Discussion:Legal Question - Officer Liability to Creditors

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Discussion Forum Index --> Advanced Tax Questions --> Legal Question - Officer Liability to Creditors
Discussion Forum Index --> Tax Questions --> Legal Question - Officer Liability to Creditors

Incognito (talk|edits) said:

9 October 2008
I have a 1040 client that is the Secretary/Treasurer of the corporation that he works for. He is not a shareholder. The corporation is owned 100% by the President. The business is not doing so good, and they may not be able to pay their creditors some time soon.

He has seen a couple invoices cross his desk for payment. The invoices were OK'd by the President. He has sent out W-9 forms and received proper replies. However, he is suspect that these invoice may not be legit. He does not know what the services on these invoices were for. It may be possible that the owner is drawing money out of the corporation to the detriment of the corporation's creditors.

He is wondering what sort of liability he may have to the corporation's creditors by issuing checks to pay these potentially bogus invoices. Any lawyers out there have any guidance?

PBCPA (talk|edits) said:

9 October 2008
I'm not a lawyer but from my days as an expert witness in Bankruptcy Court I would characterize this as a "fraudulent conveyance" to defeat a creditor. A cousin to this theory is a "preferential transfer" to defeat a creditor.

Pink Pearl (talk|edits) said:

9 October 2008
WOW...cpa since 1994 and still in college and want to turn pro at age 40....yessssssss

IDrinkYourMilkshake (talk|edits) said:

9 October 2008
Better yet, a CPA without a degree?

TDono2 (talk|edits) said:

9 October 2008
Ah, but you didn't use to have to have an actual degree to become a CPA. Besides, he could be working on his "Sports Medicine" degree. Going to need something along those lines to keep from getting hurt when going pro!

Incognito (talk|edits) said:

9 October 2008
PBCPA, I assume those terms would apply to the President of the company who is benefiting, and not to my client. Does the Secretary have an obligation to blow the whistle, and to whom? There are no other shareholders.

Dingodile (talk|edits) said:

10 October 2008
It's unlikely your client will have any liability, based upon what you describe. If the corporation goes belly up and cannot pay the creditors, then any fraudulent conveyance suit would target the assets of the President. As Secretary your client's biggest concern would normally be liability associated with a breach of his fiduciary obligations, however, since the President is 100% shareholder, and the individual benefiting from these purportedly bogus payments, no damage was caused to the shareholders.

Please note that I'm speaking very generally and you should have your client consult with an attorney who could provide actual legal advice. Of which my post is not.

Natalie (talk|edits) said:

October 10, 2008
I would also recommend your client consult with an attorney. While there may not be any direct liability, there is a fiduciary responsibility there. Given that there are questions about the legitimacy of some of these invoices, he or she needs to follow through.


There are some things your client can do before checking with an attorney. Did he or she look to see if these companies are registered with the state? How long have they been in business? (If they started up recently and around the same time, that could be sign that something funny is going on.) Do these companies have media presence, e.g., internet, yellow pages, advertising? Do the invoices have street addresses on them? (If they use P.O. boxes, that can is also a sign that they are not legitimate.)

If your client puts together several of these things and they point to not being legitimate, then it's time to call in another professional.

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