How Courts Decide Who’s Liable for Unpaid Taxes

If you’re just joining us, parts one and two of this series discussed Internal Revenue Code Section 6672. The law allows the IRS to assess penalties equal to 100 percent of the amounts due against individuals who are responsible for collecting or paying withheld taxes and who willfully fail to collect or pay them. 

This article, part three, will analyze four court decisions that resolved Section 6672 disputes, two of which were decided in favor of the IRS, and two of which were decided in favor of the taxpayer.  

Let’s start with Ted Neckles, one of the cofounders of Task Enterprises. When the IRS first became aware that Task had failed to remit hundreds of thousands of dollars in withheld taxes, the agency could do little to get its mitts on the money. Task had folded within a year of incorporation. The IRS scrutinized the pockets of former officers, but found nothing. Then the IRS zeroed in on Neckles, who was one of the original investors in Task, but not one of its officers or employees.

IRS sleuths discovered that Neckles had exercised considerable control over disbursements of funds. Although untitled and unsalaried, he was authorized to draw on all corporate accounts and signed most of the checks on the firm’s general account. Neckles decided which creditors would be paid and when. More important, he knew of the withheld-but-unpaid tax money.

The IRS forced Neckles to pay the withheld funds. When he filed suit to recover the payment, the court concluded that he was what the lawyers call a de facto (that is, in reality) employee of Task. Clearly, he could’ve seen to it that the withheld taxes were paid. Because Neckles had the power and the authority to pay any creditors and was aware of the tax arrears, he was a “responsible person” and was, therefore, liable for the taxes.

In another case, “responsible person” Michael Holmes couldn’t invoke the relief provision for volunteers (discussed in part two). That he was an unpaid director of Harvest Christian Academy, a parochial school in Pasadena, Texas, didn’t matter.

Here’s why Holmes was deemed liable for the entire amount of undeposited taxes: He was one of four persons with signatory powers for the school’s bank account (two signatures were required), he knew about the tax liabilities and he signed a tax return disclosing that no tax deposits were made. 

The court rejected as irrelevant Holmes’s contentions that he was just a volunteer and lacked the authority to sign checks by himself. His undoing was his knowledge of the unpaid taxes when he signed checks payable to other school creditors. In addition, the court had no problem with the IRS’s decision to selectively assess him for the entire amount owed. The court did, however, cite Section 6672 (d), permitting him to bring a separate suit to seek contribution from other persons characterized as responsible.

The IRS doesn’t always have the last word on who should be held liable when businesses go belly up. In another dispute, the court overruled the decision by the IRS to impose liability on Catherine Barrett, an officer who was a mere figurehead with no real authority. While Barrett had been authorized by her husband, the company president, to sign company checks, there was believable testimony that she’d done so only at the command of her husband, who ran the business “with an iron hand” and forced her to sign checks by “berating her publicly, threatening her and, at times, beating her.” The court concluded that the real authority to decide whom to pay, and when, rested solely with the husband.

The IRS also got exactly nowhere when it sought to hold Robert Senter personally liable because he was a vice president and 12 percent owner of his company. As Senter lacked authority to hire or fire, pay bills or sign tax returns, he wasn’t responsible for the unpaid taxes. What about his high rank? The court reasoned that it meant nothing given the other circumstances. 

Best Wishes to My Readers for a Happy New Year

As someone who keeps his creditors at bay only because he has a certain talent for demystification of the Internal Revenue Code, I would be remiss in the discharge of my obligations to you were I to fail to note that “year” includes, but isn’t limited to, all calendar, fiscal and taxable years. Consistent with the Joycean murkiness of Code Section 441, “taxable year” includes regular and short taxable years, as well as taxable years having 366 days.