Payroll Tax Problems

June 4, 2010

Internal Revenue Service
Attn:  James ******
1400 N. Providence Road
Media, **
Re: Joseph C******
SSN: ***-**-****
and T** Inc.
EIN: **-*******
Tax Return Form Number: 941
Proposed Assessment of Trust Fund Recovery Penalty For Periods Ending:  
September 30, 2008, March 31, 2009, and June 30, 2009

Dear James ******,

Joseph C****** (aka,Taxpayer) hereby protests the proposed assessment of the Trust Fund Recovery Penalty as set forth below. This protest is filed with respect to the 60 Day Letter (Letter 1153) dated April 17, 2010, and the accompanying explanations. Taxpayer reserves the right to file one or more supplements to this protest.

The following information is submitted in support of this protest:

1.    Taxpayer's name, address and identification number:
Joseph C******
12 Victoria Lane
*******, **
SSN:  ***-**-****
Taxpayer is a calendar year-end taxpayer. Taxpayer filed his federal income tax return on Form 1040.

2.    Date of the 60 Day Letter: April 14, 2010

3.    Taxable years at issue: T**, Inc. Forms 941 for periods ending September 30, 2008, March 31, 2009 and June 30, 2009.

4.    Request for conference: Taxpayer requests a telephonic conference with the Internal Revenue Office of Appeals with respect to the findings of the examining Revenue Agent.

5.    Request to be present at, and receive documents relating to, certain Appeals
communications: In accordance with section 1001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, Taxpayer requests to be present at all communications between the Internal Revenue Service Examination Division and the Appeals Division with respect to this matter. Taxpayer requests advance notice of such communications so that Taxpayer can arrange to be present. In addition, Taxpayer requests to be present at all communications between Chief Counsel Representatives, and the Appeals Division with respect to this matter. Taxpayer requests advance notice of such communications so that Taxpayer can arrange to be present. Taxpayer further requests copies of all written communications and summaries of any oral communications between the Internal Revenue Service Examination Division and the Appeals Division with respect to this matter. Finally, Taxpayer requests copies of all communications, whether written or written summaries of oral communications, between the Examination Division and any third party that occurred during the course of the examination of Taxpayer.

6.        Taxpayer does not agree with, and hereby protests, the proposed assessments of the Trust Fund Recovery Penalty for unpaid employment taxes from T**, Inc. for the following Form 941 tax periods:  September 30, 2008, March 31, 2009, and June 30, 2009 as described in the 60 Day Letter including those set forth below:

Adjustments to Income/Expenses

General Background:
Joseph C****** should be given the opportunity to present information that will show that he should not be assessed the Trust Fund Recovery Penalty for the unpaid employment taxes from T**, Inc.

Issue 1:  Proposed Assessment of Trust Fund Recovery Penalty
Is Joseph C****** responsible for the Trust Fund Recovery Penalty for unpaid employment taxes from T**, Inc.?


Facts:

T**, Inc. files is an 1120S corporation and is owned by the following individuals:

Name of Shareholder     Position with T**, Inc.           Percentage of stock ownership
- Barbara F******          Executive VP                               30%
- Joseph C******            President                                   30%
- Thomas R******         CEO                                             40%

T**, Inc. has operates out of the following two offices:
Location of Office              Approximate number of employees
-    Broomall, **                       89
-    Cedar Knolls, **                 74

The Broomall, ** office is the mailing address for T**, Inc. and is considered the company's headquarters.
Thomas R****** and Barbara F****** work in the Broomall, ** office and that Joseph C****** works in the Cedar Knolls, ** office.  

The distance from Joseph C******'s residence to each of T**, Inc.'s offices is as follows:
-    Residence to Broomall, ** - 88.86 miles
-    Residence to Cedar Knolls, ** - 3.19 miles  

While Joseph C****** would easily commute to the Cedar Knolls, ** office, he would not go to the Broomall, ** office because it would take about 2 hours of driving time to get there from his residence.

All of T** Inc.'s administrative functions, including payroll, banking and paying of creditor's invoices, are handled out of the Broomall office.  Joseph C****** was not made aware that other creditors were being paid ahead of the IRS in regards to the payroll taxes.

Joseph C****** is responsible for generating sales for T**, Inc., and does not have authority over any administrative business, including but not limited to payroll, human resources, and banking functions.  In addition to not working in the Cedar Knolls, ** office, Mr. C****** did not receive nor review any company financial and/or payroll reports.  Mr. C****** does not have check writing authority and consequently has not signed any checks for T**, Inc.  In addition, Mr. C****** did not sign any Forms 941.

