Author: Phillip Zagotti, JD/CPA

Estate of Rowland and Portability: Higher Stakes for Colorado Surviving Spouses

Billy Rowland’s estate claimed $3,712,562 of exclusion inherited from his late wife, Fay, and lost all of it on summary judgment. In Estate of Rowland v. Commissioner, T.C. Memo. 2025-76 (filed July 15, 2025), Chief Judge Urda held that the Form 706 filed for Fay’s estate never made a valid portability election. The return named her assets. It never said what any of them were worth.

Colorado families have more riding on that lesson. In a separate property state, the first death resets income tax basis only on the decedent’s share of jointly owned property, while a Texas or California survivor often gets a new basis on the whole community asset. That makes the deceased spousal unused exclusion (the DSUE amount) worth more here, because it lets a Colorado survivor hold appreciated assets until her own death without estate tax.

What was actually missing from the Rowland return?

Fay Rowland, of Lorain, Ohio, died April 8, 2016. Her trust made $950,000 of specific gifts, sent 20 percent of the trust estate to a family foundation, sized her husband’s share by reference to one-fourth of her gross estate, and left the residue to trusts for grandchildren. Her executor missed the extended deadline and mailed the Form 706 in late December 2017.

The return claimed DSUE of $3,712,562 from an estimated $3 million gross estate. Its schedules listed real estate, family company shares, a note, and bank accounts with no date-of-death values. The recapitulation showed $0 in every category and put the full $3 million on the line reserved for assets estimated under the special rule.

Why did the Tax Court hold the election invalid?

Under 26 U.S.C. § 2010(c)(5)(A), no election may be made on a late return, so the statute alone defeated Fay’s election. The only rescue was Rev. Proc. 2017-34, which excused lateness for a return that was “complete and properly prepared” under Treas. Reg. § 20.2010-2(a)(7). Fay’s return met the timing test and failed the quality test. Paragraph (a)(7)(i) ties completeness to the Form 706 instructions, which require a value for each asset, and paragraph (a)(7)(ii) excuses values only for marital or charitable deduction property. The return stretched that relief to gifts for friends and grandchildren. Even the spouse’s and foundation’s shares needed values, because their size fixed the grandchildren’s residue, the exception in § 20.2010-2(a)(7)(ii)(A)(1).

The court left open whether substantial compliance can ever save a DSUE election, holding only that this return fell well short, and refused to let audit-stage valuations cure it. The docket (No. 12736-22) shows partial summary judgment entered August 22, 2025, with the remaining issues set for trial in Cincinnati on November 30, 2026.

When can a portability-only return use estimates instead of appraisals?

Only when the gross estate plus adjusted taxable gifts is under the filing threshold in 26 U.S.C. § 6018(a), and only for assets that will go to the spouse or a charity. Those assets are still listed, with a good-faith estimate reported in bands from the Form 706 instructions under penalties of perjury. The relief disappears in four cases, the most common being when that property’s value affects what another beneficiary receives. The others involve special valuation provisions, partly qualifying assets, and partial disclaimers or QTIP elections.

Why does separate property make portability matter more in Colorado?

The One Big Beautiful Bill Act, Pub. L. No. 119-21, set the basic exclusion at $15,000,000 for 2026 deaths, indexed after 2026, and Rev. Proc. 2025-32 confirms the figure. A DSUE amount is fixed at the first death and does not index. Colorado adds no second layer: the Legislative Council Staff explains that the state estate tax effectively ended for deaths after December 31, 2004.

Under 26 U.S.C. § 1014, inherited property takes its date-of-death value as basis, and § 1014(b)(6) also resets the survivor’s half of community property. Colorado is not a community property state. For spouses holding title as joint tenants, 26 U.S.C. § 2040(b) includes half the value in the first estate, and only that half is revalued. A deed creates a joint tenancy only when it says so under C.R.S. § 38-31-101; tenants in common get the same half-and-half result.

Portability makes waiting for the second step-up affordable, and lifetime workarounds are weak: a gift carries over basis under 26 U.S.C. § 1015, and § 1014(e) denies a step-up when appreciated property given to a spouse who dies within one year passes back to the donor.

What does the math look like for a Boulder County family?

Hypothetical. Tom and Ellen Marsh of Louisville own their home as joint tenants; it cost $700,000 in 2003 and is worth $2.4 million. Tom’s revocable trust holds a Berthoud horse property worth $3.1 million. Tom has a $1.9 million IRA, Ellen a $1.2 million 401(k), and they share a $1.4 million brokerage account. Tom dies in February 2026; his trust leaves 10 percent of the trust estate to his daughter from a first marriage and the rest to Ellen.

Tom’s $6.9 million gross estate requires no return. Assuming no lifetime taxable gifts and ignoring expenses, a correct portability-only return shows a $310,000 taxable estate (the daughter’s share) and DSUE of $14,690,000. The house, IRA, and brokerage account can be estimated. The Berthoud property cannot, because a percentage gift and a partial marital interest trigger two exceptions. That is Rowland in Colorado.

Tom’s half of the house steps up to $1.2 million while Ellen’s half stays at $350,000. If she sells for $2.4 million within two years, while unmarried, her $850,000 gain is reduced by the $500,000 exclusion in 26 U.S.C. § 121(b)(4), leaving $350,000 taxable. A community property home would have had no gain, and the IRA gets no step-up under § 1014(c).

