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Trust Fund Recovery Penalty Case is Cautionary Tale for Business Owners in California, Nationwide

Trust Fund Recovery Penalty Case is Cautionary Tale for Business Owners in California, Nationwide

In U.S. v. Lambert, a woman’s husband opened a grocery store in the 1970s. He operated the store until the 1990s, when his son took over the business. According to the woman, she contributed some of her personal money to the grocery store and worked at the business part-time without pay. Although her primary duties were in the deli area, the woman stated that she occasionally assisted with office paperwork. She also had the authority to make employment decisions and make bank deposits on behalf of the store. Her official title at the business was reportedly that of Secretary.


After the grocery store ran out of money, the family made the decision to sell the business. The woman stated she did not know the price that her family obtained for the grocery store, but she said the proceeds of the sale were used to pay outstanding business debts. The woman offered testimony that her son was in charge of all of the grocery store’s financial affairs. She claimed that she had no role in collecting payroll taxes or filing business tax returns. The woman also claimed that her son told her he would catch up with the payroll taxes at some point. Unfortunately, the payroll taxes were never paid.


Eventually, the United States filed a lawsuit to collect more than $200,000 in unpaid payroll taxes from the woman. As part of its case, the government also sought to enforce a federal tax lien against several tracts of land the married coupled transferred into trust at around the time the store was sold. According to the U.S., the woman is a responsible person who should be held personally liable for the unpaid trust fund taxes under the U.S. Code.



As part of the court case, the woman failed to respond to certain requests for interrogatories and admissions in a timely manner. Although she eventually responded to the government’s discovery requests and submitted to a deposition, the woman later sought to amend certain responses that were deemed admitted by her according to Federal Rule of Civil Procedure 36(a)(3). Although the government opposed her motion, the Southern District of Ohio granted the woman’s request because “[u]pholding the admissions in this case would practically eliminate any presentation on the merits of the case.”


In addition to the woman’s motion, the government filed a partial motion for summary judgment against her over the unpaid trust fund recovery penalties. By filing a partial motion for summary judgment, the U.S. essentially asked the court to issue a ruling on a particular aspect of the case without proceeding with a formal trial. In order to prevail on a motion for summary judgment, there must be no genuine issue of material fact in dispute, and the evidence offered to the court must entitle a party to judgment as a matter of law. After examining the evidence provided, the federal court held that genuine issues of material fact regarding whether or not the woman is a responsible person under the law exist. Because of this, the court denied the government’s motion for summary judgment.


The Internal Revenue Code requires employers in the U.S. to withhold social security, Medicare, and other taxes from an employee’s paycheck. Those taxes are generally referred to as “trust fund taxes.” Under the Code, anyone who willfully fails to remit an employer’s trust fund taxes to the IRS may be held personally responsible for the entire unpaid amount. Determining whether an individual is a responsible person under the law normally requires a “totality of the circumstances test.”


Since the financial penalties for failing to abide by U.S. tax laws can be significant, you need an experienced tax attorney on your side. If you have questions about your obligation to pay federal payroll or other taxes, you should contact tax lawyer William Hartsock through his website. Mr. Hartsock has decades of experience advising clients across Southern California about international and other tax law matters. To discuss your situation with a dedicated tax advocate, give Mr. Hartsock a call at (858) 481-4844 today.


Additional Resources:

U.S. v. Lambert, Dist. Court, SD Ohio 2014



Photo Credit: DodgertonSkillhause, MorgueFile

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