Tax Court Rules Check Signer Responsible for Employer Taxes

In the case of Romano-Murphy, TC Memo 2012-330, Thompson/Reuters reports:

The Tax Court has ruled that a corporate officer should be held liable for the trust fund recovery penalty. It didn't buy her contention that she had made a reasonable effort to pay the delinquent employment taxes.
Background on trust fund recovery penalty.Code Sec. 6672 imposes the 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. The penalty is imposed on a “responsible person,” i.e., anyone in a business entity who has the duty to collect, account for, or pay over the tax. In determining whether there is “willfulness,” the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.
Facts. Linda Romano-Murphy was the chief operating officer and secretary of Nurses PRN, LLC (NPRN) from July 2002 through June 30, 2005. Her job was to manage all of the branches of NPRN and its payroll, accounting, and accounts receivable departments. Romano-Murphy controlled NPRN's finances, wrote and signed checks to creditors, and signed all federal income and employment tax returns. From its inception, NPRN suffered losses. By December 2004, the IRS was investigating the company for unpaid employment taxes in both 2003 and 2004.
IRS assessed the trust fund recovery penalty against Romano-Murphy based on its belief that she qualified as a responsible person under (1) and (2) above, because she knew that NPRN was using the taxes withheld from its employees' wages for corporate purposes instead of reserving them for payment of its trust fund (employment) taxes.
Tax Court. The Tax Court agreed with IRS that Romano-Murphy was a responsible person for purposes of Code Sec. 6672. Romano-Murphy claimed that she did not control NPRN's finances and was therefore not a responsible person because she owned only a 25% interest in NPRN, but the Court said that her ownership percentage was not dispositive.
Romano-Murphy also argued that she was not a “responsible person” because most checks were signed with a facsimile of her signature by lower-level managers. The court refuted this argument by noting that some of the checks were signed by Romano-Murphy personally.
Under the “reasonable cause” defense, reasonable efforts to pay trust fund taxes may absolve the responsible officer of liability. Romano-Murphy contended that many of her actions constituted reasonable efforts to pay the trust fund taxes within the context of the reasonable cause defense. For example, she pointed to her support of two proposed mergers in 2004 and argued that if either merger had been successful, the merged company would have been financially stable enough by the second quarter of 2005 to have been able to make full deposits of trust fund taxes withheld from wages. The Tax Court pointed out that arranging a merger with another company in the hopes that the merged company will later make trust fund deposits during a future quarter is not a reasonable effort to pay the trust fund taxes for the future quarter.
In addition, the Tax Court pointed out that in Thosteson v. U.S., (CA 11 6/02/03) 91 AFTR 2d 2003-2468, the Eleventh Circuit had concluded that a responsible person who knows that other creditors are being paid while the trust fund taxes have not been paid is subject to liability for the trust fund recovery penalty. The Tax Court said that Romano-Murphy was liable for the penalty because she knew that NPRN was using the taxes withheld from its employees' wages for corporate purposes instead of reserving them for payment of its trust fund taxes. During the entire second quarter of 2005 (the quarter for which the trust fund recovery penalty was assessed), Romano-Murphy knew that the trust fund taxes were not being remitted to IRS by NPRN. During the entire quarter, she had the authority to remit the trust fund taxes to the federal government, but she failed to do so. Instead, she wrote checks to other creditors (and supervised the writing of checks to other creditors).

This case is one of a long line of cases that hold check-signers and officers liable for the 100% Trust Fund Penalty.The rules determined by the court are the following:

1. Check signers are liable for employment taxes.

2. Even if the person did not physically sign the checks but had other employees use a signature stamp, that person is liable.

3. Simply being a minority shareholder and therefore not in complete control of the business does not absolve a check signer from personal liability for employment taxes.

4. Officers with titles such as Pres., CEO or other accounting related titles are almost oh East held liable for the 100% penalty.

If your business has not paid all federal and state employment taxes, you immediately need to call me concerning this issue. This tax liability is not deductible when you paid individually and is not dischargeable in bankruptcy. It is something that needs to be handled immediately or it can crush your finances.

Ron Cappuccio


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