Friday, April 15, 2011

Owners Still Owe $2 Million Responsible Person Penalty Despite Death of Accountant Who Embezzled FundsOwners Still Owe $2 Million Responsible Person Penalty Despite Death of Accountant Who Embezzled Funds

The U.S. Court of Appeals for the Eighth Circuit has granted summary judgment to the IRS in a ruling that found the owners of a company to be “responsible persons” subject to a $2 million trust fund recovery penalty for failing to timely remit employment taxes, despite their assertion that their accountant had embezzled funds, which deprived them of the opportunity to make informed decisions [Oppliger v. United States, CA8, 107 AFTR 2d ¶2011-631, 3/29/11].

Responsible person penalty. Under Code Sec. 6672(a), if an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In determining whether there is “willfulness” for purposes of Code Sec. 6672(a), the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.

The facts. In 1992, James and Gayle Oppliger formed Double O, a trucking business, and served as the sole owners and primary officers of the company. In 1997, the Oppligers formed LFC, a payroll company for Double O. The Oppligers were the sole members of LFC.

In 1996, the Oppligers hired Mary Kerkman to perform accounting and bookkeeping services for the companies. The Oppligers delegated to Kerkman the tasks of filing employment tax returns and paying payroll taxes. Kerkman provided the Oppligers with weekly reports that informed them of the companies' financial situations. Kerkman committed suicide on April 3, 2002. After her death, the Oppligers learned that Kerkman had embezzled $10,000 from the companies.

On April 4, 2002, the day after Kerkman's death, an IRS revenue officer informed the Oppligers that LFC employment taxes were not paid to the government for 13 consecutive quarters and Double O employment taxes were not paid for 17 quarters. The Oppligers claimed that this was when they first learned that Double O and LFC had not been paying employment taxes.

The Oppligers subsequently sold the assets of Double O on Sept. 1, 2002. Between April 4, 2002 and Sept. 1, 2002, LFC paid $2,117,640.43 to its employees and $3,240,138.60 to third-party creditors. The IRS then assessed penalties under Code Sec. 6672 against the Oppligers for LFC's unpaid taxes in the amount of $2,363,704.25, and Double O's unpaid taxes in the amount of $27,013.21. The Oppligers argued that they were not liable for the unpaid taxes. A federal district court granted summary judgment to the IRS, stating that there were no genuine issues of material fact regarding whether the Oppligers were responsible persons under Code Sec. 6672. The district court also determined that the Oppligers willfully failed to pay the employment (trust fund) taxes because they admitted that after the IRS informed them of their outstanding tax liabilities, they paid employees and third parties over $5 million.

The Oppligers appealed the district court ruling.

Eighth Circuit Court of Appeals ruling. The Eighth Circuit held that the Oppligers were responsible persons under Code Sec. 6672 because they had the status, duty, and authority to pay the trust fund taxes. The Eighth Circuit refuted the Oppligers' claim that Kerkman's misconduct deprived them of the opportunity to make informed decisions by noting that whether Kerkman may have been a responsible person under Code Sec. 6672 is immaterial to the Oppligers' liability since they were both responsible persons for purposes of the penalty.

The Eighth Circuit also concluded that the Oppligers had willfully failed to pay the trust fund taxes. Their decision to pay employees and other creditors, rather than the U.S. government, constituted a willful failure to pay the taxes under federal law.

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