To most practitioners, at first glance the facts in the case of Fitzpatrick v. Commissioner, T.C. Memo. 2016-199 would appear to doom Christina Fitzpatrick to being liable for the 100% trust fund penalty related to unpaid payroll taxes for the wine bar that was partially owned by her husband and for which she worked.
These “bad facts” included the fact that:
- Christina had signature authority over the bar’s checking account
- Christina signed payroll checks regularly
- Christina selected and arranged to hire Paychex to handle the restaurant’s payroll
However, despite that apparent level of control, the Tax Court found that Christina was not a responsible party based on other facts in the case.
First, although Christina had some involvement with the bar, most of her time was spent caring for her son. As the Court notes:
Petitioner's primary responsibility during the periods at issue was to serve as caregiver to her disabled son Evan,6 who suffers from a rare metabolic disorder called citrullinemia. As a result of the disorder, Evan has severe autism, cerebral palsy, and limited mobility. Evan is also speech impaired and needs assistance to perform many basic functions such as eating and going to the bathroom. He has a low IQ and a life expectancy of 33 years. He is required to take over 50 pills a day and cannot be left for any significant amount of time without adult supervision. Because of the substantial amount of attention Evan required, petitioner was unable to devote significant effort to any business enterprise.
Day to day operations of the restaurant fell the general manager, Mr. Chislett. As the Court noted:
Mr. Chislett, the general manager of the Grape, was responsible for carrying out the day-to-day business operations. He managed the employees, paid creditors, and oversaw purchases from vendors. He was responsible for hiring and firing personnel. Mr. Chislett was also Paychex's main contact during the periods at issue, and he maintained control over the payroll process. On his résumé, Mr. Chislett stated that his responsibilities included:
Management and oversight of all restaurant, with duties including; recruitment and selection of personnel, training, purchasing, inventory, sales strategies and yield management, reviewing financial statements, P&L, product mix, budgeting, forecasting revenues and expenses, and management of individual department managers/ supervisors. Supplier relations including; price negotiation, negotiation of payment terms and utilisation [sic] of key industry contacts in order to complete tasks.
Christina’s role was far more limited:
Petitioner did not have a significant role at the Grape. While she was directed to establish the business' bank account and contract with Paychex during the preopening phase of the business, she became decidedly less involved once the business was operational. Petitioner's main responsibilities were delivering checks, relaying electronic bank account balances to Mr. Chislett, and delivering the business' mail that was sent to her private mailbox. Petitioner occasionally transferred funds to and from the corporate bank account at the direction of Mr. Stamps or Mr. Fitzpatrick. Petitioner also issued checks at the direction of Mr. Stamps or Mr. Fitzpatrick for some of the business' recurring monthly expenses. Petitioner made no operational decisions. Indeed, she did not have the proper education, training, or experience to hold a management position at the Grape.
Payroll checks were delivered to the Fitzpatricks’ residence since there generally weren’t employees at the restaurant at the time early on Tuesday mornings when Paychex delivered the paychecks. Christina would sign the checks when they were delivered by Paychex and then deliver them to the restaurant that same afternoon. She had to sign the checks because Tuesday and Mr. Chislett’s day off and so he wasn’t available to sign the checks.
However, Mr. Chislett was the primary contact with Paychex aside from the delivery of the checks, compiling the information and transmitting the information to Paychex each week. Christina was not responsible for and did not review the statements included in the Paychex package.
Mr. Chislett had big plans for the restaurant—big and expensive and not cleared with the owners. These expensive plans drained the company of cash and checks began to bounce, forcing Mr. Chislett to scramble via various means to pay vendors, many of whom demanded cash or certified checks.
Eventually Paychex became a victim of the insufficient funds problems for the enterprise. In November 2008, Paychex was turned down by the bank when it attempted to charge the restaurant’s account $1,809.88 for taxes and $328.35 for an invoice. Not surprisingly, that the was last time that Paychex attempted an electronic withdraw for taxes.
While Paycheck continued to create payroll checks and take its fees from the account, it no longer handled tax deposits—a fact not known to Christina. The restaurant continued to operate from that date in 2008 until early 2011 when the operations of the restaurant were turned back over to the franchisor. Christina was not aware there were unpaid payroll taxes at any point from the cessation of Paycheck’s handling payroll tax deposits until the restaurant ceased operations.
The IRS turned to Christina as a responsible party from which to collect the unpaid trust fund taxes. The opinion notes:
Respondent argues that petitioner possessed all the recognized indicia of responsibility and was therefore a responsible person within the meaning of section 6672. Respondent further asserts that petitioner exercised substantial financial control over Dey Corp. and that at all times petitioner was a de facto officer of the corporation because she opened two corporate bank accounts, had signatory authority on both accounts, and signed checks on behalf of the corporation.
Despite all those facts, the Court found Christina was not a responsible person. The Court noted:
Petitioner lacked the authority to control the financial affairs of the business or exercise any significant authority over the disbursement of Dey Corp.'s funds. Notwithstanding petitioner's signatory authority and her spousal relationship to one of the corporation's owners, the substance of petitioner's position was largely ministerial and she lacked actual authority. The credible testimony and the documentary evidence introduced at trial demonstrate that Mr. Stamps and Mr. Chislett exercised control over the financial affairs of the corporation and that petitioner served only support functions. We are in fact puzzled that Mr. Stamps, the president of the corporation and a hands-on owner, and Mr. Chislett, the day-to-day manager, successfully evaded in the administrative phase any personal liability for these TFRPs.
… Moreover, even though petitioner signed most of the payroll checks prepared by Paychex, the duty was ministerial and done only for the convenience of the corporation. She had no duty to, and did not, oversee the employees, collect payroll information, compile payroll information, or remit the payroll information to Paychex on behalf of the corporation. Mr. Chislett was responsible for carrying out those duties.
One important point that distinguishes this case from others where the taxpayer was found to be a responsible party is likely the fact that Christina both was never aware of the actual nonpayment of taxes. The case might have turned out very differently had the IRS visited Christina before the restaurant operations were transferred back to the franchisor.
While the Court was confused about why the IRS did not go after other parties for the trust fund recovery penalty, it seems likely that the Fitzpatricks may have been the “money partners” in this enterprise—and thus the parties most likely to have the resources to pay the penalty. It’s also not unusual that the IRS often focuses on anyone with signature authority—especially when that person is signing checks at the time the trust fund payments remain outstanding.