If Ellen instead keeps the house and land and dies in 2040 with a $19.5 million estate, and her own exclusion is still $15 million (indexing will raise it by an unknown amount), the tax without DSUE is 40 percent under 26 U.S.C. § 2001(c) on $4.5 million, or $1.8 million. With the DSUE amount the tax is zero, and her heirs still get a new basis in everything outside the retirement accounts.

What if the deadline has passed, and what will the IRS check later?

Rev. Proc. 2022-32 replaced the procedure Fay’s executor used and gives an estate not otherwise required to file until the fifth anniversary of death, with a header statement on the return. The Rowland condition carries over: relief covers only a complete and properly prepared return. After five years, the remaining path is a private letter ruling request under Treas. Reg. § 301.9100-3. For the Marsh estate, the window closes in February 2031.

Section 2010(c)(5)(B) lets the IRS examine the first spouse’s return whenever the DSUE amount is used, even after that return’s limitations period has run, and reduce or eliminate the DSUE amount. In Rowland, the examiner raised the issue more than five years after Fay died. A Colorado survivor should keep the filed return, its appraisals, and proof of mailing with her own estate plan.

Filing path	What the return must show	Marsh DSUE preserved	Main risk
No Form 706	Nothing	$0	$1.8 million of tax in the 2040 scenario
Portability-only, estimates for everything	Assets listed with one estimated total, as in Rowland	$0 if disallowed	Berthoud value sets the daughter’s share, so estimates fail
Portability-only, special rule applied correctly	Appraised Berthoud property; banded estimates for the rest	$14,690,000	Estimates can be revisited when Ellen uses the DSUE
Full return	Date-of-death values on every schedule	$14,690,000	Higher appraisal cost, strongest audit record
Late return under Rev. Proc. 2022-32	Complete return plus header statement	$14,690,000 if filed by February 2031	Void if a return was actually required

Frequently Asked Questions

Does Colorado have an estate tax or an inheritance tax?

No. Colorado’s estate tax was tied to the federal state death tax credit and effectively ended for deaths after December 31, 2004, and the inheritance tax was replaced in 1980. A Colorado estate’s transfer tax exposure is federal only, which makes the portability election more important.

Do we need to file Form 706 if the estate owes no tax?

Not to pay tax, but a return is the only way to elect portability. A surviving spouse can use the unused exclusion only if the executor files a return that computes the DSUE amount. In 2026 that amount can reach $15 million.

Can a portability-only return use estimates for every asset?

Only in simple cases. Estimates are permitted for assets going to the surviving spouse or a charity when the estate is under the filing threshold. Property going to children needs a real value, as does marital property whose value affects another beneficiary’s share.

How long does an executor have to file a late portability return?

Under Rev. Proc. 2022-32, an estate not otherwise required to file can elect portability with a complete and properly prepared Form 706 filed by the fifth anniversary of death. After that, the remaining option is a private letter ruling request under Treasury Regulation section 301.9100-3.

Does remarriage cost a surviving spouse the DSUE amount?

Remarriage alone does not. The DSUE amount comes from the survivor’s last deceased spouse, and remarriage does not change that designation. If the new spouse dies first, though, that spouse becomes the last deceased spouse, and the earlier DSUE amount can no longer be applied.

Does joint tenancy give a full basis step-up in Colorado?

No. When spouses own property as joint tenants with right of survivorship, federal law includes half its value in the first spouse’s estate, and only that half gets a new basis. The survivor’s half keeps its original basis until her own death.

How North Star Law Firm Can Help

North Star Law Firm works with Colorado executors and surviving spouses on the federal side of portability, from complete Form 706 portability returns and late elections to IRS examinations of DSUE claims. Phillip Zagotti, JD/CPA, is an attorney and CPA admitted to practice before the U.S. Tax Court, and co-author with Ashley Burdette of Trusted: The Essential Guide for Trustees. The firm’s trust and estate tax planning, real estate tax strategy, and Tax Court litigation practices cover these issues. Phillip Zagotti is not licensed by the Colorado Supreme Court; for Colorado state-law questions the firm works alongside Colorado-licensed counsel.

If a spouse died in the last five years and no portability return was filed, or the return that was filed looks thin, review it before the window closes. Contact North Star Law Firm to schedule a consultation.

September 23, 2026

Colorado FBAR Deadline October 15, 2026: Three Filers and Their Fixes

The FBAR for calendar year 2025 (FinCEN Form 114, the Report of Foreign Bank and Financial Accounts) is due no later than Thursday, October 15, 2026. It goes to FinCEN, not the IRS, so a Form 1040 does not satisfy it. And this summer the IRS page describing its delinquent FBAR submission procedures, long the safe route for people with fully reported income, disappeared. The agency’s FBAR page now says filing late “is a violation and may subject you to penalties.”

This post follows three Colorado filers whose facts come up often: a Denver software engineer on an H-1B visa, a Greeley petroleum engineer on an overseas rotation, and a Fort Collins retiree with a Canadian RRSP. Each faces a different best move after the deadline.

Why does the regulation still say June 30 when the FBAR deadline is October 15?

The duty to report comes from 31 U.S.C. § 5314 and 31 C.F.R. § 1010.350, and it applies when a United States person, a term that includes resident aliens under 26 U.S.C. § 7701(b), has foreign accounts whose combined maximum values exceed $10,000. The filing rule, 31 C.F.R. § 1010.306(c), still says June 30. Congress overrode it in Pub. L. No. 114-41, § 2006(b)(11), setting an April 15 due date with an extension to October 15, which FinCEN grants automatically. The statute controls.

