Corporate Officer Held Liable for Unremitted Trust Fund Taxes

Corporate Officer Held Liable for Unremitted Trust Fund Taxes

      Officers of a business corporation are, as a rule, not personally responsible for the corporation’s debts and obligations. Like all rules, there are exceptions. One of those sections applies when payroll/trust fund taxes, withheld from employee paychecks, are not remitted to the government. In those situations, the Internal Revenue Code, specifically 26 U. S. C. § 6672(a), may impose liability on somebody who is both required to remit those taxes and “willfully” fails to do so. A recent decision from the Sixth Circuit Court of Appeals identifies a circumstance in which a willful failure was identified. United States of America v. Hartman, No. 17-2273 (6^th Cir. July 25, 2018).

      Hartman and Ott founded Spectrum Tool & Design, a Michigan corporation. Ott was assigned the responsibility of overseeing payroll and the remission of payroll taxes. This was initially done through an outside payroll company. When in December 2003, the payroll company learned that Spectrum could not afford both the wages and appropriate payroll taxes, it dropped Spectrum as a client. Thereafter, Hartman and Ott made arrangements to pay current wages, but not the related payroll taxes. Ott kept the responsibility for overseeing payroll services. Ott, however, was not up to the task. Hartman, in July, 2004, saw that checks made out to the IRS had not been mailed “Hartman phoned the Internal Revenue Service and met with an agent, who informed him that Spectrum should pay its current taxes going forward and make up the shortfall over time.” In October of that same year, the IRS agent advised Hartman that Spectrum was not paying its current taxes.

      Still, Hartman left Ott in charge of payroll obligations, assuming that everything was being handled because there were entries in the internal bookkeeping system to that effect.

      Ultimately, Spectrum would file for Chapter 11 Bankruptcy, which was ultimately converted into a chapter 7 liquidation. Suit was then brought against Hartman to recover the unpaid payroll taxes. The District Court granted summary judgment against Hartman, “ruling as a matter of law that Hartman was responsible for remitting Spectrum’s payroll taxes and that he recklessly disregarded an ‘obvious risk’ that his company was not paying those taxes.”

      In order to prevail, the government needed to demonstrate that Hartman was “willful” in failing to pay the taxes. The Six Circuit affirmed the determination that he had been willful in that:

Hartman acted willfully in this instance by repeatedly claiming to believe that Ott paid the taxes when he no longer had any plausible basis for thinking that was so. He knew of Ott’s past failures and had ample means to identify and remedy Ott’s misconduct.

Think about the uncontested chain of events that preceded the failure to pay the taxes in December 2004, before the company filed its bankruptcy petition. In December 2003, Hartman knew that Spectrum missed a payroll payment. In July 2004, Hartman found the undelivered checks on Ott’s desk and learned about Spectrum’s deficiency from the Internal Revenue Service agent. In October 2004, Hartman learned again that Ott had not been paying the taxes properly. Faced with Ott’s extensive track record of misconduct, Hartman had no plausible basis for continuing to trust Ott to remit the payroll taxes. Slip op. at 4.

      The court went on to review a similar string of factual failures that took place after the bankruptcy filing.

      While not mentioned in this decision, barring exceptional circumstances, the liability with respect to unremitted trust fund taxes is not subject to discharge in bankruptcy. For that and many other reasons, if and when a company finds itself in distress, members of management need to undertake effective efforts to be sure that current taxes are satisfied and that taxes in arrears are brought current.