Friday, October 30, 2009

White House Press Release—Remarks by the President on International Tax Policy Reform, (May. 5, 2009)
2009ARD 087-4
Obama administration: Tax havens: International tax reform
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
May 4, 2009
REMARKS BY THE PRESIDENT ON INTERNATIONAL TAX POLICY REFORM
Grand Foyer
11:39 A.M. EDT
THE PRESIDENT: All right. Good morning, everybody. Hope you all had a good weekend.
Let's begin with a simple premise: Nobody likes paying taxes, particularly in times of economic stress. But most Americans meet their responsibilities because they understand that it's an obligation of citizenship, necessary to pay the costs of our common defense and our mutual well-being.
And yet, even as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs. And many are aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals. It's a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share. It's a tax code that makes it all too easy for a number—a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all. And it's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.
Now, understand, one of the strengths of our economy is the global reach of our businesses. And I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens. This is something that I talked about again and again during the course of the campaign. The way we make our businesses competitive is not to reward American companies operating overseas with a roughly 2 percent tax rate on foreign profits; a rate that costs—that costs taxpayers tens of billions of dollars a year. The way to make American businesses competitive is not to let some citizens and businesses dodge their responsibilities while ordinary Americans pick up the slack.
Unfortunately, that's exactly what we're doing. These problems have been highlighted by Chairmen Charlie Rangel and Max Baucus, by leaders like Senator Carl Levin and Congressman Lloyd Doggett. And now is the time to finally do something about them. And that's why today, I'm announcing a set of proposals to crack down on illegal overseas tax evasion, close loopholes, and make it more profitable for companies to create jobs here in the United States.
For years, we've talked about ending tax breaks for companies that ship jobs overseas and giving tax breaks to companies that create jobs here in America. That's what our budget will finally do. We will stop letting American companies that create jobs overseas take deductions on their expenses when they do not pay any American taxes on their profits. And we will use the savings to give tax cuts to companies that are investing in research and development here at home so that we can jumpstart job creation, foster innovation, and enhance America's competitiveness.
For years, we've talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America. That's what our budget will finally do. On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 business—businesses claim this building as their headquarters. And I've said before, either this is the largest building in the world or the largest tax scam in the world.
And I think the American people know which it is. It's the kind of tax scam that we need to end. That's why we are closing one of our biggest tax loopholes. It's a loophole that lets subsidiaries of some of our largest companies tell the IRS that they're paying taxes abroad, tell foreign governments that they're paying taxes elsewhere—and avoid paying taxes anywhere. And closing this single loophole will save taxpayers tens of billions of dollars—money that can be spent on reinvesting in America—and it will restore fairness to our tax code by helping ensure that all our citizens and all our companies are paying what they should.
Now, for years, we've talked about stopping Americans from illegally hiding their money overseas, and getting tough with the financial institutions that let them get away with it. The Treasury Department and the IRS, under Secretary Geithner's leadership and Commissioner Shulman's, are already taking far-reaching steps to catch overseas tax cheats—but they need more support.
And that's why I'm asking Congress to pass some commonsense measures. One of these measures would let the IRS know how much income Americans are generating in overseas accounts by requiring overseas banks to provide 1099s for their American clients, just like Americans have to do for their bank accounts here in this country. If financial institutions won't cooperate with us, we will assume that they are sheltering money in tax havens, and act accordingly. And to ensure that the IRS has the tools it needs to enforce our laws, we're seeking to hire nearly 800 more IRS agents to detect and pursue American tax evaders abroad.
So all in all, these and other reforms will save American taxpayers $210 billion over the next 10 years—savings we can use to reduce the deficit, cut taxes for American businesses that are playing by the rules, and provide meaningful relief for hardworking families. That's what we're doing. We're putting a middle class tax cut in the pockets of 95 percent of working families, and we're providing a $2,500 annual tax credit to put the dream of a college degree or advanced training within the reach for more students. We're providing a tax credit worth up to $8,000 for first-time home buyers to help more Americans own a piece of the American Dream and to strengthen the housing market.
So the steps I am announcing today will help us deal with some of the most egregious examples of what's wrong with our tax code and will help us strengthen some of these other efforts. It's a down payment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations.
Now, it will take time to undo the damage of distorted provisions that were slipped into our tax code by lobbyists and special interests, but with the steps I'm announcing today we are beginning to crack down on Americans who are bending or breaking the rules, and we're helping to ensure that all Americans are contributing their fair share.
In other words, we're beginning to restore fairness and balance to our tax code. That's what I promised I would do during the campaign, that's what I'm committed to doing as President, and that is what I will work with members of my administration and members of Congress to accomplish in the months and years to come.
Thanks very much, guys.


White House Press Release—Leveling The Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas, (May. 5, 2009)
2009ARD 087-1
Obama administration: Tax havens: International tax reform
Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives For Shifting Jobs Overseas
There is no higher economic priority for President Obama than creating new, well-paying jobs in the United States. Yet today, our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S. In addition, our tax system is rife with opportunities to evade and avoid taxes through offshore tax havens:
• ○ In 2004, the most recent year for which data is available, U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings - an effective U.S. tax rate of about 2.3%.