Does a Denver engineer on an H-1B visa owe an FBAR for her savings back home?

Usually, because the substantial presence test makes her a resident alien. Picture an engineer who moved to the Denver Tech Center in 2021 and kept well over $10,000 in savings and fixed deposits in Pune. Her returns reported Colorado wages but left out the Indian interest, because she assumed the tax withheld in India settled it. The unpaid U.S. tax, not just the missing FBARs, decides which fix she can use.

Her bitcoin on an offshore exchange is a closer call. Under FinCEN Notice 2020-2, an account holding only virtual currency is not reportable yet, but one that also holds a rupee cash balance is.

What changes for a Greeley rotation worker paid into an account overseas?

Consider a U.S. citizen in Greeley who works 28 days on and 28 off at a gas project in Western Australia. The privately held operator pays his field allowance into an Australian account in his name, and he can sign on a local supply account he does not own. Both go on the FBAR, because § 1010.350(f) treats the power to move money by instruction to the bank as enough. Its carve-outs for regulated financial firms and SEC-registered companies do not help him.

The foreign version of the IRS streamlined procedures requires a year with no U.S. abode and 330 full days abroad. Half a year in Greeley fails that test, so he is a domestic filer. If his income was fully reported, his problem is FBAR-only.

Is a Canadian RRSP reportable if the IRS no longer wants Form 8891?

Take a retired teacher from Alberta who became a U.S. citizen and settled in Fort Collins, with an RRSP worth about CAD 310,000 and a chequing account in Lethbridge. Rev. Proc. 2014-55 made the RRSP tax-deferral election automatic and retired Form 8891, but section 5.01 says it does not change “the requirement to file FinCEN Form 114.” An RRSP also falls outside the regulation’s exception for U.S. retirement plans and IRAs. Her income reporting is clean; only the FBARs are missing.

How large is the penalty exposure once October 15 passes?

Under 31 U.S.C. § 5321(a)(5), a non-willful violation carries a $10,000 statutory maximum, waived for reasonable cause if the balance was properly reported. A willful violation can cost the greater of $100,000 or half the account balance. Indexed under 31 C.F.R. § 1010.821, those amounts are now $16,536 and $165,353. OMB Memorandum M-26-11 (Apr. 17, 2026) cancelled the 2026 inflation adjustments, as agency notices such as 91 Fed. Reg. 25936 (May 12, 2026) recite.

In Bittner v. United States, 598 U.S. 85 (2023), the government sought $2.72 million for 272 unreported accounts over five years. The Court held the non-willful penalty accrues per report, not per account, capping exposure at $50,000. With a six-year assessment period under § 5321(b)(1), each late year can add up to $16,536.

This review found no Tenth Circuit opinion on FBAR willfulness. In United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. 2018), Chief Judge Marcia Krieger held the IRS could not exceed the $100,000 cap then in 31 C.F.R. § 1010.820(g). The Fourth Circuit disagreed in United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020), and FinCEN deleted paragraph (g) as obsolete in 86 Fed. Reg. 72844 (Dec. 23, 2021). Planning around Wahdan today would be a mistake.

Missed a Colorado FBAR? Contact Us Now

Which fix fits each profile now that the delinquent FBAR procedures are gone?

All three should still file the 2025 FBAR on time; the earlier years are the problem.

The Denver engineer fits the Streamlined Domestic Offshore Procedures. She amends three years of returns, files six years of FBARs, certifies on Form 14654 that her conduct was non-willful, and pays 5 percent of the highest year-end aggregate balance. The IRS then will not assert FBAR or accuracy-related penalties absent later findings of fraud or willfulness.

The retiree cannot use that program, which requires unreported income. She files the late FBARs with a written explanation and leans on IRM 4.26.16.3.11, which says a penalty “will not be asserted” when the failure was non-willful, had reasonable cause, and the late report is accurate. IRM 4.26.16.5.2.1 lets an examiner send a Letter 3800 warning instead. Neither is a guarantee.

The Greeley engineer takes whichever lane matches his income reporting, unless there is any sign someone knew of the FBAR and chose not to file. That calls for counsel first.

What would the streamlined route cost the Denver engineer?

Hypothetical: her Pune accounts held year-end balances of $61,000 (2023), $74,000 (2024), and $83,000 (2025), less in earlier years. Unreported interest totaled $15,800 across 2023 through 2025. At a 24 percent bracket, added federal tax is about $3,790 before foreign tax credits, plus interest. The offshore penalty is 5 percent of $83,000, or $4,150. Colorado tax on the added income is no more than about $700. The total is near $8,640 plus interest and fees.

Outside the program, her four late FBARs (2021 to 2024) carry a non-willful ceiling of $66,144 before any tax deficiency.

Does fixing the federal side start a Colorado clock?

Yes, when federal taxable income changes. C.R.S. § 39-22-104 taxes “federal taxable income,” with state modifications. Under C.R.S. § 39-22-601.5(2)(a), amended federal returns trigger a federal adjustments report and payment within 180 days after the “final determination date,” which for an amended return is its filing date. The firm’s overview of Colorado state tax and DOR matters covers the state side.

