In the case of Waterhouse v. United States, United States Court of Federal Claims, 116 AFTR 2d ¶2015-5080 a corporate officer and holder of a 40% interest in the company’s stock argued that he was not a responsible person under IRC §6672 because he and another officer had agreed to divide up the responsibilities.
IRC §6662(a) provides that:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
This provision is generally referred to as the “trust fund penalty” which imposes a liability upon persons who have the ability to take action to insure that taxes withheld from employees (for federal income tax withholding, FICA and Medicare) are actually transmitted to the government by the employer. In this case the question was the first clause of the first sentence—did the officer willfully fail to pay over the taxes in question.
There was no question the taxes were not paid in this case. As well, there was also no question that other parties received payments during the time that the taxes were past due.
The taxpayer in this case knew that the company was having financial difficulties—employees had informed him that their checks sometimes bounced and he did not take his own paycheck from time to time. He also, per the court, “made a loan to Skyline in an amount of $30,000 to $40,000 in the form of deferred compensation over the last ten years of Skyline's business.”
The taxpayer and one other individual each held 40% of the company’s stock and these two effectively divided the responsibility for running the company. The taxpayer was generally responsible for running the shop and field operations, but generally did not deal with matters such as accounting. While he spent most of the day in the field, he did check in the office on a daily basis and he would have lunch once or twice a week with the other major shareholder to be updated on events.
The taxpayer had the authority to sign checks for the company but would only do so if the other shareholder was out of the office or otherwise unavailable. He did, however, have the authority to authorize payroll checks and he generally signed the checks for the field workers. As well, the Court noted:
Additionally, Mr. Waterhouse had the authority to open and close Skyline's bank accounts, guaranteed and co-signed Skyline's corporate bank loans, had the authority to make and authorize Skyline's bank deposits, and signed Skyline's first quarter 2001 Form 941, Employer Quarterly Federal Tax Return, which showed a balance due of $106,746.75. Id. at ¶¶ 80- 83.
Mr. Waterhouse only managed field and shop employees at Skyline, and was authorized to hire and fire employees who worked in the field or shop at Skyline. Id. at ¶¶ 75, 78. He also purchased materials for projects as part of his project management responsibilities.
He was also made aware of the payroll tax issues prior to the eventual failure and bankruptcy of the enterprise. As the opinion continues:
Before Skyline ceased operations, Mr. Statham informed Mr. Waterhouse that Skyline was delinquent on paying employment taxes withheld over to the United States and that he was working on getting them paid. Id. at ¶ 29. At a February 2004 meeting with the IRS, the revenue agent conducted an interview of Mr. Waterhouse, and recorded the results of that interview on a Form 4180. Id. at ¶ 30. At the conclusion of the interview, Mr. Waterhouse was given the opportunity to look over the form and confirm or correct what the agent wrote. Id. Mr. Waterhouse signed the Form 4180, and declared that the information on the form was correct and complete, to the best of his knowledge or belief. Id. The document notes that Mr. Waterhouse was told of Skyline’s tax liabilities. Def.’s Tr. Ex. 5 at 006. After the IRS’s 2004 visit, Skyline was able to stay in business for another year. Jt. Stip. ¶ 32. During that time, vendors were paid after Mr. Waterhouse learned about Skyline’s unpaid tax liabilities.
Being aware that taxes were unpaid but allowing parties to be paid is generally fatal to a taxpayer’s claim of not being subject to the §6672 penalty. But, Mr. Waterhouse argued, he had not acted willfully in the matter of the taxes because the other major shareholder (Mr. Stratham) had agreed to handle matters in that area. Being the person in charge of operations rather than finances, Mr. Waterhouse argued that he should not treated as a responsible person.
There was no question that Mr. Stratham himself was a responsible person, a fact that he admitted during his testimony. But §6672 doesn’t limit its application in such a way that there is only a single responsible person—rather, multiple individuals can be found to be responsible persons. While the IRS can’t “double up” the amount it collects, it can collect the entire balance from any responsible person. So, we can safely presume, Mr. Stratham had not actually paid over the taxes.
