Salzillo v. United States, 66 Fed. Cl. 23 (2005)
Background. Every employer is required by law to withhold federal income taxes and FICA taxes from employees' wages when they are paid (with certain exceptions). The tax code specifies that these withheld taxes are held in trust for the United States and so they are commonly referred to as "trust fund taxes."
In imposing the obligation to collect these taxes on employers, Congress recognized that some employers might fail to set aside and pay over the taxes to the government. When an employer fails to remit the withheld taxes, the United States must still credit each employee as if the withheld taxes were actually sent to the government. As a result, the United States obligates itself to pay benefits such as social security and income tax refunds, for which there is no corresponding revenue.
To protect against such losses, the persons responsible for ensuring that the trust fund taxes are paid, and who willfully fail to do so, may be held personally liable under section 6672 of the tax code. This section specifies that "any person required to collect and pay over any tax … who willfully fails to collect such tax and pay over such tax, or willfully attempts in 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." This means that persons who are responsible for withholding taxes and paying withheld taxes to the government may be assessed a penalty of up to 100% of the taxes that are not withheld or paid.
Case study. When a company began experiencing severe financial problems, its president ordered the chief financial officer (CFO) to use withheld taxes to pay creditors. The CFO protested, but was told that he would be fired if he did not comply. The IRS later assessed a penalty of $554,000 against the CFO under section 6672 of the tax code. The CFO appealed to the federal Court of Claims.
The court noted that liability under section 6672 requires (1) a person, (2) who is required to collect and pay over withheld taxes, but who (3) willfully fails to do so. The first two requirements are combined into the single concept of "responsible person." Such a person generally must have some authority over the payment of taxes. The court acknowledged that the CFO in this case had check writing authority, and that such authority generally indicates the ability to pay taxes. However, the court concluded that the CFO in this case was not a responsible person:
Liability under section 6672 is not imposed because someone is an officer or has check writing authority, or even effectuates payments to third parties rather than the IRS. Rather, the existence of these features is important only in indicating whether such an individual had the effective power to make payments to the IRS.
A person having check writing authority will not be a responsible person under section 6672 if the "corporate president controlled which creditors would be paid, including the IRS." Such was the case here. The court pointed out that when the CFO attempted to pay the IRS $50,000 without obtaining the president's permission, the president quickly detected the unauthorized use of funds and shifted money from the account in question to prevent the check from being cashed by the IRS. The court concluded, "The root principle that emerges is that an individual is not responsible if a third party exercises so much control over corporate funds as affirmatively to prevent that individual from effectuating payments to the IRS. That is exactly what happened here [since] the president deprived the CFO of effective power to pay the IRS."
Key point. The court rejected the CFO's argument that he could not be a responsible person because he had been ordered by his superior to use the withheld taxes to pay creditors. It noted that "instructions from a superior not to pay taxes do not take a person otherwise responsible under section 6672 out of that category." This rule "applies even where it is found likely that had the employee disobeyed the instruction not to pay the IRS, he or she would have been fired."
Relevance to church treasurers. Section 6672 contains no exemption for church officers or employees. As a result, any church officer or employee having the authority to pay withheld taxes to the government is potentially liable for 100% of the taxes owed if the church for any reason fails to pay them. This case illustrates the following important points:
First, check writing authority is one fact to consider in deciding if someone is a responsible person under section 6672. However, in and of itself, it may not be determinative.
Second, a person having check writing authority will not be a responsible person under section 6672 if an officer exercises so much control over corporate funds "as affirmatively to prevent that person from effectuating payments to the IRS."
Third, the court rejected the CFO's argument that he could not be a responsible person because he had been ordered by his superior to use the withheld taxes to pay creditors. It stressed that "instructions from a superior not to pay taxes do not take a person otherwise responsible under section 6672 out of that category." And, this rule applies even where it is likely that the employee would have been fired if he or she had disobeyed the instruction not to pay the IRS.
Key point. Other courts have reached the same conclusion. To illustrate: (1) A federal appeals court, in a recent case, concluded that "it is not a defense that a taxpayer would lose his job if he signed a check to the IRS without the express authority of a superior." Lubetzky v. United States, 393 F.3d 76 (1st Cir. 2004). (2) Another federal appeals court concluded that "the fact that [an employer] might well have fired [an employee] had he disobeyed instructions and paid the taxes does not make him any less responsible for their payment." Howard v. United States, 711 F.2d 729 (5th Cir. 1983).
