A district court in the Northern District of California has held that the officer of a now-defunct corporation is personally responsible for the Trust Fund Recovery Penalty based upon the company’s failure to collect, account for, and pay over federal withholding taxes. See United States v. Guerin, 113 AFTR 2d 2014 (N.D. Cal. April 28, 2014). In 1994, Fitz William Guerin, the defendant, purchased an existing software development and advertising firm that he renamed Orbit Network, Inc. Mr. Guerin served as the company’s president and chief executive officer, and also was a minority shareholder. He was also an authorized signer on the company’s bank accounts and checks, and he also signed the company’s quarterly employment tax returns (Forms 941).

Beginning on June 1, 1998, Mr. Guerin became aware that Orbit was not making timely payments of federal employment taxes. Despite that knowledge, Mr. Guerin thereafter authorized payments to company creditors other than the U.S. Treasury, and he personally signed checks payable to creditors other than the government during that time period.

Pursuant to IRC § 6672, the IRS thereafter assessed liabilities against Mr. Guerin personally for the company’s unpaid employment taxes for numerous quarters between 1996 and 1999. The total amount of the assessments exceeded $600,000.

Section 6672(a) provides, in relevant part, 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 … be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Under § 6672(a), an individual may be held liable for unpaid withholding taxes if (1) he or she was a “responsible person” for collection and payment of the employer’s taxes; and (2) he or she “willfully” failed to pay the tax. United States v. Jones, 33 F.3d 1137, 1139 (9th Cir. 1999). For purposes of § 6672, a “person” includes “an officer or employee of a corporation … who … is under a duty to perform the act in respect of which the violation occurs.” 26 U.S.C. § 6671(b).

Responsible Officer Analysis

The Court first addressed the question of whether Mr. Guerin was a “responsible officer.” The Court observed that district courts employ a number of factors to determine whether a person is a “responsible person” for purposes of imposing liability. Although no single factor is dispositive in evaluating whether an individual is a “responsible person” within the meaning of § 6672(a), “the most critical factor is whether a person had significant control over the enterprise’s finances.” United States v. Chapman, 7 Fed. App’x. 804, 807 (9th Cir. 2001) (citations omitted). An individual is more likely to be found responsible if he or she: (1) holds corporate office; (2) has check-signing authority; (3) can hire and fire employees; (4) manages the day-to-day operations of the business; (5) prepares payroll tax returns; (6) signs financing contracts; and (7) determines financial policy. Jones, 33 F.3d at 1140–41; Jordan v. United States, 359 F. App’x 881, 882 (9th Cir. 2002). Importantly, more than one person may be held liable under § 6672(a); an individual need not be “the most responsible.” Chapman, 7 Fed. App’x. at 806–07.

Applying these factors, the Court easily concluded that Mr. Guerin was a responsible officer based upon the following facts:

• Defendant was a founder of the company and served as President and Chief Executive Officer until October 5, 1999, when he resigned.
• Defendant was also a minority shareholder and a member of the senior management team that ran the company.
• Defendant supervised senior management, but never had a supervisor himself.
• Defendant could hire and fire employees, and was solely responsible for hiring and terminating members of Orbit’s senior management.
• Defendant was an authorized signer on Orbit’s bank accounts, there were no restrictions on his ability to sign checks on Orbit’s behalf, and he signed checks on Orbit’s behalf. While others were also authorized signers on Orbit’s bank accounts, Defendant alone was authorized to issue checks without a co-signer.
• Defendant managed the day-to-day operations of the business, such as “[d]irect[ing] an executive management staff;” “managing employees;” “signing or countersigning corporate checks;” “making or authorizing bank depots;” and “dealing with major customers.”
• Defendant had the authority to, and did, sign quarterly employment tax returns (Forms 941) on behalf of Orbit. Among others, Defendant was responsible for collecting, accounting for, and paying over federal withholding taxes for Orbit.
• Defendant had the authority to sign contracts and agreements binding Orbit, including a Binding Letter of Intent which contemplated a merger of two companies.
• Defendant represented Orbit in meetings with financial backers and potential investors.
• Defendant, among others, had the authority to, and did, determine to whom corporate disbursements would be made on behalf of Orbit, and to direct that such disbursements be made.
• Defendant testified that he was responsible for making decisions about the strategic direction of Orbit; and that he had the “final say” with respect to acquisitions.

