In the case of United States v. Ulasi, et al, USDC SD Texas, Case No. 4:17-cv-01164, we once again revisit the issue of the trust fund penalty found in IRC §6672 and what can make a person a “responsible person” who ends up on the hook for the withheld payroll taxes.
IRC §6672(a) provides, in part:
(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.
Note that three different issues could cause an individual to be subject to this penalty, which applies to taxes withheld (for federal income taxes, FICA and Medicare) but not to penalties related to such taxes or the payroll taxes imposed on the employer (such as the employer share of FICA and Medicare, or the entire FUTA tax). A taxpayer who willfully does any of the following three things can be held liable for unpaid taxes:
Fails to collect a tax that should have been withheld;
Fails to make a payment of taxes withheld, or account for such taxes and pay them over; and
Attempts to evade or defeat any of these withholding taxes.
The taxpayers in this case founded Jubilee Group Home, Inc. which provided home healthcare to individuals with intellectual disabilities. The corporation contracted with Medicaid to provide such services.
The taxpayers from whom the IRS sought to collect the unpaid taxes had the following duties in the years in question:
Michael Umeorah was Jubilee’s president from 1998 to May 2007. (Docket Entry No. 60-1 at 7; Docket Entry No. 60-31 at 17). Ulasi succeeded him as president and supervised Jubilee’s day-to-day operations. (Id.). It is unclear whether Ulasi is still Jubilee’s president, but the record shows that Michael Umeorah resumed managing Jubilee’s affairs in December 2013. (Docket Entry No. 60-1 at 7; Docket Entry No. 60-18 at 40:1–2). Although Michael Umeorah and Ulasi both ran Jubilee and set its financial policy, each director had independent authority over Jubilee’s operations. (Docket Entry No. 60-1 at 9; Docket Entry No. 60-18 at 37:21–24; Docket Entry No. 60-22 at 26–28). Ulasi, the Umeorahs, and Denchuwuku could all hire and fire employees, pay Jubilee’s bills, contract on Jubilee’s behalf, set salaries, and make federal-tax deposits. (Docket Entry No. 60-1 at 9–10). They received compensation for their work as directors, and Angela Umeorah received a salary for working as a nurse. (Docket Entry No. 60-1 at 7, 13; Docket Entry No. 60-17 at 38:11–13).
The opinion describes the beginning of the tax payment issues as follows:
Jubilee began accumulating tax debt in 1998. (Id. at 8; Docket Entry No. 60-18 at 28:21–24). By 2007, Jubilee owed $1.25 million in unpaid employee payroll taxes. (Docket Entry No. 60-1 at 8; Docket Entry No. 60-49 at 1). Michael Umeorah and Ulasi calculated the payroll and determined the payroll-tax amounts Jubilee deposited from 1998 to 2006. (Docket Entry No. 60-1 at 10; Docket Entry No. 60-48 at 1; Docket Entry No. 60-50 at 1). Umeorah and Ulasi prepared, reviewed, or signed the payroll-tax returns from 1998 to 2015. (Id.). While Umeorah and Ulasi did the work for Jubilee’s payroll, any director could authorize paying the payroll, paying the payroll taxes, and signing the payroll-tax returns. (Id.). Ulasi, Denchukwu, and the Umeorahs knew of Jubilee’s failure to satisfy its tax obligations. (Id. at 11).
Two of the individuals in this case resided outside of the country during a portion of the period under question. As the opinion notes:
Angela Umeorah lived in Nigeria from 2004 to 2012. (Docket Entry No. 60-1 at 14; Docket Entry No. 60-17 at 19:21–23, 43:1–21). During these years, she visited Houston periodically to see family and to work as a nurse for a local hospital. (Docket Entry No. 60-1 at 14; Docket Entry No. 60-17 at 21:7–15). She knew that Jubilee had not paid its taxes before she departed, and she learned that it continued to fail to pay its taxes when she returned to the United States in 2012. (Docket Entry No. 60-1 at 14; Docket Entry No. 60-17 at 54:16–11, 56:6–10). In March 2012, Angela Umeorah worked with the Internal Revenue Service to pay down Jubilee’s tax debt. She also authorized multiple payments of Jubilee’s federal taxes. (Docket Entry No. 60-1 at 14; Docket Entry No. 60-17 at 59–60; Docket Entry No. 35 at 1–4, 6, 8–11, 19, 21, 23,).
