Operator: Be Careful Handling Ad Valorem Taxes

Originally published by Charles Sartain.

Posted by Charles Sartain

This is to be expected in these dark days of diminished cash flow. Imagine:  You are the operator and the non-ops have given you their share of ad valorem taxes, expecting you to pay them to the taxing authority at the right time. Things are a little tight, if you know what I mean, so you divert “borrow” the funds for more pressing obligations. You intend, of course, to replace the money “when things get better”.  Time passes; “things” don’t get better; your entity – a corporation, LLC, whatever – collapses. Not to worry; your personal assets are protected because that’s what corporations are for, right?  Wrong, at least in Texas.

The Texas Tax Code imposes personal liability upon any person who receives or collects an ad valorem tax from another person. The recipient holds the funds in trust for the benefit of the taxing unit and is liable to the taxing unit for the full amount collected plus penalties and interest.

Who is the ”responsible individual”?

It’s not just the entity that is liable:

“ … [A]n individual who controls or supervises the collection of tax or money from another person, or an individual who controls or supervises the accounting for and paying over of the tax or money, and who willfully fails to pay or cause to be paid the tax or money is liable as a responsible individual for an amount equal to the tax or money, plus all interest, penalties, and costs, not paid or caused to be paid.”

Lest there be doubt, the Code defines a ”responsible individual” for us:

“A  ‘responsible individual’ includes an officer, manager, director, or employee or a corporation, association, or limited liability company or a member of a partnership who, as an officer, manager, director, employee, or member, is under a duty to perform an act with respect to the collection, accounting, or payment of a tax or money … “.

If you are “robbing” Peter to pay Paul, make sure Peter isn’t a governmental entity.

The other side of the coin

Non-operator, do you know what your operator is doing with the tax money being collected from you?

Musical interlude

Where to start! RIP David Bowie and Glenn Frey.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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