Joseph C****** does not have sole authority to determine T**, Inc.'s financial policy.  There is no evidence presented that would indicate that the three shareholders met during the periods at hand to discuss and determine T** Inc.'s financial policy regarding the payment of payroll and payroll taxes.

Mr. C****** does not have the authority to pay bills from creditors or others, That responsibility is the authority of those working in the Broomall, ** office.  

Mr. C****** does not have the authority to guarantee or co-sign loans, That responsibility is the authority of those working in the Broomall, ** office.  

Mr. C****** does not have the authority to hire/fire employees, That responsibility is the authority of those working in the Broomall, ** office.

Law

IRC Section 6671

6671(a) Penalty Assessed as Tax. - The penalties and liabilities provided by this subchapter shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as taxes, except as otherwise provided, any reference in this title to "tax" imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.

6671(b) Person Defined. - The term "person", as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.

IRC Section 6672

IRC § 6672(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 i-n 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. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.

The penalty equal to 100 percent of amounts withheld from the compensation of an employee is imposed if the withheld amounts are not remitted to the United States. Code Sec. 6672 . It is only these amounts of tax withheld from the employee to which the penalty may apply; the penalty does not apply to the employer's share of the FICA tax, and the penalty does not apply to the FUTA tax or other amounts of tax due from the employer. Slodov v. United States, SCt, 78-1 ustc ¶9447, 436 US 238.

The penalty is imposed on responsible persons, who generally are officers or employees of the person or entity responsible for remitting the withheld taxes. Responsible persons are subject to the penalty if they willfully fail to collect, account for, and pay employee withholding taxes
Responsible Persons

In Wilma Shore v. Brown, Plaintiff v. Kevin M. Brown, Acting Commissioner of Internal Revenue Service of United States of America, and Does 1 through 10 inclusive, Defendant. United States of America, Counterclaimant v. Wilma Shore v. Brown, Counterclaim Defendant, and Gregory Shore and Brenda O. Reynolds, Additional Counter claim Defendants., U.S. District Court, E.D. California, 2009-2 U.S.T.C. ¶50,68, the court stated that "The Ninth Circuit has consistently identified persons who have "the final word as to what bills should or should not be paid, and when" as "responsible" persons under  §6672 . Purcell v. United States [93-2 ustc ¶50,460], 1 F.3d 932, 936 (9th Cir. 1993). A person has the final word if that person had "the authority required to exercise significant control over the corporation's financial affairs, regardless of whether he exercised such control in fact." Purcell [ 93-2 ustc ¶50,460], 1 F.3d at 937. In other words, responsibility is a matter of status, duty, and authority, not knowledge. Davis, 961 F.2d at 873 (upholding the trial court's finding of "responsible person" based on the plaintiff's position as the president, member of the board, and major shareholder, even though the plaintiff had no knowledge of the tax default). "Authority turns on the scope and nature of an individual's power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld employment taxes are paid over flows from the authority that enables one to do so.” Purcell [ 93-2 ustc §50,460], 1 F.3d at 936.
Willingness
The failure to collect or account for and pay over trust fund taxes must be willful, 1 Courts look to the actions undertaken to determine whether the failure to collect and pay over is willful.
Willfulness has been defined as the "voluntary, conscious, and intentional decision to prefer other creditors to the United States." 2

Paying creditors instead of paying over withholding taxes with the knowledge that the taxes are due constitutes willfulness as a matter of law. Carlson v. United States, S.D. Iowa, 2003-1 ustc §50,265. Similarly, a responsible person's knowledge that payments are being made to other creditors after the responsible person has become aware of the employer's failure to pay trust fund taxes is sufficient to constitute willfulness. Crutcher v. United States, N.D. Ala., 2002-1 ustc 50,289.

Neither a bad motive nor a specific intent to defraud the government is a necessary element. 3 Knowledge of the duty has been held to satisfy the willfulness requirement, as has the reckless disregard for known risks. 4 For example, where the president of the board of directors knew of the company's history of tax payment problems and of the company's current, steadily increasing tax liability, the taxpayer was held to have recklessly disregarded a known risk that taxes were not being paid. Jefferson v. United States, CA-7, 2008-2 ustc ¶50,587. More than mere negligence is required, 5 however, and a person is not subject to the  Code Sec. 6672  penalty if the non-compliance is unintentional, Winchester v. IRS, E.D. Mich., 88-1 ustc ¶9237, 686 FSupp 605, or if, as a result of negligence, he or she is unaware of the default in the payment of withholding taxes. Calderone v. United States, CA-6, 799 F2d 254. Voluntary use of alcohol and narcotics may be incapacitating, but it is not a defense to liability. United States v. Landau, CA-2, 98-2 ustc ¶50,667, 155 F3d 93.