Factor	Denver H-1B engineer	Greeley rotation worker	Fort Collins retiree
Why a U.S. person	Resident alien under 26 U.S.C. § 7701(b)	U.S. citizen in Colorado	Naturalized U.S. citizen
What was missed	FBARs and Indian interest income	FBARs, including a signature-authority account	FBARs only
Non-willful ceiling	$66,144 for 2021 to 2024	$16,536 per late year	$16,536 per late year
Best path after October 15	Streamlined domestic procedures	Streamlined if income was missed; otherwise late FBARs	Late FBARs with a reasonable-cause explanation
Likely cost	About $8,640 plus interest	5 percent of highest balance, or possibly nothing	Nothing if reasonable cause is accepted
Colorado follow-up	Federal adjustments report within 180 days	Only if federal returns are amended	None

Frequently Asked Questions

Is the October 15 FBAR deadline automatic, or must I ask for it?

It is automatic. Federal law sets an April 15 due date with an extension to October 15 that FinCEN applies to everyone, with no form needed. For 2025 accounts, a report filed through the BSA E-Filing System by October 15, 2026 is on time, even though the Treasury regulation still mentions June 30.

Do I need an FBAR if each of my foreign accounts is under $10,000?

Possibly. The threshold adds together the highest values of all your foreign financial accounts during the year. Three accounts that each peaked at $4,000 total $12,000, which triggers the requirement, and every account must then be listed. Whether the accounts earned taxable income makes no difference.

Does an H-1B visa holder living in Colorado have to file an FBAR?

Usually. The FBAR rules treat resident aliens as United States persons, and most H-1B workers meet the substantial presence test. Once resident, they report home-country bank, deposit, and brokerage accounts whenever the combined maximum value tops $10,000 during the year.

Is a Canadian RRSP or RRIF exempt from FBAR reporting?

No. Rev. Proc. 2014-55 made the tax-deferral election automatic and retired Form 8891, but it expressly leaves the FinCEN Form 114 requirement in place. The FBAR retirement exception covers U.S. plans such as 401(k)s and IRAs, not Canadian ones, so an RRSP or RRIF belongs on the report.

Can I still file late FBARs without a penalty now that the delinquent FBAR procedures are gone?

Sometimes. The IRS took down those procedures in 2026 and now warns that late filing may bring penalties. The Internal Revenue Manual still says no penalty will be asserted when the failure was non-willful, had reasonable cause, and the late report is accurate, so a careful written explanation matters.

Will fixing my FBARs require an amended Colorado return?

Only if the fix changes federal taxable income. Late FBARs alone create no Colorado filing. Amended federal returns reporting foreign interest, as the streamlined procedures require, generally call for a Colorado federal adjustments report and payment within 180 days after the federal amendment is filed.

How North Star Law Firm Can Help

North Star Law Firm helps Colorado individuals and families resolve missed FBARs and the income tax problems that travel with them, from streamlined submissions and reasonable-cause statements to FBAR penalty examinations. Phillip Zagotti, JD/CPA, is an attorney and CPA admitted to practice before the U.S. Tax Court, and he represents clients before the IRS on penalty abatement, unfiled and amended returns, and cross-border questions including expatriation and international tax. Phillip Zagotti is not licensed by the Colorado Supreme Court; for Colorado state-law questions the firm works alongside Colorado-licensed counsel.

If October 15 is close, or already behind you, and it is unclear which of these profiles fits, sort that out before anything goes to FinCEN or the IRS. Contact North Star Law Firm to schedule a confidential review.

September 22, 2026

Colorado Contractors Short on Cash: Trust Fund Debts and Bankruptcy Choices

Builder insolvencies in Australia have roughly tripled in a few years, and commentary there focuses on insolvent trading rules that make directors pay personally. American law has no general counterpart. In Colorado, an owner’s personal risk arrives through a narrower door: progress draws owed to subs and suppliers, and payroll withholding owed to the IRS.

A diverted draw can be nondischargeable, and withheld payroll tax, once converted into a penalty against a responsible person, is a priority tax no individual discharge reaches. Knowing how those debts behave lets an owner pick a path before a supplier’s lawsuit or a revenue officer sets the timing.

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North Star Tax and Legal Briefing: Colorado Contractors Short on Cash

A five-minute audio version of this article. Trust fund draws, the Bullock intent standard, the payroll tax penalty that survives without it, and how a workout, Chapter 7, and Subchapter V compare.

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Builder failures in Australia have roughly tripled in a few years, and the commentary there is all about directors paying personally for trading while insolvent. American law has no rule like that. But if you run a construction company in Colorado and cash is getting tight, do not relax. Your personal risk arrives through two narrower doors. The first is the progress draw you spent on the wrong job. The second is the payroll tax you withheld from your crew and never sent to the I R S. One of those debts follows you out of bankruptcy only if a supplier can prove what you knew. The other follows you without anyone proving bad intent at all.

Colorado has a trust fund statute for construction money. When an owner or general contractor pays a draw to a contractor or subcontractor, that money is held in trust for the subs, laborers, and suppliers who did the work that draw paid for. A draw on a Pueblo school remodel belongs to that remodel’s suppliers. The statute does not require a separate bank account for every job. It does require separate records of account for each project. Using a Loveland draw to pay Greeley invoices is the violation. And a violation is theft under Colorado law, which opens the civil theft remedy: three times actual damages, plus attorney fees. Here is the distinction to hold onto. The supplier’s claim is a state law trust claim. The I R S claim on withheld payroll tax is a federal priority tax. They behave very differently once you file.

Start with the supplier. In a two thousand seven decision, the Colorado Supreme Court held that a trust fund claimant does not need a perfected mechanic’s lien, or even time left to file one. A supplier that let the lien deadline pass can still argue your draws were held in trust for it. The Tenth Circuit treats that statute as creating the kind of trust that lets the debt survive an individual’s discharge. The company form does not protect you either. Colorado courts hold anyone in complete control of the money personally liable.