Mr. Stratham did testify with regard to what he did to deal with the taxes. As the opinion notes:
He testified that he was the person to determine whether the IRS should be paid, but stated that “[t]he only time that [Mr. Waterhouse] was ever consulted would be if – if there was a problem and I wasn’t going to be able to get them taken care of maybe as quickly as I would like to.” Tr. 39:25-40:9. He further stated that the IRS would call or send a letter informing them of the deficiency, and came to the office “four or five times” over the course of 15 years. Tr. 44:2-15. He testified that he would not tell Mr. Waterhouse about the issue if it would be taken care of quickly, but sometimes did tell him about the issue. Tr. 44:16-45:8. However, he testified that he would always present Mr. Waterhouse with a plan for payment at the same time. Tr. 45:9-17.
Mr. Stratham then goes on to outline how things proceeded from the IRS’s September 2003 interview over payroll taxes through the final collapse of the company. He noted:
Regarding the IRS deficiencies at issue here, Mr. Statham testified about the events surrounding his interview with the IRS on September 9, 2003. He could not recall whether he had informed Mr. Waterhouse of the deficiency prior to the interview, but admitted after reviewing the interview report that he must have. Tr. 56:1-12. He further testified that Mr. Waterhouse never followed up with him about the deficiency, but stated that it was reasonable because previous deficiencies had always been resolved. Tr. 56:13-23. While Mr. Statham could not recall a time when Mr. Waterhouse expressed an interest in paying the IRS, he did recall that Mr. Waterhouse expressed an interest in paying employees who worked under him. Tr. 57:8-16. Additionally, Mr. Statham testified that Mr. Waterhouse was concerned, as he would be “because he knew it was a payable,” but that he may not have “realized that maybe he should have been more concerned.” Tr. 70:2-8. He also testified that Skyline did pay creditors other than the IRS while the deficiency was owed. Tr. 59:1-9. Finally, he stated that “when the business was closed, the money was in the receivables, and in the bank, to have taken care of this obligation.” Tr. 70:14-16. However, he stated, “everything happened so fast,” implying that this prevented the deficiency from being resolved. Tr. 70:18.
Mr. Statham testified that Skyline’s financial problems came to a head following a strike in 2002 and an ensuing dispute with the union. While Skyline and the union had an ongoing dispute regarding pension payments, Mr. Statham testified that the most direct cause of Skyline’s bankruptcy was the union’s decision to pull its workers and reassign them to other companies based on the incorrect assumption that Skyline was liquidating its assets. Tr. 59:10-60:12.
Mr. Waterhouse testified that while he knew about the issue from 2003 interview, he never asked Mr. Stratham about the balance due since he assumed Mr. Stratham would tell him if the taxes were going to be a problem. Thus, he contended he acted reasonably in assuming that the taxes were going to be taken care of—after all, he had his hands full dealing with operational issues on jobs to keep the doors open.
The Court did not agree. The opinion noted:
The court finds that Mr. Waterhouse was a responsible person within the meaning of § 6672. As an equal owner of Skyline with Mr. Statham, the evidence established that plaintiff possessed authority over Skyline’s finances. He signed checks for the company, including on one occasion a check to the IRS. He made financial decisions regarding production and payroll and had the authority to hire and fire the majority of Skyline’s employees. He met with Mr. Statham regularly about the business and had to concur in major financial decisions. The fact that he did not focus his attention on the company’s day-to-day administrative dealings does not negate the fact that he had that authority and the accompanying responsibility to oversee Skyline’s financial obligations.
