The courts look at sec. 6672 TFRP.

• Author: Jacobs, Harriett A.
• Position: Internal Revenue Code; Trust Fund Recovery Penalty

Courts have long been asked to determine who is a "responsible person" under the Code's Trust Fund Recovery Penalty (TFRP) provisions. The majority of recent decisions in some way held for the Government. Practitioners can use these results as a guide to the factors which go into sustaining--or avoiding--a TFRP assessment.

Background

Sec. 6672 provides that, "any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over" Simply put, when a business withholds payroll tax deductions from its employees, and fails to pay these "trust funds" to the government, the Service can "pierce the corporate veil" and collect an equivalent amount of money directly from any "responsible person." This civil penalty, previously known as the 100% penalty, is now called the TFRP.

If more than one person is deemed liable, the amount of the penalty is not apportioned; each is assessed the same amount of the trust funds not paid for in the periods when they shared liability. When this happens, all parties receive credit for each other's subsequent payments. They also receive credit for any payments made by the collecting entity (the corporation), which reduce the unpaid trust fund amounts.

Assessment of a penalty is made after investigation and recommendation by a revenue officer. The recommendation can be appealed administratively to the IRS's Office of Appeals. However, an adverse decision by Appeals cannot be further appealed to the courts.

To obtain judicial review, a person must pay part of the assessment and then file a claim for a refund. The amount paid should be equal to the tax withheld from one employee for one calendar quarter; if this amount cannot easily be determined, a token amount, such as $100, is normally paid. When the individual's claim for refund is denied, he may bring a suit to recover the payment in either U.S. District Court or the U.S. Court of Federal Claims. This gives the court jurisdiction to determine the liability of the parties involved.

Court Tests

The courts look at two tests in determining whether to uphold an IRS assessment of the TFRP--was the individual a responsible person, and was the failure to pay over the funds

In Doyle (1999), the Court of Federal Claims quoted various cases to define a responsible person. According to Slodov, 436 US 238 (1978), "the `responsible person' must be under a duty to collect, truthfully account for, or pay over taxes." Per Greenberg, 46 F3d 239 (3rd Cir. 1994), "responsibility is a matter of status, duty or authority, not knowledge." Godfrey, 748 F2d 1568 (Fed. Cir. 1984), cautioned that, "the test of responsibility `is a test of substance, not form.'"

Two cases hint at a possible exception for a taxpayer who only appears to have status, duty or authority. Referring to McCarty, 437 F2d 961 (Ct. Cl. 1971), the court noted, "if a...