Willfulness

The Court next turned to the question of whether Mr. Guerin willfully failed to collect, account for, or remit payroll taxes. A responsible person may not be held personally liable under section 6672(a) unless his or her failure to collect, account for, or remit withholding taxes was willful. Winter v. United States, 196 F.3d 339, 345 (2d Cir. 1999). Willfulness involves a “voluntary, conscious and intentional act to prefer other creditors over the United States.” Buffalow v. United States, 109 F.3d 570, 573 (9th Cir. 1997). Thus, “[i]f a responsible person knows that withholding taxes are delinquent, and uses corporate funds to pay other expenses, … our precedents require that the failure to pay withholding taxes be deemed “willful.””Phillips v. I.R.S., 73 F.3d 939, 942 (9th Cir. 1996).

The Court also easily found that the defendant acted with the requisite level of willfulness, based upon Mr. Guerin’s admission that he was aware that federal withholding taxes were not being paid in 1998, but nevertheless continued to pay other creditors. The Court found that “Defendant’s deliberate decision to use corporate revenues received after he first became aware of the delinquency to pay other creditors, including himself, rather than to diminish Orbit’s tax debt falls within the literal terms of the Ninth Circuit’s definition of willfulness. Klotz v. United States, 602 F.2d 920, 923 [44 AFTR 2d 79-5709] (9th Cir. 1979) (“Willfulness” is defined as a “voluntary, conscious and intentional act to prefer other creditors over the United States.”).”

Joint and Several Liability

Finally, the Court addressed an argument advanced by Mr. Guerin that the IRS should have sought payment of the company’s unpaid employment taxes before pursuing him. Under IRC § 6672, liability may extend to more than one corporate officer, not just the most responsible. In particular, the responsible officer penalty is distinct from and in addition to the employer’s liability for these taxes.  The Court rejected this argument, finding that even if there were entities or individuals other than the defendant through whom the IRS could have collected Orbit’s unpaid trust fund taxes, Mr. Guerin could not escape liability on those grounds because the government is not required to pursue collection against every responsible person, or against the corporation itself, before attempting to collect from a responsible person under § 6672.

Analysis

The Court’s decision in United States v. Guerin is illustrative of the personal risks that corporate officers face when companies fail to timely deposit employment taxes. Responsible officers can face personal liability for their company’s unpaid employment taxes if the failure to pay over the taxes is determined to be willful. As the Guerin decision demonstrates, willfulness is not a difficult legal standard for the government to satisfy, especially when it is undisputed that the corporate officer in question was aware of the unpaid employment taxes and authorized payments to other creditors. In small businesses, corporate officers will almost always be aware of the fact that employment taxes are not being paid, and that company funds are being used to pay other creditors.

In addition to being held personally responsible for unpaid corporate employment taxes, corporate officers may also face criminal liability for failing to pay withholding taxes. The IRS describes the fraudulent practice of withholding taxes from employees but intentionally failing to pay over the taxes as “pyramiding”:

“Pyramiding” of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme.

The IRS Criminal Investigation Division, in its most recent annual report, states that one of its top enforcement priorities in the employment tax area is combating the illegal practice of withholding employment taxes and failing to pay over those taxes to the U.S. Treasury. Two recent criminal cases illustrate the efforts of the IRS and the Justice Department in the employment tax fraud area.

On April 30, 2014, the Justice Department announced that an attorney in Oklahoma had pleaded guilty to willfully failing to pay employment taxes in connection with his law practice. See United States v. Larry Douglas Friesen (W.D. Oklahoma) (DOJ press release here). In that case, the defendant failed to pay over to the IRS the federal income and FICA taxes due and owing during three tax quarters in the 2007 calendar year in the amount of approximately $320,000.

In another case, the Justice Department announced on April 11, 2014, that a physician in Indiana had been sentenced to a prison sentence of one year and a day for failing to pay employment taxes in connection with his medical practice. See United States v. Ronald Eugene Jamerson (N.D. Indiana) (press release here). According to court pleadings, Jamerson deducted and collected from his employees’ paychecks federal income taxes and employment taxes in the amount of $63,929 over 11 tax quarters between 2006 and 2008, but failed to file the employment tax returns and pay over the related employment taxes. The defendant was ordered to pay restitution to the IRS in the amount of $541,083 for unpaid individual income taxes and employment taxes, which represented the total tax loss owed for all tax periods from 2003 through 2008, according to the plea agreement.