Trust Fund Penalty Upheld Against Non-Profit Ops Director
Trust Fund Penalty Upheld Against Non-Profit Ops Director
Cuda, (DC PA 10/04/2011) 108 AFTR 2d 2011-5354
A district court has determined on summary judgment that the former operations director and chief of a non-profit corporation was liable for the trust fund recovery penalty under Code Sec. 6672. The court rejected the taxpayer’s argument that the chief financial officer (CFO) should have collected and paid the taxes, finding that Code Sec. 6672 imposes liability on all responsible persons, not just the most responsible person.
Background. Under Code Sec. 6672(a), if an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility.
Facts. Anthony Cuda (Cuda) was the operations director and chief of Seneca Area Emergency Services, Inc. ("SAES"), a non-profit corporation that provides ambulance and emergency medical services. Cuda was responsible for overseeing the day-to-day operations of SAES, and he had the authority to sign checks on SAES’s behalf and provide input on how to prioritize SAES’s bill payments.
In 2003, office manager Gary Pennington began embezzling money from SAES and stopped paying the company’s bills, including its federal payroll taxes. Cuda learned in May of 2003 that Pennington had not paid SAES’s payroll taxes for over a year, and sometime in 2004 he met with IRS to discuss the outstanding taxes. Pennington was discharged from his position in 2004, and his responsibilities were delegated to Brian Dankis.
In 2005, SAES could only pay some of its bills, and cuts were made to keep it operating. Dankis, the CFO, was responsible for all of the company’s expenses, including tax payments. Withheld payroll taxes for the period ending Mar. 31, 2005, weren’t paid over to IRS, and Dankis sent Cuda an email notifying him of a “tax situation.” The payroll taxes for the period ending June 30, 2005, similarly weren’t paid, and Cuda was expressly made aware of the outstanding taxes and IRS’s recent demand for payments.
Dankis told Cuda that he would handle the taxes, then falsely informed SAES’s accountant that a tax payment had been made. In August of 2005, Dankis was notified that he and Cuda might have a Code Sec. 6672 penalty imposed against them, but didn’t notify Cuda of this warning. Payroll taxes went unpaid for the next tax period ending Sept. 30, 2005.
Dankius resigned later in 2005, and SAES filed for bankruptcy protection in December. (Its Chapter 11 plan was later confirmed in December of 2006.) SAES’s payroll taxes again went unpaid for the tax period ending Dec. 31, 2005. Cuda testified that while he knew of SAES’s ongoing tax problems, he wasn’t aware that no payments were being made towards its outstanding payroll taxes until 2006. Cuda left SAES in August of 2006.
IRS assessed a Code Sec. 6672 penalty against Cuda on Nov. 16, 2006, for $73,680.69. On May 10, 2010, IRS filed a complaint to reduce the assessment, plus accrued statutory additions, to judgment. Cuda asserted in his answer that Dankis, and not himself, was responsible for collecting, accounting for, and paying the taxes.
Court upholds penalty. The district court agreed with IRS that Cuda was liable for the Code Sec. 6672 penalty. Cuda admitted that he was a “responsible person,” and the court rejected his attempts to show that he didn’t act willfully.
Cuda first argued that he didn’t have knowledge that the payroll taxes weren’t being paid in 2005. However, this claim was belied by Cuda’s own admission that he was made aware of IRS’s demand for payments as early as July of 2005, and continued to sign checks paying off other creditors after that time. (Other facts also indicated that Cuda acted recklessly, in that he ignored earlier indications that SAES wasn’t paying the withheld taxes.) Further, the court noted that since Cuda was a responsible person during the period when the taxes should have been paid, even if he didn’t have knowledge of the tax delinquency until later, he nonetheless had a duty but failed to pay over all after-acquired funds to IRS.
The court also rejected Cuda’s attempts to insulate himself from liability based on Dankis’s assurances regarding the taxes and SAES’s bankruptcy. Regardless of whether Dankis had a duty to pay SAES’s taxes, such wasn’t relevant to Cuda’s liability since Code Sec. 6672 applies to all responsible persons. Additionally, Cuda’s claim that SAES’s bankruptcy should mitigate his liability was rejected as unsupported and meritless.
In the end, the court found that Cuda, despite having the authority to authorize payment of the delinquent taxes, instead relied on Dankis’s assurances that he would handle them. Since he was aware of the delinquencies, but used the company’s funds that it received to pay other non-tax obligations, he was clearly liable for the Code Sec. 6672 penalty.