As tax professionals, understanding the intricacies of the Trust Fund Recovery Penalty (TFRP) under 26 U.S.C. § 6672 is crucial, particularly when advising clients who hold significant corporate roles. A recent case, Warnement v. The United States, heard in the United States Court of Federal Claims, offers valuable insights into the court’s analysis of the "responsible person" and "willfulness" elements, providing a granular look at the burden of proof in tax controversies.

Case Background and Factual Allegations

The case involves Joseph L. Warnement, who sought a refund of federal taxes and associated interest from the Internal Revenue Service (IRS) after being assessed penalties under 26 U.S.C. § 6672. The penalties stemmed from INgage Networks, Inc. (“INgage”), a now-defunct software and consulting company, which failed to remit federal income and social security taxes, known as trust fund taxes, withheld from employee paychecks over seven tax quarters between July 2012 and March 2014. The IRS assessed the penalty against Mr. Warnement on the grounds that he had a duty to remit the taxes due to his role at INgage, and that he willfully failed to do so by being aware of the delinquency and prioritizing other creditors over the IRS. The government subsequently counterclaimed for the full amount of the unpaid trust fund taxes.

INgage, founded in 1999, began experiencing severe financial distress in 2011 after its primary customer, American Express, terminated a major contract. Mr. Warnement was initially brought in as a consultant at the end of 2011 to help revive contract negotiations and attract new business. By May 2012, despite his initial refusal due to the company’s precarious financial state, board minutes indicate that Mr. Warnement was voted to be the "new CEO of INgage Networks," and he was subsequently introduced as such to shareholders.

From May 2012 through 2015, Mr. Warnement consistently presented himself as the CEO of INgage Networks across various platforms, including his email signature, the company’s website, his personal LinkedIn page, business cards, board meeting minutes, letters, depositions, signed demand notes and security agreements, organizational charts, pitch decks, the employee handbook, and even in correspondence with the IRS and filings with the Florida Department of State.

However, Mr. Warnement contended that he did not officially accept the CEO title until he signed an employment agreement in 2016. He maintained that he declined to sign any agreement earlier to avoid liabilities, choosing instead to remain a consultant. He claimed he "repeatedly clarified that he was not CEO" and referred to himself as "Executive in waiting" or "President in waiting". His theory was that INgage’s operations were unique due to its small size and significant board oversight, with CEO responsibilities, including control over finances, residing with board chairman Don Gunther and board secretary Robert "Bob" Claussen, who were actively present in the Naples office. Mr. Warnement’s responsibilities, he asserted, were limited to sales, marketing, and securing funding, and he acted only at the board’s direction.

Supporting his claims, other INgage board members like Michael O’Brien and William Shroeger affirmed that Mr. Warnement’s primary role was securing financing, and that Gunther and Claussen were actively involved in daily operations. David Kolan, a CPA and board member, also stated that Gunther and Claussen were in charge of daily operations and payroll. Mr. Warnement also pointed to instances where his authority was circumscribed, such as not having check-signing authority (checks were signed by Bacon or Claussen) and requiring board permission for expenditures over $100,000. He even cited an instance in April 2014 where he directed a payroll tax payment to the IRS, but was then directed by Gunther and Shroeger to stop it.

Conversely, the government presented evidence that Mr. Warnement exercised significant control, approving disbursements, halting payments to attorneys, directing fund allocation, signing contracts, approving expenses, authorizing payroll, hiring and firing employees, determining compensation, and signing loan agreements for millions of dollars. Employee testimony further conflicted with Mr. Warnement’s claims, with Lori Bacon and Christine Richards stating that Mr. Warnement was heavily involved in daily operations, while Gunther and Claussen were less so or ineffective.

Regarding the tax delinquency itself, INgage’s payroll difficulties began in early 2012, leading to the loss of its payroll processor, ADP, and a transition to manual payroll administration by Lori Bacon. In September 2012, Gwen Nugent, an HR team member, explicitly warned Mr. Warnement via email about the consequences of failing to process payroll through ADP, including the risk of audit and personal liability for "responsible persons" under 26 U.S.C. § 6672 for trust fund taxes. Mr. Warnement claims he did not understand this email, calling it "Chinese". However, cash schedules sent monthly to him by Bacon, beginning September 2012, consistently reflected accruing quarterly taxes in a "liability bucket".