Now the point that cuts the other way. Since the Supreme Court’s Bullock decision in two thousand thirteen, the supplier has to prove you knew the money was trust money, or were grossly reckless about it. In the Cupit case, a roofing company owner who simply paid the oldest bills first did not have that mental state, until the day another supplier served him with a trust fund complaint. Everything diverted after that date was excepted from discharge and trebled as theft. In a second Colorado case the builder won outright: every vendor was paid, the records were adequate, and no culpable state of mind was proved. Records and notice decide these cases.

Payroll tax works differently, and this is where owners get hurt. When you withhold income tax and the employee share of Social Security and Medicare, then use it to pay someone else, the I R S can assess a penalty equal to that withheld amount against every responsible person who willfully failed to pay it over. Willful does not mean evil. Paying other creditors instead is the evidence. And unlike the supplier, the I R S does not have to prove knowledge or recklessness at the discharge stage. That penalty is a priority tax that no individual discharge reaches, in Chapter seven, eleven, or thirteen. Owners pay suppliers first because the supplier is the one calling. The tax is the debt that survives anyway. The front end fix is boring: separate records for every job, and payroll deposits made before anyone else gets a check.

So what does the company do? A workout has no automatic stay, so one civil theft lawsuit can unravel it. Chapter seven gives an L L C no discharge, and the company’s case does nothing for the owner personally. Subchapter Vee, for companies under the current cap of three million four hundred twenty-four thousand dollars, lets the company pay priority taxes over up to five years, and when the plan requires it, the court can send those payments to the trust fund taxes first, which shrinks the owner’s own penalty exposure. This week, pull the draw history and vendor payments for every open job and check that the money stayed with the project. Confirm your last two quarters of payroll deposits actually went in. If either number is off, get it reviewed before a demand letter or a revenue officer sets the schedule. That’s what we do at North Star Law Firm. The initial consultation is free, and the full written analysis with citations is at c o dash legal dot net.

What does Colorado’s trust fund statute require when a contractor gets paid?

Under C.R.S. § 38-22-127(1), funds disbursed to a contractor or subcontractor on a construction project “shall be held in trust” for the subs, laborers, and suppliers with lien or bond rights for the work that draw paid for. A draw on a Pueblo school remodel belongs to that remodel’s suppliers.

Subsection (2) excuses a good faith dispute or setoff, and subsection (3) switches the statute off where the contractor posted a bond or the owner signed a written release. Subsection (4) requires “separate records of account for each project,” though not separate bank accounts. Using a Loveland draw to pay Greeley invoices is the problem. Subsection (5) makes a violation theft, which opens the civil theft remedy in C.R.S. § 18-4-405: three times actual damages plus attorney fees.

A missed lien deadline does not end the exposure. On certification from the Tenth Circuit, the Colorado Supreme Court held that a trust fund claimant need not have a perfected lien or still be able to perfect one. Fowler & Peth, Inc. v. Regan, 151 P.3d 1281 (Colo. 2007). In the follow-on opinion, Fowler & Peth, Inc. v. Regan (In re Regan), 477 F.3d 1209, 1211 n.1 (10th Cir. 2007), the panel adopted the view that the statute “creates such a trust,” meaning the express or technical trust 11 U.S.C. § 523(a)(4) requires. Colorado bankruptcy judges rely on that footnote.

Can the owner of a Colorado LLC or corporation be personally liable?

Yes, if the owner controlled the money. In Flooring Design Associates, Inc. v. Novick, 923 P.2d 216 (Colo. App. 1995), a vice-president who diverted trust funds to other corporate bills was held personally liable. Colorado bankruptcy courts apply the same rule to anyone in complete control of an entity’s finances. An LLC does not shield a member’s own handling of trust money.

One boundary helps owners. In Yale v. AC Excavating, Inc., 2013 CO 9, an LLC manager’s own “survival loan” to his company was not trust money. Draws from an owner or general contractor remain trust funds, measured job by job, and a civil theft finding can triple the exposure.

Colorado Contractor Behind on Suppliers or Payroll Tax? Contact Us Now

How did Bullock change the discharge fight in Colorado?

Before 2013, the Tenth Circuit BAP counted even a negligent failure to account as defalcation. In re Storie, 216 B.R. 283 (B.A.P. 10th Cir. 1997). Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013), now requires “knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.”

In In re Cupit, 514 B.R. 42 (Bankr. D. Colo. 2014), aff’d, 541 B.R. 739 (D. Colo. 2015), a roofing company owner who paid the oldest bills first lacked that mental state until August 5, 2011, when another supplier served him with a trust fund complaint. Later diversions met Bullock: $47,775.56 was excepted from discharge and trebled to $143,326.68 as theft. In Fuller v. Clasby, Adv. No. 23-01212 (Bankr. D. Colo. Nov. 26, 2024), the defense won: the builder had paid every vendor, its cost breakdown satisfied subsection (4), and no culpable state of mind was proved. Records and notice decide these cases.

Where do unpaid payroll taxes fit?

Under 26 U.S.C. § 6672, the IRS can assess a penalty equal to unpaid withheld income tax and employee FICA against any responsible person who willfully failed to pay it over. IRS guidance says “no evil intent or bad motive is required,” and paying other creditors instead is evidence of willfulness.

