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Administrative Dissolution

Imagine moving along day-by-day, business as usual, when you receive mail from the Indiana Secretary of State notifying you that your company has been administratively dissolved.  Some would panic, some would throw the notice away without reading it and some would call their registered agent and/or attorney to figure out just what was going on.  We strongly suggest the latter, understand the panic and advise you to read your mail.

Indiana Code 23-1-46-1 provides:

The secretary of state may commence a proceeding under section 2 of this chapter to administratively dissolve a corporation if:

1) the corporation does not pay within sixty (60) days after they are due any franchise taxes or penalties imposed by this article or other law;

2) the corporation does not deliver for filing its biennial report to the secretary of state within sixty (60) days after it is due;

3) the corporation is without a registered agent or registered office in this state for sixty (60) days or more;

4) the corporation does not notify the secretary of state within sixty (60) days that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued; or

5) the corporation’s period of duration stated in its articles of incorporation expires.

Failing anyone of these options will result in the Secretary of State dissolving the corporation administratively.  This means that your company is not legally allowed to carry on any business except that business which involves winding up and dissolution.

If you timely respond to the notice provided by the Secretary of State and correct each ground for dissolution to the reasonable satisfaction of the Secretary of State within 60 days, you can avoid this administrative dissolution.  Many small business (if not all) will struggle to survive if they cannot produce revenue over time and may lose clients permanently due to this administrative dissolution.  Once the dissolution is completed, however, there is a reinstatement process that can take up to two to three months.

The reinstatement process is relatively simple and can be completed by you, your registered agent or attorney.  The process includes the following:

Step 1:

Complete forms AD19 Reinstatement Affidavit and ROC-1 Responsible Officer Information forms.  Mail these forms to the Indiana Department of Revenue, and allow at least four weeks for processing.  Once you receive your Certificate Clearance stating that no tax is owed by the entity, continue forward.

Step 2:

Complete State Form 4160 Application for Reinstatement.

Step 3:

Complete State Form 48725 Business Entity Report and pay the filing fees ($15.00 for for-profit entities, $10.00 for non-profit entities) for all years owed.

Step 4: Mail all forms with the Certificate of Clearance from the Department of Revenue to the Secretary of State, along with all fees ($30.00 Reinstatement fee plus all business entity report filing fees.)

Everything must be mailed together and a check or money order must be sent.  No Cash!

Once everything is processed and the Secretary of State is satisfied with your application, your corporation will be reinstated.

What is the lesson from all of this?  Stay on top of your company.  Be organized and practice ordinary business diligence.  Be sure to stay informed, and have a knowledgable registered agent that can assist you with your corporation’s legal maintenance.



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Willful and Responsible – The IRS Test

When seeking to collect certain withholding taxes, the Internal Revenue Service will attach any individual who may be responsible, in any manner, for the collection and turning over of said tax.  This can be quite the wide net cast by an entity whose resources are effectively limitless and who does not have much incentive to back off of their collection attempts.  Because of this, it is important to know the test which the IRS will use to determine whether an individual is liable for the certain tax that is owed.

To start, the Internal Revenue Code, at section 6672, imposes the following duty:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Two conditions must be met before an individual can be held liable under this provision: (1) she must be responsible for the collection and payment of withholding taxes, and (2) she must willfully fail to collect and pay them over.  See Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976); Pacific National Ins. V. United States, 422 F.2d 29 (9th Cir. 1976).  The test of responsibility under section 6672 is a functional one, which focuses upon the degree of control and influence which the individual exercised over the financial affairs of the corporation and, more specifically, over the disbursement of funds.  See Taubman v. United States, 499 F.Supp. 1133 (E.D. Mich. 1978).  Liability attaches to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the Government.  Scott v. United States, 354 F.2d 292, 296; see also Gefen v. United States, 400 F.2d 476, 482 (5th Cir. 1968), cert. den’d, 393 U.S. 1119, 89 S.Ct. 990, 22 L.Ed.2d 123.

The Court in Benoit v. Commissioner of Revenue specifically sets out indicia of responsibility as follows:

1)    ID of officers, directors & stockholders;

2)    Ability to sign checks on behalf of the corporation;

3)    ID of individual who hires and fires employees;

4)    ID of individual who was in control of financial affairs; and,

5)    Those with an entrepreneurial stake in the corporation.

Benoit v. Commissioner of Revenue, 453 N.W.2d 336, 344 (Minn. 1990).   Federal law treats the person with effective power to pay the tax as the “responsible person.”  Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983).  Courts read the term “responsible person” expansively.  O’Callaghan v. United States, 943 F.Supp. 320, 324 (S.D.N.Y. 1996).  An “employee with the power and authority…to direct the payment of taxes is a responsible person within the meaning of section 6672.”  Feist v. United States, 221 Ct.Cl. 531, 607 F.2d 954, 960 (1979).

In the responsible person analysis, the answer often pivots on whether the person had power to make tax payments in light of the enterprise’s financial organization and decision-making structure.  O’Connor v. United States, 956 F.2d 48, 51 (4th Cir.1992).  This is fact-intensive; in some instances, employees who perform clerical functions of collecting and paying taxes are not responsible persons.  Feist, 607 F.2d at 957, 960.

While that sums up the responsible person analysis, what of the willful person?  A number of courts have addressed the “willful” component of section 6627.  These courts have defined the term “willful” in this context to mean voluntary, conscious and intentional (as opposed to accidental) decisions not to remit funds properly withheld to the Government. Spivak v. United States, 370 F.2d 612, 615 (2d Cir. 1967), 499 F.2d 90, 94 (4th Cir. 1962); Hewitt v. United States, 377 F.2d 921, 924, 22 A.L.R.3d 1 (5th Cir. 1967); Flan v. United States, 326 F.2d 356, 358 (7th Cir. 1964); Bloom v. United States, 272 F.2d 215, 223 (9th Cir. 1959).  The Court in Kizzier v. United States stated that

“A responsible person acts willfully within the meaning of [section] 6672 if he acts in such a manner that he knows or intends that, as a consequence of his conduct, withheld employment taxes belonging to the government will not be paid over but will be used for other purposes.”

Kizzier v. United States, 598 F.2d 1128, 1132 (CA 8 1979).

Therefore, to be held liable for certain withholding taxes not withheld, the individual must both be responsible (i.e. be required to withhold and pay over certain taxes) as well as willful (i.e. intentionally carry out conduct that brings about a certain known consequence).  Failing to meet one of these criteria will alleviate an individual from the penalties imposed by the IRS concerning withholding.

Internal Revenue Service Circular 230 Disclosure: In compliance with IRS requirements, you are on notice that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.



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