A Baltimore lawyer spent years helping a family manage its investment holding company. He wasn't the owner. He didn't personally benefit from the company's tax positions. But when the IRS came calling on more than $8 million in disputed loans, a federal court held him personally liable for $1,880,987.96 of the company's tax bill — not because he owned the business, but because he helped direct payments to other creditors while the company owed the government money.
If you run a small business, sit on its board, or have signing authority over its bank account, this case is worth twenty minutes of your attention. The legal doctrine behind it — a 200-year-old statute most business owners have never heard of — can reach far beyond corporate directors of family holding companies. It can reach you.
The case: how $8 million in loans turned into a $1.88 million personal tax bill
The facts, condensed from United States v. Neuberger (U.S. District Court for the District of Maryland), read like a cautionary tale in slow motion.
Isaac Neuberger, a principal at a Baltimore law firm, served as the sole director, president, and treasurer of Lehcim Holdings, Inc., an investment holding company he'd formed in 2001 for a family's investment interests. Between roughly 2010 and 2020, Lehcim received a series of loans totaling more than $8 million from a related lender, Nightingale Ventures, Ltd. — an entity Neuberger had also served as a director of. Lehcim claimed interest-expense deductions on those loans across a decade of tax returns.
The IRS audited and disagreed. It determined the loans weren't bona fide debt at all, disallowed the interest deductions, and in 2019 issued a Notice of Deficiency for more than $1.4 million in taxes and penalties — a 30-day letter dated March 14, 2019 pegged the proposed deficiency at just under $1.88 million for tax years 2010 through 2015. By November 2020, the IRS had escalated to a Final Notice of Intent to Levy for more than $2 million.
Here's the part that turned a corporate tax dispute into a personal one: Neuberger had known about the IRS's preliminary conclusions since July 2018. Despite that knowledge, he helped orchestrate more than $8.8 million in distributions and transfers between June 2019 and March 2020 — repaying the very Nightingale loans the IRS had flagged as invalid, and leaving Lehcim insolvent with nothing left to pay the government's claim.
The government sued Neuberger personally in 2022. The court found that even though another individual was reportedly the ultimate decision-maker on the repayment plan, Neuberger was "integral to the plan's development and execution" and functioned as Lehcim's representative — which, under the statute at issue, is enough to trigger personal liability. In October 2025 the court ruled Neuberger liable; in January 2026 it entered judgment for $1,880,987.96. Notably, the government had sought more than $3.3 million including post-2019 penalties and interest, but the court capped Neuberger's personal exposure at the claim amount that existed at the time of the disputed payments — a detail worth remembering later in this article.
The law behind it: the Federal Priority Statute
The statute doing the heavy lifting here is 31 U.S.C. § 3713, often called the Federal Priority Statute. It's not part of the bankruptcy code, and that distinction matters enormously — more on that below.
In plain English, § 3713 does two things:
First, it gives the U.S. government's claims priority over other creditors when a debtor is insolvent and transfers its assets, or otherwise winds down, outside of a formal bankruptcy proceeding. Three things have to be true for the government's claim to jump the line: a debt is owed to the United States, the debtor is insolvent, and there's an assignment or transfer of assets for the benefit of other creditors (or some other "act of bankruptcy").
Second — and this is the part that ensnared Neuberger — § 3713(b) creates personal liability for the "representative" of the debtor (an officer, director, fiduciary, or simply whoever controls or executes the payment) who pays other creditors ahead of the government's claim. That liability attaches, up to the amount of the payment made, when three conditions line up:
- The representative paid or distributed the debtor's assets to other creditors before satisfying the government's claim.
- The debtor was insolvent at the time of that payment.
- The representative knew, or had notice, of the government's claim.
Notice that nothing in this list requires the representative to be an owner, to have personally profited, or to have acted in bad faith in some dramatic sense. It requires knowledge of a government claim, insolvency, and a decision to pay someone else first. That's a combination that can show up in a struggling small business far more easily than most owners realize.
Why this isn't the same as bankruptcy — or the payroll tax penalty you may already know about
Two mental models trip people up here, and both are wrong in ways that matter.
"I'm not in bankruptcy, so this doesn't apply to me." Actually, the opposite is closer to true. Section 3713 is specifically built for situations outside formal bankruptcy — informal wind-downs, workouts, insolvent businesses quietly paying down favored creditors before closing shop. If a company files Chapter 7 or Chapter 11, the Bankruptcy Code's own priority scheme takes over and § 3713 generally steps aside. It's the businesses that never file — the ones that just run out of runway and start settling accounts on their own — where this statute does its work.
"This is basically the same as the Trust Fund Recovery Penalty, and I already know about that." Not quite. The Trust Fund Recovery Penalty is narrower and specific: it targets "responsible persons" who fail to remit withheld payroll taxes. The Federal Priority Statute is broader. It can reach any federal claim — income tax, penalties, interest, disallowed deductions like the ones in Neuberger's case — and it can reach anyone functioning as the debtor's representative, not just someone with payroll-tax withholding duties. If you've mentally filed "personal liability for the IRS" under "payroll taxes only," this case is a reminder that the filing cabinet is bigger than that.
Who's actually exposed
It's tempting to read this case and think "that's a $2 million dispute between lawyers and holding companies, not my $400,000 landscaping business." But nothing about the doctrine is limited by company size. The exposure runs to:
- Owner-operators managing a cash crunch. If you're deciding which bills to pay first while your business owes the IRS money you're contesting or can't yet pay, you are the "representative" the statute is talking about.
- Anyone with check-signing or payment authority, even if they don't own equity — a controller, a managing member, an outside CFO, or a family member helping wind down a relative's business.
- Businesses that are informally insolvent but never file for bankruptcy — which describes a lot of small businesses that simply close their doors, sell off assets, pay out what they can to lenders and vendors, and stop operating.
The trigger isn't malice. It's the ordinary, understandable instinct to keep a landlord, a key supplier, or a patient lender whole while a tax dispute drags on — done while insolvent and with notice of the government's claim.
A practical checklist if your business is insolvent or winding down
None of this means you need to panic over routine bill-paying in a healthy business. The exposure is specific: insolvency, notice of a government claim, and a choice to pay someone else first. If your business is in that zone, a few habits meaningfully reduce risk:
- Get a real read on insolvency before making discretionary payments. "Insolvent" here is a balance-sheet and cash-flow question — assets versus liabilities, tested at the time of each transfer — not a formal declaration. If you're not sure where you stand, that uncertainty is itself a signal to slow down.
- Treat any IRS notice as changing your payment priorities immediately. Once you've received a deficiency notice, a 30-day letter, or even informal audit findings suggesting a liability, the safest assumption is that the government's claim now has to be dealt with before you pay down insider loans or other discretionary obligations — even if you're contesting the amount.
- Be especially careful with related-party and insider loans. Repaying a loan from a family member, an affiliated entity, or another insider while an IRS matter is open is exactly the fact pattern that produced personal liability here. Get professional advice before making that call.
- Keep a clean, dated, transaction-level ledger. This is the evidence a court will use to reconstruct who paid whom, when, and what they knew at the time. Good records cut both ways — they can establish liability, but they're equally how an officer demonstrates that a payment was ordinary and necessary (payroll, a properly secured debt) rather than a discretionary payoff to an insider.
- Remember the exposure has a ceiling, not an open tab. The court in this case capped personal liability at the claim's value on the date of the disputed payments, rejecting the government's push to add later-accruing interest and penalties. Acting to resolve a government claim sooner, rather than letting it sit while other creditors get paid, limits your downside rather than compounding it indefinitely.
Keep Your Finances Organized from Day One
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