The District Court for the Southern District of Ohio denied summary judgment for the IRS's assessment against the volunteer treasurer of a private not-for-profit school for the school's unpaid employee payroll taxes. According to the court, the treasurer provided sufficient evidence that he reasonably believed that the taxes were being paid, and whether he had reasonable cause for not paying the taxes was a genuine issue of material fact.
Facts: David Bibler was a volunteer member of the board of directors of Excel Academy, an Ohio not-for-profit tax-exempt private school. He served as treasurer of the board of directors, which required him to sign or co-sign checks presented to him by the CEO or her assistant. Bibler had no authority to decide which bills to pay and was not responsible for completing the organization's payroll, financial reports, or tax filings. The CEO was responsible for those duties.
Excel Academy did not pay its employee payroll taxes for the last quarter of 2011 and, by October 2012, when Bibler and the rest of the board were informed of the lapse, owed the IRS $34,959. The board instructed the CEO to pay the IRS. From October 2012 until July 2013 (after the school had closed), Bibler signed or co-signed checks totaling $137,698 to creditors other than the IRS. The Service assessed a trust fund recovery penalty (TFRP) against him in 2014 as a responsible person under Sec. 6672(a). Bibler paid $250 toward the TFRP and filed suit to recover the $250 and for the abatement of all assessments for the fourth quarter of 2011, on the grounds that he was not a responsible party. The IRS moved for summary judgment.
Issues: Under Sec. 6672, any responsible person who willfully fails to collect or account for and pay taxes withheld from employees or willfully attempts to evade or defeat those taxes is personally liable for 100% of the amount not collected or accounted for and paid over. Sec. 7501 provides that the withheld funds are held in trust for the government.
A responsible person is anyone who is required to collect, account for, and pay these employment and withholding (trust fund) taxes. Such responsibility can be determined by how much influence and control the person has over disbursements of taxes and other funds. Sec. 6672(e) provides an exception to Sec. 6672(a) for voluntary board members of tax-exempt organizations who serve solely in an honorary capacity, do not participate in the organization's day-to-day or financial operations, and do not have actual knowledge of the failure to pay the employee withholding taxes.
The courts have held that a responsible person has willfully failed to pay the employment taxes and thus is liable for the taxes when the person had actual knowledge of, or recklessly disregarded, facts and known risks that the taxes were not paid. However, the courts, under the reasonable-cause exception, have held the responsible person's failure to pay the taxes was not willful if that person can show that he or she reasonably believed the taxes were being paid. The IRS argued that Bibler should be held liable for the taxes because he negligently continued to pay other creditors after he and the board of directors were made aware of the unpaid withholding taxes.
Holding: The court assumed for purposes of the summary judgment motion that Bibler was a responsible person, finding that he did not qualify for the Sec. 6672(e) volunteer exception because he had actual knowledge of the failure to pay the withholding taxes. However, the court further found that he had raised a genuine issue of material fact of whether his failure to pay the taxes was willful under the reasonable-cause exception. He knew that the CEO had been instructed by the board of directors to make the payments and stated he believed she was communicating with the IRS and was making installment payments of the back taxes. The court found no evidence that contradicted this belief; therefore, it denied the IRS's motion for summary judgment.
- Bibler, No. 2:17-cv-134 (S.D. Ohio 4/23/18)
— By Charles J. Reichert, CPA,instructor of accounting, University of Minnesota—Duluth.