Responsible Person Penalty Upheld Against Majority Owner and Financier of Company
The Court of Federal Claims has held that the majority owner, CEO, and principal financier of a publishing corporation was responsible for its nonpayment of payroll tax, and willfully failed to pay over the funds to the government. Although he did not exercise day-to-day control over the entity, he clearly had the capacity to do so. He also drew on company funds in an attempt to recoup cash he advanced to the entity during the same time he knew payroll taxes were unpaid.
Jenkins v. U.S., 108 AFTR 2d 2011-_____, 09/15/2011
Trust Fund Recovery Penalty. Code Sec. 6672 imposes the trust fund recovery penalty on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not collected and paid. The penalty is imposed on a “responsible person,” i.e., anyone in a business entity who has the duty to collect, account for, or pay over the tax. In determining whether there is “willfulness,” 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.
Facts. In 1992, Timothy Jenkins and Gary Puckrein founded Dialogue Diaspora, Inc. (“DDI”), a corporation which published American Visions magazine and promoted African-American culture. Jenkins was a majority stockholder, CEO, CFO, and publisher. He also was a major financial backer of DDI. He rented space to DDI, advanced money to it under a loan agreement secured by a factor’s lien, and made a series of advances to DDI or American Visions totaling over $250,000. Puckrein was DDI President and editor of American Visions andwas primarily responsible for the day-to-day management of the business from 1992 to 1994.
Early in 1995, Jenkins and Puckrein had a major falling out, and in April of that year, Jenkins learned that DDI had been experiencing employment tax problems with the IRS and had entered into an installment agreement for the payment of those taxes. DDI did not stay compliant with the installment agreement and, in June of 1995 after having learned Puckrein was secretly operating a competing company, Jenkins changed the locks on DDI’s premises, called a board meeting, and ousted Puckrein. On July 5, 1995, Jenkins wrote a check on DDI’s bank account for $16,668 made payable to himself and his wife (the last of 13 such checks), cashed the check and deposited the proceeds into one of his personal bank accounts. Jenkins said that he wrote this check to himself based on the loan/factoring agreement and admitted that, at the time he wrote it, he knew about the unpaid IRS liability.
After taking various procedural steps, the IRS collected $264,097.56 from Jenkins by levying on his individual retirement account and Social Security benefits. Jenkins then filed a claim for refund seeking in an attempt to recover the levied assets. The IRS disallowed Jenkins’ refund claim and, in turn, Jenkins filed a suit for refund in the Court of Federal Claims.
Court of Federal Claims Finds in Favor of the IRS. Ruling in favor of the IRS, the Court held that Jenkins was a responsible person who willfully failed to collect, account for, or remit the withholding taxes. Jenkins held various positions of significant authority within DDI, sat on the company’s board and, together with his wife, owned at least 50% of the company’s stock. In addition, he had the ability to sign checks on DDI’s primary bank account and the ability to withdraw funds from those accounts. Because of his stake in the corporation and his role as a director, Jenkins also had the ability to precipitate reorganizations of the corporation’s leadership. Moreover, he held an additional entrepreneurial stake in DDI via his role in financing the company and leasing the building that was used as its principal place of business. Owing to his multi-faceted role within the corporation and his role as a financier of first resort, the Court held that Jenkins plainly had the leverage and authority to “avoid the default” and demand that the corporation not squander the taxes it withheld from its employees. Although he claimed not to have exercised day-to-day decision making authority regarding DDI’s tax obligations, Jenkins clearly possessed the effective power to do so. The Court pointed out that it was well-accepted that a person need not actually perform an entity’s tax functions (withhold and pay over payroll tax deposits) in order to be a responsible person under Code Sec. 6672.
The Court also held that Jenkins willfully failed to collect, account for, and remit the withholding taxes owed by DDI. There was little doubt that Jenkins had an earnest desire for DDI to pay the past due and current taxes it owed the IRS, but only if the payment did not adversely impact his own ability to recoup moneys owed to him by DDI. It was in pursuit of the latter goal, and certainly not the former, that Jenkins wrote himself a check for $16,668.45 (the last of at least 13 checks) in an attempt to recover his investment in DDI. The Court determined that every time he signed one of these checks, he should have wondered, in light of DDI’s history of delinquency, its modest size, and the lack of improvement in its bottom line, whether history was repeating itself and he was signing over to creditors (and himself) money that belonged to the United States.