Delegating authority does not allow taxpayer to avoid responsible person status.

• Author: Beavers, James A.

The Fourth Circuit held that a taxpayer who was chairman of the board and vice president of a company with actual authority over the company's financial affairs could not avoid responsible person status by delegating her authority to control the company to her husband.

Background

In 1969, Ford Johnson formed a nonprofit corporation, Koba Institute Inc., to perform various government contracts in conjunction with Koba Associates Inc., a for-profit corporation that he owned and managed. When Koba Associates failed to pay its payroll taxes in the mid-1990s, the IRS assessed trust fund recovery penalties against Mr. Johnson. The outstanding payroll taxes, accompanied by the lien subsequently imposed on Mr. Johnson for the Sec. 6672 trust fund recovery penalties, ultimately led Mr. Johnson to close Koba Associates. The presence of the lien severely limited Mr. Johnson's ability to obtain credit for Koba Institute.

To avoid this problem, Mr. Johnson and his wife, Mary Johnson, undertook a plan in 1998, where Koba Institute converted to a for-profit corporation under Maryland law, with Mrs. Johnson as its sole shareholder. Because Mrs. Johnson "was not encumbered by a lien" as Mr. Johnson was, her status as the corporation's owner enabled Koba Institute to enter into leases and other contracts, as well as obtain lines of credit based on Mrs. Johnson's endorsement.

As the sole shareholder of Koba Institute, Mrs. Johnson elected herself as chair of the corporation's board of directors in 2001. According to the Johnsons, because they had agreed that Mrs. Johnson would be the primary caregiver of the couple's children, Mrs. Johnson "delegated" and "entrusted" her authority in the corporation to Mr. Johnson and thereafter elected Mr. Johnson president of Koba Institute on Feb. 20, 2001. Mrs. Johnson, in turn, served as the corporation's vice president. As vice president, Mrs. Johnson had the power to sign company checks, including payroll checks.

Having "delegated" her authority to Mr. Johnson, Mrs. Johnson's actual involvement at Koba Institute was limited from 2001 through 2004. Nonetheless, she had an office at Koba Institute and received a significant annual salary ranging from approximately $100,000 to $193,000, as well as a corporate car and cellphone. In addition, the rent for Mrs. Johnson's residence, shared with Mr. Johnson, was provided by Koba Institute.

In the period at issue, 2001-2004, Mrs. Johnson had limited involvement with Koba...