Unlike a supplier, the IRS need not prove knowledge or gross recklessness at the discharge stage. The penalty is a tax “required to be collected or withheld” under 11 U.S.C. § 507(a)(8)(C), and § 523(a)(1)(A) excepts it from an individual’s discharge. Owners often pay suppliers first, yet the tax is the debt that survives without proof of bad intent.

How do a workout, Chapter 7, and Subchapter V compare?

A workout has no automatic stay, so one civil theft lawsuit can unravel it. Chapter 7 gives a corporation or LLC no discharge under 11 U.S.C. § 727(a)(1); a trustee collects receivables and retainage and closes the company. Under § 524(e), the company’s case does nothing for the owner.

Subchapter V eligibility runs through the small business debtor definition in 11 U.S.C. § 101(51D), which § 1182(1) adopts. Since the April 1, 2025 adjustment (90 Fed. Reg. 8941), the cap is $3,424,000; the temporary $7,500,000 limit sunset June 21, 2024. The Senate and House each passed bills in 2026 (S. 3977 and H.R. 7730) to restore $7.5 million, but neither is law at this writing.

The plan is due within 90 days under § 1189(b) and can be confirmed without a creditor vote if it commits three to five years of disposable income under § 1191(c). Priority taxes must be paid within five years of the petition under § 1129(a)(9)(C), and United States v. Energy Resources Co., 495 U.S. 545 (1990), lets the court direct those payments to trust fund taxes first when the plan requires it, shrinking the owner’s penalty exposure.

For a plan confirmed over objection, § 1192(2) withholds discharge of debts “of the kind specified in section 523(a).” The Fourth Circuit applied that to an LLC in Cantwell-Cleary Co. v. Cleary Packaging, LLC, 36 F.4th 509 (4th Cir. 2022), and the Fifth and Eleventh Circuits agree. The Tenth Circuit has not ruled.

What might this look like for a Colorado Springs drywall subcontractor?

Hypothetically, Quartzcrest Wallboard LLC (fictional) in Colorado Springs has one member, Dana. It received $640,000 in draws on three jobs near Briargate but owes its board and stud supplier $162,000 on them after Dana moved $118,000 to payroll and truck notes on a losing fourth job. It missed two quarters of Form 941 deposits totaling $84,000, of which $62,000 is trust fund tax. General contractors hold $71,000 in retainage, and the bank line is $260,000 with Dana’s guarantee.

In Chapter 7, the LLC dissolves and Dana still faces $118,000 of trust fund exposure (up to $354,000 if theft is proved) and a $62,000 penalty that a personal Chapter 7 would not clear. In Subchapter V, the $84,000 runs about $1,400 a month over 60 months before interest, applied first to the $62,000 trust portion, while retainage and roughly $3,300 a month over three years retire the supplier’s $118,000.

Debt	Company in Chapter 7	Company in Subchapter V	Owner’s personal exposure
Diverted draws owed to supplier	No entity discharge	Paid through plan; § 1192(2) argument in a cramdown	Liable if in control; nondischargeable only with Bullock intent
Civil theft treble damages	No entity discharge	Plan treatment or settlement	Nondischargeable with the base debt (Cupit)
Withheld income tax and employee FICA	Priority claim	Paid within five years; can go to trust portion first	§ 6672 penalty; nondischargeable
Employer share of FICA	Priority claim	Paid within five years	Not part of the § 6672 penalty
Bank line with guarantee	Collateral liquidated	Secured claim under the plan	Guarantee generally dischargeable personally
Retainage owed to company	Collected by trustee	Collected to fund the plan	Held in trust for that job’s suppliers once received

Frequently Asked Questions

Does a Colorado supplier need a recorded mechanic’s lien to bring a trust fund claim?

No. The Colorado Supreme Court held in 2007 that a claimant under C.R.S. § 38-22-127 needs neither a perfected lien nor time remaining to file one. A supplier that let the lien deadline pass can still claim that project draws were held in trust for it.

Is putting all project money in one bank account a trust fund violation?

Not by itself. The statute does not require a separate bank account for each project, so long as trust funds are not misspent. It does require separate records of account for each project, and without them a contractor struggles to prove where the money went.

Can a trust fund claim be discharged in the owner’s personal Chapter 7?

Sometimes. After Bullock v. BankChampaign, the supplier must prove knowledge or gross recklessness. Colorado bankruptcy courts have found that standard met after an owner was put on notice of trust fund duties, and not met where the owner lacked awareness or kept adequate records.

Is the trust fund recovery penalty ever dischargeable?

Not for an individual in Chapter 7, 11, or 13. It is treated as a priority tax the debtor had to collect or withhold. An owner can still dispute responsible-person status or willfulness, and a company plan can pay down the underlying taxes.

Can an LLC in Subchapter V discharge a supplier’s trust fund claim?

With a consensual plan, ordinary Chapter 11 discharge rules apply. For a plan confirmed over objection, three federal circuits hold that section 523(a) debts survive even for an LLC; the Tenth Circuit has not decided. The LLC’s discharge never releases the owner’s own liability.

What is the Subchapter V debt limit right now?

Since April 1, 2025, it has been $3,424,000 in noncontingent, liquidated debts, at least half from business activity. Bills to restore the lapsed $7,500,000 limit passed each chamber in 2026, so a contractor near the line should confirm the figure on the filing date.

