This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses the importance of not paying other creditors before you pay payroll taxes to the IRS.
No good deed goes unpunished if you owe payroll taxes.
IRS>Employees. Pay the payroll taxes to the IRS, no matter who else you have to stiff. That’s the lesson of a sad court case out of Houston last week.
Dr. McClendon ran Family Practice Associates for 20 years. Sometime along the way his CFO started keeping the payroll taxes the practice was supposed to remit to the IRS for himself, until by 2009 $10 million was unpaid. The U.S. District Court Judge takes up the story (my emphasis, citations omitted):
Family Practice stopped operating and remitted its remaining receivables to the IRS to pay toward the tax liability. Dr. McClendon made a $100,000 personal loan to Family Practice “for the restricted purpose of . . . using the funds to pay the May 15, 2009 payroll.” Family Practice used that loan to pay its employees.
McClendon was assessed a total of $4,323,343.70 in tax penalties under 26 U.S.C. § 6672. He paid a small part, then sued for a refund and abatement of the remaining penalty amount. After discovery, the government moved for summary judgment.
You can’t fault a guy for making sure his employees get paid, right? The IRS can. The court explains how the Sec. 6672 “trust fund recovery penalty” works:
“Liability under § 6672 thus is composed of two elements: (1) that the taxpayer was a ‘responsible person,’ and (2) that the taxpayer willfully failed to collect, account for, or pay over such taxes.”
The doctor stipulated that he was a “responsible person,” but said he didn’t “willfully” fail to pay over taxes. The judge said that by paying that final payroll, he did just that:
Summary judgment for the government is proper because the undisputed facts show that, as a matter of law, Dr. McClendon acted willfully. After Dr. McClendon knew that Family Practice owed back taxes, he loaned Family Practice money to make payroll. Family Practice used that money to pay its current payroll obligation to its employees rather than to pay the taxes it owed.
Even though he was just helping his employees, and the company wouldn’t have had that $100,000 if he hadn’t loaned it?
Dr. McClendon also argues that he had reasonable cause to provide a way to pay the employees because “he acted morally and generously in using his own money to make sure Family’s staff . . . were paid for the work they had performed. . . .” Fully accepting as a fact that Dr. McClendon’s motives were admirable does not make that fact legally relevant. Dr. McClendon provides no authority for holding that a taxpayer who consciously decides to use unencumbered funds to pay a creditor other than the government had reasonable cause to do so because the taxpayer had good motives. The Fifth Circuit has made clear that a taxpayer who consciously decides to use unencumbered funds to pay a creditor other than the government cannot benefit from the reasonable-cause defense. There is no basis for a different result here.
So a $100,000 good deed buys a $4.3 million tax liability.
The moral? I see two lessons. First, the tax man is very serious about collecting withholding and payroll taxes. If you you have to stiff every other creditor, you want to pay the IRS. Don’t pay anyone else first, not even a little.
Also, keep an eye on payroll taxes. Businesses are supposed to remit payroll taxes through EFTPS, the Electronic Federal Tax Payment System. EFTPS users can go online to make sure that the payments are actually being made. The doctor probably wishes he had.
McClendon v. United States, No. 4:15-cv-02664 (D.C. S.D. TX (Nov. 17, 2016)).
Here’s the rest of this week’s Tax Roundup:
Monday, November 21, 2016
Career Corner, Holiday Party Socializing With No Regrets Afterwards (Bryce Sanders, Going Concern). “Your own workplace party is like living in a fishbowl. You feel required to show up but having much fun is often out of the question.”
Dean Zerbe, Trump and Taxes — What’s Really Going To Happen?. Dean Zerbe is a former top taxwriting aide in the Senate.
ITEP Staff, The Road Ahead for State Tax Policy (Tax Justice Blog). The post summarizes state tax policy changes that may result from the election.
Jack Townsend, Limitations on Cross-Examination of Cooperating Co-Conspirators as Sixth Amendment Violation?
Jared Walczak, Portland Considers Tax on Companies with High CEO Pay (Tax Policy Blog). O, just as accurately, “Portland considers giving corporate decision makers a great reason to avoid Portland.”
Jason Dinesen, From the Archives: Yes, You Have to File a Tax Return Even If You’re 72 Years Old
Jim Maule, When Tax Isn’t About Numbers: What is a Bank?. “Why does it matter if MoneyGram is a bank? The answer is simple. Banks are subject to special federal income tax rules, most of them beneficial to the bank.”
