Officers, Directors and Trustees – Part 1

Church Law and Tax 1989-11-01 Recent Developments Officers, Directors, and Trustees Richard R. Hammar, J.D.,

Church Law and Tax 1989-11-01 Recent Developments

Officers, Directors, and Trustees

Can the officers and directors of a church or other nonprofit organization be personally liable for the amount of payroll taxes that are not withheld or paid over to the government? Yes, concluded a federal district court in New York in a significant ruling. A church-operated charitable organization failed to pay over to the IRS withheld income taxes and the employer’s and employees’ share of FICA taxes for a number of quarters in both 1984 and 1985. Accordingly, the IRS assessed a penalty in the amount of 100% of the unpaid taxes ($230,245.86) against each of the four officers of the organization pursuant to section 6672 of the Internal Revenue Code, which specifies that “any person required to collect … and pay over any [FICA or income] tax who willfully fails to collect 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.” The officers challenged the validity of the IRS actions. The court observed that federal law requires employers to withhold FICA and income taxes from the wages of their employees, and to hold the withheld taxes as a “special trust fund” for the benefit of the United States government until paid or deposited. If an employer fails to make the required payments, “the government may actually suffer a loss because the employees are given credit for the amount of the taxes withheld regardless of whether the employer ever pays the money to the government.” Accordingly, “section 6672 of the Code supplies an alternative method for collecting the withheld taxes. Pursuant to this section, the government may assess a penalty, equal to the full amount of the unpaid tax, against a person responsible for paying over the money who willfully fails to do so.” The court observed that a person is liable for the full amount of taxes under section 6672 if “(1) he or she was under a duty to collect, account for, and pay over the taxes (i.e., a ‘responsible person’), and (2) the failure to pay the taxes was ‘willful.'” The court concluded that the four officers of the church-related charitable organization satisfied both requirements, and accordingly that they were personally liable for the unpaid taxes under section 6672. The officers were “responsible persons” since (1) they were directors as well as officers, (2) they had the authority to sign checks (including payroll checks), and (3) they were involved in “routine business concerns such as corporate funding, bookkeeping, salaries, and hiring and firing.” The fact that a nonprofit organization was involved, and that the officers donated their services without compensation, did not relieve them of liability. The court also ruled that the officers acted “willfully” and accordingly met the second requirement of section 6672. It defined “willful action” as “voluntary, conscious and intentional—as opposed to accidental—decisions not to remit funds properly withheld to the government.” There need not be “an evil motive or an intent to defraud.” The court specifically held that “the failure to investigate or to correct mismanagement after having notice that withheld taxes have not been remitted to the government is deemed to be willful conduct.” Further, the court concluded that payment of employee wages and other debts with the knowledge that the payment of payroll taxes is “late” constitutes willful conduct. What is the relevance of this case to churches and church leaders? It demonstrates that church officers and directors can be personally liable for the payment of income taxes and FICA taxes that they fail to withhold, account for, or pay to the government. It does not matter that they serve without compensation, so long as they satisfy the definition of a “responsible person” and act willfully. Many church officers and directors will satisfy the definition of a “responsible person,” and such persons can be personally liable for unpaid payroll taxes if they act under the liberal definition of “willfully” described above. Clearly, church leaders must be knowledgeable regarding a church’s payroll tax obligations, and insure that such obligations are satisfied. Carter v. United States, 89-2 USTC para. 9446 (S.D.N.Y. 1989).

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