The argument that he was “only the operations guy” did not serve to absolve him of responsibility:
His control over Skyline’s production provided Mr. Waterhouse with a significant amount of financial responsibility, including control over Skyline’s substantive business. It is undisputed that Mr. Waterhouse was responsible for dealing with vendors and suppliers in order to complete Skyline’s jobs. Those vendors, suppliers, and employees continued to be paid after Mr. Waterhouse became aware that Skyline was deficient in its tax obligations to the United States. Indeed, the Federal Circuit has held that “where a person has authority to sign the checks of the corporation or to prevent their issuance by denying a necessary signature or where the person controls the disbursement of the payroll or controls the voting stock of the corporation he will generally be held ‘responsible.’” Godfrey, 748 F.2d at 1576 (internal citations omitted).
But, the taxpayer argued, he had skipped paychecks from time to time. Didn’t that mean that he was taking steps to conserve funds for the IRS? Actually, the opinion noted, it worked against him:
…[P]laintiff only did not receive a paycheck in cases where he expressly elected to defer compensation as a loan to Skyline. As a result, rather than distancing him from Skyline, plaintiff's deferral of compensation makes it more clear that Mr. Waterhouse was involved in Skyline's finances.
Or, to put it differently, it made clear he was aware the finances were shaky—thus making his approval of other payments (like paying employees and vendors) even more of a problem.
What about the argument that, because of their agreement to split duties, the business would have been effectively dissolved had Mr. Waterhouse stepped in and actually paid the IRS in preference to other creditors when Mr. Stratham did not feel that was an appropriate move? Well, that didn’t go far either:
Accordingly, while it may have been important for the practical functioning of Skyline for Mr. Waterhouse and Mr. Statham to divide responsibilities, it did not legally limit Mr. Waterhouse from ensuring that the IRS was paid. Had he wished to exercise it, Mr. Waterhouse retained the same legal authority over Skyline’s finances as Mr. Statham. It is well-established that “[t]here may be more than one responsible person.” Stuart, 337 F.3d at 36 (citing Harrington v. United States, 504 F.2d 1306, 1312 (1st Cir. 1974)). Thus, while the court accepts that Mr. Statham may have been the primary party responsible for administering Skyline’s finances, it is clear that Mr. Waterhouse was also a responsible person within the meaning of § 6672.
His conduct was also found to rise to the level of willfulness. Once he became aware that taxes were unpaid, his duties under §6672 rise to the level of taking action to insure the taxes were actually paid. As the opinion notes:
The fact that Mr. Statham paid Skyline’s taxes without discussion with Mr. Waterhouse before 2003 does not make Mr. Waterhouse’s conduct in and after 2003 reasonable. Mr. Waterhouse had a responsibility to ensure that Skyline’s taxes were paid after Mr. Waterhouse learned of the tax deficiency in 2003 and the continuing problem in 2004. Mr. Waterhouse’s decision to ignore Skyline’s tax liability after he was told of the problem in 2003 and was visited by the IRS in 2004 was plainly reckless.
…In this case, plaintiff failed to provide any evidence to support an argument that he made any efforts—reasonable or otherwise—to protect monies owed to the United States. To the contrary, the evidence shows that Mr. Waterhouse directed payments to be made to other parties despite the deficient taxes and neither directed payments to be made to the United States nor sought assurances that such payments had been made. In such circumstances, there is nothing to excuse plaintiff’s willfulness.
Unfortunately the actions of Mr. Waterhouse are all too common in cases like this. When there are multiple owners of a business, the responsibilities are almost always divided up in some fashion. And, as the Court agreed, such divisions generally must be respected as a practical matter to keep the business functioning—a party stepping “over the line” to question the other party’s decisions in that party’s area of responsibility tends to lend to a break-up of the business.
Similarly, it is easy for a person who does deal with the tax issues to decide that the taxes will be dealt with eventually—note that even when the doors were closing, Mr. Stratham believed that sufficient assets existed to get the taxes paid. Unfortunately for him, the bank seized those assets to deal with its debt before Mr. Stratham could use the funds to pay the taxes due.
But in the area of responsible person penalties a decision such as the one Mr. Stratham made has a very direct impact on all other individuals who have any connection with the financial activities of the business, including virtually any member of senior management.