED
    • RECORD KEEPING REQUIREMENTS BE DEFINED INCLUDING WHEN DISTRIBUTED TO THE OFFICERS
    • FIDUCIARY REQUIREMENTS BE DEFINED
    • 338 TRANSFERS COMPLETED (PERSONAL OR OTHER ENTITY ASSETS) AND WHERE THESE CONTRIBUTIONS WILL GO ON THE BALANCE SHEET.
    • SECTION 1244 ELECTION BE MADE (STOCK CAPITAL GAIN PROTECTION)
  6. DETERMINE HOW OFTEN THESE MEETINGS WILL OCCUR
  7. REVIEW THE INITIAL MEETING TO ENSURE THAT STATE AND FEDERAL RULES REGARDING RECORD KEEPING, MEETING INTERVALS AND EMPLOYMENT AGREEMENTS ARE PROPER.
  8. ENSURE ALL STEPS HAVE BEEN COMPLETED FOR THE CORPORATION’S FUTURE SUCCESS AND COMPLIANCE TO ALL LAWS. THIS IS CRITICAL TO THE FUTURE OF ANY CORPORATION. THIS IS HOW THE CORPORATION WILL OPERATE IN THE FUTURE.

AFTER THE INITIAL SET UP OF THE CORPORATION IS COMPLETED THE CORPORATION MUST MAINTAIN IT’S CORPORATE STATUS BY:

  1. FILE IT’S YEARLY REPORT TO THE SECRETARY OF STATE
  2. IN THE STATE REPORT INCLUDE CHANGES TO OFFICERS AND DIRECTORS
  3. MAINTAIN THE PURPOSE SET FORTH IN THE YEARLY BOARD OF DIRECTORS MEETINGS
  4. HOLD, AT LEAST ONE BOARD OF DIRECTORS MEETING EACH YEAR
  5. MAINTAIN A SET OF FORMAL BOOKS INCLUDING A BALANCE SHEET, AND PROFIT AND LOSS STATEMENT.
  6. MEET THE REQUIREMENTS FOR REPORTING THE FINANCIAL STATUS OF THE CORPORATION TO THE BOARD
  7. FILE AND PAY ALL TAXES DUE ON A TIMELY BASIS INCLUDING INCOME AND EMPLOYMENT TAXES.
  8. KEEP THE CORPORATION FINANCIALLY AND LEGALLY VIABLE
  9. AT LEAST ONE OFFICER / DIRECTOR MUST BE PAID AS AN EMPLOYEE. IF AN “S” CORPORATION THE RECOMMENDED RAITO OF SALARY TO PASS THROUGH IS AT LEAST 50%

REMEMBER - OPERATING A CORPORATION IS NOT A RIGHT GUARANTEED BY THE CONSTITUTION IT IS A PERMISSION GRANTED BY THE STATE WHICH HAS REQUIREMENTS TO BE FOLLOWED. IF THE TRUST BETWEEN THE OFFICERS/DIRECTORS AND THEIR FIDUCIARY DUTY TO THE CORPORATION IS BROKEN THE CORPORATION MAY NOT CONTINUE TO BE RECOGNIZED FOR EITHER TAX OR CIVIL RESPONSIBILITY PROTECTION PURPOSES.

DEFINITION OF A THREE STRIKES CORPORATION, AND HOW TO DETERMINE THIS FACT.

  1. INSOLVENT LIABILITIES HIGHER THAN ASSETS, FROM THE BALANCE SHEET. ALSO CONSIDER LOOKING AT ACTUAL VALUE OF THE EQUIPMENT, THE CURRENT (NOT BOOK VALUE) OF THE REAL ESTATE, THE COLLECTABILITY OF THE RECEIVABLES AND THE POSSIBLE REDUCTION OF LIABILITY FROM THE SALE OF ITEMS INCLUDED IN LONG TERM DEBT ALSO LOOK AT THE OFFICERS/SHAREHOLDERS PERSONAL POSSIBILITY OF CONTRIBUTIONS TO MAKE THE CORPORATION SOLVENT.
  2. CONSISTENTLY NON PROFITABLE. TO DETERMINE THE NON PROFITABILITY OF A CORPORATION LOOK AT THE DATE INCORPORATED ON PAGE #1 VS THE RETAINED EARNINGS ON THE BALANCE SHEET ON PAGE #4 OF THE BALANCE SHEET
  3. NON-COMPLIANCE. THERE ARE TWO COMPONENTS TO TAX COMPLIANCE
    • FILING OF RETURNS, EVEN IN THE CASE OF A CORPORATION (OR ANYONE ELSE) WHO IS NOT GOING TO STAY IN BUSINESS RETURNS HAVE TO BE FILED. THIS STEP HAS TO OCCUR BEFORE ANYTHING YOU DO OR RECEIVE FROM/FOR THE CLIENT STARTS
    • PAYMENT OF TAXES. TWO QUARTERS PLUS THE CURRENT QUARTER IS THE RULE. IT HAS HAPPENED IN THE PAST THAT THE IRS BENDED ON THIS ISSUE (DON’T BANK ON IT). THE KEY HERE IS TO CONVINCE THE RO, THROUGH INFORMATION RECEIVED FROM YOUR CLIENT