• ○ A January 2009 GAO report found that of the 100 largest U.S. corporations, 83 have subsidiaries in tax havens.
• ○ In the Cayman Islands, one address alone houses 18,857 corporations, very few of which have a physical presence in the islands.
• ○ Nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands, and Ireland.
Today, President Obama and Secretary Geithner are unveiling two components of the Administration's plan to reform our international tax laws and improve their enforcement. First, they are calling for reforms to ensure that our tax code does not stack the deck against job creation here on our shores. Second, they seek to reduce the amount of taxes lost to tax havens - either through unintended loopholes that allow companies to legally avoid paying billions in taxes, or through the illegal use of hidden accounts by well-off individuals. Combined with further international tax reforms that will be unveiled in the Administration's full budget later in May, these initiatives would raise $210 billion over the next 10 years. The Obama Administration hopes to build on proposals by Senate Finance Committee Chairman Max Baucus and House Ways and Means Chairman Charles Rangel - as well as other leaders on this issue like Senator Carl Levin and Congressman Lloyd Doggett - to pass bipartisan legislation over the coming months.
1. Replacing Tax Advantages for Creating Jobs Overseas With Incentives to Create Them at Home: The Administration would raise $103.1 billion by removing tax advantages for investing overseas, and would use a portion of those resources to make permanent a tax credit for investment in research and innovation within the United States.
• Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas: Currently, businesses that invest overseas can take immediate deductions on their U.S. tax returns for expenses supporting their overseas investments but nevertheless “defer” paying U.S. taxes on the profits they make from those investments. As a result, U.S. taxpayer dollars are used to provide a significant tax advantage to companies who invest overseas relative to those who invest and create jobs at home. The Obama Administration would reform the rules surrounding deferral so that - with the exception of research and experimentation expenses - companies cannot receive deductions on their U.S. tax returns supporting their offshore investments until they pay taxes on their offshore profits. This provision would take effect in 2011, raising $60.1 billion from 2011 to 2019.
• Closing Foreign Tax Credit Loopholes : Current law allows U.S. businesses that pay foreign taxes on overseas profits to claim a credit against their U.S. taxes for the foreign taxes paid. Some U.S. businesses use loopholes to artificially inflate or accelerate these credits. The Administration would close these loopholes, raising $43.0 billion from 2011 to 2019.
• Using Savings from Ending Unfair Overseas Tax Breaks to Permanently Extend the Research and Experimentation Tax Credit for Investment in the United States: The Research and Experimentation Tax Credit - which provides an incentive for businesses to invest in innovation in the United States - is currently set to expire at the end of 2009. To provide businesses with the certainty they need to make long-term investments in research and innovation, the Administration proposes making the R&E tax credit permanent, providing a tax cut of $74.5 billion over 10 years to businesses that invest in the United States.
2. Getting Tough on Overseas Tax Havens: The Administration's proposal would raise a total of $95.2 billion over the next 10 years through efforts to get tough on overseas tax havens by:
• Eliminating Loopholes for “Disappearing” Offshore Subsidiaries : Traditionally, U.S. companies have been required to report certain income shifted from one foreign subsidiary to another as passive income subject to U.S. tax. But over the past decade, so-called “check-the-box” rules have allowed companies to make their foreign subsidiaries “disappear” for tax purposes - permitting them to legally shift income to tax havens and make the taxes they owe the United States disappear as well. The Obama administration proposes to reform these rules to require certain foreign subsidiaries to be considered as separate corporations for U.S. tax purposes. This provision would take effect in 2011, raising $86.5 billion from 2011 to 2019.
• Cracking Down on the Abuse of Tax Havens by Individuals: Currently, wealthy Americans can evade paying taxes by hiding their money in offshore accounts with little fear that either the financial institution or the country that houses their money will report them to the IRS. In addition to initiatives taken within the G-20 to impose sanctions on countries judged by their peers not to be adequately implementing information exchange standards, the Obama Administration proposes a comprehensive package of disclosure and enforcement measures to make it more difficult for financial institutions and wealthy individuals to evade taxes. The Administration conservatively estimates this package would raise $8.7 billion over 10 years by:
o ○ Withholding Taxes From Accounts At Institutions That Don't Share Information With The United States: This proposal requires foreign financial institutions that have dealings with the United States to sign an agreement with the IRS to become a “Qualified Intermediary” and share as much information about their U.S. customers as U.S. financial institutions do, or else face the presumption that they may be facilitating tax evasion and have taxes withheld on payments to their customers. In addition, it would shut down loopholes that allow QIs to claim they are complying with the law even as they help wealthy U.S. citizens avoid paying their fair share of taxes.
o ○ Shifting the Burden of Proof and Increasing Penalties for Well-Off Individuals Who Seek to Abuse Tax Havens: In addition, the Obama Administration proposes tightening the reporting standards for overseas investments, increasing penalties and imposing negative presumptions on individuals who fail to report foreign accounts, and extending the statute of limitations for enforcement.
• Devoting New Resources for IRS Enforcement to Help Close the International Tax Gap: As part of the Obama Administration's budget, the IRS will hire nearly 800 new employees devoted to international enforcement, increasing its ability to crack down on offshore tax avoidance.
