Incorporation and Bankruptcy Do Not Protect Officials From Tax Liability
Over the past few months, commonwealth Treasury Department tax collectors have come out in force to shut down shops and seize dozens of businesses for failing to remit millions of dollars in sales & use taxes (IVU by its Spanish acronym) and withholding, or retention, taxes to the agency.
Many of the businesses that owed taxes are incorporated entities whose legal identity is separate from that of the owners or shareholders. The law states that corporations can take out loans, sue and be sued, or engage in other legal obligations. Shareholders or officials in incorporated entities cannot be held liable in their personal capacity for the corporation’s debts.
However, that is not the case when the debt consists of delinquent taxes, warns Yasmín Colón Colón, a partner at Emmanuelli Law Firm in Ponce.
“The answer to the question—on whether the corporate veil protects the personal assets of officials who have failed in their obligations to the Treasury Department—is no. They are personally liable for the debt,” she said.
The Treasury Department is providing payment plans to businesses so they can pay back the money they did not retain from their employees’ checks but the agency is demanding full payment of the delinquent IVU taxes, forcing businesses to seek bankruptcy protection.
While a bankruptcy court will give businesses breathing room to restructure their debt, it will not shield them from having to pay commonwealth taxes because they are not dischargeable debt, Colón Colón warns. “What usually happens is that the person or corporation that files for bankruptcy will have a chance to pay back the amount owed in taxes in installments,” she told Caribbean Business.
Colón Colón cited dispositions in the Internal Revenue Code that force businesses to withhold taxes from their employees paychecks, retain 7% in taxes from their checks paid in contracts for professional services and to also retain money from the IVU and remit it to the Treasury Department.
The person who has the responsibility for retaining and remitting the taxes, but fails to do so, will be held liable for delinquent taxes. “And what does the term ‘person who is obligated’ mean? The Internal Revenue Code defines such a person as any individual, association, partnership, trust, corporation or any official, agent or corporation employee or a partner, agent or employee of a partnership or trust that as the individual, official, agent, employee or trustee. It also includes the official, agents or employees of a department or government agency,” she said.
The responsibility, or liability, imposed by the Internal Revenue Code is not only monetary but also a third-degree felony if the person obligated to pay the taxes knowingly did not meet that requirement.
The code states that the criminal responsibility falls on the chief operating officers, the president, the chief financial official, the accountant or comptrollers, or any person obligated to withhold the tax or remit it to the agency.
“The Puerto Rico Internal Revenue Code not only allows the Treasury Department to collect taxes from the corporation as principal debtor, but empowers the department to go after officers or managers who fail to retain or remit payments to Treasury, and also criminalizes the failure to withhold the taxes or the failure to make the payments to the tax authorities,” she said.
Nonetheless, she said that based on her experience, the agency pursues criminal charges against employers only when they have owed taxes for several years and have not approached the agency to seek a payment plan or other alternatives.