BEFORE GOING INTO SPECIFICS REGARDING THE DIFFERENT TYPES AND FUNCTIONS OF CORPORATIONS WE MUST DISCUSS THE OFFICERS AND DIRECTORS RESPONSIBILITIES AS TO TAX COLLECTION ISSUES AND COLLECTION REQUIREMENTS REGARDING

EMPLOYMENT TAXES. IN MOST CASES WITH CORPORATIONS THE IRS WILL LOOK TO COLLECT PAST DUE TAX DEBTS BY FIRST LOOKING AT THE CORPORATION'S AVAILABLE CASH(OBVIOUS) AND THEN LOOKING AT THE OTHER ASSETS LISTED BELOW UNTIL THEY HAVE COLLECTED THE DEBT OR EXHAUSTED THE RESOURCES OF THE DEBTOR CORPORATION. IN SOME CASES WITH A NON THREE STRIKES CORPORATION, IRS COLLECTION ENFORCEMENT CAN BE NEGOTIATED TO ALLOW THE CORPORATION TO CONTINUE OPERATING WHILE PAYING BACK THE TAX DEBT

OTHER ASSETS BESIDES CASH THE IRS WILL LOOK AT FOR COLLECTION PURPOSES AGAINST A CORPORATION WITH PAST DUE TAX DEBT:

  • INVENTORY AT IT’S CURRENT MARKET VALUE.
  • RECEIVABLES, 30 DAY OR CURRENTLY COLLECTABLE.
  • REAL ESTATE ASSETS
  • OTHER FIXED ASSETS INCLUDING MACHINERY AND OFFICE EQUIPMENT AT FAIR MARKET VALUE
  • FUTURE INCOME VALUE.

TO UNDERSTAND WHY THE IRS LOOKS TO ASSET COLLECTION IN THIS ORDER WE WILL LOOK AT EACH:

  • INVENTORY IN MANY CASES CAN BE SOLD AT COST EITHER BACK TO THE VENDOR IT WAS PURCHASED FROM OR LIQUIDATED BY RECEIVER OR TAXPAYER IN THE GENERAL COURSE OF BUSINESS. INVENTORY CAN NOT BE LEVIED BUT IT CAN BE RECORDED AND HELD BY FILING A UCC (UNIFORM COMMERCIAL CODE FILING (PREVIOUSLY A CHATTEL MORTGAGE)INVENTORY IS CONSIDERED A LIQUID ASSET.
  • RECEIVABLES: THESE CAN AND ARE OFTEN LEVIED ASSETS SINCE RECEIVABLES ARE CONSIDERED UNCOLLECTED CASH THEY ARE TREATED IN THE SAME MANNER AS CASH EXCEPT THE IRS WILL NOT NORMALLY COLLECT RECEIVABLES WHICH ARE HARD COLLECTION CASES.
  • REAL ESTATE ASSETS: ALTHOUGH THE IRS CAN SEIZE REAL PROPERTY, IN THE PAST NUMBER OF YEARS THEY HAVE NOT EXCEPT IN A FEW EXTREME SITUATIONS. THE IRS WILL NORMALLY LIEN THE PROPERTY WHICH EFFECTIVELY CAUSES THE CORPORATION LOSS OF ANY EQUITY IN THE ASSET
  • OTHER FIXED ASSETS: THE IRS, EXCEPT IN CASES OF A NON THREE STRIKES CORPORATIONS WILL REQUIRE THE SALE OF THESE ASSETS AT FAIR MARKET VALUE. NORMALLY THESE ASSETS FAIR MARKET VALUE AND THEIR BOOK VALUES ARE VERY FAR APART. FOR INFORMATION REGARDING ESTIMATES OF VALUE WE WILL REFER TO THE BALANCE SHEET PORTION OF THE BALANCE SHEET.
  • FUTURE EARNINGS, USED WHEN A CORPORATION IS A CONTINUING VIABLE ENTITY AND CAN ENSURE FUTURE COMPLIANCE

FURTHER REGARDING THESE ASSETS HOW DO YOU DETERMINE WHAT ASSETS THE CORPORATION HAS AND HOW DO YOU DETERMINE A VIABLE ENTITY VS. A THREE STRIKES CORPORATION. THE FOLLOWING INFORMATION IS HELPFUL IN DETERMINING THE HEALTH OF A CORPORATION:

  1. A CURRENT BALANCE SHEET AND PROFIT AND LOSS STATEMENT
  2. TWO PAST YEARS TAX RETURNS
  3. THE ORIGINAL AND TWO PAST YEARS BOARD OF DIRECTORS MINUTES
  4. A RECEIVABLE AGING REPORT
  5. A CURRENT VALUE OF INVENTORY BASED ON LOWER OF COST OR MARKET VALUES
  6. COPIES OF THE RESPONSIBLE OFFICERS/DIRECTORS/EMPLOYEES TAX RETURNS AND ASSET EQUITY LISTINGS. NOTE THE REASONS FOR THE PERSONAL INFORMATION IS TO DETERMINE IF THE PERSONAL SPENDING HABITS OF THE OFFICERS IS PART OF THE PROBLEM
  7. DOES THE OFFICER/SHAREHOLDER HAVE SUFFICIENT ASSETS/INCOME TO CONTINUE THE CORPORATION WITH OUT SIDE FUNDS.
  8. A CURRENT PAYABLES LISTING
  9. A CURRENT LONG TERM LIABILITY LISTING

