Posts from: February 2016

Shareholder Loans to Family Business–Are They Really Loans?

June Shaw agreed to advance up to $1 Million to her family’s company, SRG, pursuant to an unsecured revolving line of credit note.  June Shaw advanced $808,475 to SRG pursuant to the Note.  SRG began facing financial difficulties but June kept making advances under the Note.  In 2009, her brother Kenneth Shaw, president of SRG, advised June that the company could not repay her.  June listed the amount as a bad debt on her tax return.  The IRS denied the deduction and was upheld by the Tax Court.

On appeal, the Ninth Circuit upheld the Tax Court’s ruling.  It held that the advance was not a bona fide debt that arose from a debtor-creditor arrangement.  “Notably her behavior was not consistent with that of a traditional lender; she continued to advance money to SRG despite its unstable finances and the company’s failure to repay any interest or principal.”

If you are intending to treat advances to your closely held company as loans, it is important that you act like a “real” creditor and document and treat the advance as a loan.  A real creditor would require a note to document the loan, would stay aware of the company’s finances and ability to repay the debt, would require regular payments and depending on the amount loaned, would require collateral security.  If you fail to follow the formalities of a “real” lender-borrower relationship, you may find that your advance is not afforded the same tax treatment as a bona fide loan.

If you have any questions about family loans to family or other closely-held businesses or any other aspect of family businesses, please contact:

Morris R. Saunders at: or 312-368-0100.

Are You Personally Responsible for the Payment of Withholding Taxes?

The Court of Appeals recently upheld the IRS’s determination that two officers of a corporation were responsible for the payment of withholding taxes that were not paid by the corporation. The IRS may find personal liability attaches to responsible persons who act willfully in not paying trust fund taxes to the IRS.

Schiffmann was the company’s president and CEO. He also served as a director and owned stock in the company. As such, he was deeply involved in the day-to-day management of the company; his functions included the power to hire and fire, the development of fundraising strategies, and the formulation of a retention and compensation plan for the company’s workforce. Furthermore, he was a signatory on the company’s bank accounts, and regularly signed checks. In November of 2005 the board adopted a resolution specifically authorizing him to sign financial and contractual obligations up to $100,000 without a second signature. Schiffmann was found to have acted willfully because — after becoming aware that the trust fund taxes were not being paid — he did not pay them. Instead, he allowed the company to use unencumbered funds to pay other creditors. Given Schiffmann’s position and authority, no more was required to support a finding of willfulness.  In August 2005, the company hired Cummings as a financial consultant. Cummings became the CFO on October 25, 2005, and as such had check signing authority and was generally responsible for the company’s financial well-being.  On November 18, 2005, the company board of directors (which then consisted of at least four members) met to discuss, among other things, the outstanding trust fund tax liabilities.   Following the meeting in which the board gave him the power to sign checks and contractual obligations up to $75,000, he exercised that power to pay rent and operational expenses. The company’s tax liabilities went begging. So viewed, Cummings acted willfully because he voluntarily, consciously, and intentionally preferred other creditors to the United States.

They nonetheless signed checks to pay other creditors, but did not pay the government. The funds backing these checks came primarily from cash infusions raised by Schiffmann and the company’s board chairman. Matters went downhill from there: the trust fund tax arrearage was not paid, new trust fund taxes accumulated, the company’s financial decline continued, and the board fired Schiffmann and Cummings in June of 2006.

The court considered each corporate officer’s status, duties, and authority.  The inquiry focused on the “function of an individual in the employer’s business, not the level of the office held.” The criteria that typically inform the determination include whether the person is an officer and/or director; whether the person owns shares or otherwise has an equity interest in the company; whether the person participates actively in day-to-day management of the company; whether the person has authority to hire and fire; whether the person “makes decisions regarding which, when, and in what order outstanding debts or taxes will be paid”; whether the person exercises significant superintendence over bank accounts and disbursement records; and whether the person is endowed with check-signing authority. Though this list is not meant to be exhaustive and no one factor is dispositive, debt prioritization, control over bank accounts, and check-signing authority are at the “heart of the matter” because they “identify most readily the person who could have paid the taxes, but chose not to do so.”

If you have any questions in this area, please contact:

Morris R. Saunders at: or 312-368-0100.