Mr. Warnement admitted that in February 2013, he discovered INgage’s trust fund tax liability had swelled to $314,000 for 2012. He stated his "personal risk antenna really rose" and he alerted the board, alleging that the board then prioritized spending on employee benefits, critical vendors, and salaries before addressing trust fund taxes. Despite repeated emails from Bacon and communications from the IRS throughout 2013 and 2014 regarding unfiled Form 941s and unremitted taxes, INgage failed to remit taxes for the final two quarters of 2012, all of 2013, and the first quarter of 2014, accumulating over $609,000 in unpaid trust fund taxes. Although INgage later began to address new tax liabilities and filed missing Form 941s in July 2014, the prior delinquencies remained.

Taxpayer’s Request for Relief

Mr. Warnement’s complaint ultimately sought a determination that he is not liable for trust fund recovery penalties under 26 U.S.C. § 6672 and that he is entitled to a refund of the $1,315.45 he paid representing tax withholdings for one employee during the relevant periods, along with overpayments from his personal taxes that were credited to the outstanding penalties.

Court’s Analysis of Legal Standards

The Court’s analysis began by outlining the unique burden of proof in tax controversy cases at the summary judgment stage. The burden of proof rests on the taxpayer to demonstrate that the Commissioner’s determination is invalid. Once the government establishes a prima facie case by introducing its assessment (which carries a presumption of correctness), both the burden of going forward with evidence and the ultimate burden of persuasion shift to the plaintiff. To defeat summary judgment, the plaintiff must present "sufficient evidence to raise a question as to the outcome of the case," going "beyond the pleadings by use of evidence such as affidavits, depositions, answers to interrogatories and admissions".

The core of the legal analysis revolves around 26 U.S.C. § 6672, which empowers the IRS to impose a penalty on "any person required to collect, truthfully account for, and pay over" trust fund taxes if an employer "willfully fails to collect" or remit them. This provision requires the IRS to prove two elements:

The person was under a duty to perform, known as a "responsible person".
The person willfully evaded remitting the tax.

Determining a "Responsible Person" The court emphasized that the term "responsible person" extends beyond "mere mechanical functions" to anyone who is "in fact responsible for controlling corporate disbursements," or has "the final word as to what bills should or should not be paid, and when". This determination is a question of fact, subject to a "test of substance, not form," where no single factor is determinative, but rather the "totality of the circumstances" is considered. Indicia of responsibility include check-signing authority, day-to-day fiscal management, ability to pay creditors, control over payroll, and being the person creditors look to for payment. "Final word" means "significant rather than exclusive control over the disbursal of funds". Importantly, liability can attach to "any" responsible persons, not just the "most responsible," and instructions from a superior not to pay taxes do not absolve an otherwise responsible person.

Conversely, a person with apparent authority may not be considered a "responsible person" if they lack the actual authority to authorize payment or nonpayment of taxes. Mere office holding is insufficient. The "root principle" is that an individual is not responsible if a third party’s control "affirmatively prevent[s] that individual from effectuating payments to the IRS". The Court’s inquiry is a fact-specific examination of actual authority and whether it was "significantly circumscribed by another authority".

Establishing "Willfulness" The "willfulness" requirement is met by demonstrating that the failure to remit taxes was "voluntary, conscious, or intentional, as opposed to accidental". Bad intent is not required; "reckless disregard of an ’obvious and known risk’ that taxes might not be remitted" is sufficient. Mere negligence, however, is not. Willfulness can be shown by evidence that the responsible person had knowledge of payments to other creditors, including employees, after being aware of the failure to pay over withholding taxes. This involves two steps: 1) awareness of the delinquency, and 2) favoring other creditors over the IRS. Even with limited funds, a responsible person has a duty to prorate available funds between the government and employees.

A taxpayer may rebut a showing of willfulness by affirmatively demonstrating one of three points: 1) unawareness that taxes were unpaid, 2) lack of reasonable opportunity to discover the delinquency and remedy it, or 3) reasonable efforts made to pay the taxes owed.

Application of Law to the Facts and Court’s Conclusions

Regarding "Responsible Person" The Court denied in part the government’s motion for summary judgment on the "responsible person" element. While Mr. Warnement undisputedly held the "seemingly important title" of CEO and presented himself as such, the Court concluded that his use of the CEO title was not dispositive of actual authority. A genuine dispute of material fact remained as to whether he had the actual authority to pay the taxes owed.

