4. RESPONSIBILITY

§ 5:7 In general

The key to liability under § 6672 is control of finances within the employer corporation: the power to control the decision-making process by which the employer corporation allocates funds to other creditors in preference to its withholding tax obligations.

Liability attaches to those with power and responsibility within the corporate, structure for seeing that the taxes withheld from various sources are remitted to the government. This duty is found generally in high corporate officials charged with general control over corporate business affairs who participate in decisions concerning payment of creditors and disbursal of funds.

§ 5:8 Ultimate Control

The Trust Fund Recovery Penalty should only apply to the person or persons who have ultimate control over the company finances. Who decides which bills get paid by the company? Where a person is not “an officer charged with general control over the corporation’s business affairs who participated in decisions concerning payment of creditors and disbursement of funds,” that person should not be held liable for the penalty. In this vein, a corporate officer who was totally dominated by his father was relieved of liability for the Trust Fund Recovery Penalty in the case of Goodick v. United States.

§ 5:9 Person’s Authority

The court in Monday, held that “[corporate office does not, per se, impose a duty to collect and pay over withheld taxes.” Several factors may indicate that a party is a responsible person, but the key element is whether that person has the statutorily imposed duty to make tax payments. This duty is considered in light of the person’s authority over an enterprise’s finances or general decision making. The substance of the circumstances must be such that the officer exercises and uses his authority over financial affairs or general management or is under a duty to do so, before that officer can be deemed to be a responsible person.

§ 5:10 Responsibility Supposed By Corporate Office

It is seldom that there would be a clear case of ultimate authority. Most companies have more than one person in control, and when there is a business failure, each officer will find it economically to his advantage to point at the others. In order to determine the proper person or persons against whom to assess the penalty, the Internal Revenue Service must review the entire physical operation of the corporation. Unfortunately, the Internal Revenue Service tends to dwell upon such outward signs of responsibility of signing checks and tax returns as opposed to the question of ultimate authority. The; mere fact that someone signs checks or tax returns within the company, does not in fact indicate with certainty that that person should be held liable. The fact that someone has a grandiose corporate title may also not be indicative of her true authority within the company. Many sophisticated individuals who have had prior problems with the internal Revenue Service will grant titles to titular officers and, have them sign appropriate corporate documents. Only with an intense review of all the facts of a company can one reach a determination of who has ultimate authority to pay company obligations.

§ 5:11 Check Signing

A person’s signature on corporate checks is usually the primary indicator used by the Service to determine control over corporate finances. Many times however, the person signing checks lacks decision-making power. Unfortunately, the Service may force that person to file ah appeal to prove his innocence. A mere titular officer of the corporation should not be held liable for trust funds due to be paid. However, that does not mean that the officer will not have the fight of his or her life to avoid a claim by the IRS.

§ 5:12 Multiple Responsible Persons

The fact that others in the corporation may also have been responsible for accounting for and paying over withheld taxes will not relieve a person of responsibility. There may be more than one person liable for the penalty. There can never be a situation where no one is a responsible person. If the government asserts against more than one-person, it may collect from any or all of the responsible persons. The policy of the Service is to collect only the total amount of the tax, but it may at times fail to adequately control collection efforts. In many such cases it may over-collect the tax. Prior to the passage of TBR2 the responsible person could not sue other responsible parties for contribution. The relevant cases conflict on whether there is a state law right of contribution among responsible persons that are required to pay a penalty assessment pursuant to § 6672. Those cases which have found that there is no state law right to contribution under these circumstances reason that Congress neither explicitly nor implicitly created a right to contribution remedy under state law. Those cases which grant a state right of contribution rely on the reasoning that the § 6672 penalty is not meant to punish, but rather to ensure payment of taxes, and therefore the, government has no interest in who is eventually responsible for the money.

§ 5:13 Federal Right Of Contribution

When more than one person is liable for the trust fund penalty, each person who has paid the penalty has the right to (recover from any other persons who are liable for the penalty, an amount equal to the excess amount paid by the respective taxpayer. This suit must be brought as a separate cause of action and may not be brought in conjunction with a collection suit by the United States or a refund suit by one of the responsible persons. [IRC § 6672(d)]

§ 5:14 § Liability Of Accountants And Attorneys

A person does not have to be an employee or officer of the corporation. The term “responsible person” includes any person who is connected or associated with the corporation-employer in such a manner that he or she has the power to see that the taxes are paid or the power to make final decisions concerning the corporation, or determines which creditors are to be paid and when they are to be paid. Under this analysis attorneys, accountants and financial institutions have been held to be responsible persons.

