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United States v. Mitchell

02-3386, 2003 WL 22995207 (U.S. Ct. of App., 3rd Cir. 2003)

TAXATION; RESPONSIBLE PARTIES—It is not a defense to responsible party liability under the Internal Revenue Code that the wage paying entity did not have income with which to remit payroll taxes; liability arises upon the payment of wages that were subject to withholding.

A construction company failed to pay employment taxes. The government sued the company’s president under Section 6672 of the Internal Revenue Code (Code) to collect those taxes from him as a “responsible” person. A “responsible” person is one who willfully fails to pay an entity’s employment taxes and thereby becomes liable to pay an amount equivalent to what is owed by the entity.

At the conclusion of a trial, the lower court found for the government and found the president liable for the unpaid taxes.

On appeal, the president claimed that the construction company had received no payments from its customers during the relevant time period, and therefore the company had no money with which to pay employment taxes. Consequently, it could not have placed funds in trust for the payment of these taxes. Under that theory, the corporation would have had no obligation to pay taxes and, therefore, the president could not be held personally liable. The Code requires employers to deduct and withhold payroll taxes as wages are paid. Thus, the company became liable for payroll taxes the moment that it paid wages to its employees, regardless of whether it received payments from its customers and regardless of whether the withheld funds were placed in a separate account.

The Court also found the president to be a “responsible” person under the Code providing that “any person required to collect, truthfully account for, and pay over any tax . . . who willfully fails to collect such tax, or truthfully account for and pay over such tax . . . shall . . . be liable to a penalty equal to the total amount of the tax.” The relevant Code section defines a “person” as “an officer or an employee . . . who . . . is under a duty to perform the act in respect of which the violation occurs.” Therefore, an individual responsible for the collection and payment of a corporation’s trust fund taxes who willfully fails to do so is personally liable.

Two conditions must be satisfied prior to attaching liability. The individual must be a “responsible” person, and his failure to pay the tax must be “willful.” Responsibility is a matter of status, duty or authority, not knowledge. There are several factors for determining whether an officer is “responsible for collecting and paying a company’s taxes including: the contents of the company’s bylaws; the ability to sign checks on the company account; the signature on the company’s tax returns; the payment of other creditors; the identity of officers, directors, and principal stockholders in the corporation; the identity of those in charge of hiring and discharging employees; and the identity of individuals in charge of the firm’s financial affairs.”

The Court found that the individual in this case was qualified as a “responsible” person because he was the company’s president, served on its Board of Directors, and had signature authority over its bank accounts. Furthermore, his claim that he resigned before the tax payments were due was contradicted by the testimony of the chairman of the company’s Board of Directors. In addition, the president’s own testimony indicated a level of familiarity with the company’s financial affairs after his purported resignation that could only have come from his involvement in the company’s most important decisions. As to a “forgery contention” by the president, the lower court determined that his signature had in fact appeared on company checks during the time in question. As a result, the Court held that the president was a “responsible” person.

To prove that the failure to withhold taxes is willful, it must be shown that a responsible person knew that the taxes were due or acted in a reckless disregard of this fact when he failed to remit to the IRS. The president’s testimony indicated that he was aware of the tax obligation and took no steps to pay it. As a result, the withholding of taxes in this case was considered willful and the lower court did not err in finding that the president was a responsible person and that he willfully failed to cause his company to pay federal employment taxes.


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