How North Star Law Firm Can Help

North Star Law Firm represents Colorado contractors and business owners in Chapter 7 and Subchapter V cases in the U.S. Bankruptcy Court for the District of Colorado. Phillip Zagotti, JD/CPA, is admitted to that court and to the U.S. Tax Court, so the firm can address the plan and the trust fund recovery penalty together. See the firm’s pages on Subchapter V reorganization, Chapter 7 bankruptcy, and discharging tax debt. Phillip Zagotti is not licensed by the Colorado Supreme Court; for Colorado state-law questions the firm works alongside Colorado-licensed counsel.

The order in which draws, suppliers, and payroll deposits are addressed affects what survives a bankruptcy. To review the numbers before a demand letter or a revenue officer sets the schedule, contact North Star Law Firm.

September 21, 2026

Colorado’s Permanent QBI Addback and Vendor Fee Repeal: What Owners Owe in 2026

When Congress enacted the One Big Beautiful Bill Act in July 2025, Colorado’s revenue took an automatic hit, because Colorado’s income tax starts from federal taxable income. The General Assembly answered in an August 2025 special session, and on August 28 Governor Polis signed five revenue bills whose main provisions first apply to 2026 returns.

This post is for S corporation shareholders, partners in operating LLCs, sole proprietors, and Colorado retailers. It prices the now-permanent QBI addback for a hypothetical Grand Junction owner, then turns to the corporate provisions, one of which a June 2026 statute has already rewritten.

Why does a federal deduction change what you owe Colorado?

Under C.R.S. § 39-22-104, Colorado taxes federal taxable income, adjusted by state additions and subtractions, at 4.40 percent. A temporary TABOR rate cut under C.R.S. § 39-22-627 needs a surplus, and Legislative Council Staff’s September 2026 revenue forecast reports that FY 2025-26 revenue fell $175.9 million short of the TABOR cap, so 4.40 percent applies to 2025 and 2026 income.

Section 70105 of Pub. L. No. 119-21 removed the sunset on the 26 U.S.C. § 199A deduction, which on its own would have cut Colorado revenue. Colorado’s response was HB 25B-1001. Its legislative declaration calls the addback “a continuation of existing tax policy,” the General Assembly’s basis for skipping a TABOR vote; for other bills it relied on the de minimis rule of TABOR Found. v. Reg’l Transp. Dist., 2018 CO 29.

Who has to add back the QBI deduction on a Colorado return?

The addback sits in C.R.S. § 39-22-104(3)(o). It began with 2021 under HB 20-1420; HB 25B-1001 deleted its 2025 end date and left the thresholds alone. A single filer adds back the entire federal 199A deduction when adjusted gross income is greater than $500,000, and a joint filer when it is greater than $1,000,000. The Department of Revenue’s 2025 filing guide agrees. One exception matters in Weld County and on the Western Slope: taxpayers required to file Schedule F are excluded.

Under Rev. Proc. 2025-32, the 2026 joint-filer phase-in for the 199A wage and property limits ends at $553,500. A couple with AGI above $1 million is nearly always past it, so owners of specified service businesses like medical practices and law firms get no 199A deduction and have nothing to add back. The addback falls on non-service businesses that pay real W-2 wages or hold depreciable property: contractors, manufacturers, distributors, restaurant groups. The final fiscal note puts the revenue at $95.5 million for FY 2026-27.

What does the addback cost a Grand Junction S corporation owner?

Hypothetical: a married couple in Grand Junction owns a commercial HVAC contractor organized as an S corporation. For 2026 the company pays one spouse a $220,000 salary, pays $1.1 million of total W-2 wages, and reports $900,000 of ordinary income on the K-1. The couple also earns $40,000 of interest, so AGI is $1,160,000. Assume $60,000 of itemized deductions and no other Colorado modifications.

Federally, 20 percent of $900,000 is $180,000. Neither the wage limit nor the taxable income cap binds, so federal taxable income is $920,000. At a 37 percent marginal rate, which begins at $768,700 for joint filers in 2026, the deduction saves $66,600 of federal tax. Colorado then adds the $180,000 back. Colorado taxable income becomes $1,100,000 and the tax is $48,400, compared with $40,480 if Colorado followed the federal figure. The addback costs this family $7,920 a year.

Why does the $1 million line matter so much?

Section 39-22-104(3)(o) has no phase-in. At $1,000,000 of joint AGI the addback is zero; one dollar more and the whole deduction comes back. Suppose the same S corporation earns $760,000. AGI is $1,020,000, the 199A deduction is $152,000, and Colorado tax is $42,240. Had the company made an extra $20,000 employer contribution to the owners’ retirement plan, AGI would be exactly $1,000,000, not “greater than” the threshold, and the Colorado bill would fall to $34,848. That is $7,392 of state tax saved on a $20,000 contribution.

A gain on a Montrose rental can push a family over the line just as easily. Itemized deductions do not help, because they come after AGI. Retirement contributions do, and so can the SALT Parity Act election under C.R.S. § 39-22-343: under IRS Notice 2020-75, the electing entity deducts the Colorado tax it pays, which lowers the owners’ AGI.

Should the permanent addback change entity choice or owner salary?

Above the threshold, the addback costs 4.40 percent of the 199A deduction, or 0.88 percent of QBI. That rarely justifies converting a profitable S corporation into a C corporation, where Colorado’s 4.40 percent corporate tax is followed by a second layer on dividends. The salary question does change. Under 26 U.S.C. § 199A(c)(4), reasonable compensation is not QBI, but above the Colorado line salary and K-1 income produce identical Colorado taxable income. The owner’s pay becomes a purely federal calculation, and a low salary chosen to enlarge QBI earns nothing from Colorado while the IRS still tests S corporation compensation for reasonableness. Below the line, Colorado follows the federal deduction and adds 4.40 percent to the savings.

