Slodov v. United States

1978-05-22

Headline: Limits personal liability for new company managers: Court narrows payroll-trust tax penalty, reversing lower court and making it harder for successors to be held personally liable when prior withheld funds were already dissipated.

Holding: The Court reversed the Sixth Circuit and held that §6672 does not make a new manager personally liable for withholding taxes collected before he took control when those funds had been dissipated and later funds are not traceable.

Real World Impact:

Limits personal liability for new owners when prior withheld payroll taxes were already spent.
Clarifies that managers remain liable for taxes collected while they are in control.
Leaves IRS collection tools intact, including liens and bankruptcy claims against employer assets.

Topics: payroll tax withholding, corporate officer liability, IRS collection rules, trust-fund taxes, tax penalties

Summary

Background

An orthodontist bought three vending-food corporations that already owed about $250,000 in unpaid payroll withholding and FICA taxes. He learned the corporations’ bank accounts were overdrawn, stopped payment on checks to the IRS, told IRS officials there were no funds, and then ran the businesses from February to July 1969. The firms paid current withholding obligations while operating but never paid the preexisting withheld taxes; the companies later went bankrupt.

Reasoning

The Court addressed whether the federal payroll-tax penalty (26 U.S.C. §6672) makes a new manager personally responsible for unpaid withholding taxes that were collected before he took control. The Court rejected a reading that would always attach liability to a successor merely because later receipts came into the business. It held that the penalty can apply when trust funds collected earlier are still traceable or otherwise impressed with a trust at the time control is assumed. But the related statute (26 U.S.C. §7501) does not automatically make all funds received after takeover into trust funds for prior tax debts, and liability requires a willful failure to pay.

Real world impact

The Court reversed the Sixth Circuit and cleared the buyer of liability for the preexisting unpaid withholdings here because those withheld funds were dissipated before he assumed control and later receipts were not directly traceable. The ruling leaves intact the IRS’s other collection tools and confirms that managers can still be liable for taxes they collect or for trust funds that are present and traceable when they take control.

Dissents or concurrances

A partial dissent warned this limit could make it easier to divert funds after ownership changes; a concurrence stressed the importance of the statute’s “willful” fault requirement.