Leveling the Playing Field: Removing Tax Incentives For Moving Jobs Overseas and Curbing Tax Havens
Backgrounder
I. Replacing Tax Advantages to Create Jobs Overseas with Incentives to Create Jobs at Home
As the first plank of its international tax reform package, the Obama Administration intends to repeal the ability of American companies to take deductions against their U.S. taxable income for expenses supporting profits in low-tax jurisdictions on which they defer paying taxes on for years and perhaps indefinitely. Combined with closing loopholes in the foreign tax credit program, the revenues saved will be used to make permanent the tax credit for research and experimentation in the United States. This will be accomplished through:
1. Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas
Current Law
• Companies Can Defer Paying Taxes on Overseas Profits Until Later, While Taking Tax Deductions on Their Foreign Expenses Now : Currently, a company that invests in America has to pay immediate U.S. taxes on its profits from that investment. But if the company instead invests and creates jobs overseas through a foreign subsidiary, it does not have to pay U.S. taxes on its overseas profits until those profits are brought back to the United States, if they ever are. Yet even though companies do not have to pay U.S. taxes on their overseas profits today, they still get to take deductions today on their U.S. tax returns for all of the expenses that support their overseas investment.
• Deferral Rules Use U.S. Taxpayer Dollars to Create A Tax Advantage for Companies That Invest Abroad: As a result, this preferential treatment uses U.S. taxpayer dollars to provide companies with an incentive to invest overseas, giving them a tax advantage over competitors who make the same investments to create jobs in the United States.
Example Under Current Law:
• Suppose that two U.S. companies decided to borrow to invest in a new factory. Company A invests that money to build its plant in the U.S., while Company B invests overseas in a jurisdiction with a tax rate of only 10 percent.
• Company A will be able to deduct its interest expense, reducing its overall U.S. tax liability by 35 cents for every dollar it pays in interest. But it will also pay a 35 percent tax rate on its corporate profits.
• Company B will also be able to deduct its interest expense from its U.S. tax liabilities at a 35 percent rate. But it will only face a tax of 10 percent on its profits.
• Thus, our current tax code uses U.S. taxpayer dollars to put companies that invest in the United States at a competitive advantage with companies who invest overseas.
The Administration's Proposal
• Level the Playing Field: The Administration's commonsense proposal, similar to an earlier measure proposed by House Ways and Means Chairman Charles Rangel, would level the playing field by requiring a company to defer any deductions - such as for interest expenses associated with untaxed overseas investment - until the company repatriates its earnings back home. In other words, companies would only be able to take a deduction on their U.S. taxes for foreign expenses when they also pay taxes on their foreign profits in the United States. This proposal makes an exception for deductions for research and experimentation because of the positive spillover impacts of those investments on the U.S. economy.
• Raise $60.1 Billion From 2011 to 2019: This proposal goes into effect in 2011, and would raise $60.1 billion between 2011 and 2019.
2. Closing Foreign Tax Credit Loopholes
Current Law
• Companies Can Take Advantage Of Foreign Tax Credit Loopholes: When a U.S. taxpayer has overseas income, taxes paid to the foreign jurisdiction can generally be credited against U.S. tax liabilities. In general, this “foreign tax credit” is available only for taxes paid on income that is taxable in the U.S. The intended result is that U.S. taxpayers with overseas income should pay no more tax on their U.S. taxable income than they would if it was all from U.S. sources. However, current rules and tax planning strategies make it possible to claim foreign tax credits for taxes paid on foreign income that is not subject to current U.S. tax. As a result, companies are able to use such credits to pay less tax on their U.S. taxable income than they would if it was all from U.S. sources - providing them with a competitive advantage over companies that invest in the United States.
The Administration's Proposal
• Reform the Foreign Tax Credit to Remove Unfair Tax Advantages for Overseas Investment: The Administration's proposal would take two steps to rein in foreign tax credit schemes. First, a taxpayer's foreign tax credit would be determined based on the amount of total foreign tax the taxpayer actually pays on its total foreign earnings. Second, a foreign tax credit would no longer be allowed for foreign taxes paid on income not subject to U.S. tax. These reforms would go into effect in 2011, raising $43.0 billion from 2011 to 2019.
3. Making R&E Tax Credit Permanent to Encourage Investment in Innovation in the United States: The resources saved by curbing tax incentives for jobs overseas and limiting losses to tax havens would be used to strengthen incentives to invest in jobs in the United States by making permanent the R&E tax credit.
Current Law
• R&E Credit Is Set to Expire At End of 2009 : Under current law, companies are eligible for a tax credit equal to 20 percent of qualified research expenses above a base amount. But the research and experimentation tax credit has never been made permanent - instead, it has been extended on a temporary basis 13 times since it was first created in 1981 - and is set to expire on December 31, 2009.
How It Works
• Through the research and experimentation tax credit, companies receive a credit valued at 20 percent of qualified research expenses in the United States above a base amount. Taxpayers can also elect to take an alternative simplified research credit that provides an incentive for increasing research expenses above the level of the previous three years. Taxpayers may also take a credit based on spending on basic research and certain energy research.
• Any uncertainty about whether the R&E credit will be extended reduces its effectiveness in stimulating investments in new innovation, as it becomes more difficult for taxpayers to factor the credit into decisions to invest in research projects that will not be initiated or completed prior to the credit's expiration.
