Interrelated Family of LLCs and Other Entities Pierced, Largely on the Basis of Co-Mingling of Assets

Interrelated Family of LLCs and Other Entities Pierced, Largely on
the Basis of Co-Mingling of Assets

      One of the classic justifications for piercing the veil of a corporation, LLC or other structure that otherwise affords asset partitioning is the co-mingling of the assets of the various business structures. Rather, each corporation, LLC or otherwise needs to receive its accounts receivable and pay its accounts payable. The balance may, in appropriate circumstances, the distributed as a distribution. In a recent case from Colorado, these rules are violated, and the assets of certain ventures were used to pay the debts of others. On the basis of this co-mingling, piercing was awarded so that assets, in this case a tax return payable to one subset of the companies could be applied to satisfy tax liabilities of other parts of the family. Cordes v. United States, 121A.F.T.R. 2^nd  2008-510, 2018 WL 496839 (D. Colo. Jan. 22, 2018).

      W.H.M. “Willy” Van Bakel, a citizen of the Netherlands, through a wide variety of LLCs and other structures organized in various states or in the Netherlands, operated a string of dairy farms around the United States. Numerous of these organizations fell behind on their responsibility to collect and remit employment taxes with respect to the employees. Separately, one of the LLCs, Orleton Farms, LLC had sold its property at a public auction. 10% of the sales price, $2,710,000, was paid to the IRS under section 1445(a). It would, ultimately, be determined and no tax was owed, so those funds were due to be refunded.

      Meanwhile, as the various LLCs experienced problems, judgments were issued against various of the companies and in some cases against Willy. In the course of a bankruptcy proceeding, it was learned that the refunded amount of it was that there was a plan to apply the refund amount to the withholding tax liability. That withholding tax liability did not arise, however, from the activities of Orleton Farms. Still, that tax return would be applied to address a liability incurred under the consolidated tax return of the various LLCs. When the government applied an offset against the tax return, the receiver for one of the companies within the group filed an action seeking a refund. The course of discovery, Marcus Carlin, a CPA who served as the controller for the group of companies, described them as being in “complete disarray,” that intra-company transfers were not recorded or were recorded improperly and that the assets of every entity were cross collateralized. Further, based upon his testimony, it was determined that:

By the middle of 2009 the entities were unable to pay their bills as they became due. Carlin testified that before bills would be paid, bookkeepers assigned to particular entities would make a list of those entities’ obligations. Carlin recalled that “a lot of times it happened that we would see what we would have with the milk checks coming in, what we had outgoing, and then kind of divvying it up from there.” Carlin said that funds to cover the bills might come from “whatever particular entity had a few extra pennies in its account.” Carlin testified that by 2009 Van Bakel was making the ultimate decisions about which bills would be paid and from which accounts.

      Based upon these facts, the LLCs were pierced, thereby denying the receiver’s claim for the funds collected by the IRS in its withholding from the tax return.