Conviction of Manufacturing VP for Failing to Remit Payroll Taxes Upheld

(Parker Tax Publishing March 2022)

The Fourth Circuit upheld the conviction of a manufacturing executive, who withdrew amounts from her 401k fund to partially pay the company's employment taxes, for tax fraud and for making materially false statements to federal agents. The court also agreed with the lower court's application of an abuse-of-trust enhancement to the executive's prison sentence because the executive essentially ran the company and had a fiduciary obligation to carry out her legal duty to collect and remit payroll taxes. U.S. v. Barringer, 2022 PTC 41 (4th Cir. 2022).

Background

Teresa Barringer was the long-time Executive Vice President (EVP) and a Board member of J&R Manufacturing, Inc. (J&R), a Virginia company that produced electrical connectors for coal mining equipment. Her responsibilities as EVP included managing J&R's accounting, payroll, sales, and accounts receivable, while her duties as a Board member included collecting and paying federal payroll taxes. In late 2012, J&R began experiencing financial difficulties due to a downturn in the coal market, and, by 2014, it was delinquent on filing and paying its payroll taxes. Barringer subsequently received a letter from the IRS notifying her that she was civilly responsible for the delinquent taxes. Fearing that personal liability, Barringer sought to access her account in the company's 401(k) retirement plan, administered by AXA Equitable Insurance Company (AXA), as a source of funds from which to pay the company's employment taxes. In November 2014, Barringer faxed AXA a Hardship Withdrawal Request Form requesting $311,859 from her 401(k) account to prevent eviction from her home or a foreclosure of the mortgage on her principal residence. Based on her representations, AXA approved the request, and Barringer deposited the funds into a J&R account to pay the delinquent payroll taxes and keep the company afloat.

According to bank records, Barringer's mortgage balance was only approximately $200,000 when she withdrew the funds from her 401(k) account, she was on time with her payments, and she had not received any delinquent or foreclosure notices. By 2016, J&R had again fallen behind on its payroll taxes. On September 2, 2016, Barringer requested from AXA a final distribution from her 401(k) account, citing the end of her employment with J&R on August 31, 2016, as the basis. AXA approved the request. When Barringer received the distribution, she again deposited the funds, along with some of her personal savings, into the J&R account in order to fund the company. But this time, although there was money in the account that could have been paid to the IRS for the delinquent payroll taxes, Barringer chose to pay herself and other vendors instead. Notwithstanding her representation to AXA, Barringer continued working for J&R until October 28, 2016, receiving benefits and payments from the company during that period.

On July 25, 2019, Barringer's attorneys met with IRS and FBI agents, Virginia State Police, and attorneys from the U.S. Attorney's Office, all of whom were investigating potential financial crimes at J&R. Barringer joined the interview and, during the interview she stated that her last day at J&R was October 28, 2016. But later in the interview, Barringer changed her answer and asserted that she left J&R on August 31, 2016.

Barringer was subsequently tried for willfully failing to collect and truthfully account for and remit payroll taxes in violation of Code Sec. 7202 (i.e., tax fraud), wire fraud, and making materially false statements to federal agents. During the resulting trial, Ron Vincek, AXA's senior director of 401(k) operations, testified that AXA would not have approved Barringer's withdrawal request if the stated reason for the withdrawal did not satisfy IRS requirements and opined that failure to comply with those requirements could jeopardize the validity of J&R's entire 401(k) plan.

An IRS agent testified that J&R had unpaid payroll taxes in the first three quarters of 2016 and that at Barringer's direction, J&R paid $96,160 in other bills without first paying off those payroll tax balances. He did, however, note that the company paid off its outstanding payroll tax balance in 2019, which post-dated Barringer's employment at J&R.

Barringer testified that she and the other Board members were responsible for paying the payroll taxes, and that she proposed using the 401(k) funds to pay such taxes after receiving the IRS letter informing her of her civil liability. In her mind, she said, she did nothing wrong when she withdrew funds from her 401(k) account to pay the payroll taxes because she was using her own funds to save the company. And she did so because she believed that she would be unable to pay her mortgage if J&R collapsed. Barringer also testified that she contacted AXA in 2016 to inquire whether she could close her 401(k) account, but that AXA informed her she could only do so if she was no longer employed at J&R. She stated that she listed her last day of employment with J&R as August 31, 2016, in order to access the 401(k) funds, but that she intended to be rehired the following week. During closing arguments, the prosecutor reiterated that the case was "about taxes, fraud, and lies," and emphasized that Barringer's false statements on the 401(k) hardship withdrawal forms could have endangered the validity of everyone's 401(k).

The jury subsequently convicted Barringer on all counts but the court granted Barringer's motion for a judgment of acquittal as to the wire fraud charges. The court denied her motion for a new trial on all other counts and she was sentenced to 36 months in prison. In reaching that sentence, the court applied a two-level enhancement because Barringer "abused a position of public or private trust, or used a special skill, in a manner that significantly facilitated the commission or concealment of the offense." Barringer appealed her conviction to the Fourth Circuit arguing, in part, that the government introduced inadmissible evidence relating to the wire fraud charges, such as her 401k withdrawal forms, which produced spillover evidence that tainted the jury's consideration of the remaining counts and was wrong in applying the enhancement.

Analysis

The Fourth Circuit affirmed the district court's judgment and sentence. The court found that, even though the wire fraud count was dropped, the related evidence with respect to the 401k withdrawal forms was necessary to complete the story of Barringer's false statements during the federal investigation against her and thus was admissible. A closer question for the court was whether the government's line of questioning and arguments on how Barringer's actions could have put the entire 401(k) plan in jeopardy for the whole company would be admissible. While this contention was arguably necessary for the wire fraud counts to demonstrate an element of that offense - i.e., that Barringer defrauded another of a property interests - it was arguably not relevant to any element of the tax fraud or false statement counts, the court said. In a trial on those remaining counts, the court observed, the government's line of argument could perhaps be excluded under the Federal Rules of Evidence for confusing the issues and/or misleading the jury. Under those circumstances, the court said, the argument could also possibly be excluded as "unfair prejudice." Though perhaps close, the court perceived no prejudice to Barringer when the challenged evidence was considered in context. Indeed, the court concluded, any potential prejudice was mitigated by the strength of the government's evidence on the remaining counts, the district court's jury instruction to consider each count separately, and the overall core similarity of the facts underlying all counts.

The Fourth Circuit concluded that the government presented strong evidence to support the false statement convictions. For example, Barringer's statement during her interview with investigators that her employment with J&R ended on August 31, 2016, the court said, directly contradicted payroll records and her claims in two other court cases. Further, Barringer's statement that she needed funds from her 401(k) account because she was worried about a possible foreclosure if J&R collapsed was contradicted, the court noted, by the evidence that her mortgage was up-to-date and had less than a $200,000 remaining balance, which was substantially less than the $311,859 she withdrew for claimed hardship purposes.

For a discussion of the requirements to remit payroll taxes and the penalties on a responsible person who fails to do so, see Parker Tax ¶210,108.

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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