Absentee Owner and President of Corporation Was "Responsible Person" For Payroll Taxes. (Parker Tax Publishing December 28, 2014)

An absentee owner-president of a tractor dealership was unable to escape liability for payroll taxes his unscrupulous manager failed to remit as his technical authority over the company made him a "responsible person". Shore v. U.S., 2014 PTC 586 (D. Idaho 12/4/14).

In 2004, William Shore started Bear River Equipment, Inc. (BRE), a tractor dealership, and hired Tom Lewis to manage every aspect of the business, with the intent that Lewis would one day purchase BRE. Lewis managed the day to day operations of BRE, including financial management, purchasing of product lines, employee management, and paying BRE's bills.

Lewis was also responsible for submitting all tax forms and paying the payroll taxes. Shore treated BRE as if it belonged to Lewis, acting primarily as an investor and playing a limited role in operations. However, Shore also signed the Articles of Incorporation as President of BRE, signed contracts on behalf of BRE, personally guaranteed an operating line of credit, and was the sole shareholder. Shore also discussed operations with Lewis twice a month, reviewed BRE balance sheets and annual statements, and had authority to sign BRE checks.

In 2005, Shore became aware of unpaid payroll obligations and directed Lewis to pay them. In 2007, Shore discovered that Lewis had embezzled from BRE, stolen assets, and failed to pay creditors or pay BREs taxes for 2006 and 2007. Shore then fired Lewis, took over management of BRE, paid more than $120,000 to unsecured creditors, and ultimately decided to close the company. Shore paid $101,583.09 in trust fund recovery penalties to the United States and then sought a refund of the penalty amount, claiming he was not liable for the payments because he was not a "responsible party" during Lewis's tenure as manager and his conduct was not "willful" as he did not know about BRE's tax liability at the time BRE failed to remit payroll taxes in 2006 and 2007.

Generally, employers must withhold federal income and social security taxes from the wages of their employees. Code Secs. 3102(a) and 2402(a). Under Code Sec. 6672(a), the IRS may assess a 100 percent penalty on responsible persons who willfully fail to collect, account for, and pay over the taxes to the United States. In order for the United States to assess the penalty, two requirements must be met:

(1) the party assessed must be a "responsible person," required to "collect, truthfully account for and pay over the tax; and

(2) the party assessed must have "willfully refused to pay the tax."

The court ruled Shore was liable for the unpaid withholding taxes as a "responsible person" under Code Sec. 6672, and denied the refund request. The court found Shore was a "responsible person" because he had the authority to conduct the financial affairs of the corporation, and by extension, had the authority to ensure withheld employment taxes were paid. The court pointed to his title, full stock ownership, check writing authority, and ability to force Lewis out of the business as evidence of his duty and authority. The court also emphasized Shore's previous actions to ensure payroll taxes were paid in 2005 after he learned they had not been remitted and the fact Shore ultimately took complete control over BRE upon learning of the tax liability.

The court also found Shore acted "willfully" based on his awareness that withholding taxes had gone unpaid and breached his duty under Code Sec. 6672 by using after-acquired money to pay debts, wages and expenses to keep BRE running rather than paying the back taxes he owed to the IRS.

The court also denied Shore relief under the narrow Slodov exception, which allows new managers to escape liability for actions taken by prior management. The court noted the exception did not apply since Shore was a "responsible person" at all times.

For more information on Responsible Persons, see Parker Tax ¶ 210, 108. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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