Bibler v. U.S., (DC OH 4/23/2018) 121 AFTR 2d ¶2018-690
A district court has denied summary judgment to IRS on its imposition of the trust fund recovery penalty under Code Sec. 6672 against a volunteer treasurer of a private school. The court found that the taxpayer showed that there was a genuine issue of material fact on whether his conduct met a “reasonable cause” exception. Accordingly, the issue had to be determined at trial.
Background. Under Code Sec. 6672(a), if an employer fails to properly pay over its payroll taxes, IRS can seek to collect a trust fund penalty equal to 100% of the unpaid taxes from a person who:
- Is a “responsible person”, i.e., one who is responsible for collecting, accounting for, and paying over payroll taxes; and
- Willfully fails to perform this responsibility.
In determining who is a responsible person, the courts generally look at several factors, including:
- The duties of the officer as outlined by the corporate by-laws;
- The ability of the individual to sign checks for the corporation;
- The identity of the officers, directors, and shareholders;
- The identity of the individuals who hired and fired employees;
- The identity of the individuals who were in control of the financial affairs of the corporation. (Gephart v. U.S., (CA 6 1987) 59 AFTR 2d 87-1099)
Other factors include whether the person had access to the company’s books and records, and whether the individual has made personal loans to the company.
The Sixth Circuit has held that a responsible person will be found liable under Code Sec. 6672(a) if IRS can demonstrate that he had either
- Actual knowledge that the trust fund taxes were not paid and the ability to pay the taxes, or
- Recklessly disregarded known risks that the trust fund taxes were not paid.
In other words, for a responsible person to be deemed to have acted willfully under Code Sec. 6672(a), he must have either “had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the government” (Gephart, (CA 6 1987) 59 AFTR 2d 87-1099) or “deliberately or recklessly disregarded facts and known risks that the taxes were not being paid”. (Calderone, (CA 6 1986) 58 AFTR 2d 86-5703)
In Byrne v. U.S., (CA 6 2017) 119 AFTR 2d 2017-1824, the Sixth Circuit reiterated its holding in Calderone that a responsible person is reckless and therefore willful under Code Sec. 6672(a) when he disregards obvious or known risks that trust fund taxes are not being paid to IRS and fails to investigate. However, the Court said it had to balance the government’s prerogative to recover that which is owed with limiting liability for that recovery to those who are personally at fault. While noting that Code Sec. 6672(a) did not have a reasonable cause exception, it adopted the Second Circuit’s “reasonable cause” exception to Code Sec. 6672(a) liability: “a responsible person’s failure to cause the withholding taxes to be paid is not willful if he believed that the taxes were in fact being paid, so long as that belief was, in the circumstances, a reasonable one”. (Winter, (CA 2 1999) 84 AFTR 2d 99-6892)
Code Sec. 6672(e) provides that unpaid volunteer board members of tax-exempt organizations who are solely serving in an honorary capacity, aren’t involved in day-to-day financial activities, and don’t know about the penalized failure are exempt from the penalty, unless that results in no one being liable for it. However, in Rev Rul 84–83, 1984-1 CB 264, IRS noted that a volunteer member of a board of trustees can still be deemed liable if he is found to meet the tests of responsibility and willfulness under Code Sec. 6672.
Facts. Excel Academy was an tax exempt private school that served children who were behaviorally and emotionally challenged. David Bibler was appointed to the school’s Board of Directors after the former executive director and founder of the school was indicted for violation of the State’s bingo laws. Mr. Bibler agreed to serve as a volunteer Board member, and the Board elected him Treasurer of the Board of Directors.
No member of the Board, including Mr. Bibler, was responsible for the day-to-day operations of Excel Academy. Those duties fell to the Chief Executive Officer (CEO) and her staff of administrative personnel, teachers, and staff. Neither Mr. Bibler nor any other Board member had the responsibility to determine who to pay or which bills required delayed payment. These decisions fell to the CEO. Payroll was handled by the CEO and her staff. Financial reports were prepared by the CEO and her staff and presented at meetings. However, Mr. Bibler, as Treasurer, signed or co-signed checks that were presented to him by the CEO or her assistant.
