Company Owner's Daughter Is a Responsible Person for Two Payroll Quarters

(Parker Tax Publishing November 2022)

The Eleventh Circuit upheld a jury verdict which found that the daughter of a company's owner was a responsible person liable for penalties for failing to pay the company's employment taxes for two payroll quarters. According to the court, the jury's finding was supported by the fact that the daughter was a corporate officer who controlled the company's finances and had authority to disburse company's funds and thus had sufficient control over her father's company to have been able to avoid the company's non-payment of its payroll taxes. Scott v. U.S., 2022 PTC 331 (11th Cir. 2022).

Background

Ashley Scott's father founded Scott Air in 1992. The company specialized in servicing and installing heating and air-conditioning units. Within a decade after the company's founding, Ashley Scott (Scott) had assumed the role of corporate secretary and also had a hand in the company's financial affairs. She described herself as the company's "Accounting Manager" on her 2004 tax return. Although Scott's father was generally responsible for paying major operating expenses, Scott sometimes stepped in to pay creditors. She was also the "point person" for the company's outside accountant and the company's sole bank account listed her as one of three signatories (the other two were her father and brother). Besides these responsibilities, Scott was in charge of the company's payroll. Between 2004 and 2007, she signed most, if not all, the company's payroll checks. And during that period, Scott withheld amounts from employees' wages as required and sent checks both to (1) the Florida Department of Revenue, thus satisfying some employees' child-support obligations, and (2) the IRS, thus satisfying a lien against another employee's wages.

But during that same period, the company stopped paying its payroll taxes to the IRS. The IRS then invoked Code Sec. 6672, under which a person responsible for paying a company's payroll taxes can be held personally liable when those taxes go unpaid, to assess a penalty against Scott to the tune of approximately $680,000. That amount reflected the company's unpaid payroll taxes for 13 quarters between 2004 and 2007. Scott paid part of the assessed penalty and sued for a refund in a district court. The government then moved for partial summary judgment, arguing that Scott was a "responsible person" during all 13 quarters between 2004 and 2007 and that she "willfully" failed to pay the company's taxes during all four quarters in 2007. After a three-day trial, the jury found that Scott willfully failed to pay the company's taxes for six of the nine quarters at issue. Scott appealed, arguing that the district court erred by granting summary judgment on both issues: (1) that Scott was a responsible person for all 13 quarters between 2004 and 2007, and (2) that she willfully failed to pay taxes for all four quarters in 2007. The Eleventh Circuit affirmed the district court's order granting summary judgment on the willfulness issue, but reversed on the responsible-person issue. The court found that whether Scott was a responsible person during the 13 quarters between 2004 and 2007 was too close to be decided on summary judgment. Still, the Eleventh Circuit noted, the evidence in the record would permit a jury to find that Scott was a responsible person during the 13 quarters at issue.

On remand, the district court held a second jury trial to determine whether Scott was a responsible person during the ten quarters for which her willfulness had already been determined. Although the jury concluded that Scott was not a responsible person during seven of those quarters, it also found that she was a responsible person during the third quarter of 2005, the fourth quarter of 2006, and the second quarter of 2007. Scott appealed again, this time arguing that the district court erred by refusing to give a jury instruction she proposed. In Scott v. United States, 2019 PTC 504 (11th Cir. 2019), the Eleventh Circuit once again agreed with Scott and held that the district court's failure to give Scott's proposed jury instruction constituted plain error.

The district court held a third jury trial. The jury returned a verdict in the government's favor for the third quarter of 2005 and the fourth quarter of 2006, finding that Scott was a responsible person during those quarters. But the jury also returned a verdict in Scott's favor for the second quarter of 2007, finding that Scott was not a responsible person for that quarter. Scott appealed to the Eleventh Circuit arguing that the record was devoid of any facts or indicia establishing responsibility.

Under Code Sec. 3102 and Code Sec. 3402, an employer is required to withhold funds for federal social security and income taxes from employees' paychecks. Code Sec. 6672 provides that, when an employer fails to pay trust-fund taxes to the government, the IRS may assess a penalty against a responsible person who has willfully failed to perform a duty to collect, account for, or pay those trust-fund taxes. The question the Eleventh Circuit had to resolve was whether to disturb the jury's finding that Scott was a responsible person during the third quarter of 2005 and the fourth quarter of 2006.

Analysis

The Eleventh Circuit agreed with the jury and held that Scott was a responsible person for the payroll periods at issue. The court noted that whether Scott was a responsible person during those quarters turned on whether she had sufficient control over Scott Air's affairs to avoid non-payment of the employment taxes. That test, the court said, stems from a broad interpretation of Code Sec. 6671, which defines a "responsible person" to include an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to pay the trust-fund taxes. The court noted that, besides being the corporate secretary, Scott was in charge of the company's payroll and had the authority to dis-burse corporate funds.

Furthermore, the court observed that Scott filled out and signed the company's payroll tax returns during the third quarter of 2005 and the fourth quarter of 2006. And on the same day that Scott signed the payroll tax return for the fourth quarter of 2006, she signed a check to the IRS to pay for the company's unemployment taxes. But Scott never signed a check to pay for the company's payroll taxes. To the court, the fact that Scott signed the company's payroll tax returns during the third quarter of 2005 and the fourth quarter of 2006 proved that she knew a balance was due for those quarters. So, the bottom line for the court was that the record contained evidence that Scott knew about the company's unpaid payroll taxes and failed to pay them, even though she wrote checks to satisfy similar obligations during the same time frame.

For a discussion of the responsible person penalty, 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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