The Administration's Proposal
• Create Certainty to Encourage New Investment and Innovation at Home By Making the Research and Experimentation Tax Credit Permanent: To give companies the certainty they need to make long-term research and experimentation investment in the U.S., the Administration's budget includes the full cost of making the R&E credit permanent in future years. By making this tax credit permanent, businesses would be provided with the greater confidence they need to initiate new research projects that will improve productivity, raise standards of living, and increase our competitiveness. And with over 75 percent of credit dollars attributed to wages, the credit would provide an important incentive for businesses to create new jobs.
• Paid For With Provisions That Make the Tax Code More Efficient and Fair: This change would cost $74.5 billion over 10 years, which will be paid for by reforming the treatment of deferred income and the use of the foreign tax credit.
II. Getting Tough on Overseas Tax Havens
Some countries make it easy for U.S. taxpayers to evade or avoid U.S. taxes by withholding information about U.S.-held accounts or giving favorable tax treatment to shell corporations created just to avoid taxes. In certain cases, companies are taking advantage of currently legal loopholes to avoid paying taxes by shifting their profits to tax havens. In other cases, Americans break the law by hiding their income in hidden overseas accounts, and these tax havens refuse to provide the information the IRS needs to enforce U.S. law. Either way, these tax havens make our tax system less fair and harm the U.S. economy. President Obama proposes to address tax havens by:
1. Eliminating Loopholes that Allow “Disappearing” Offshore Subsidiaries: Current law allows U.S. businesses to establish foreign subsidiary corporations, but then to “check a box” to pretend that the subsidiaries do not exist for U.S. tax purposes. This practice allows taxes that would otherwise be paid in the U.S. on passive income to be avoided, at great cost to U.S. taxpayers.
Current Law
• Disappearing Subsidiaries Allow Corporations to Shift Income Tax-Free: Traditionally, if a U.S. company sets up a foreign subsidiary in a tax haven and one in another country, income shifted between the two subsidiaries (for example, through interest on loans) would be considered “passive income” for the U.S. company and subject to U.S. tax. Over the last decade, so-called “check-the box” rules have allowed U.S. firms to make these subsidiaries disappear for U.S. tax purposes. With the separate subsidiaries disregarded, the firm can shift income among them without reporting any passive income or paying any U.S. tax. As a result, U.S. firms that invest overseas are able to shift their income to tax havens. It is clear that this loophole, while legal, has become a reason to shift billions of dollars in investments from the U.S. to other counties.
Example under Current Law
• Suppose that a U.S. company invests $10 million to build a new factory in Germany. At the same time, it sets up three new corporations. The first is a wholly owned Cayman Islands holding company. The second is a corporation in Germany, which is owned by the holding company and owns the factory. The third is a Cayman Islands subsidiary, also owned by the Cayman Islands holding company.
• The Cayman subsidiary makes a loan to the German subsidiary. The interest on the loan is income to the Cayman subsidiary and a deductible expense for the German subsidiary. In this way, income is shifted from higher-tax Germany to the no-tax Cayman Islands.
• Under traditional U.S. tax law, this income shift would count as passive income for the U.S. parent - which would have to pay taxes on it. But “check the box” rules allow the firm to make the two subsidiaries disappear — and the income shift with them. As a result, the firm is able to avoid both U.S. taxes and German taxes on its profits.
The Administration's Proposal
• Require U.S. Businesses That Establish Certain Foreign Corporations To Treat Them As Corporations For U.S. Tax Purposes: The Administration's proposal seeks to abolish a range of tax-avoidance techniques by requiring U.S. businesses that establish certain corporations overseas to report them as corporations on their U.S. tax returns. As a result, U.S. firms that invest overseas would no longer be able to make their subsidiaries — or their income shifts to tax havens — disappear for tax purposes. This would level the playing field between firms that invest overseas and those that invest at home.
• Raise $86.5 Billion from 2011 to 2019: This loophole would be closed beginning in 2011, raising $86.5 billion from 2011 to 2019.
2. Cracking Down on the Abuse of Tax Havens by Individuals: The IRS is already engaged in significant efforts to track down and collect taxes from individuals illegally hiding income overseas. But to fully follow through on this effort, it will need new legal authorities. Current law makes it difficult for the IRS to collect the information it needs to determine that the holder of a foreign bank account is a U.S. citizen evading taxation. The Obama administration proposes changes that will enhance information reporting, increase tax withholding, strengthen penalties, and shift the burden of proof to make it harder for foreign account-holders to evade U.S. taxes, while also providing the enforcement tools necessary to crack down on tax haven abuse.