Key points supporting this conclusion included:

Lack of Check-Signing Authority: Both parties agreed Mr. Warnement did not have check-signing authority, with evidence showing checks were signed by Bacon or Claussen.
Board-Imposed Limitations: Mr. Warnement provided evidence that his ability to disburse funds required board direction or approval, as demonstrated by his inability to bind the company in a major lawsuit settlement without board permission.
Ambiguous Day-to-Day Control: While he appeared to exercise apparent authority (e.g., firing/hiring employees, approving compensation, signing loan agreements, directing payments), the autonomy of these actions and whether they were at the board’s explicit behest remained unclear.
Conflicting Testimonies: Testimonies from board members and employees offered disparate views on Mr. Warnement’s actual authority versus Gunther and Claussen’s control. For instance, despite his physical distance, Mr. Warnement appeared to direct payments, yet one instance showed him halting an IRS payment on Gunther’s and Shroeger’s instruction.
Inability to Weigh Evidence at Summary Judgment: Given the conflicting evidence, the Court could not definitively determine if Mr. Warnement had "significant...control over the disbursal of funds" that was not significantly limited by Gunther and Claussen.

Therefore, the Court held that whether Mr. Warnement was a "responsible person" within the meaning of section 6672 was an issue for trial, necessitating further fact-finding.

Regarding "Willfulness" In contrast, the Court granted in part the government’s motion for summary judgment on the "willfulness" element, finding that Mr. Warnement failed to demonstrate a genuine issue regarding his awareness of the unpaid taxes and his knowledge of payments to other creditors. The Court asserted that if Mr. Warnement were to be found responsible at trial, his willfulness would be established as a matter of law.

The government presented compelling evidence of Mr. Warnement’s awareness:

Explicit Warnings: Gwen Nugent’s September 2012 email clearly outlined trust fund tax consequences and personal liability under § 6672. Mr. Warnement’s claim of not understanding this was deemed unsupported.
Consistent Reporting: Monthly cash schedules and emails from Lori Bacon, starting in September 2012, continually detailed accruing payroll tax liabilities. Mr. Warnement’s assertion of not opening these documents or understanding "liabilities" was found to be unsupported.
Admitted Awareness: Mr. Warnement himself admitted he became aware of the significant tax liability ($314,000) in February 2013 and brought it to the board’s attention, stating his "personal risk antenna really rose".

Furthermore, the evidence overwhelmingly indicated Mr. Warnement’s knowledge of payments to other creditors after becoming aware of the tax delinquency. He approved employee pay raises, authorized special payroll distributions, hired new employees, authorized checks to non-IRS creditors, and directed payments for operating expenses.

Mr. Warnement’s attempts to rebut willfulness were deemed inconsistent and unsupported. His arguments that he was unaware until February 2013, then believed taxes were immediately paid, while simultaneously claiming he prioritized them and never directed non-payment, did not meet his burden. His refusal to "officially" become CEO until 2016, contingent on a tax payment plan, further contradicted his claims of believing the taxes were current.

Conclusion for Tax Professionals

This case underscores several critical points for CPAs, Enrolled Agents, and tax attorneys:

The presumption of correctness attaches to IRS assessments, placing a substantial burden on taxpayers to disprove both responsibility and willfulness.
Titles alone are insufficient to establish "responsible person" status; actual authority and control over corporate disbursements, evaluated in the totality of circumstances, are paramount. The presence of other individuals with significant control, even if they don’t absolve the taxpayer, can create a factual dispute requiring trial.
Awareness of tax delinquency combined with knowledge of payments to other creditors is sufficient to establish "willfulness," irrespective of intent. Claims of ignorance or misunderstanding, especially from financially sophisticated individuals, are unlikely to prevail without substantial supporting evidence.
Inconsistent explanations by the taxpayer regarding knowledge and actions can undermine attempts to rebut willfulness, making it a challenging element to contest once awareness and preference for other creditors are demonstrated.

As demonstrated here, even where the element of responsibility remains a question for trial due to conflicting evidence, the evidence of willfulness can be so compelling that a court may rule on it as a matter of law, contingent on a finding of responsibility. This case serves as a poignant reminder of the high bar for taxpayers challenging TFRP assessments and the importance of meticulous documentation regarding roles, responsibilities, and financial decision-making within distressed entities.

Prepared with assistance from NotebookLM.