Illinois – Payment to Creditors Rather than State Resulted in Willful Failure to Pay Penalty

SALT Report 2704 – The Illinois Department of Revenue issued a ruling regarding an assessment imposed on a Taxpayer as the responsible officer of a business. In this case, the Taxpayer was the vice president, treasurer, and secretary of a failed printing business that he co-owned.

In 2009, the Taxpayer filed the businesses August sales tax return and paid the amount due from a checking account that was funded by a line of credit. However, in that same month the bank notified the Taxpayer that they would no longer provide a line of credit or honor any checks written from that account. As a result, there were insufficient funds in the account when the Department deposited the check.

In September 2009, the Taxpayer entered into a business bankruptcy agreement in which it agreed to transfer all of the business assets and the Taxpayer’s home over to an administrator for dispersal to various creditors. The bankruptcy agreement did not name the Department of Revenue as a creditor. Because of this, the Department determined that the Taxpayer was the responsible officer and he was held personally liable for the sales tax due from its August 2009 return.

Under Illinois law, 35 ILCS 735/3-7, “Any officer or employee…who has the control, supervision or responsibility of filing returns and making payment of the amount of any trust tax imposed in accordance with that Act and who willfully fails to file the return or make the payment to the Department or willfully attempts in any other manner to evade or defeat the tax shall be personally liable for a penalty equal to the total amount of tax unpaid by the taxpayer including interest and penalties.” The Taxpayer is protesting this decision.

At the evidentiary hearing the Taxpayer admitted that he was, in fact, the responsible officer but denied that he “willfully” failed to file or remit the tax payment. In his defense, he stated that when he agreed to turn over the business assets to be dispersed to creditors he thought that included the businesses tax liabilities as well.

However, at the conclusion of the hearing, the Administrative Law Judge stated that although the Taxpayer made every effort to ensure that its creditors, other than the Department, were paid, the courts have explicitly held that a responsible officer “acts willfully in failing to pay delinquent taxes if he prefers other creditors to the state.”

Consequently, the Taxpayer’s decision to transfer control of the business and its assets before verifying that the tax liability had been paid “was a conscious and deliberate choice” made by the Taxpayer and his business partner. As a result, the Taxpayer was held liable for the August 2009 taxes in addition to the responsible party penalty and interest.

For Further Information

Illinois Department of Revenue – Administrative Hearing Decision #ST 13-05