Current Law
• A Free Ride for Financial Institutions that Flout Reporting Rules: A centerpiece of the current U.S. regime to combat international tax evasion is the Qualified Intermediary (QI) program, under which financial institutions sign an agreement to share information about their U.S. customers with the IRS. Unfortunately, this regime, while effective, has become subject to abuse:
o ○ At Non-Qualifying Institutions, Withholding Requirements Are Easy to Escape: Currently, an investor can escape withholding requirements by simply attesting to being a non-U.S. person. That leaves it to the IRS to show that the investor is actually a U.S. citizen evading the law.
o ○ Loopholes Allow Qualifying Institutions to Still Serve as Conduits for Evasion: Moreover, financial institutions can qualify as QIs even if they are affiliated with non-QIs. As a result, a financial institution need not give up its business as a conduit for tax evasion in order to enjoy the benefits of being a QI. In addition, QIs are not currently required to report the foreign income of their U.S. customers, so U.S. customers may hide behind foreign entities to evade taxes through QIs.
o ○ Legal Presumptions Favor Tax Evaders Who Conceal Transactions: U.S. investors overseas are required to file the Foreign Bank and Financial Account Report, or FBAR, disclosing ownership of financial accounts in a foreign country containing over $10,000. The FBAR is particularly important in the case of investors who employ non-QIs, because their transactions are less likely to be disclosed otherwise. Unfortunately, current rules make it difficult to catch those who are supposed to file the FBAR but do not. And even when the IRS has evidence that a U.S. taxpayer has a foreign account, legal presumptions currently favor the tax evader — without specific evidence that the U.S person has an account that requires an FBAR, the IRS cannot compel an investor to provide the report or impose penalties for the failure to do so. This specific evidence may be almost impossible for the IRS to get.
• The IRS Lacks the Tools It Needs to Enforce International Tax Laws: In addition to the shortcomings of the QI program, current law features inadequate tools to crack down on wealthy taxpayers who evade taxation. Investors who withhold information about overseas investments face penalties limited to 20 percent of the amount of the understatement. The statute of limitations for enforcement is typically only three years - which is often too short a time period for the IRS to get the information it needs to determine whether a taxpayer with an offshore account paid the right amount of tax. And there are no requirements that U.S. individuals or third parties report transfers to and from foreign accounts, limiting the ability of the IRS to determine whether taxpayers are paying what they owe.
Example Under Current Law
• Through a U.S. broker, a U.S. account-holder at a non-qualified intermediary sells $50 million worth of securities.
• If the seller self-certifies that he is not a U.S. citizen and the non-qualified intermediary simply passes that information along to the U.S. broker, the broker may rely on that statement and does not need to withhold money from the transaction.
• As a result, a U.S. taxpayer who provides a false self-certification can easily avoid paying taxes, since the non-QI has not signed an agreement with the IRS, and the IRS may have limited tools to detect any wrongdoing.
Proposal
In addition to initiatives taken within the G-20 to impose sanctions on countries judged by their peers not to be adequately implementing information exchange standards, the Obama administration proposes to make it more difficult to shelter foreign investments from taxation by cracking down on financial institutions that enable and profit from international tax evasion. These measures - expected to raise $8.7 billion over 10 years - would:
• Strengthen the “Qualified Intermediary” System to Crack Down on Tax Evaders: The core of the Obama Administration's proposals is a tough new stance on investors who use financial institutions that do not agree to be Qualifying Intermediaries. Under this proposal, the assumption will be that these institutions are facilitating tax evasion, and the burden of proof will be shifted to the institutions and their account-holders to prove they are not sheltering income from U.S. taxation. As a result, the Administration proposes to:
o Impose Significant Tax Withholding On Transactions Involving Non-Qualifying Intermediaries: The Administration's plan would require U.S. financial institutions to withhold 20 percent to 30 percent of U.S. payments to individuals who use non-QIs. To get a refund for the amount withheld, investors must disclose their identities and demonstrate that they're obeying the law.
o Create A Legal Presumption Against Users Of Non-Qualifying Intermediaries: The Administration's plan would create rebuttable evidentiary presumptions that any foreign bank, brokerage, or other financial account held by a U.S. citizen at a non-QI contains enough funds to require that an FBAR be filed, and that any failure to file an FBAR is willful if an account at a non-QI has a balance of greater than $200,000 at any point during the calendar year. These presumptions will make it easier for the IRS to demand information and pursue cases against international tax evaders. This shifting of legal presumptions is a key component of the anti-tax haven legislation long championed by Senator Carl Levin.
o Limit QI Affiliations With Non-QIs: The Administration's plan would give the Treasury Department authority to issue regulations requiring that a financial institution may be a QI only if all commonly-controlled financial institutions are also QIs. As a result, financial firms couldn't benefit from siphoning business from their legitimate QI operations to illegitimate non-QI affiliates.
• Provide the IRS With The Legal Tools Necessary to Prosecute International Tax Evasion : The Obama administration proposes to improve the ability of the IRS to successfully prosecute international tax evasion through the following steps:
o Increase Penalties for Failing to Report Overseas Investments : The Administration's plan would double certain penalties when a taxpayer fails to make a required disclosure of foreign financial accounts.
o Extend the Statute of Limitations for International Tax Enforcement: The Administration's plan would set the statute of limitations on international tax enforcement at six years after the taxpayer submits required information.
o Tighten Lax Reporting Requirements : The Administration's plan would increase the reporting requirement on international investors and financial institutions, especially QIs. QIs would be required to report information on their U.S. customers to the same extent that U.S. financial intermediaries must. And U.S. customers at QIs would no longer be allowed to hide behind foreign entities. U.S. investors would be required to report transfers of money or property made to or from non-QI foreign financial institutions on their income tax returns. Financial institutions would face enhanced information reporting requirements for transactions that establish a foreign business entity or transfer assets to and from foreign financial accounts on behalf of U.S. individuals.
