Thursday, January 29, 1998

There's no loophole for good intent

By A.J. COOK / Scripps Howard News Service

The company president tried hard to help the Internal Revenue Service and got stung doing it.

Faced with a sinking ship, Henry D. Buffalow Jr., president and sole shareholder of Buffalow's Inc., asked his controller to draw up a list of creditors. The employee did this and then disappeared.

Later, Buffalow received a notice from the IRS showing the company owed payroll withholding taxes. This wasn't on the list.

Now the president knew the company was doomed. Still, it had valuable assets Ñ contracts and its list of customers Ñ that would be worthless if it shut down immediately. He decided the wisest plan was to keep operating until he found buyers for these intangible assets.

He knew that to keep the doors open he had to stay current with pay for vendors and employees and stave off the IRS. So Buffalow contacted the officer who sent the notice and explained the plan. She told him to keep the agency informed and keep current with future payroll taxes.

The agent didn't warn Buffalow of the quagmire ahead if he paid others before the IRS.

Buffalow carried out the plan with some success. He kept the corporation afloat long enough to sell some intangibles, pay current withholding taxes and work $100,000 off of the old tax debt.

A job well done? No, not according to the IRS. Because some vendors and employees were paid before the old withholding taxes, the agency held him personally liable.

Generally, the only time an employee, officer or shareholder must personally pay a corporation's debt is when that individual is responsible for paying other creditors rather than paying withheld taxes. The government said that's what Buffalow did.

He appealed. In court he said the IRS officer tacitly approved his plan. The judge said it takes more than that to bind the government.

Buffalow said he kept the company going to save something for the government, and rescue operations should be encouraged. The court said it was sorry, but that's no excuse.

Cases like this do send a mystifying message to businesses. Buffalow would have been better off had he shut down the company rather than trying to maximize the money for the government.

Finally, the executive insisted he had good intentions. The judge said this doesn't matter: "The tax engine is blindly voracious. It does not look into a man's heart before it devours him."

(A.J. Cook, lawyer and accountant, is counsel with the Memphis law firm of Pietrangelo and Cook.)