The U.S. Court of Appeals for the Eighth Circuit recently ruled that two business owners were personally liable for more than $2 million in payroll taxes that were not paid over to the federal government, allegedly due to the misconduct of their businesses’ bookkeeper. The 8th Circuit’s opinion, which upheld a District Court’s entry of summary judgment against the taxpayers, underscores the significant consequences business owners and officers may face when their businesses fail to pay over to the federal government the payroll taxes they withhold from their employees’ paychecks.
James and Gayle Oppliger owned a trucking business and a separate company that employed the individuals who performed services for the trucking company. The Oppligers were the sole owners and primary officers of the companies. They hired Mary Kerkman to perform accounting and bookkeeping services for the companies, and delegated to her the tasks of filing employment tax returns and paying payroll taxes. In April 2002, Kerkman committed suicide, after which the Oppligers learned that Kerkman had embezzled $10,000 from the companies.
The day after Kerkman’s death, an IRS revenue officer visited the companies’ offices and asked the Oppligers why they had failed to appear at a meeting with her. The Oppligers then learned, allegedly for the first time, that payroll taxes were not paid to the government for 13 consecutive quarters for one company and 17 quarters for the other company. They sold the assets of the trucking company several months later, and paid approximately $5 million to its employees and creditors. They did not, however, remit the outstanding payroll taxes to the government.
The IRS assessed more than $2.3 million in penalties against the Oppligers over the unpaid payroll taxes. The Oppligers paid just over $30,000 for the outstanding payroll taxes, and then filed refund claims with the IRS. They claimed that they were not liable for the unpaid taxes. Their refund claims were denied, and the Oppligers filed suit seeking a refund and a ruling that they were not liable for the penalties assessed against them. The United States counterclaimed to have the tax assessments reduced to a judgment against the Oppligers. The District Court granted the United States’ request for summary judgment, and ruled that the Oppligers were liable for the withheld payroll taxes and penalties.
The 8th Circuit affirmed the District Court’s entry of judgment in favor of the government. It explained that pursuant to Sections 3101; 3102(a), (b); 3402; and 3403 of the Internal Revenue Code of 1986 (Code), employers are required to withhold income, Social Security, and Medicare taxes from employees’ wages. The amounts withheld from wages are held in trust for the government, and the employer is required to pay them over to the government at the appropriate times. The withheld funds may not be used for any other purpose. Section 6672 of the Code imposes a penalty on any “responsible person” who willfully fails to pay over withholding taxes to the government. The penalty equals 100% of the payroll taxes that were withheld from the employees’ paychecks and not paid over to the government.
The 8th Circuit agreed that the Oppligers were responsible persons under the Code, because they had the ability and authority to avoid their businesses’ failures to pay over their payroll taxes. In reaching that conclusion, the court considered a non-exhaustive list of factors used by a number of other courts, including whether the Oppligers:
- Served as officers or members of the board of directors.
- Owned substantial stock in the company.
- Managed day-to-day operations.
- Possessed the authority to hire or fire employees.
- Made decisions as to the disbursement of funds and payment of creditors.
- Controlled bank accounts and disbursement of records.
- Possessed check-signing authority.
The 8th Circuit noted that the Oppligers formed the companies and that they each held offices, managed the day-to-day business, owned both companies, possessed the authority to sign tax returns on behalf of both companies, and signed payroll checks for both companies. In addition, they signed for bank notes and on security agreements, and served as the businesses’ personal guarantors. This finding was not surprising.
In addition to agreeing that the Oppligers were responsible persons, the court also held that they willfully failed to pay over the withheld payroll taxes to the government. It explained that they were aware of their companies’ tax liabilities and failed to pay the taxes to the government despite their knowledge of the liabilities. In addition, the court noted that the Oppligers could have paid such taxes to the government when they sold the assets of their trucking company, but they chose to pay out more than $5 million to their employees and other creditors.
The result may have been different if the sole reason for the failure to pay over the withheld payroll taxes was due to the dishonesty of Kerkman. That is, had the Oppligers paid over the withheld payroll taxes as soon as they were informed of the issue by the IRS agent, the IRS may not have imposed the penalty. Here, however, the Oppligers chose to prefer other creditors over the IRS after they knew the payroll taxes had not been paid over to the government.
The 8th Circuit’s opinion is just another example of courts finding business owners personally liable for the failure to pay over payroll taxes to the government. These cases underscore the importance of paying over payroll taxes in a timely fashion and the serious consequences, which can also include criminal charges and incarceration, resulting from the failure to do so. Business owners and officers should therefore ensure that their businesses are in compliance with their payroll tax obligations.