Michael Umeorah lived in Nigeria from 2006 to 2013. (Docket Entry No. 60-1 at 11; Docket Entry No. 61 at 2). He visited Houston frequently, often staying for two weeks or longer. (Docket Entry No. 60-1 at 11; Docket Entry No. 60-18 at 63:3–10). Michael Umeorah knew that Jubilee owed taxes before he left for Nigeria, but he hoped that Ulasi and Denchukwu would take care of the debt while he was away. (Docket Entry No. 60-1 at 12; Docket Entry No. 60-18 at 42:19–21). When he returned to Houston in 2013, he and Ulasi negotiated a repayment plan with the Internal Revenue Service. (Docket Entry No. 60-1 at 13; Docket Entry No. 60-18 at 32–33).
While in Nigeria, the Umeorahs filed personal income-tax returns and made mortgage payments on their home in Sugar Land, Texas. (Docket Entry Nos. 60-37, 60-38, 60-39, 60-40, 60-41, 60-42, 60-43, 60-44, 60-45, 60-46). They kept Jubilee’s books and bank statements at their residence, which was the company’s mailing address. (Docket Entry No. 60-1 at 12; Docket Entry No. 60-17 at 40–41).
After their return from Nigeria, the Umeorahs took a very active role in the company. As the Court notes:
Michael Umeorah took control of Jubilee’s accounts in 2014. (Docket Entry No. 60-1 at 12; Docket Entry No. 60-18 at 40:1–2). From 2014 to 2018, Michael and Angela Umeorah made multiple payments to Jubilee’s creditors, other than the government, after learning of the unpaid tax debt. (Docket Entry No. 60-1 at 17–18; Docket Entry No. 60-17 at 90–93; Docket Entry No. 60-25 at 2–31; Docket Entry No. 60-26 at 2–6; Docket Entry No. 60-36 at 17).
The government eventually decided to pursue the parties in this case for the taxes in question. As the opinion notes:
In April and May 2007, the Internal Revenue Service assessed trust-fund-recovery penalties against Ulasi, Denchukwu, and Michael and Angela Umeorah under 26 U.S.C. § 6672, alleging that they were liable for Jubilee’s failure to pay federal payroll taxes for the 31 quarters from December 31, 2003, to March 31, 2015. (Docket Entry No. 1; Docket Entry No. 60-1 at 3–6). The Internal Revenue Service also assessed penalties against each defendant for failing to pay personal income taxes from 2004 to 2014. (Docket Entry No. 60-1 at 6). As of December 11, 2017, Michael and Angela Umeorah’s unpaid balances for the trust-fund-recovery penalties are $1,016,554.81 and $1,016,803.00, respectively. (Docket Entry No. 60-1 at 3, 6). Their joint income-tax assessment penalties total $124,007.05. (Docket Entry No. 60-1 at 6; Docket Entry No. 60-20 at 1–41). The government recorded tax liens against the Umeorahs' home in Sugar Land for the joint income-tax penalties and the individual trust-fund-recovery assessments. (Docket Entry No. 60-1 at 18–19; Docket Entry No. 60-28 at 1–8; Docket Entry No. 60-29 at 1–10; Docket Entry No. 60-30 at 1–10).
The Umeorahs argued that they should not be liable for the penalties. As the Court summarized in its opinion:
The Umeorahs dispute their liability to pay the assessments on the grounds that they lacked access to Jubilee’s accounts and that Ulasi misled them as to the unpaid tax debt. (Docket Entry No. 61 at 6).
The Court begins its analysis by summarizing the view of the Fifth Circuit Court of Appeals (to which any appeal of this decision would be heard) on who is a “responsible person” for purposes of this provision:
The Fifth Circuit “generally takes a broad view of who is a responsible person under § 6672.” Gustin v. I.R.S., 876 F.2d 485, 491 (5th Cir. 1989). Responsibility “is determined by looking to one’s status within a corporation — that is, one’s duty and authority to withhold and pay taxes.” Barnett, 988 F.2d at 1454. It “does not require knowledge that one has that duty and authority.” Id. Because responsibility does not turn on actual knowledge, an individual “may be a responsible person . . . even though he does not know that withholding taxes have not been paid, and he does not cease to be a responsible person merely by delegating the responsibility to others.” Id. at 1454–55. Indicia of responsible-person status, none of which is dispositive, include whether the individual: (1) “is an officer or member of the board of directors”; (2) “owns a substantial amount of stock in the company”; (3) “manages the day-to-day operations of the business”; (4) “has the authority to hire or fire employees”; (5) “makes decisions as to the disbursements of funds and payment of creditors”; and (6) “possesses the authority to sign company checks.” Id. at 1455.
While one individual might have more power than other directors, officers, or employees to withhold and pay taxes, “[t]here may be — indeed, there usually are — multiple responsible persons in any company.” Id. The issue is “whether the person had the effective power to pay the taxes.” McClendon, 892 F.3d at 783 (quotation omitted). The issue here is whether the Umeorahs did, or “by virtue of [their positions in Jubilee], could have had[,] ’substantial' input into such decisions.” Barnett, 988 F.2d at 1455.