WHEN ALL OF THIS INFORMATION IS COLLECTED THE FOLLOWING WILL BE CONSIDERED

  • IS THIS CORPORATION VIABLE ENOUGH TO CONTINUE
  • ARE ALL RETURNS FILED INCLUDING 1120’S AND 941’S, 940’S, W-2’S, W3’S ETC.
  • IS THIS CORPORATION A THREE STRIKES ORGANIZATION
  • DOES THE CORPORATION HAVE ENOUGH ASSETS TO SATISFY THE ENTIRE DEBT
  • IS IT POSSIBLE FOR THIS CORPORATION TO CONTINUE IF CHANGES ARE MADE AND THE IRS ACCEPTS A OIC TO REDUCE OR WIPE OUT THE DEBT.

IF THE CORPORATION CAN CONTINUE THE IRS WILL NORMALLY CONSIDER A SETTLEMENT WITH 2 QUARTERS PLUS THE CURRENT QUARTER COMPLIANCE AND IN MANY CASES LEAVE THE CORPORATION A REASONABLE AMOUNT OF CASH AND RECEIVABLES TO CONTINUE OPERATING. THEY WILL NOT NORMALLY RELEASE LIENS AGAINST REAL PROPERTY WITHOUT PAYMENT. AT THIS TIME THEY WILL ALSO LOOK AT THE CORPORATIONS RESPONSIBLE PARTIES FOR OUTSIDE CONTRIBUTIONS TO THE CORPORATION FROM PERSONAL. IF POSSIBLE THEY MAY REQUIRE THE INDIVIDUAL TO CONTRIBUTE TO THE CORPORATION AN AMOUNT UP TO THE PROPOSED TRUST FUND RECOVERY AMOUNTS.

A DEFINITE OUTCOME CAN BE DETERMINED IN IRS COLLECTION CASES INVOLVING CORPORATIONS OR OTHER 941 ISSUES THROUGH THE COURSE OF THE INVESTIGATION AND INTERVIEW. YOU WILL LEARN HOW TO RECOGNIZE AND DEAL WITH THE PROBLEMS YOU WILL HAVE WITH CORPORATIONS AND THE PROPER INFORMATION NECESSARY TO DETERMINE WHAT THEIR FUTURE IS.

DEFINITION OF A RESPONSIBLE PARTY: REQUEST BANK SIGNATURE CARDS. NORMALLY THE IRS WILL USE THESE AS A DETERMINING FACTOR AS TO WHO IS RESPONSIBLE ALTHOUGH THEY CAN AND WILL ALSO CONSIDER AN INDIVIDUALS RESPONSIBILITY TO THE CORPORATION FOR THE FILING AND /OR PAYING OF THESE TAXES.

THE TRUST FUND PENALTIES (IT IS NOT A PENALTY) ARE ASSESSED TO THE RESPONSIBLE PARTY/PARTIES. THESE INCLUDE

  1. THE FEDERAL WITHHOLDING PORTION FROM THE EMPLOYEE LINE # 2 W-2 FORM
  3. THE EMPLOYEES PORTION OF THE OASDI/FICA 6.2%
  4. THE EMPLOYEES PORTION OF THE MEDICARE 1.45%
  5. ANY OTHER FEDERALLY (THROUGH WAGE ATTACHMENT) REQUIRED DEDUCTIONS NOT TURNED OVER TO THE IRS INCLUDING CHILD SUPPORT PAYMENTS, STUDENT LOAN PAYMENTS, TAX WAGE ATTACHMENTS ETC.

NO ONE WHO CAN BE DETERMINED A RESPONSIBLE PARTY WILL BE LEFT OUT OF THIS COLLECTION EFFORT. ALL ARE 199% RESPONSIBLE FOR THIS AND THE IRS CAN AND WILL USE THE DEEP POCKETS METHOD OF COLLECTION.

THAT THE CORPORATION IS VIABLE OR IT IS GOING TO STOP DOING BUSINESS. THIS IS NECESSARY FOR THE CORPORATION TO CONTINUE UN-HARASSED BY LEVIES.

COLLECTION OF CORPORATE INCOME TAXES NOT PAID. THIS IS PROBABLY THE EASIEST COLLECTION ISSUE. CORPORATION INCOME TAXES STAY WITH THE CORPORATION AND CAN ONLY BE COLLECTED TO THE EXTENT OF CORPORATE ASSETS AND FUTURE EARNINGS.

Bob Poeschl is an Enrolled Agent with over 25 years of tax experience. He currently lives and practices in Seattle, WA
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