In Schiffmann v. United States, the IRS, following notice and demand, made trust fund recovery penalty assessments against Schiffmann and Cummings, among others, alleging that, as of March 2014, Schiffmann owed close to $400,000 plus interest for nearly five full quarters beginning April 1, 2005, and Cummings owed more than $250,000 plus interest for nearly three full quarters beginning October 1, 2005. Schiffmann, after an unsuccessful refund and abatement request, filed suit in the federal district court seeking to recover his seized sums and nullify the assessments. The government counterclaimed against Schiffmann, Cummings, and others, seeking to recover the remainder of the overdue taxes and penalties; Cummings responded by counterclaiming against the government, seeking to nullify the assessments against him. Ultimately, the district court ruled in favor of the government, awarding $394,334.28 plus interest against Schiffmann and $254,280.82 plus interest against Cummings. Schiffmann and Cummings appealed.
The appeals court noted that, as a general matter, liability for unpaid trust fund taxes attaches when a “person required to collect, truthfully account for, and pay over” trust fund taxes “willfully fails” to do so. The court noted that this applies to a corporate officer who is a “responsible person,” that is, a person within a company who has a duty to collect, account for, and pay over trust fund taxes. Making that determination, the court said, entails consideration of a corporate officer’s status, duties, and authorities and factors such as:
- whether the person is an officer and/or director;
- whether the person owns shares or otherwise has an entity interest in the company;
- whether the person participates in day-to-day management of the company;
- whether the person has authority to hire and fire;
- whether the person makes decisions regarding which, when, and in what order outstanding debts or taxes will be paid;
- whether the person exercises significant superintendence over bank accounts and disbursement records; and
- whether the person is endowed with check-signing authority.
In other words, the bottom line is the extent of the officer’s decision-making authority, i.e., whether the officer “had the ‘effective power’ to pay the taxes—that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.”
As for “acting willfully,” the court explained that it requires “knowledge that taxes are due and withheld and conscious disregard of the obligation to remit them,” manifested as a “voluntary, conscious and intentional decision to prefer other creditors to the [government].” The court noted that neither a specific intent to cheat the government nor an evil motive is required, but that “[i]t is enough if a defendant knows that the taxes are due from the company and yet disburses funds for other purposes or knowingly fails to pay the required sum to the government.”
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 appeals court’s decision.
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 firstname.lastname@example.org.
 Schiffmann v. United States, No. 14-2179 (1st Cir. Jan. 29, 2016), at 5, fn.3.
 Id. at 5.
 Id. at 5–6.
 Id. at 6.
 Id. at 7.
 Id. at 7–8.
 Id. at 8 (internal citations omitted) (emphasis in original).
 Id. at 9.
 Id. at 9–10.