The opinion first looks at Michael’s status as a responsible person. He argues he was abroad during the time in question, did not have direct access to the accounts, he was unaware the taxes had not been paid, and he had delegated the payment to one of the other owners. The Court did not find any of this prevented Michael from being a responsible person:
Even accepting his conclusory statements and unsubstantiated assertions, the uncontroverted record evidence shows that he met at least three of the Barnett factors during the 31 quarters from December 2003 to March 2015. He owned 25 percent of Jubilee’s stock, (Docket Entry No. 60-18 at 27:14–15; Docket Entry No. 60-31 at 17); he was a member of the board of directors, (Docket Entry No. 60-17 at 24–25; Docket Entry No. 60-18 at 27:5–10); and he had the authority to hire or fire employees, (Docket Entry No. 60-18 at 29:14–20). Before and while he lived in Nigeria, he also served as Jubilee’s president; managed the company’s daily affairs; was jointly responsible for payroll; could or did determine Jubilee’s financial policy; knew of the company’s tax problems; and worked with the Internal Revenue Service to address the unpaid tax debt. (Docket Entry No. 60-17 at 52:21–24, 79:13–15; Docket Entry No. 60-18 at 16:9–11, 32–33, 34:5–9, Docket Entry No. 60-31 at 17). These undisputed facts show that, as a matter of law, Michael Umeorah was a “responsible person” during the 31 quarters. See Arriondo v. United States, 196 F. Supp. 3d 708, 720–21 (S.D. Tex. 2016).
Although Michael Umeorah neither managed Jubilee’s day-to-day operations nor accessed its accounts from May 2007 to January 2013, his arguments about his time abroad lack merit. Umeorah’s arguments are that he was not a “responsible person” because he was unaware of Jubilee’s status, including its failure to deposit payroll taxes, and because he delegated authority to Ulasi. The arguments are foreclosed by Barnett, 988 F.2d at 1454–55, which held that ignorance of the company’s unpaid tax debt and delegation of the power to pay do not absolve a “responsible person” of liability under § 6672). Whether Michael Umeorah ignored his duty to pay taxes or delegated it to another party is irrelevant. Id.
The Court noted, in particular, that merely not having access to the accounts during the time period was not sufficient to prevent a finding that he was a responsible person:
Michael Umeorah’s best argument centers on his lack of access to company accounts. But, as the government observes, the power to write company checks is just one of six factors the court considers in determining responsibility; it is not dispositive. While abroad, Michael Umeorah met three of six factors for liability as a responsible person. He was a director; he owned a substantial amount of stock; and he maintained the authority to hire and fire employees. (Docket Entry No. 60-1 at 11–13; Docket Entry No. 60-18 at 27:5–9). He also visited Houston often and spoke to Ulasi about Jubilee’s affairs. (Docket Entry No. 60-17 at 42:17–25).
More to the point, Michael was not prevented from getting access to the account from which he would have discovered that Jubilee’s tax problems had continued during his time in Nigeria:
No evidence supports an inference that Michael Umeorah could not have accessed Jubilee’s accounts and funds if he asked Ulasi or other directors. Indeed, the opposite appears to be true. Michael Umeorah regained access without difficulty when he returned to the United States in 2013, suggesting that he was not a signatory on Jubilee’s accounts while abroad by choice or because of a lack of interest or diligence, not because Ulasi denied him access or misled him about Jubilee’s failure to pay taxes. (Docket Entry No. 60-18 at 23:16–19, 40:1–2).
The Court found that Angela’s claim that she was also not a responsible person failed for reasons very similar to those that caused the Court to find that Michael was a responsible person:
The evidence shows that she met at least three of the Barnett factors because she was a director, owned 25 percent of Jubilee’s stock, and had the authority to hire or fire its employees. (Docket Entry No. 60-17 at 26–27; Docket Entry No. 60-23 at 1); see Rogers v. United States, No. H-13-3544, 2015 WL 1472342, at *4 (S.D. Tex. Feb. 11, 2015) (“[T]he Fifth Circuit has been clear that . . . the presence of one or more Barnett factors often indicates that an individual has actual authority to pay the taxes.”). She also made decisions as to the payment of creditors and even worked with the Internal Revenue Service to try to address Jubilee’s tax debt in 2012. (Docket Entry No. 60-17 at 59–60). Her attempt to escape responsible-person status by blaming Ulasi is unavailing. See Barnett, 988 F.2d at 1454–55. The undisputed facts show that Angela Umeorah had the effective power to pay Jubilee’s payroll taxes. Id. at 1454.