For many business taxpayers who have Small Business Administration (SBA) financing that ultimately goes into default, it can be difficult to work with an SBA receiver and operate a business. While understanding that relationship requires an expertise that is outside the scope of this article, a recent Eleventh Circuit Court case confirmed that employment taxes must be paid to the Internal Revenue Service (IRS) even if the SBA receiver provides contrary advice.
In Myers v. United States, 923 F.3d 935 (11th Cir. 2019), the business’s Chief Financial Officer (CFO) argued that he should not be a responsible person, pursuant to Internal Revenue Code (I.R.C.) § 6672, because the SBA receiver directed him to refrain from paying the business’s payroll taxes.
For the IRS to prevail in its assessment of the trust fund recovery penalty pursuant to I.R.C. § 6672, the liable taxpayer must be both responsible and willful in their failure to collect and remit the employment taxes. The IRS’s guidance regarding the assessment of the trust fund recovery penalty can be found here.
Responsibility
Responsibility is generally defined as being responsible for collecting, accounting for, and paying over payroll taxes. In determining who is responsible, the courts will review a number of factors, including the following:
- The duties of the officer as outlined in the corporate by-laws.
- The ability of the individual to sign checks.
- The identity of the officers, directors, and shareholders.
- The identity of the individuals who hired and fired employees.
- The identity of the individuals who were in control of the financial affairs of the corporation.
None of the above factors are dispositive. The court will review all the elements of the case in determining whether an individual is responsible.
Willfulness
Willfulness is generally defined as a responsible individual that has either actual knowledge that the trust taxes were not paid or recklessly disregarded the known risks that the trust fund taxes were not paid. Recklessness is generally defined as a disregard for obvious or known risks that the trust taxes are not being paid and a failure to investigate that fact.
The actual knowledge element of the willfulness standard was not an element that was highly litigated on its face. Most disputes relating to willfulness centered around factual disputes and not legal challenges. You can find more content regarding trust fund recovery penalty cases here.
In Myers, the CFO acknowledged that he would have been liable for the trust fund recovery penalty if the SBA receiver were private equity. But, because the SBA is a government organization, Myers argued that the IRS should be estopped from imposing the trust fund recovery penalty because he was obeying the instructions of another government agency.
The Court dismissed this argument, instead holding that the SBA was effectively operating as any private equity concern and, therefore, Myers could not avoid the trust fund recovery penalty. In a concurring opinion, the Court noted that Myers’s actions were not objectively reasonable. Any officer of a company is responsible for making sure that the applicable federal taxes are paid. Furthermore, the SBA’s liquidation procedures require an SBA receiver to make all appropriate filings with the federal tax authorities. Essentially, even the SBA cannot alleviate a business of its employment tax obligations.