. United States v. Kim, CA-7, 97-1 ustc ¶50,370, 111 F3d 1351

2. United States v. McCombs, CA-2, 94-2 ustc ¶50,363, 30 F3d 310; Caterino v. United States, CA-1, 86-1 ustc ¶9452, 794 F2d 1, 6, cert. denied, 480 US 905; Powers v. United States, CA-2, 2001-1 ustc ¶50,338, 5 FedAppx 97; Rocha v. United States, D. Ore., 2001-1 ustc ¶50,425, 142 FSupp 2d 1277; Thosteson v. United States, M.D. Ala., 2001-2 ustc ¶50,653, 182 FSupp 2d 1189, aff'd, CA-11, 331 F3d 1294; Cook v. United States, FedCls, 2002-1 ustc ¶50,328, 52 FedCl 62; In re Howard, E.D. N.C., 2003-2 ustc ¶50,683, 301 BR 456.
3. Harrington v. United States, CA-1, 74-2 ustc ¶9772, 504 F2d 1306; Monday v. United States, CA-7, 70-1 ustc ¶9205, 421 F2d 1210; United States v. Beltran, S.D. Fla., 2004-2 ustc ¶50,416, 316 BR 37
4. Wright v. United States, CA-7, 87-1 ustc ¶9130, 809 F2d 425; Mazo v. United States, CA-5, 79-1 ustc ¶9284, 591 F2d 1151; Monday v. United States, CA-7, 70-1 ustc ¶9205, 421 F2d 1210; In re Fry, E.D. Mo., 91 BR 69; Phillips v. United States, CA-9, 96-1 ustc ¶50,057, 73 F3d 939; Johnson v. United States, D.C. Md., 2002-1 ustc ¶50,267, 203 FSupp 2d 416, aff'd, CA-4, 2003-1 ustc ¶50,345, 50 FedAppx 113, cert. denied, 124 SCt 60; Finley v. United States, CA-10, 97-2 ustc ¶50,613, 123 F3d 1342; Kalb v. United States, CA-2, 74-2 ustc ¶9760, 505 F2d 506, cert. denied, 421 US 979; Malloy v. United States, CA-11, 94-1 ustc ¶50,145, 17 F3d 329; Pitts v. United States, D.Ariz., 2001-1 ustc ¶50,419.
5. Kalb v. United States, CA-2, 74-2 ustc ¶9760, 505 F2d 506, cert. denied, 421 US 979; Young v. United States, N.D. Tex., 85-1 ustc ¶9247, 609 FSupp 512, 519

