Federal Court Deems Business Owner a Responsible Person in Trust Fund Tax Penalty Case
In Shore v. U.S., a retired man opened a farm equipment business on his property with a managing partner. At the time the business was opened, the man verbally agreed to let the managing partner buy his interest in the business at any point in the future as long as the partner paid the man the $150,000 that he initially invested. The managing partner was tasked with all of the day-to-day business operations, including hiring employees, filing tax returns, and collecting payroll taxes. According to the retired man, he viewed his role as that of an investor. The managing partner and his wife apparently presented themselves to the public as the owners of the company, although the partner never exercised his option to purchase the retired man’s interest in the farm equipment business.
The retired man signed the company’s articles of incorporation, held the title of president, and owned 100 percent of the shares in the corporation. In his capacity as president, the man apparently signed a number of contracts and secured a line of credit on behalf of the business. The retired man reportedly spoke to the managing partner monthly and made quarterly visits to the farm equipment business. He also reviewed balance sheets, annual statements, and payroll tax obligations. Finally, the man had the authority to write checks on the company’s bank account.
In 2005, the business owner directed his managing partner to pay the payroll taxes that were past due before January 2006. In the latter half of 2007, the man received an Internal Revenue Service notice that stated that the farm and equipment business did not remit the payroll taxes that were due in 2006 or for the first half of 2007. Not long after, the retired man allegedly discovered that his managing partner was stealing from the company and took over management of the corporation. Ultimately, the man decided to cease all business operations. Before doing so, however, he paid $120,000 to unsecured creditors instead of remitting the funds to the IRS.
Eventually, the business owner paid the United States government about $101,000 in order to satisfy the farm equipment company’s trust fund recovery penalties. After that, he filed a lawsuit against the nation in Idaho federal court, claiming the money should be refunded to him because he was not a responsible person under the law. In response to the case, the U.S. filed a motion for summary judgment with the court. When a party to a lawsuit files such a motion, the party is asking the court to rule there are no material issues of fact in dispute and to enter judgment in the moving party’s favor.
The Internal Revenue Code requires employers in the United States to withhold certain taxes from each employee’s paycheck. Such taxes are referred to as trust fund taxes because they are held in trust for an employee until the money is submitted to the U.S. Treasury. Under 26 U.S.C. § 6672(a), an employer or other responsible individual who is tasked with collecting or paying trust fund taxes who willfully fails to do so may be held personally liable for the entire unpaid amount. Whether or not someone is deemed to be a responsible person under the law requires a totality of the circumstances test.
First, the District of Idaho examined the facts of the case in order to determine whether the retired man was a responsible person under the law. Although it was clear that the man delegated the day-to-day operations of the business to his partner, the court stated it was legally significant that he still had the authority to determine how the business conducted its financial and other affairs. In addition, factors such as his ownership interest in company shares, title, check writing authority, and ability to determine which creditors should be paid first indicated the man had the authority to remit the unpaid payroll taxes. According to the court, the facts conclusively demonstrated that the business owner was a responsible person under the law even though he delegated the bulk of his authority to his managing partner.
Next, the court examined whether or not the retired man’s conduct was willful. The court said that a responsible person acts willfully if the individual fails to remit payroll taxes that he or she knew were delinquent. Although the man learned the trust fund taxes were not remitted to the Treasury after the fact, the court held he acted willfully because he allowed other creditors to be paid prior to the U.S. after he learned the payroll taxes at issue were unpaid.
A narrow exception to Section 6672 states that new management of a business cannot be held personally liable for any existing trust fund tax delinquencies. Because of this, the man claimed that he became new management when he fired his partner and took over the daily operations of the farm equipment business. According to the Idaho court, the exception was created to encourage investors to attempt to save failing businesses. Since the retired man already invested in the business and had the authority to exercise control over it when the unpaid payroll taxes became due, the federal court ruled that the exception did not apply.
Finally, the United States District Court for the District of Idaho granted the U.S. government’s motion for summary judgment.
If you have questions about your payroll or other U.S. tax obligations, contact certified tax law specialist William Hartsock through his website. Mr. Hartsock has more than three decades of experience representing and advising San Diego clients about payroll, international, and other tax law matters. To speak with a reliable and hardworking tax lawyer today, give Mr. Hartsock a call at (858) 481-4844.
Shore v. U.S., Dist. Court, D. Idaho 2014
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