22 February 2017 Tax Court rejects IRS determination that restaurant owner's son was personally liable for payroll trust fund taxes In Charles D. Shaffran, Sr. v. Commissioner, T.C. Memo 2017-35, the Tax Court has held a petitioner is not liable for Section 6672 trust fund recovery penalties (TFRPs) stemming from unpaid employment taxes owed by a restaurant. The court found that he did not have authority to hire or fire employees, to review or reconcile the company's bank accounts, or to disburse funds for the company. Paul Roberts organized the Restaurant Group of Destin, LLC in March 2006 and opened a restaurant, Sunset Charlie's, in Miramar Beach, Florida. Roberts was the owner and managing member with Carlos D. Shaffran, the petitioner's son. Roberts took care of Sunset Charlie's day-to-day operations, which included payroll-related matters. Roberts and Shaffran (the son) were the authorized signatories on three bank accounts — an operating account, a "payroll" account and a "tax" account — and regularly signed checks drawn on those accounts. Charles D. Shaffran, Sr. (the petitioner) visited the restaurant two to three times per week. The petitioner spent most of his time sitting at the bar in the restaurant. Occasionally, he was asked to train bartenders, receive deliveries and pay suppliers with checks signed by Roberts or Shaffran. The petitioner also wrote out checks for Shaffran to sign and some of the checks were written to the petitioner and his wife for repayment of a $6,500 loan extended to Restaurant Group. Additionally, the petitioner signed four checks drawn on the operating account to pay suppliers and to partially repay the loan made by the petitioner's wife. The bank honored all of the checks, even though the petitioner was not an authorized signatory on the account. Restaurant Group failed to pay employment taxes to the IRS for the third quarter of 2006, all of 2007 and the fourth quarter of 2008. It also did not pay its suppliers and landlord, and was evicted from its location in 2008. It went out of business that same year. On March 17, 2011, the IRS sent petitioner a Letter 1153, Trust Fund Recovery Penalty Letter, at a post office box shared with his son (Shaffran), petitioner's last known address, through certified mail. The letter stated that petitioner had 60 days to file a formal protest contesting the proposed assessment of the TFRPs. The petitioner did not receive the letter because Shaffran intercepted it. The IRS assessed the TFRPs on petitioner on June 2, 2011. The IRS mailed the petitioner a Letter 1058, Final Notice of Intent to Levy and Notice of Your Rights to a Hearing, and later issued a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320. The petitioner filed a collection due process (CDP) appeal. The petitioner did not agree to the proposal offered by the Appeals settlement officer and the officer sustained the collection actions. The petitioner filed suit in the Tax Court. The Tax Court ruled that mere signing of checks is insufficient to assert responsible party for trust fund taxes. Under Sections 3102(a) and 3402(a), employers are required to withhold federal income tax, Social Security and Medicare taxes from their employees' wages. Those withheld taxes are called "trust fund taxes." Section 6672 allows the Commissioner to impose penalties on employers that fail to withhold and pay these trust fund taxes. Specifically, the penalties are "imposed on any 'person' required to collect, truthfully account for, or pay over any tax withheld who willfully fails to do so. In this context, the term 'person' is often taken to mean a 'responsible person' and includes an officer or employee of a corporation who, as such, is under a duty to collect, account for, or pay over the withheld tax." The result of the penalty is to hold responsible parties personally liable for the trust fund taxes they do not pay over to the IRS. In this case, the IRS argued that the "petitioner is a responsible person because he acted as a 'de facto officer' by signing four checks and writing out several others" for Shaffran (the son) to sign. The petitioner argues that he is not a responsible person because he did not own or manage Restaurant Group. He also lacked the authority to sign checks and to "determine the priority of payment" to Restaurant Group's creditors. The Tax Court found that a "preponderance of the evidence establishes that petitioner lacked sufficient control over Restaurant Group's affairs to avoid the nonpayment of its employment taxes during the tax periods in question." The court observed that the petitioner was not an employee, officer, owner, or director of Restaurant Group and was not an authorized signatory on the bank accounts. The court further found no evidence that the petitioner was involved in the preparation of the employment tax returns or the payment of the employment taxes. Therefore, the Tax Court held that the petitioner is not a responsible person under Section 6672 and is not responsible for the TFRPs. This case illustrates the potential benefit and importance of filing Form 8822-B, Change of Address or Responsible Party — Business to notify and update responsible party information with the IRS as required in TD 9617. By way of background, beginning January 1, 2014, any person or entity having an Employer Identification Number (EIN) is required to file Form 8822-B, boxes 8a through 9b, to report any change in the identity of their responsible party information. Diligence in confirming that the Form 8822-B is properly and timely filed could help individuals tangentially involved in a business from being mistakenly identified as personally liable for unpaid trust fund taxes.
Document ID: 2017-0358 | |||||||||||