3. Hire Nearly 800 New IRS Staff to Increase International Enforcement: As part of the President's budget, the IRS would be provided with funds to support the hiring of nearly 800 new employees devoted specifically to international enforcement. The funding would allow the IRS to hire new agents, economists, lawyers and specialists, increasing the IRS' ability to crack down on offshore tax avoidance and evasion, including through transfer pricing and financial products and transactions such as purported securities loans. According to estimates by the IRS, every additional dollar invested in enforcement in recent years has yielded about four dollars in added tax revenues.
White House Press Release—Leveling The Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas, (May. 5, 2009)
2009ARD 087-1
Obama administration: Tax havens: International tax reform
Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives For Shifting Jobs Overseas
There is no higher economic priority for President Obama than creating new, well-paying jobs in the United States. Yet today, our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S. In addition, our tax system is rife with opportunities to evade and avoid taxes through offshore tax havens:
• ○ In 2004, the most recent year for which data is available, U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings - an effective U.S. tax rate of about 2.3%.
• ○ A January 2009 GAO report found that of the 100 largest U.S. corporations, 83 have subsidiaries in tax havens.
• ○ In the Cayman Islands, one address alone houses 18,857 corporations, very few of which have a physical presence in the islands.
• ○ Nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands, and Ireland.
Today, President Obama and Secretary Geithner are unveiling two components of the Administration's plan to reform our international tax laws and improve their enforcement. First, they are calling for reforms to ensure that our tax code does not stack the deck against job creation here on our shores. Second, they seek to reduce the amount of taxes lost to tax havens - either through unintended loopholes that allow companies to legally avoid paying billions in taxes, or through the illegal use of hidden accounts by well-off individuals. Combined with further international tax reforms that will be unveiled in the Administration's full budget later in May, these initiatives would raise $210 billion over the next 10 years. The Obama Administration hopes to build on proposals by Senate Finance Committee Chairman Max Baucus and House Ways and Means Chairman Charles Rangel - as well as other leaders on this issue like Senator Carl Levin and Congressman Lloyd Doggett - to pass bipartisan legislation over the coming months.
1. Replacing Tax Advantages for Creating Jobs Overseas With Incentives to Create Them at Home: The Administration would raise $103.1 billion by removing tax advantages for investing overseas, and would use a portion of those resources to make permanent a tax credit for investment in research and innovation within the United States.
• Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas: Currently, businesses that invest overseas can take immediate deductions on their U.S. tax returns for expenses supporting their overseas investments but nevertheless “defer” paying U.S. taxes on the profits they make from those investments. As a result, U.S. taxpayer dollars are used to provide a significant tax advantage to companies who invest overseas relative to those who invest and create jobs at home. The Obama Administration would reform the rules surrounding deferral so that - with the exception of research and experimentation expenses - companies cannot receive deductions on their U.S. tax returns supporting their offshore investments until they pay taxes on their offshore profits. This provision would take effect in 2011, raising $60.1 billion from 2011 to 2019.
• Closing Foreign Tax Credit Loopholes : Current law allows U.S. businesses that pay foreign taxes on overseas profits to claim a credit against their U.S. taxes for the foreign taxes paid. Some U.S. businesses use loopholes to artificially inflate or accelerate these credits. The Administration would close these loopholes, raising $43.0 billion from 2011 to 2019.
• Using Savings from Ending Unfair Overseas Tax Breaks to Permanently Extend the Research and Experimentation Tax Credit for Investment in the United States: The Research and Experimentation Tax Credit - which provides an incentive for businesses to invest in innovation in the United States - is currently set to expire at the end of 2009. To provide businesses with the certainty they need to make long-term investments in research and innovation, the Administration proposes making the R&E tax credit permanent, providing a tax cut of $74.5 billion over 10 years to businesses that invest in the United States.
2. Getting Tough on Overseas Tax Havens: The Administration's proposal would raise a total of $95.2 billion over the next 10 years through efforts to get tough on overseas tax havens by:
• Eliminating Loopholes for “Disappearing” Offshore Subsidiaries : Traditionally, U.S. companies have been required to report certain income shifted from one foreign subsidiary to another as passive income subject to U.S. tax. But over the past decade, so-called “check-the-box” rules have allowed companies to make their foreign subsidiaries “disappear” for tax purposes - permitting them to legally shift income to tax havens and make the taxes they owe the United States disappear as well. The Obama administration proposes to reform these rules to require certain foreign subsidiaries to be considered as separate corporations for U.S. tax purposes. This provision would take effect in 2011, raising $86.5 billion from 2011 to 2019.