Analysis

Responsibility

The facts of this case are similar to those of U.S. District Court, So. Dist. N.Y., United States of America, Plaintiff v. Alexander Burger, Irwin Goldfeder and Alan J. Levy, Defendants [89-2 USTC ¶9452].  In this case, the minority stockholder-director of a bankrupt family corporation with unpaid tax liability was not a responsible person for purposes of the penalty for the failure to pay over withheld taxes. Such individual lacked significant control over the financial affairs of the corporation, did not have the power to sign checks, and did not make decisions involving the disbursement of funds.
In U.S. District Court, So. Dist. N.Y., United States of America, Plaintiff v. Alexander Burger, Irwin Goldfeder and Alan J. Levy, Defendants [89-2 USTC ¶9452], the court noted that "For purposes of §6672, a "responsible person" includes one who either individually or as part of a group exercises ultimate authority over a corporation's financial affairs. See, e.g., Kalb v. United States [74-2 ustc ¶9760 ], 505 F.2d 506, 511 (2d Cir. 1974), cert. denied, 421 U.S. 979 (1975); Monday v. United States [70-1 ustc ¶9205 ], 421 F.2d 1210, 1214-15 (7th Cir. 1970). A "responsible person" also includes any person who has significant control over the corporation's affairs and participates in decisions concerning what bills should or should not be paid and when, and thus determines whether the United States or other creditors will be paid. See, e.g., Simpson v. United States [88-2 ustc ¶9474 ], 664 F.Supp. 43 (S.D.N.Y. 1987); Abramson v. United States [85-1 ustc ¶93800 ], 48 Bankr. 809 (E.D.N.Y. 1985). Ultimate authority and significant control do not mean exclusive authority or control, so that more than one person may be held responsible under §6672 . See Thibodeau v. United States [87-2 ustc ¶9620 ], 828 F.2d 1499, 1503 (11th Cir. 1987); Simpson, 664 F.Supp. at 48.”
In further support that the defendant was not a Responsible Person, the court in "Burger, et al" stated that, "In sum, the evidence may show that Levy's status invested him with a moral duty to try to persuade those with the requisite corporate power and responsibility to direct payment of the withholding taxes. But such a moral duty is not equivalent to the duty to pay that is described by §6671 and enforced by §6672. I have been unable to find a single case in which a minority shareholder who was not an officer and was not a signatory of corporate checks, and who did not in fact perform the function of a corporate officer, was held liable as a responsible person under §6672 . Compare Thibodeau v. United States [87-2 ustc ¶9620], 828 F.2d 1499 (11th Cir. 1987) (responsible person was director and president of corporation, with check signing authority); Gephart v. United States [87-1 ustc ¶9319], 818 F.2d 469 (6th Cir. 1987) (responsible person was general manager of corporation, with check signing authority, and had authority initially to determine which creditors to pay); Howard v. United States [83-2 ustc ¶9528], 711 F.2d 729 (5th Cir. 1983) (responsible person was minority shareholder, director, treasurer, and executive vice-president, and sole or joint signatory on checking account during relevant quarters); Feist v. United States [79-2 ustc ¶9635], 607 F.2d 954 (Ct. Cl. 1979) (responsible person was sole shareholder of parent corporation, and chairman and treasurer of subsidiary); Neckles v. United States [78-2 ustc ¶9701 ], 579 F.2d 938 (5th Cir. 1978) (per curiam) (responsible person was "moving force" in organizing venture, signatory on checking account, and participant in "just about everything"); Hartman v. United States [76-2 ustc ¶9578 ], 538 F.2d 1336 (8th Cir. 1976) (responsible person was minority shareholder, president of corporation, and signatory); Harrington v. United States [74-2 ustc ¶9772 ], 504 F.2d 1306 (1st Cir. 1974) (responsible person was majority shareholder, president, and treasurer); Brown v. United States [72-2 ustc ¶9568 ], 464 F.2d 590 (5th Cir. 1972), cert. denied, 410 U.S. 908 (1973) (responsible person was president and signatory); Liddon v. United States [71-2 ustc ¶9591 ], 448 F.2d 509 (5th Cir. 1971), cert. denied, 406 U.S. 918 (1972) (responsible person was 50% shareholder, director, and signatory); Gold v. United States [81-1 ustc ¶9231 ], 506 F.Supp. 473 (E.D.N.Y.) aff’d, 671 F.2d 492 (1981) (responsible person was shareholder, director, secretary-treasurer, and signatory, who approved certain bills for payment) with Maggy v. United States [77-2 ¶9686], 560 F.2d 1372, 1374-75 (9th Cir. 1977), cert. denied, 439 U.S. 821 91978) (board chairman a signatory was not responsible because he "was kept isolated from the [Board's financial] committee’s activities and decisions"); Bauer v. United States [76-2 ustc ¶9720], 543 F.2d 142, 149 (Ct. Cl. 1976) (substantial shareholder, vice-president, and director, who was head of corporation's photo finishing division, not responsible because he was "an outsider" with respect to financial and fiscal affairs); Cassis v. United States, 86-2 ustc (CCH) ¶9800 (S.D. Ohio 1986) (50% shareholder, director, and officer not responsible because his duties did not require him to be involved in such matters and because his role in financial affairs in fact was "de minimis"); Abramson v. United States, 85-1 ustc (CCH) ¶9380 (E.D.N.Y. 1985) (30% shareholder, secretary-treasurer, board member, and signatory not responsible because not involved in corporation's finances, but mainly handled sales); Bernardi v. United States, 74-1 ustc (CCH) ¶9170 (N.D. Ill.), aff'd on opinion below, [75-1 ustc ¶9133 ], 507 F.2d 682 (7th Cir. 1974), cert. denied, 422 U.S. 1042 (1975) (minority shareholder, vice-president, director, and signatory not a responsible person because he did not truly participate in decision making about disbursements or other financial matters); In re Brahm, 85-2 ustc (CCH) ¶9708 (M.D. Bankr. Fla. 1985) (president and signatory is not responsible, but mere figurehead)."


