On October 26, 2021, the Tax Court issued a Memorandum Opinion in the case of Cashaw v. Commissioner (T.C. Memo. 2021-123). The primary issue presented in Cashaw was whether the petitioner is liable for trust fund recovery penalties.
Background to Cashaw v. Commissioner
The petitioner was presented with difficult choices during her tenure as temporary chief administrator of a hospital. The hospital was under a state order freezing its bank accounts except for the purpose of making specified payments to certain hospital staff, vendors, and creditors following the approval of a third party.
The petitioner prioritized payments among the hospital’s staff, vendors, and private creditors that she deemed provided “essential patient care services.” This prioritizing included her refusal at times to sign checks on behalf of Riverside where the purported purposes of the payments did not align, in her eyes, with such patient services…including payments to the IRS of employment taxes.
The TFRP Proceedings
On April 7, 2015, the IRS sent Letter 1153 (Trust Fund Recovery Penalty Letter) to the petitioner at her last known address, but it was marked unclaimed. Nonetheless, the IRS assessed the trust fund recovery penalty (TFRP) against petitioner on July 27, 2015. After petitioner failed to pay the assessed liabilities, respondent sent petitioner Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, for the TFRPs on October 6, 2015. Shortly thereafter, respondent also sent petitioner Letter 3172 (Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC § 6320).
In response to the lien and levy notices, petitioner timely submitted Form 12153 (Request for a Collection Due Process or Equivalent Hearing), to the IRS Office of Appeals (Appeals Office) in which she challenged the TFRP liabilities. The settlement officer assigned to petitioner’s case requested financial information from petitioner, which petitioner never provided. Following petitioner’s collection due process (CDP) hearing, respondent issued a notice of determination in March 2016 sustaining the proposed collection actions.
The Tax Court Proceeding
To begin, the Tax Court held that the assessment of the TFRPs against the petitioner following the mailing of the Letter 1153 was valid; thus, the Tax Court could consider the merits of that assessment, i.e., the underlying liabilities, provided petitioner was not statutorily precluded from raising them during her CDP hearing.
Challenging Underlying Liability
A taxpayer cannot challenge an underlying liability in a CDP hearing, and the Tax Court cannot review that liability, if the taxpayer had an earlier opportunity to dispute the assessment of that liability. A Letter 1153 provides a taxpayer with an administrative means for protesting a proposed assessment of TFRPs with the IRS, which constitutes an opportunity for the taxpayer to dispute the underlying tax liability for purposes of IRC § 6330(c)(2)(B).
A Letter 1153, however, that is neither received nor deliberately refused by a taxpayer does not constitute an opportunity to dispute the taxpayer’s liability. In the present case, the Letter 1153 was sent to the petitioner’s last known address, but it was not actually received by the petitioner.
The evidence does not suggest, and the IRS does not claim, that the petitioner refused acceptance of the Letter 1153. Accordingly, the petitioner was not precluded from raising her underlying liabilities at the CDP hearing, and the Tax Court was not precluded from reviewing them.
Employers have a duty to withhold income and employment taxes from their employees’ wages. When net wages are paid to an employee and the employer does not pay over the withheld funds, the IRS has no recourse against the employee. For this reason, IRC § 6672 provides a collection tool allowing the IRS to impose penalties on certain persons who fail to withhold and pay over trust fund taxes. The penalty under IRC § 6672 is equal to the total amount of the tax not paid over and is imposed on (1) any responsible person who (2) willfully fails to collect, account for, and pay over the tax.
So, who is a “responsible person?”
A Responsible Person
A responsible person is any person required to collect, account for, and pay over withheld taxes. Whether someone is a responsible person is “a matter of status, duty and authority, not knowledge.” Courts consider some of the following factors in making this determination:
- the individual’s status as an officer or member of the business’ board of directors;
- the individual’s role in managing the day-to-day operations of the business;
- whether the individual made decisions as to the disbursement of funds and payment of creditors; and
- the individual’s authority to sign checks on behalf of the business.
No single factor is dispositive, with the crucial inquiry being whether the person, by virtue of the person’s position in the company, had the “effective power” to pay the taxes owed based on their actual authority or ability, or could have had “substantial input” into such decisions.
The Tax Court notes at the outset that “there is little dispute that the petitioner was a responsible person.” Well, then… She was the chief administrator of the hospital during the periods at issue. She managed the hospital’s operations, participated in board meetings, and had check-signing authority over the bank accounts during the periods at issue. She reviewed hospital expenses and prioritized payments to hospital staff, vendors, and private creditors that she deemed provided essential services to the hospital and its patients.