The school fell behind in its payment of employee payroll taxes for the quarterly tax period that ended on Dec. 31, 2011. The record indicates that the Board of Directors was made aware that the payroll taxes were owed for the 4th quarter of 2011 at a Board meeting of Oct. 17, 2012. This report was made by the CEO or her assistant. The President of the Board specifically instructed and directed the CEO to pay the tax. Mr. Bibler understood that the CEO was in communication with IRS and was making installments on the 4th quarter 2011 tax liability.
It was not disputed that, after receiving the information that Excel Academy’s payroll taxes were in arrears, Mr. Bibler continued to sign checks as Treasurer making payments to creditors other than IRS. Nor was it in dispute that while he was serving as Treasurer, Excel Academy failed to file its Form 941 (Employer’s Quarterly Federal Tax Return) for the fourth quarter of 2011 that was due Jan. 31, 2012.
IRS assessed Mr. Bibler liability for these taxes under Code Sec. 6672. He paid the tax for one employee for each quarter of liability and filed a refund claim, asserting that he was not a liable person required to collect, account for, and pay over payroll and/or withholding taxes for Excel Academy. Upon denial, he filed suit for a refund in the district court.
Taxpayer’s position. Mr. Bibler produced evidence to show that he signed checks and co-signed checks at the behest of the CEO, and that he had no duty or authority to sign or file tax forms for Excel Academy. He showed that he did not oversee the employees, collect payroll information, compile payroll information, or remit payroll information to the payroll service on behalf of the corporation or to IRS. Further, he did not make decisions as to what bills were to be paid and those bills for which payment might require a delay. These decisions were those of the CEO. In addition, Mr. Bibler stated that the Board directed the CEO to pay the trust fund taxes as soon as the Board learned that the taxes were behind a quarter, and he believed the CEO contacted IRS and was paying the taxes as directed.
Court’s conclusion. The district court, denying IRS summary judgment, found that the question of whether Mr. Bibler was a responsible person liable for the trust fund recovery penalty was an issue to be decided at trial.
Under the exception for voluntary board members of tax-exempt organizations under Code Sec. 6672(e), it appeared that Mr. Bibler had met the first two prongs of the test, in that he provided evidence to show:
- That he was serving solely in an honorary capacity, and
- That he did not participate in the day-to-day or financial operations of the organization.
However, the court noted that the exception requires a third prong, that the person (3) did not have actual knowledge of the failure on which such penalty was imposed. The Board was told that the tax was not paid, confirming that at that point Mr. Bibler had actual knowledge. For argument’s sake, the court assumed that Mr. Bibler was a responsible person. However, this factor alone was not dispositive: to be penalized for a company’s tax delinquency a responsible person’s failure to pay trust fund taxes must be willful.
The district court concluded that, in view of the Sixth Circuit’s adoption of the “reasonable cause” exception in Byrnes, it had to consider whether Mr. Bibler had produced sufficient evidence to raise a genuine issue of material fact to support a reasonable belief that the taxes were in fact being paid. Mr. Bibler attested that he understood that the CEO, who had been specifically instructed by the President and all of the members of the Board to pay the tax, was in communication with IRS and was making installments on the 4th quarter tax liability in November and December of 2012, within two months of assessment and in 2013.
The evidence in the record did not contradict Mr. Bibler’s stated belief. Considering all of the evidence in the light most favorable to Mr. Bibler, the district court concluded that he had provided evidence sufficient to raise a genuine issue of material fact concerning whether his conduct met the Sixth Circuit’s “reasonable cause” exception. Accordingly, this issue was to be decided by a jury at trial and not by the summary judgment motion.
References: For the willful failure to collect and pay over tax for purposes of the trust fund recovery penalty, see FTC 2d/FIN ¶V-1717; United States Tax Reporter ¶66,724.