In Richard G. De Alto, Plaintiff v. The United States, Defendant , (May 13, 1998), U.S. Court of Federal Claims, (May 13, 1998) [98-1 USTC ¶50,433], the court held that, "The vice president of a corporation was not liable for the 100 percent penalty for nonpayment of payroll taxes because control of the corporation and, particularly, payment of creditors was dominated by its president. Although the vice president was aware of the corporation’s tax deficiencies, he did not have the practical authority to direct payments or to prevent them. He was authorized on bank documents to sign checks on the corporation's behalf, but that authority was strictly limited by the corporation's president to emergency situations occurring in the president's absence. Moreover, his check-signing authority was exercised infrequently and, ultimately, he was terminated for payment of creditors without the president's authorization. Thus, the vice president was not a responsible person for purposes of the trust fund recovery penalty."

Mr. C****** was a minority stockholder and President of T** Inc. and was not responsible for paying any creditors and any payroll taxes.  Mr. C****** lacked significant control over the financial affairs of the corporation, did not have the power to sign checks, and did not make decisions involving the disbursement of funds.

The final authority over T** Inc.'s financial affairs for tasks, including but not limited to writing checks, paying creditors and paying payroll taxes and wages, was not with Mr. C******.  Instead, the final authority for all of T** Inc.'s financial affairs rested with those officials who were located in the headquarters office (Broomall, PA).
Willfulness

In determining whether a stockholder was willful in not paying over withholding tax to the IRS, U. S. District Court, No. Dist. Tex., Dallas Div., Gilbert J. Bruneman, Plaintiff v. United States of America, defendant , (Oct. 13, 1976), (Oct. 13, 1976) [76-2 USTC ¶9743], held that, "Taxpayer was not the person responsible for the collection and payment of withheld taxes since he did not have the final word as to what checks would be prepared, for whom, and in what amount, or who had any significant control over such matters. Taxpayer was only a nominal officer of the corporation, and, pursuant to the understanding he had with the others and directors, he was not to serve and did not serve in such capacity. Further, taxpayer was always a minority stockholder, and never possessed the right or claimed the right to dictate corporate policy, including the payment of creditors.”
In addition, Robert White v. the United States , (Feb. 17, 1967), U.S. Court of Federal Claims, (Feb. 17, 1967), [67-1 USTC ¶9250] held that, "The president of a corporation, who had the ultimate authority to decide which creditors to pay and when, was a person under a duty to collect and pay over withheld income and FICA taxes. Penalties for failure to pay over such taxes were proper where he willfully (voluntarily, consciously, and intentionally) failed to do so.”
In U.S. District Court, East. Dist. La., Richard W. Hare v. United States of America , (Mar. 03, 1997), (Mar. 3, 1997) [97-1 USTC ¶50,293, the court found that, "A corporation's chief financial advisor did not qualify as a responsible person liable for the trust fund recovery penalty, but its president was a responsible person. The advisor had no authority to sign or disburse checks and was not regularly involved in the payroll process. Further, his decisions with respect to creditors' payments were subject to final approval by corporate officers. On the other hand, the president, who was a member of the board, had the power to disburse funds, pay creditors, and sign checks. In addition, the president willfully failed to pay over the withheld taxes because he made payments to other creditors after learning of the payroll tax delinquencies."
Mr. C****** is in the same position as the above noted cases in that he is not willful, since he did not have the final word as to what checks would be prepared.  Further, Mr. C****** did not possess the right to dictate corporate policy including the payment of creditors.  Additionally, Mr. C******  did not voluntarily, consciously, and intentionally pay employee withholding taxes to the IRS.

Mr. C******'s primary responsibility was to oversee the Sales Division.  He was not regularly involved in the payroll process.

Conclusion

Mr. C****** did not have ultimate authority over T** Inc.'s financial affairs and therefore is not considered a "Responsible Person" under IRC §6672.  Mr. C****** was responsible for generating sales for T**, Inc.

Further, Mr. C****** was not involved in the payroll process and any other administrative matters of T** Inc.  Mr. C****** was responsible for the Sales Division within T**, Inc. and consequently, did not willfully fail to pay the employees’ withholding taxes to the IRS.

Mr. C****** should not be held liable for the unpaid employment taxes from T**, Inc.


As noted above, Taxpayer reserves the right to file one or more supplements to this protest, as appropriate. We would be pleased to discuss with you a schedule for resolving this appeal promptly.
Please continue to direct all future correspondence concerning this matter to:

Jeffrey Galante
Respectfully submitted,

By:    
Jeffrey Galante
Enrolled Agent
JG Tax Group

REPRESENTATIVE'S PERJURY DECLARATION

Under penalties of perjury, I declare that this protest was prepared under my supervision and although I do not know of my own knowledge if the facts contained herein are true, on the basis of the information furnished me, I believe them to be true and correct.

By:    
Jeffrey Galante
Enrolled Agent
JG Tax Group