As most employers (and employees) know, the Internal Revenue Service (IRS) requires employers to withhold federal income taxes from employees’ wages and to hold such taxes in trust for the government, often referred to as “trust fund taxes.”[1] If they are not paid to the government as required, the IRS may look past the corporate form and hold officers of the corporation personally liable under certain circumstances.[2] Specifically, the Internal Revenue Code provides that “any person required to collect . . . and pay over any tax . . . who willfully fails to collect such tax . . . shall . . . be liable to a penalty equal to the total amount of the tax evaded . . . .”[3] While this may be harsh and contrary to the principle of separate corporate identity, the underlying rationale is that corporate officers who have the power and authority to pay required taxes when the corporation has enough funds must be held responsible for such failure to act.
In Schiffmann v. United States, a recent federal appeals court case, Richard Schiffmann and Stephan Cummings were officers of ICOA, a Rhode Island corporation that struggled “to stay current on federal trust fund tax obligations.”[4] Schiffmann became president of ICOA in October 2004 and CEO in April 2005 and Cummings became CFO in October 2005.[5] Subsequently, Schiffmann and Cummings became aware of the full extent of ICOA’s outstanding trust fun tax liabilities, but they continued to ignore them while paying the company’s other creditors.[6] In November of 2005, the company’s board of directors met to discuss the outstanding federal trust fund tax liabilities and granted Schiffmann and Cummings check-signing authorities for up to $100,000 and $75,000, respectively.[7] Nevertheless, Schiffmann and Cummings continued to ignore the company’s tax obligations and let new trust fund taxes accumulate.[8] Meanwhile, the company’s finances continued to decline and the board eventually fired Schiffmann and Cummings in June 2006.[9]
This post was part of a multi-part series on Schiffmann v. United States and corporate officers’ trust fund tax responsibility. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will discuss the ensuing IRS and court proceedings.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Kelly Chermack – Kelly Chermack is a legal assistant in the Dallas office of The R. Shawn McBride Law Firm, PLLC. She can be reached at [email protected].
[1] See generally Schiffmann v. United States, No. 14-2179 (1st Cir. Jan. 29, 2016) (internal citations omitted), at 3.
[2] Id.
[3] 26 U.S.C. § 6672(a).
[4] Schiffmann v. United States, at 3–4.
[5] Id. at 4.
[6] Id.
[7] Id.
[8] Id.
[9] Id. at 4–5.