Petitioner argues that another administrator exercised greater financial control over hospital funds during the periods at issue; however, this does little (nothing) to negate the petitioner’s status as a responsible person.
IRC § 6672 applies to “any” responsible person, not the person “most responsible” for the payment of the taxes. Moreover, the responsible individual need not even have the “final word” as to which creditors should be paid in order to be liable for TFRPs. Rather, it is sufficient that the person have “effective power” or “significant input” in the decision as to whether funds are to be used to pay Federal taxes owed.
The petitioner exercised such requisite control during the periods at issue by signing checks, moving funds between the hospital’s accounts, and determining which vendors and creditors should be paid or not paid when the hospital’s financial resources were scarce, and amounts were owed to the government. As such, the Tax Court took little time determining that the petitioner was a responsible person for purposes of IRC § 6672.
A responsible person will be held liable for a TFRP only where the failure to pay the withholding tax was willful. “Willful” for this purpose does not mean the responsible person must have a criminal or other bad motive; instead, the responsible person must only exhibit a voluntary, conscious, and intentional failure to collect, truthfully account for, and pay over the taxes withheld from the employees. To establish willfulness, there is no requirement that the responsible person intended to deprive the Federal Government of the withholding tax.
Willfulness can exist where the “responsible person acts with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the government.” Willfulness is typically proven by evidence that a responsible person paid other creditors when withholding taxes were due to the government.
The petitioner does not dispute that she knew that the hospital was not fully paying its trust fund taxes and even acknowledged prioritizing the signing of checks to vendors and creditors over the government. Generally, such actions demonstrate willfulness for purposes of IRC § 6672. However, the petitioner contends that she was not willful because the hospital’s available funds were encumbered by certain legal obligations that excused her failure to pay the hospital’s Federal withholding tax obligations.
The Tax Court ever so cordially disagreed.
The Fifth Circuit (to which this case is appealable) recognizes that a taxpayer may avoid liability for a TFRP by showing reasonable cause for a failure to collect, account for, and pay over trust fund taxes. However, reasonable cause is a very limited exception. Indeed, the Tax Court observes, rather caustically, that the Fifth Circuit has yet to see any “taxpayer [who] has carried that pail up the hill.”
Thus, the reasonable cause exception is rather like the yeti, skunk ape, or the Loch Ness monster. It may exist, but proving it is not going to be easy. The facts were not on the petitioner’s side in this case, seeing as she knew (and conceded that she knew) that trust fund taxes were due to the government, and that she paid other creditors to the detriment of the government.
- IRC 6330(c)(2)(B); Mason v. Commissioner, 132 T.C. 301, 317 (2009). ↑
- See Mason, 132 T.C. at 317-18. ↑
- Id. at 318; Fitzpatrick v. Commissioner, T.C. Memo. 2016-199, at *18. ↑
- IRC § 3102(a); IRC § 3402(a). ↑
- Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir. 1979). ↑
- See Newsome v. United States, 431 F.2d 742, 745 (5th Cir. 1970). ↑
- Mazo, 591 F.2d at 1154. ↑
- IRC § 6672(a); Mazo, 591 F.2d at 1154. ↑
- Mazo, 591 F.2d at 1156. ↑
- Barnett v. IRS, 988 F.2d 1449, 1454-55 (5th Cir. 1993). ↑
- Id. ↑
- Accord Barnett, 988 F.2d at 1455 (noting that businesses may have several responsible persons under IRC § 6672). ↑
- Brown v. United States, 464 F.2d 590, 591 n.1 (5th Cir. 1972). ↑
- See Barnett, 988 F.2d at 1454-55; Brown, 464 F.2d at 591. ↑
- IRC § 6672. ↑
- Newsome, 431 F.2d at 745. ↑
- Id. at 747. ↑
- Mazo, 591 F.2d at 1155. ↑
- Gustin v. United States, 876 F.2d 485, 492 (5th Cir. 1989). ↑
- See Davis v. United States, 402 F. App’x 915, 919-920 (5th Cir. 2010); Howard v. United States, 711 F.2d 729, 735 (5th Cir. 1983). ↑
- Newsome, 431 F.2d at 746-747. ↑
- Logal v. United States, 195 F.3d 229, 233 (5th Cir. 1999) (quoting Bowen v. United States, 836 F.2d 965, 968 (5th Cir. 1988)). ↑
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