U.S. v. Commander, (CA 3 5/25/2018) 121 AFTR 2d 2018-1861, cert denied 12/3/2018
The Supreme Court has declined to review a decision of the Third Circuit Court of Appeals upholding IRS’s imposition of the trust fund recovery penalty under Code Sec. 6672 against a 50% owner of a member-managed company who was required to sign off on all significant decisions and actions relating to the company.
Background. Code Sec. 6672 imposes a responsible person penalty (aka trust fund recovery 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, courts consider factors including whether the taxpayer signed the company’s tax returns, served as an officer of the corporation or a member of its board of directors, owned a substantial amount of stock in the company, participated in day-to-day management of the company, determined which creditors to pay and when to pay them, had the ability to hire and fire employees, or possessed check writing authority. (Brounstein v. U.S., (CA 3 1992) 71 AFTR 2d 93-1714) 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.
Willfulness for purposes of Code Sec. 6672 includes a voluntary, conscious and intentional act to prefer other creditors over the U.S. Thus, if a responsible person knows that withholding taxes are delinquent, and uses corporate funds to pay other expenses, such failure to pay withholding taxes is deemed “willful.” (Mazo v. U.S., (CA 5 1979) 43 AFTR 2d 79-853, Thibodeau v. U.S., (CA 11 1987) 60 AFTR 2d 87-5763)
Facts. Darren Commander and Kenneth Skerianz (who passed away during the pendency of the action) formed Darken Architectural Woodwork Installation LLC (Company) in 2003. Commander and Skerianz were each 50% owners of Company, signatories of its Operating Agreement, and the sole officers. Company was member-managed, and all decisions and actions and many significant financial transactions could only be made with both party’s consent.
Skerianz was responsible for hiring field employees, assigning employees to each job, ensuring work was completed in the field, recording hours worked, and distributing employee paychecks. Company failed to pay income and employment taxes for Company employees between 2007 and 2009. Company continued to employ and pay workers through 2009. Trust fund recovery penalties totaling $1.6 million were assessed against Commander in 2010 and thereafter accrued significant interest.
District court decision. The district court, resolving Commander’s and the government’s cross-motions for summary judgment, sided with the government, finding that there were no factual disputes that Commander was a responsible person who acted willfully with respect to Company’s tax payments.
The court noted that responsibility is a matter of “status, duty or authority, not knowledge.” (Quattrone Accountants, Inc. v. IRS, (CA 3 1990) 65 AFTR 2d 90-580) There was no dispute that Commander was a 50% owner and one of two officers of a member-managed company, that his approval was required for all company decisions and actions and many significant financial transactions, and that he also had check-signing authority and power to pay Company’s bills and sign paychecks. While Commander argued that Skerianz was solely responsible for paying the taxes, the court found that whether or not they were Skerianz’s responsibility was irrelevant because Commander was, in fact, a responsible person.
The court also concluded that Commander acted “willfully” within the meaning of Code Sec. 6672. Commander testified that he became aware that the taxes weren’t being paid “somewhere between 2007 and 2009” and that he received regular updates about correspondence with IRS during that time. The court said that it appeared that Commander had actual knowledge that the taxes weren’t being paid—or at a minimum ought to have known—and that he paid employees and other creditors instead of remedying Company’s tax delinquency. Therefore, the court found that he acted willfully (or at least with reckless disregard for whether the taxes had been paid). (For more details on the district court decision, see “50% owner liable for trust fund penalty despite not having primary responsibility over taxes.”)
Commander appealed, arguing that his case raised genuine disputes of material fact as to both his status as a responsible person and whether his failure to pay Company’s tax was willful.
Third Circuit affirmed. The Court of Appeals for the Third Circuit rejected Commander’s arguments and upheld the district court’s grant of summary judgment for the government.
The Third Circuit found that the undisputed evidence showed that Commander was a responsible person. Commander argued on appeal that the tax and payroll responsibilities were entirely Skerianz’s, but the Third Circuit agreed with the district court that “the division of labor between the two partners is irrelevant, because there can be more than one responsible person.”
The Third Circuit also rejected Commander’s claim that he had originally misspoken in saying that he was aware of the tax deficiencies “somewhere between 2007 and 2009” and had intended to say that he “later learned” of the tax deficiencies between those years. The district court had rejected this claim, which Commander had asserted in an affidavit in opposition to summary judgment, as conclusory, self-serving, and generally insufficient to defeat summary judgment. The Third Circuit agreed, noting further that Commander had failed to present any specific facts to contradict his prior testimony. And, the Third Circuit also stated that Commander’s challenges to when he became aware of the tax issues were generally insufficient to disturb the district court’s willfulness finding as “he indisputably was in a position to know there was a tax problem during each quarter at issue.”
Finally, the Third Circuit disagreed with Commander that he was “never given the opportunity to state his own recollection of the facts” and was denied the testimony of witnesses who would have corroborated his claims. Nothing precluded him from presenting his version of events in his own summary judgment motion nor in his opposition to the government’s motion, and he didn’t offer any witness affidavits but instead focused solely on Skerianz’s responsibilities. (For more details on the Third Circuit’s decision, see “CA 3 affirms 50% owner’s liability for trust fund penalty.”)
No further review. On Dec. 3, 2018, the Supreme Court refused to review the Third Circuit’s decision. Accordingly, that decision is now final.
References: For who is a “responsible person,” see FTC 2d/FIN ¶ V-1704; United States Tax Reporter ¶ 66,724.