McClendon v. U.S., (DC TX 1/22/2019) 123 AFTR 2d ¶2019-363
A district court, granting IRS’s motion for summary judgment, has concluded that a chief financial officer (CFO) was liable for the trust fund recovery penalty under Code Sec. 6672. The court determined that he was a responsible person who willfully failed to pay the taxes of the company.
Background. Code Sec. 6672 imposes a responsible person penalty (which is also known as the trust fund recovery penalty or the 100% penalty) on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not collected and paid.
In determining whether an individual is a responsible person, the Fifth Circuit considers various factors, including whether the taxpayer: (1) served as an officer of the corporation-employer or a member of its board of directors; (2) owned a substantial amount of stock in the company; (3) participated in day-to-day management of the company; (4) had the ability to hire and fire employees; (5) determined which creditors to pay and when to pay them; or (6) possessed check writing authority. Not every factor must be present; instead, a court must consider the totality of the circumstances to determine whether the individual in question had the effective power to pay the taxes owed. There can be more than one responsible person in a business. (Barnett, (CA 5 1993) 71 AFTR 2d 93-1614)
In Barnett, the Fifth Circuit concluded that willfulness under Code Sec. 6672 requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent. In that case, the Court ruled that a responsible person acted willfully where he knew of the corporation’s unpaid liabilities and failed to apply certain amounts towards them.
Facts. Dr. Robert L. McClendon founded Family Practice Associates, a professional medical association, in ’79. Richard T. Stephen, Jr., was the chief financial officer of Family Practice from ’95 to 2009. Stephen ran Family Practice’s day-to-day operations, managed Family Practice’s finances, controlled the company’s bank accounts, was responsible for preparing and filing payroll-tax returns, maintained Family Practice’s books and records, paid creditors and determined the order of payment, and was authorized to hire and fire employees.
Family Practice began to accumulate tax debt in 2003. By 2009, Family Practice owed over $11 million in employee payroll taxes. Stephen knew of Family Practice’s failure to file corporate tax returns and to make federal-tax deposits. From 2003 to 2009, Stephen paid Family Practice’s creditors, other than IRS, after learning of the unpaid tax debt.
In 2011, IRS assessed $4,323,344 in trust-fund-recovery penalties against Stephen under Code Sec. 6672, alleging that he was liable for Family Practice’s failure to pay federal payroll taxes from July 2003 to December 2008. IRS also assessed penalties against Dr. McClendon who, after paying a nominal portion of the assessment, sued IRS for a refund of the amount paid and an abatement of the penalties. IRS counterclaimed against Dr. McClendon and Stephen to recover the assessments.
Court’s conclusion. The district court, granting IRS’s motion for summary judgment, found that Richard Stephen was a responsible person who willfully failed to pay Family Practice’s payroll taxes from July 2003 to October 2008. Accordingly, it held that he was indebted to IRS for $4,323,344 as of Aug. 27, 2012, plus prejudgment and post-judgment interest.
Responsible person. The district court found that the evidence confirmed that Stephen met five of the Barnett factors from July 2003 to December 2008, and that he had effective power to pay the tax. In deposition testimony and responses to interrogatories, Stephen conceded that he was Family Practice’s chief financial officer, managed the company’s daily affairs, had the authority to hire and fire employees, paid creditors and determined the order of payment, was an authorized signatory on Family Practice’s accounts, and was responsible for payroll and filing corporate tax returns.
Further, Stephen admitted that he determined Family Practice’s financial policy and knew of the business’s failure to satisfy its tax obligations.
The district court concluded that these undisputed facts showed that, as a matter of law, Stephen was a responsible person during the period at issue.
Willfulness. The district court concluded that because Stephen was aware of the unpaid tax debt, could have paid it, and made payments to creditors other than IRS, there was no genuine factual dispute material to finding that his failure to satisfy the company’s tax obligation from July 2003 to December 2008 was willful.
The district court determined that a review of IRS’s evidence showed that Stephen willfully failed to pay the taxes owed. He admitted that he knew of the duty to pay the payroll taxes and was responsible for Family Practice’s payroll. He also admitted that he paid creditors other than IRS, and the evidence demonstrated that he made these payments during the period at issue.