A recent decision by the Eleventh Circuit Court of Appeals highlights the danger of mixing business and personal funds. In In re Tomberlin (USCA11 Case: 2010776)(presently unpublished until the time to request rehearing has expired), the Eleventh Circuit held that by depositing his personal paycheck into a business account of a business he owned to “protect” his money to “get-by financially” after a 20 million dollar judgment was entered against him and while he owed over 300k in back taxes which the IRS was trying to collect, a debtor acted with “intent to hinder, delay, or defraud” a creditor and denied the debtor a discharge in bankruptcy. The debtor, Dr. Tomberlin, argued that he acted on the advice of counsel in putting his personal paycheck in his company, and that in doing so he never intended to hinder, delay, or defraud a creditor.
In an unusually brief and succinct opinion, the Eleventh Circuit noted that action, by itself, showed the requisite intent to hinder, delay, or defraud a creditor under Section 727(a)(2)(A) of the Bankruptcy Code.
Some of you may be asking, why didn’t the good doctor just put it into something that is immune to creditors, such as a retirement account (in North Carolina retirement accounts are exempt from creditor’s claims, regardless of the amount in the account. Not all states are this generous). We will never know. Perhaps because putting it in a retirement account would have made no difference with respect to the IRS. No state’s exemptions laws are binding on the IRS (under the Supremacy clause of the Constitution, the states cannot limit the power of the federal government with respect to federal matters, and the collection of taxes by the IRS is a federal matter). Depending on the law of the state in which Dr. Tomberlin resided, putting the money into a retirement may have put it beyond reach of the $20 MM judgment creditor, but that’s another blog post altogether.
In this case, it was not even the IRS that was pushing the issue, it was the $20 MM judgment creditor, and therein lies the rub. Under most fraudulent conveyance statutes, a creditor does not have to show the transfer was done with intent to hinder, delay, or defraud that particular creditor, it is sufficient if the creditor can show the debtor acted with intent to hinder, delay, or defraud any creditor.
So what is a business owner to do? First, plan early, often, and follow the plan. Typically once the clouds are gathering it is too late to do any meaningful asset protection planning, but with careful and strategic advanced planning, assets can be protected. Second, instead of playing dodge ball with the IRS, he should have had his counsel or accountant reach out to the IRS and negotiate a payment plan. Although the IRS would still have been a creditor as long as the liability was unpaid, it was the debtor’s own statements that he was trying to “protect” his money to “get by financially” that hung him. Third, he should not have commingled business and personal assets. Business owners are frequently advised not to commingle assets so the nature of the asset-business or personal remains clear.
Hagan Barrett PLLC counsels business owners on strategic business, tax, and risk management techniques. The views expressed herein are solely those of the author’s and do not constitute and are not intended as legal advice.