In Schiffmann v. United States, on appeal, the court noted that Schiffmann, as CEO and president, had access to the company funds and signing power, and as a director and shareholder, was deeply involved in the day-to-day management of the company, making him a “responsible person.” His “deep-seated involvement in the financial affairs of the company, including his power over ICOA’s bank accounts and payroll, and his check-signing authority, gave him “’effective power’ to pay the taxes.” The court found that Schiffmann acted willfully because he was aware of the unpaid trust fund taxes and “did not lift a finger to pay them.” Similarly, Cummings, as CFO, was a signatory to the company’s principal bank accounts and enjoyed check-signing authority, with a power to decide which outstanding bills to pay, and in what order, making him a “responsible person.” The court found that Cummings, too, acted willfully because he was aware of the unpaid trust fund taxes and instead paid other bills, such as rent and operational expenses, over the government—despite the expertise he had gained as an IRS field auditor, which should have made him understand the extent of his fiduciary obligation with respect to these liabilities. In other words, the appeals court found that both Schiffmann and Cummings were responsible persons during the relevant quarters and each of them acted willfully in failing to pay the company’s overdue and current trust fund taxes and in prioritizing other creditors over the government.
Schiffmann and Cummings then claimed that the company’s funds were largely encumbered and, thus, unavailable for tax payments. The court said, however, that funds are deemed encumbered only if the taxpayer was legally obligated to use them for some purpose other than the satisfaction of a preexisting or current trust fund tax liability and that funds are not encumbered simply because corporate officers elect to earmark them informally for specific purposes (such as payroll or trade debts). The court noted that the company received more than $500,000 in capital infusions while Cummings was its CFO and more than $900,000 while Schiffmann was CEO, as well as steady stream of revenue from its business operations, yet there was no evidence to support a finding that all or any substantial part of these funds were encumbered by obligations superior to that owed to the IRS.
Schiffmann and Cummings also argued that the board of directors limited their check-signing authority by directing that it not be used to pay taxes and that they were subordinate to the wishes of the board of directors and, thus, neither of them had the final word about which creditors got paid and which did not. There was, however, no such evidence in the form of board resolutions. The appeals court said that, in light of the full record, the only reasonable view of the evidence is that Schiffmann and Cummings possessed and exerted significant control over the company’s corporate finances and could have paid the IRS more money had they had the will to do so. Accordingly, the appeals court affirmed the district court’s judgment in favor of 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. If you have any questions about the content of this blog or other legal issues not discussed here, please contact us.
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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 12.
 Id. at 13.
 Id. at 14.
 Id. at 14–15.
 Id. at 15.
 Id. at 16.
 Id. at 17.
 Id. at 18.
 Id. at 19.