Parent's president and chairman not liable for subsidiary's payroll tax.

• Author: O'Driscoll, David

E was M corporation's president and chairman. M owned all of F corporation's stock; F owned all of T corporation's stock. M made E chairman of T. However, E was not involved in the day-to-day operations. Nonetheless, the IRS assessed E, under Sec. 6672, for T's failure to pay over more than $1 million in payroll taxes that T had collected from its employees.

Analysis

The recovery of a penalty under Sec. 6672 depends on whether the person assessed (1) is a "responsible person" and (2) acted "willfully" in failing to collect payroll taxes or pay them over (Davis, 961 F2d 867 (9th Cir. 1992); Buffalow, 109 F3d 570 (9th Cir. 1997)).

Responsible Person

Responsibility is a matter of "status, duty, and authority, not knowledge"; see Davis. A person is "responsible" if he or she has the "final word" on paying bills, meaning "the authority required to exercise significant control over the corporation's financial affairs, regardless of whether [the individual] exercises such control in fact"; see Jones, 60 F3d 584 (9th Cir. 1995). Under Sec. 6671(b), a person includes an officer or employee of a corporation who is "under a duty. to perform the act in respect to which the violation occurs."

An individual's lack of involvement in day-to-day financial decisionmaking or tax matters is irrelevant when he or she has the authority to pay or to order the payment of delinquent taxes. Courts sometimes invoke a nonexclusive list of "factors" in determining responsibility, such as whether the individual had authority to sign checks, served as an officer or director and could hire and fire employees. The most critical factor, however, is having significant control over the corporation's finances.

E was not a person responsible for collecting, truthfully accounting for and paying over payroll taxes withheld from T's employees for the tax period at issue. Although E was chairman of T's board, he did not have the "final word" on which of T's bills would be paid. E was not an officer of T, did not control its day-to-day financial affairs, did not have the ability to sign its checks and otherwise lacked authority to direct the payment of T's delinquent tax liabilities, other than in his role as chairman of T's board. Thus, E's role did not allow him to exercise significant control over T's finances.

Willfulness

Willfulness is shown by "a voluntary, conscious and intentional act to prefer other creditors over the U.S. No bad motive need be proved, and conduct motivated...