The case of Arriondo v. United States, USDC SD Texas, Case No. 4:14-cv-02734 illustrates the dangers posed even to someone without an ownership interest in the company for unpaid withholding taxes under IRC §6672. In this case a taxpayer who was the CEO, president, treasurer and director of a company was found liable for the unpaid trust fund taxes due to a failure to inquire about the possibility of unpaid payroll taxes once he became aware the company was in financial difficulty and for paying other bills (including the salaries of employees) during the short period from the date he became aware of the unpaid taxes until the company filed bankruptcy.
IRC §6672(a) provides:
(a) General rule
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.
While Mr. Arriondo held the positions in the organization noted above, he held no direct equity interest in the company which was a subsidiary of a company whose shares were held by an Employee Stock Ownership Plan. He was aware the company was financially challenged, as the prior CEO had sold an ownership interest back to the company, causing it to have significant debt.
As well, Mr. Arriondo had loaned the company money personally to enable it to pay its employees. He also became aware that his director of finance had failed to pay sales taxes to the state of Texas. As the opinion notes:
In April of 2009 the State of Texas sent American Steel a notice of levy for unpaid excise tax.17 Arriondo was aware of the “issues with the state controllers” towards the end of 2008.
Q: So at the end of '08, you were aware that the corporation was having difficulty paying taxes owed to the State of Texas?
A: The sales taxes had not been paid which I remember when I had found out, I was furious and I said well, why isn't this -- is this not being paid, you need to take care of this right away. And the and I think [Latiolais] said well, we don't have the funds. And I said I don't care if we don't have the funds. You need to go over there and make a payment arrangement because we can’t be -- I said they're going to shut us down. We can’t do that. That was -- that’s how adamant I was about getting this thing taken care of. But other than that, I had no other knowledge of anything else not having been paid.
Latiolais, a certified public account and American Steel's director of finance, assured him that the state tax issue was a timing issue related to a tax return, and she was able to work out a payment schedule fairly easily. Arriondo did not investigate further or inquire about other potential tax issues.
Unfortunately it turned out that in addition to the sales tax problem, the director of finance had also been keeping another problem hidden from the CEO—that payroll taxes were not being paid currently. The company had made partial deposits on the taxes due on the fourth quarter 941 for 2008 and no payments on taxes due for the first quarter of 2009. These returns showed the balances due on the forms prepared by the director of finance for filing.
While the director of finance signed the fourth quarter 941 for 2008, she resigned her position before without signing or filing the Form 941 for that quarter (though after she prepared the form).
Thus the new acting controller discovered the problem and had to present the bad news to Mr. Arriondo:
On May 18, 2009, Steve Dawson ("Dawson"), who began acting as controller after Latiolais's departure, informed Arriondo that Latiolais had been using employee payroll tax trust fund money to pay creditors rather than the IRS and had been writing checks but not releasing them. That was the first time Arriondo learned of the unpaid taxes. On the same day, Dawson told Arriondo that American Steel did not have enough money to pay the taxes owed to the IRS. Latiolais had lied to Arriondo about American Steel's finances and ceased paying tax withholdings and child-support withholdings while assuring Arriondo that the company had enough money to pay employees. Latiolais had instructed her employees not to pay federal withholding taxes to the IRS.
Mr. Arriondo immediately recognized that these unpaid taxes presented an insurmountable problem for the organization. As the opinion continues:
When he learned of the unpaid payroll taxes, Arriondo began shutting down the company and laying off employees. Arriondo met with a bankruptcy attorney approximately one week after learning of the unpaid taxes. The bankruptcy attorney told Arriondo to complete the shutdown of the company and to gather the necessary information for bankruptcy. American Steel filed for bankruptcy protection on June 5, 2009, eighteen days after Dawson informed Arriondo of the unpaid taxes.
You may be wondering at this point how Mr. Arriondo could have been found liable for the taxes—after all, he shut down the company rather than continue to “borrow” the trust funds.
But while his general course may have been appropriate, specific actions he took later opened the door for the IRS to come after him for the funds (and given he had advanced the company money to pay the payroll in the past, it seems likely the IRS was coming after a person with “deep pockets” in this case, not necessarily the most culpable).
Although the company had funds when the shortage was discovered, the Company paid amounts to other parties. That included paying employees for wages due during that period, and paying his own salary during that period.
Two payroll payments were made after Arriondo learned of the unpaid taxes (all taxes were paid on these payroll disbursements), and he and Steve Dawson remained on payroll until the end of June. Weekly employees were paid one week in arrears on the following Friday. They were paid on May 22nd for work that had previously been performed. The final payroll was on May 29, 2009, but many of those checks bounced.
As well, he had allowed a $9,000 deposit to be paid to a supplier in the hope that the company would be able to complete a job that would give the company the money to pay off the payroll taxes. Unfortunately, the supplier did not treat that as a deposit, but rather applied it to other balances due from the company—thus serving only to reduce the funds available to pay taxes.
The District Court found that these steps amounted to “willfulness” sufficient to cause Mr. Arriondo to be liable for the unpaid payroll taxes. Rather than pay employees or other creditors, the CEO had a responsibility to apply the funds to pay off the trust fund liabilities. Similarly, it’s not “OK” to try to take on more work to pay off the taxes—or, to be somewhat more correct in a practical sense, it’s not OK to do so unless the plan actually succeeds.
As well, the Court found that Mr. Arriondo should have realized there was a reasonable chance that payroll taxes were not being paid when the problem with the state of Texas arose. As the opinion notes “[a] person acts willfully if he recklessly disregards a known or obvious risk that the taxes may not be remitted to the government.”
The Court found:
Arriondo knew that the company was (and had been) struggling financially, that Latiolais had failed to pay state excise taxes in 2008, and that Arriondo had needed to advance the company $20,000 to cover employee payroll in early 2009. He testified that Latiolais told him that she had not paid the state taxes due to lack of funds. Despite this knowledge, particularly of Latiolais’ failure to pay the state taxes, he did not review or inquire into the status of other tax payments. Thus, Arriondo failed to correct mismanagement after being notified that some taxes had not been duly remitted. Although the unpaid taxes were not federal employment taxes, this behavior is similarly reckless.
The case serves as a warning about the risk any person (even if not an owner) is exposed to if he/she continues to serve an organization which has unpaid payroll taxes, as well as the duty imposed on any person in a position of responsibility for an organization to assure him/herself that payroll taxes are actually being paid.