What does a Colorado retailer lose now that the vendor fee is gone?

Under C.R.S. § 39-26-105(1)(d), a timely filer kept 4 percent of the state tax it reported, capped at $1,000 per filing period, and since 2022 retailers with over $1 million of taxable sales in a period got nothing. HB 25B-1005 ends all retention of state tax beginning January 1, 2026.

With the state rate at 2.9 percent under C.R.S. § 39-26-106, a hypothetical Pueblo hardware store with $150,000 of monthly taxable sales used to keep $174 a month, or $2,088 a year. The largest loss, $1,000 a month, falls on monthly filers with taxable sales between roughly $862,000 and $1 million. The Department of Revenue’s sales and use tax page says local service fees may still be retained where they apply.

What changed for C corporations with foreign income or affiliates?

OBBBA section 70321 set the deduction under 26 U.S.C. § 250 at 33.34 percent of foreign-derived deduction eligible income. HB 25B-1002 added C.R.S. § 39-22-304(2)(l), which adds that deduction back before apportionment. It also presumed, for 2026, that a group member incorporated in Hong Kong, Ireland, Liechtenstein, the Netherlands, or Singapore exists for tax avoidance and belongs in the combined report, absent economic substance. HB 26-1289, signed June 3, 2026, drops Liechtenstein for 2027 and creates a ten-year water’s-edge election. HB 25B-1004 sold tax credits to C corporations and insurers only, at no less than 80 percent of face.

What should owners and retailers do before the 2026 filing season?

Most of these steps carry a year-end deadline, because AGI is largely fixed once December 31 passes.

Your situation	What changed for 2026	Step to consider before filing	Authority
Pass-through owner well above $500,000 AGI (single) or $1,000,000 (joint)	QBI addback is now permanent	Budget 4.40 percent of the 199A deduction in Colorado estimates	C.R.S. § 39-22-104(3)(o); HB 25B-1001
Owner projected within about $50,000 of the threshold	All-or-nothing cliff at the AGI line	Model retirement contributions, gain timing, and the SALT Parity Act election before December 31	C.R.S. §§ 39-22-104(3)(o), 39-22-343
Farm or ranch owner filing Schedule F	Exception carried forward unchanged	Confirm Schedule F is required for the year the 199A deduction is claimed	C.R.S. § 39-22-104(3)(o)
Retailer filing Colorado sales tax	State vendor fee ended January 1, 2026	Review 2026 returns for improper state retention and keep local service fees where allowed	C.R.S. § 39-26-105(1)(d)(V); HB 25B-1005
C corporation exporter or group with foreign affiliates	FDDEI addback; five jurisdictions added; Liechtenstein removed for 2027	Recompute the combined group and document economic substance for listed-country members	C.R.S. §§ 39-22-303, 39-22-304(2)(l); HB 26-1289

Frequently Asked Questions

Does Colorado’s QBI addback apply to every business owner?

No. It applies only when adjusted gross income exceeds $500,000 on a single return or $1,000,000 on a joint return, and never to a taxpayer required to file Schedule F for the year. Owners below those lines keep the federal section 199A deduction on their Colorado returns.

Is the Colorado addback phased in as income rises?

No. It is a cliff. A joint filer with AGI of exactly $1,000,000 adds back nothing, while one with $1,000,001 adds back the entire 199A deduction. Itemized deductions do not lower AGI, so owners near the line look at retirement contributions and entity-level tax elections.

What Colorado income tax rate applies to 2026 income?

The statutory rate is 4.40 percent. A temporary TABOR rate reduction requires a surplus, and Legislative Council Staff reported in September 2026 that none was collected in FY 2025-26. Under current law, individuals should plan on 4.40 percent of 2026 Colorado taxable income.

Can a Colorado retailer still keep part of the sales tax it collects?

Not for state sales tax on sales made on or after January 1, 2026. HB 25B-1005 ended the 4 percent state vendor fee, which had been capped at $1,000 per filing period. The Department of Revenue says retailers may still keep local service fees where they apply.

Could an S corporation or LLC buy the tax credits Colorado sold?

No. HB 25B-1004 limited corporate credit buyers to C corporations authorized to do business in Colorado, with a parallel program for insurers. The credits sold for at least 80 percent of face, are not refundable, and cannot be carried to a tax year beginning after December 31, 2033.

Is Liechtenstein still on Colorado’s tax haven list?

For 2026 tax years, yes. HB 25B-1002 added Hong Kong, Ireland, Liechtenstein, the Netherlands, and Singapore beginning with 2026. HB 26-1289 removes Liechtenstein for tax years beginning on or after January 1, 2027, and requires a periodic outside review of every listed jurisdiction.

How North Star Law Firm Can Help

North Star Law Firm advises Colorado pass-through owners on the federal side of these decisions, including section 199A planning, S corporation compensation, retirement plan design, and entity selection, and coordinates that work with the Colorado state tax and DOR consequences described above. When the IRS questions an owner’s salary or deduction, the firm handles IRS audit defense. Phillip Zagotti, JD/CPA, is an attorney and CPA admitted to practice before the U.S. Tax Court. Phillip Zagotti is not licensed by the Colorado Supreme Court; for Colorado state-law questions the firm works alongside Colorado-licensed counsel.

If your 2026 income is close to the Colorado addback threshold, or you are rethinking your structure before year end, contact North Star Law Firm to talk through the numbers.

September 20, 2026