Kay Bell, Trump’s tax deductible Trump U. settlement. “Even as he prepares to be sworn in on Jan. 20 as the United States’ 45th president, he will facing, as of today, more than 70 lawsuits filed against him.”
Kristine Tidgren, Ninth Circuit Affirms Dismissal of California Egg Lawsuit (Ag Docket). “I’ve called it the “Hokey-Pokey” law. The California Legislature passed AB 1437 in 2010 to make it a crime to sell a shelled egg in California if that egg came from a hen confined in a cage that did not allow it to “lie down, stand up, fully extend its limbs, and turn around freely” (hence the Hokey-Pokey reference).”
Lew Taishoff, FBAR OR FUBAR? – REDUX. “OK, but is there between Title 31 FBARing and Title 26 collection alternatives (such as Section 7122 OICs) ‘…a great gulf fixed: so that they which would pass from hence to you cannot; neither can they pass to us, that would come from thence,’ as a far greater authority put it?”
Peter Reilly, What To Do Right Away In Anticipation Of Coming Trump Tax Cuts: “The confluence of a
Robert D. Flach comes through with more Buzz! IRA planning, withholding adequacy, and much more!
Robert Wood, Trump Gets $25 Million Tax Write-Off For Trump University Settlement. Of course, it will cost Trump $25 million pre-tax. If all of the people saying he still has NOLs sheltering is income are right, it’s $25 million after tax too.
Roger McEowen, The Future of the Federal Estate Tax and Implications for Estate Planning
TaxGrrrl, Arsenal Star Sanchez Is The Latest Soccer Player To Be Accused Of Tax Evasion In Spain
TaxProf, The IRS Scandal, Day 1290, Day 1291, Day 1292. No scandals here, except for all the scandals.
Tony Nitti, Trump’s New Day Job Will Cost Him Millions In Tax Breaks. “As President, Trump will no longer qualify to claim the special tax deal for real estate professionals.” If we can assume that he will spend more time on the President job than the real estate mogul business, that is.
Tuesday, November 22, 2016
Carl Davis, At Amazon.com, Sales Tax Evasion is No Longer an Option for Most Shoppers (Tax Justice Blog).
Eugene Steuerle, Six bipartisan opportunities for president-elect Trump (TaxVox). “Paraphrasing Herb Stein, who was President Nixon’s chief economic adviser, ‘what can’t continue won’t.’ And that’s true with the nation’s unsustainable fiscal path.”
Jack Townsend, Mens Rea Element of False Claims Crime, Includes links to discussions of wilfulness requirements as they apply here.
Jeremy Scott, Despite Pence’s Pledge, Tax Reform Is Far From Certain (Tax Analysts Blog)
Kay Bell, Some U.S. corps doing just fine with current tax code
Keith Fogg, No Attorney’s Fee Award when § 7430 Action Brought Directly by Attorney Instead of Client (Procedurally Taxing).
Kyle Pomerleau, Stephen Entin, The House GOP’s Destination-Based Cash Flow Tax, Explained (Tax Policy Blog). From last June, a primer on the Ryan plan.
Lew Taishoff, NEITHER EQUITY NOR DESIGNATION – PART DEUX. The Tax Court is taking Friday off.
News from the Profession. How’s Grant Thornton’s Unlimited Vacation Policy Been Working Out? (Caleb Newquist, Going Concern). “Last year, the only second-tier accounting firm not cool enough to go by its initials, Grant Thornton, announced a new paid-time off policy that would allow its employees to take unlimited vacation.”
Peter Reilly, Foreclosure Cash For Keys Not Taxable As Service Income. “…given the low stakes and the weakness of the IRS position, this really feels like everything was on autopilot from the point at which Greentree decided they needed to issue a separate 1099 for the ‘cash for keys’.”
Robert D. Flach reports on THE 2016 NATP YEAR-END TAX UPDATE WORKSHOPS. “When I do have to sit through the ethics preaching, usually daydreaming or reading the paper, some of what I do hear is, to me, complete nonsense.”
Robert Wood, As Trump Tax Cuts Emerge, High 13.3% California Tax Spells Exodus. “Like other high tax states, California is likely to probe how and when you stopped being a resident.”
TaxGrrrl, IRS Wants Court Authority To Identify Bitcoin Users & Transactions At Coinbase.
TaxProf, The IRS Scandal, Day 1292: WSJ