• Cracking Down on the Abuse of Tax Havens by Individuals: Currently, wealthy Americans can evade paying taxes by hiding their money in offshore accounts with little fear that either the financial institution or the country that houses their money will report them to the IRS. In addition to initiatives taken within the G-20 to impose sanctions on countries judged by their peers not to be adequately implementing information exchange standards, the Obama Administration proposes a comprehensive package of disclosure and enforcement measures to make it more difficult for financial institutions and wealthy individuals to evade taxes. The Administration conservatively estimates this package would raise $8.7 billion over 10 years by:
o ○ Withholding Taxes From Accounts At Institutions That Don't Share Information With The United States: This proposal requires foreign financial institutions that have dealings with the United States to sign an agreement with the IRS to become a “Qualified Intermediary” and share as much information about their U.S. customers as U.S. financial institutions do, or else face the presumption that they may be facilitating tax evasion and have taxes withheld on payments to their customers. In addition, it would shut down loopholes that allow QIs to claim they are complying with the law even as they help wealthy U.S. citizens avoid paying their fair share of taxes.
o ○ Shifting the Burden of Proof and Increasing Penalties for Well-Off Individuals Who Seek to Abuse Tax Havens: In addition, the Obama Administration proposes tightening the reporting standards for overseas investments, increasing penalties and imposing negative presumptions on individuals who fail to report foreign accounts, and extending the statute of limitations for enforcement.
• Devoting New Resources for IRS Enforcement to Help Close the International Tax Gap: As part of the Obama Administration's budget, the IRS will hire nearly 800 new employees devoted to international enforcement, increasing its ability to crack down on offshore tax avoidance.
Leveling the Playing Field: Removing Tax Incentives For Moving Jobs Overseas and Curbing Tax Havens
Backgrounder
I. Replacing Tax Advantages to Create Jobs Overseas with Incentives to Create Jobs at Home
As the first plank of its international tax reform package, the Obama Administration intends to repeal the ability of American companies to take deductions against their U.S. taxable income for expenses supporting profits in low-tax jurisdictions on which they defer paying taxes on for years and perhaps indefinitely. Combined with closing loopholes in the foreign tax credit program, the revenues saved will be used to make permanent the tax credit for research and experimentation in the United States. This will be accomplished through:
1. Reforming Deferral Rules to Curb A Tax Advantage for Investing and Reinvesting Overseas
Current Law
• Companies Can Defer Paying Taxes on Overseas Profits Until Later, While Taking Tax Deductions on Their Foreign Expenses Now : Currently, a company that invests in America has to pay immediate U.S. taxes on its profits from that investment. But if the company instead invests and creates jobs overseas through a foreign subsidiary, it does not have to pay U.S. taxes on its overseas profits until those profits are brought back to the United States, if they ever are. Yet even though companies do not have to pay U.S. taxes on their overseas profits today, they still get to take deductions today on their U.S. tax returns for all of the expenses that support their overseas investment.
• Deferral Rules Use U.S. Taxpayer Dollars to Create A Tax Advantage for Companies That Invest Abroad: As a result, this preferential treatment uses U.S. taxpayer dollars to provide companies with an incentive to invest overseas, giving them a tax advantage over competitors who make the same investments to create jobs in the United States.
Example Under Current Law:
• Suppose that two U.S. companies decided to borrow to invest in a new factory. Company A invests that money to build its plant in the U.S., while Company B invests overseas in a jurisdiction with a tax rate of only 10 percent.
• Company A will be able to deduct its interest expense, reducing its overall U.S. tax liability by 35 cents for every dollar it pays in interest. But it will also pay a 35 percent tax rate on its corporate profits.
• Company B will also be able to deduct its interest expense from its U.S. tax liabilities at a 35 percent rate. But it will only face a tax of 10 percent on its profits.
• Thus, our current tax code uses U.S. taxpayer dollars to put companies that invest in the United States at a competitive advantage with companies who invest overseas.
The Administration's Proposal
• Level the Playing Field: The Administration's commonsense proposal, similar to an earlier measure proposed by House Ways and Means Chairman Charles Rangel, would level the playing field by requiring a company to defer any deductions - such as for interest expenses associated with untaxed overseas investment - until the company repatriates its earnings back home. In other words, companies would only be able to take a deduction on their U.S. taxes for foreign expenses when they also pay taxes on their foreign profits in the United States. This proposal makes an exception for deductions for research and experimentation because of the positive spillover impacts of those investments on the U.S. economy.
• Raise $60.1 Billion From 2011 to 2019: This proposal goes into effect in 2011, and would raise $60.1 billion between 2011 and 2019.
2. Closing Foreign Tax Credit Loopholes
Current Law
• Companies Can Take Advantage Of Foreign Tax Credit Loopholes: When a U.S. taxpayer has overseas income, taxes paid to the foreign jurisdiction can generally be credited against U.S. tax liabilities. In general, this “foreign tax credit” is available only for taxes paid on income that is taxable in the U.S. The intended result is that U.S. taxpayers with overseas income should pay no more tax on their U.S. taxable income than they would if it was all from U.S. sources. However, current rules and tax planning strategies make it possible to claim foreign tax credits for taxes paid on foreign income that is not subject to current U.S. tax. As a result, companies are able to use such credits to pay less tax on their U.S. taxable income than they would if it was all from U.S. sources - providing them with a competitive advantage over companies that invest in the United States.
The Administration's Proposal
• Reform the Foreign Tax Credit to Remove Unfair Tax Advantages for Overseas Investment: The Administration's proposal would take two steps to rein in foreign tax credit schemes. First, a taxpayer's foreign tax credit would be determined based on the amount of total foreign tax the taxpayer actually pays on its total foreign earnings. Second, a foreign tax credit would no longer be allowed for foreign taxes paid on income not subject to U.S. tax. These reforms would go into effect in 2011, raising $43.0 billion from 2011 to 2019.