§ 5:15 Corporate Officers Avoiding Liability

A persuasive case to cite on behalf of a taxpayer who is a corporate officer is Lumetta.16 The defendant was a director and officer of the employer corporation during the tax quarters in question but was found not to have had sufficient control of financial decision making to be liable under IRC § 6672. Although the taxpayer in Lumetta was authorized to sign checks of the corporation and was a required cosignor of all checks over $500, the court found that such checks were always presented to him, by others and that he:

made no determination as to which creditors would be paid or as to when the checks would be issued, nor did he possess any legal or actual power to exercise general-policy or fiscal control to the extent he would be, or was, responsible for the corporation’s failure to remit its payroll taxes.

§ 5:16 Corporate Presidents

Several recent cases have relieved corporate presidents of the obligation for the Trust Fund Recovery Penalty. In Alsheskie v. United States, the President and Chairman of the Board of the employer corporation was not a responsible officer for tax withholding because he was employed during the tax year and his authority was limited by the terms of a financing agreement. Under the agreement his employer was obligated: to turn over amounts received from customers to its parent corporation due to an earlier default. He did not have discretionary authority to pay the taxes and he did not have control over which bills would be paid even though he signed payroll checks and checks to creditors. Thus, he was not liable for failure to pay over withholding taxes In Bradshaw v. United States and Rykoff v. United States, corporate presidents were relieved of the responsibility to pay the Trust Fund Recovery Penalty because of actions by the corporate bank. In each case the bank took over control of the business.

§ 5:17 Tougher Test In Some Circuits

The Fifth, Sixth and Eleventh Circuits have adopted a much tougher view of responsibility which makes it easier to impose liability upon subordinates who sign checks. In Howard, the court held an executive vice president (Howard) to be a responsible person even though he had been ordered not to pay withholding taxes by the chief executive officer (Jennings). The court held:

“The fact that Jennings might well have fired Howard had he disobeyed Jennings’ instructions and paid the taxes does not make Howard any less responsible for their payment. Howard had the status, duty and authority to pay the taxes owed, and would only have lost that authority after he had paid them, Authority to pay in this context means effective power to pay. That Howard had this authority is demonstrated by the fact that he did issue small checks without Jennings’ approval on a number of occasions. Had Jennings fired Howard for paying the taxes, Howard would at least have fulfilled his legal obligations. Faced with the possibility of leaving the frying pan with only minor burns, Howard chose instead to stay on in the vain hope of avoiding the fire. While we appreciate the difficulty of his position, we cannot condone his abdication of the responsibility imposed upon him by law.”

§ 5:18 Other Courts

Not all courts have agreed with the findings of Howard. The remaining circuits have yet to adopt this test. The IRS refers to the defense of following orders as the Nuremberg Defense” and has been aggressively seeking adoption of Howard within the remaining circuits. Obviously, those of us who represent taxpayers would prefer that the test remain as propounded in Adams, which held in pertinent part:

The person who is responsible for the payment of corporate taxes within the meaning of § 6672 is that individual who has the final word as to what bills should or should not be paid and when… In this context the word ‘final’ means significant rather than exclusive control over the disbursal of funds.

§ 5:19 Creditors

The courts have determined that third-party creditors can be held liable for the Trust Fund Recovery Penalty when they have assumed and exercised control over the payment of creditors of the debtor corporation. In Walker v. U.S., a representative of a major creditor of the defaulting employer was held liable for the Trust Fund Recovery Penalty. He had assumed the power to determine which creditors would be paid in order to control the operations; of the debtor corporation. The same was true in Pacific National Insurance, where a .surety had assumed control of the disbursement of the debtor corporation’s funds. In a case involving a Ford dealership in foreclosure by Universal C.I.T. Credit Corporation, the court held that the officers were not liable for taxes subsequent to foreclosure where the lender took control of the corporation. Where a bank exerts control over the corporate funds, a responsible officer may still be held liable.

§ 5:20 Voluntary Board Members

TBR2 provides additional protection for voluntary board members of tax exempt organizations from the assertion of penalty. It provides that the IRS shall not assert the penalty if the member:

(1) is serving solely on an honorary capacity;

(2) does not participate in day-to-day or financial operations; and

(3) does not have actual knowledge of the failure to pay such penalty.

This provision does not apply, however, if it would result in ho person being held liable for the penalty. [I.R.C.§ 6672(e)]

§ 5:21 Disclosure Of Collection Efforts

TBR2 requires the IRS to disclose to each person assessed with a trust fund penalty the following information:

(1) name of any other party who has been held liable for the penalty; and

(2) the efforts which the IRS has made in an attempt to collect the taxes including the general nature of collection activity.

[I.R.C. §6103(e)(9)]

This provision was passed to allow persons who have been assessed to determine the full impact of the IRS’ efforts to collect from others. It does not require that the IRS exert any specific efforts for collection against any particular responsible person.