Unpaid President of Nonprofit Organization Was Not Responsible Person

In 1989, L agreed to become the unpaid president of C, a nonprofit social club, after its president resigned. C had been experiencing financial problems and employed several full-time paid staff members to manage its affairs, including a general manager, a bookkeeper-secretary and a catering manager.

L did not sign payroll checks, because C had outsourced its payroll administration to ADP. During Ls tenure as president, ADP used an outdated signature stamp bearing Ls predecessors name.

During Ls term, creditors called each day to seek payment; C was required to pay for all new purchases with cash. Both Cs staff and the board of directors decided whom to pay.

At a special board meeting on March 7, 1990, a consultant L hired informed the board of the seriousness of Cs financial problems and its failure to pay trust fund taxes. L had not been aware of the tax problem prior to the meeting. Thereafter, L instructed ADP to ensure that all trust fund taxes were paid. One week later, due to Cs failure to pay its taxes, L formally tendered his resignation as president, but later agreed to continue as acting president. C filed for bankruptcy in June 1990. The IRS sought to collect $48,265 in Cs unpaid trust fund taxes from L.

Sec. 6672(a) provides as follows:

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 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.

Under this provision, the financially responsible persons of a business entity who fail to ensure that payroll withholding taxes and Social Security taxes are paid are subject to a penalty in the amount of the unpaid taxes. The assessment of such a penalty against an individual gives rise to a rebuttable presumption of correctness in favor of the government; see Psaty, 442 F2d 1154 (3d Cir. 1971). To avoid Sec. 6672 liability, a taxpayer bears the burden of coming forward and proving by a preponderance of the evidence that he is not a responsible person within meaning of the statute, or that he did not willfully fail to remit the trust fund taxes; see Brounstein, 979 F2d 952 (3d Cir. 1992). The burden on the taxpayer is not altered because the issue arises in the context of a bankruptcy proceeding; see Raleigh v. IL Dept of Rev., 530 US 15 (2000). In the instant case, L bears the burden of proving either that he was not a responsible person within the meaning of the statute or that his actions were not willful as that term is defined by the law. A responsible person under Sec. 6672(a) is a person required to collect, truthfully account for or pay over any tax to the government; see Quattrone Accountants, Inc., 895 F2d 921 (3d Cir. 1990). Responsibility, in this context, is a matter of status, duty, or authority, not knowledge. Under In re Treacy, 255 BR 656 (ED PA 2000), the following factors are indicia of responsibility:

1. Contents of the corporate bylaws;

2. Ability to sign checks on the companys bank account;

3. Signature on the employers Federal quarterly and other tax returns;

4. Payment of other creditors in lieu of the U.S.;

5. Identity of officers, directors and principal stockholders in the firm;

6. Identity of individuals in charge of hiring and discharging employees; and

7. Identity of individuals in charge of the firms financial affairs.

The question of control over finances must be answered in light of the totality of the circumstances; no single factor, or the absence thereof, is determinative; see Fiataruolo, 8 F3d 930 (2d Cir. 1993).

Cs bylaws gave L financial authority over the operation of the club, but the bylaws were frequently ignored. For instance, Cs president was supposed to authorize and co-sign checks, but L rarely co-signed checks. As president, L was an authorized signatory on Cs bank accounts, but a corporate president is not necessarily presumed to have direct, actual knowledge of the status of tax payments simply because he is president; see In re Brady, 110 BR 16 (DC NV 1990).

Moreover, the payroll was issued by an independent contractor whose function was so far removed from Ls control that it used the facsimile signature of Ls predecessor, not that of L, on payroll checks.

L was only one of several C officers, employees and members who sometimes authorized the payment of creditors. L was the president of C only for a short time in the waning days of Cs existence. L delegated most hiring and firing decisions to the general manager. There is no evidence that L signed Cs tax reports. In short, L had only nominal financial authority as to C and was only marginally involved in day-to-day financial operations, especially payroll operations. While on paper L may have been a responsible person, in the totality of the actual circumstances, his degree of responsibility over payment of bills and taxes was very limited.

For a responsible person to be held liable under Sec. 6672, he must be found to have made a willful decision to prefer other creditors over the IRS. The Third Circuit has defined willfulness in this context as a voluntary, conscious and intentional decision to prefer other creditors over the government. A responsible person acts willfully when he or she pays other creditors in preference to the IRS knowing that taxes are due, or with reckless disregard for whether taxes have been paid; see Greenberg, 46 F3d 239 (3d Cir. 1994).

L denies having authorized payments to other creditors after March 7, 1990, when he first became aware of the nonpayment of taxes. L bears the burden of proving his denial. There is ample circumstantial support to sustain his burden. C was not Ls full-time business or even a source of income to him. He was not responsible for the actual payment of taxes. A great number of people made daily decisions about which creditors to pay. Under such conditions, it is readily believable that L himself did not authorize any payments to any other creditors after March 7, 1990.

While the IRS did produce an agreement dated March 9, 1990 and signed by L, there is no proof that L wrote a check from Cs account to make the downpayment on the agreement. Indeed, it appears quite possible that L may have written a personal check or obtained the downpayment from another C member, because C was so strapped for funds. The IRS had access to Cs bank records, from which it could have produced checks signed by L after March 7, 1990. There are no such checks of record. Without such evidence, the IRS has not refuted Ls case.

Moreover, Ls testimony proved that, after March 7, 1990, he attempted to correct the lack of payment of trust fund taxes. The court finds it credible that L contacted ADP to instruct it to ensure that the taxes were paid. The IRS neither called witnesses from ADP to refute Ls testimony, nor impeached his credibility on the issue. Ls testimony finds circumstantial support in the fact that as an unpaid officer of a nonprofit organization, he had nothing to gain by keeping C afloat while putting himself at great risk of substantial tax liability. He had every motivation to contact ADP to correct the problem, and no motivation to fail to do so. The IRS does not assert that L was required to take further steps to ensure that taxes were paid.

In the absence of evidence that additional measures were required, the court is not inclined to speculate about alternative actions L could have undertaken. In short, the totality of the circumstances indicates that L should not bear responsible person liability. His case may be compared to that of Holley, ED WI, 2/7/89, in which a volunteer director of a social services program was relieved of liability under Sec. 6672 due to financial confusion and a lack of funds in the waning days of the agency. The court held that a finding of gross negligence in management of the organization was necessary for an imposition of responsible person liability. 

Similarly, in this case, L may be said to have been in the wrong position at the wrong time. He became president while C was in a state of financial chaos in its waning days. If he was negligent at all, it can hardly be considered gross negligence.

In re E. Harry Lartz, Bktcy. Ct., MD PA, 3/10/03