Benjamin Alarie (Osler Chair in Business Law, University of Toronto; CEO, Blue J Legal) & Ann Velez (Senior Legal Research Associate, Blue J Legal), Cashaw: Conflicting Duties and the Trust Fund Recovery Penalty, 177 Tax Notes Fed. 1257 (Nov. 28, 2022):
Employers in the U.S. are required to help the federal government in its tax administration endeavors by periodically withholding and remitting employees’ payments for income taxes, Social Security, and Medicare. That duty is special: Under section 7501(a), employers hold employee payroll tax withholdings in trust for the United States. For this reason, payroll withholdings are sometimes referred to as “trust fund taxes.” One of the tools the IRS uses to collect withholdings when employers fail to remit them on time (or at all) is the trust fund recovery penalty (TFRP).
A person can be found responsible and willful for failure to remit even if they were neither a director nor an officer of the employer. And a person can be saddled with TFRP liability even if they experienced a conflict between the duty to remit taxes and other duties, such as obedience to their employer, obligations under state law, their professional code of conduct, or their moral convictions. Litigated TFRP cases frequently reflect these kinds of challenging circumstances. Cashaw [v. Commissioner, T.C. Memo. 2021-123 (Oct. 27, 2021)], is no exception. In October 2021 the Tax Court, while expressing sympathy for Pamela Cashaw’s situation as an administrator of a cash-strapped hospital, noted that it was a court of law, not equity, and ruled that she must be held personally liable for the TFRP in the approximate amount of $173,000. The case has been appealed to the Fifth Circuit.
We assess Cashaw’s prospects on appeal.
Blue J’s TFRP machine-learning algorithm has been trained to identify the likelihood that the penalty will or will not be applied by a court. The algorithm considers the factual circumstances of more than 375 court decisions concerning the TFRP between 1956 and 2022. Leveraging the Blue J TFRP model to generate our analysis and assess various interpretations of the facts and circumstances in Cashaw, we find that there is a substantial probability that the Tax Court’s decision on TFRP liability will be reversed if Cashaw can persuade the Fifth Circuit that the government has overstated her level of involvement in reviewing and approving payroll and that at least one of the following is accurate: (1) she reasonably relied on statements made by others; (2) her actions after learning of the trust fund tax delinquencies were appropriate; or (3) it was reasonable for her to prioritize her duty to the hospital’s patients over any trust fund tax responsibilities. On the other hand, if the Fifth Circuit endorses the Tax Court’s findings of fact, the Blue J TFRP algorithm predicts a win for the government with 86 percent likelihood. Some matters being raised on appeal are beyond the scope of the TFRP model. For example, Cashaw is arguing that the IRS abused its discretion and violated her constitutional due process rights. Because those issues are outside the TFRP algorithm, it cannot be used to generate a prediction on them. As with many TFRP cases, the most likely outcome greatly depends on how the relevant facts and circumstances are characterized. In this context, the ability to rapidly assess different permutations and combinations of facts and circumstances with the Blue J TFRP model is particularly helpful.
For more on Cashaw, see Bryan Camp (Texas Tech), Lesson From The Tax Court: A Hard Choice Is Still A Choice (Nov. 8, 2021)
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