Successor Liability-Beware

Often, buyers are advised to buy the assets of a business that is for sale, not the ownership interests.  That is based on the general principle that if you buy the assets of a business, then you are not liable for the business’s obligations unless you expressly agree to satisfy obligations.

However, an exception to this general rule is founded upon “successor” liability.  That is, if the buyer’s newly formed business can be found to be a successor of the seller’s business, then the buyer’s business may be found to be liable for the obligations of the seller’s business.  Such liability can be for the seller’s taxes, employment obligations and even union liabilities.

A recent case in California found that the buyer who set up a new business was a successor employer and therefore liable for the withdrawal liability of a prior business under the Multiemployer Pension Plan Amendments Act.  In this situation, the “buyer” only purchased certain assets of the “seller” at a public liquidation sale but was found to be liable for some of the “seller’s” liabilities.

The prior business, Studer’s Floor Covering, Inc. (“Studer’s”) was in the construction industry.  It ceased doing business on December 31, 2009.  At that time, it was party to a collective bargaining agreement, pursuant to which it made contributions to a multiemployer defined benefit pension plan (the “Fund”).

The owner of Studer’s announced to its sale staff that Studer’s would go out of business in a couple of months.  A member of Studer’s sales staff formed a new company (“Michaels”) two months prior to Studer’s going out of business. Michaels obtained a lease for the same storefront Studer’s operated its business, effective January 1, 2010.  Michael put up a sign “Michaels/Studer’s” on the storefront, obtained the same telephone numbers and purchased 30% of Studer’s tools, equipment and inventory at a public liquidation sale.  He did not obtain the customer list since the owner had personal knowledge of most customers.  Michaels employed eight installers (of whom five had been Studer’s employees) and used mainly independent contractors.

The Appellate Court held that the court should consider “continuity of the workforce” as a major factor.  Continuity could be found to exist if a majority of the new employer’s employees were employees of the old employer.  The court held that the changes in ownership here did not affect successor liability.  An important factor was substantial continuity as measured by customer retention.  The Court also was swayed by the new business using the same telephone numbers, the same location and the sign that incorporated the name of the prior business.

Where putative successors do rely on insider knowledge, similar public presentation (signs, location) to corner their predecessor’s market store, and have a continuity of the work force, courts may find the successor doctrine to apply.  New businesses that are concerned about the liabilities of the prior businesses should carefully consider these factors.

Levin Ginsburg has represented and provided counsel for many buyers and sellers of businesses.  If you have any questions regarding successor liability or any other aspect of your business, please contact:

Morris R. Saunders at: or 312-368-0100.

That Looks Just Like Our Product!

The phone rings and it is one of our clients telling us that someone has taken the design of their product and is selling a competing product.  The competitor is not solidly a typical trademark infringer, as they named the infringing product something completely different.

Trade dress to the rescue?  Not so fast.  Patent design or trade dress infringement theories can sometimes be a successful remedy, but not always.   Patent design requires a prior patent registration, which oftentimes, the victim of the infringement either did not realize it, should have filed a design patent, or did not take the time or money and put it toward that task.  Therefore, patent design is only as good as the forethought and planning that may have (or may not have) gone into the product design.

So, we are left with trade dress protection.  Trade dress is typically defined as the “look and feel” of a product and is a bit elusive considering it is not usually filed in an application before the USPTO.  Therefore, this client would be left to try to factually establish infringement in court, an often time consuming and expensive venture.

Converse was certainly up for the challenge several years ago.  The shoe company sued multiple companies concerning the alleged “copying” of its iconic Chuck Taylor shoe designs.  An argument typically argued by defendants in these cases is functionality – that is – if the design is functional, a necessary component for the product to work or function, then that element is not eligible for trademark protection.   However, a most interesting other argument is that Converse waited so long to file these lawsuits, that the design was already copied by so many companies that it became “generic.”   While trademark infringement defendants often argue laches, or delay in filing suit, that has somehow prejudiced defendant, we do not often see an argument that delay caused the design to become generic.  That is, that there already were so many infringers and Converse did not act quickly enough so as to determine that the design is actually not protected.

What is interesting is the lesson to business owners and designers.  This example is yet another reason to periodically review the product lines and advertising to determine whether the brands are adequately protected.  Additionally, companies should also be vigilant when it comes to protecting its product designs, and even website designs, before it is too late.

If you have any questions in this area, please contact:

Natalie A. Remien at: or 312-368-0100


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