3. Making R&E Tax Credit Permanent to Encourage Investment in Innovation in the United States: The resources saved by curbing tax incentives for jobs overseas and limiting losses to tax havens would be used to strengthen incentives to invest in jobs in the United States by making permanent the R&E tax credit.
Current Law
• R&E Credit Is Set to Expire At End of 2009 : Under current law, companies are eligible for a tax credit equal to 20 percent of qualified research expenses above a base amount. But the research and experimentation tax credit has never been made permanent - instead, it has been extended on a temporary basis 13 times since it was first created in 1981 - and is set to expire on December 31, 2009.
How It Works
• Through the research and experimentation tax credit, companies receive a credit valued at 20 percent of qualified research expenses in the United States above a base amount. Taxpayers can also elect to take an alternative simplified research credit that provides an incentive for increasing research expenses above the level of the previous three years. Taxpayers may also take a credit based on spending on basic research and certain energy research.
• Any uncertainty about whether the R&E credit will be extended reduces its effectiveness in stimulating investments in new innovation, as it becomes more difficult for taxpayers to factor the credit into decisions to invest in research projects that will not be initiated or completed prior to the credit's expiration.
The Administration's Proposal
• Create Certainty to Encourage New Investment and Innovation at Home By Making the Research and Experimentation Tax Credit Permanent: To give companies the certainty they need to make long-term research and experimentation investment in the U.S., the Administration's budget includes the full cost of making the R&E credit permanent in future years. By making this tax credit permanent, businesses would be provided with the greater confidence they need to initiate new research projects that will improve productivity, raise standards of living, and increase our competitiveness. And with over 75 percent of credit dollars attributed to wages, the credit would provide an important incentive for businesses to create new jobs.
• Paid For With Provisions That Make the Tax Code More Efficient and Fair: This change would cost $74.5 billion over 10 years, which will be paid for by reforming the treatment of deferred income and the use of the foreign tax credit.
II. Getting Tough on Overseas Tax Havens
Some countries make it easy for U.S. taxpayers to evade or avoid U.S. taxes by withholding information about U.S.-held accounts or giving favorable tax treatment to shell corporations created just to avoid taxes. In certain cases, companies are taking advantage of currently legal loopholes to avoid paying taxes by shifting their profits to tax havens. In other cases, Americans break the law by hiding their income in hidden overseas accounts, and these tax havens refuse to provide the information the IRS needs to enforce U.S. law. Either way, these tax havens make our tax system less fair and harm the U.S. economy. President Obama proposes to address tax havens by:
1. Eliminating Loopholes that Allow “Disappearing” Offshore Subsidiaries: Current law allows U.S. businesses to establish foreign subsidiary corporations, but then to “check a box” to pretend that the subsidiaries do not exist for U.S. tax purposes. This practice allows taxes that would otherwise be paid in the U.S. on passive income to be avoided, at great cost to U.S. taxpayers.
Current Law
• Disappearing Subsidiaries Allow Corporations to Shift Income Tax-Free: Traditionally, if a U.S. company sets up a foreign subsidiary in a tax haven and one in another country, income shifted between the two subsidiaries (for example, through interest on loans) would be considered “passive income” for the U.S. company and subject to U.S. tax. Over the last decade, so-called “check-the box” rules have allowed U.S. firms to make these subsidiaries disappear for U.S. tax purposes. With the separate subsidiaries disregarded, the firm can shift income among them without reporting any passive income or paying any U.S. tax. As a result, U.S. firms that invest overseas are able to shift their income to tax havens. It is clear that this loophole, while legal, has become a reason to shift billions of dollars in investments from the U.S. to other counties.
Example under Current Law
• Suppose that a U.S. company invests $10 million to build a new factory in Germany. At the same time, it sets up three new corporations. The first is a wholly owned Cayman Islands holding company. The second is a corporation in Germany, which is owned by the holding company and owns the factory. The third is a Cayman Islands subsidiary, also owned by the Cayman Islands holding company.
• The Cayman subsidiary makes a loan to the German subsidiary. The interest on the loan is income to the Cayman subsidiary and a deductible expense for the German subsidiary. In this way, income is shifted from higher-tax Germany to the no-tax Cayman Islands.
• Under traditional U.S. tax law, this income shift would count as passive income for the U.S. parent - which would have to pay taxes on it. But “check the box” rules allow the firm to make the two subsidiaries disappear — and the income shift with them. As a result, the firm is able to avoid both U.S. taxes and German taxes on its profits.
The Administration's Proposal
• Require U.S. Businesses That Establish Certain Foreign Corporations To Treat Them As Corporations For U.S. Tax Purposes: The Administration's proposal seeks to abolish a range of tax-avoidance techniques by requiring U.S. businesses that establish certain corporations overseas to report them as corporations on their U.S. tax returns. As a result, U.S. firms that invest overseas would no longer be able to make their subsidiaries — or their income shifts to tax havens — disappear for tax purposes. This would level the playing field between firms that invest overseas and those that invest at home.
• Raise $86.5 Billion from 2011 to 2019: This loophole would be closed beginning in 2011, raising $86.5 billion from 2011 to 2019.
2. Cracking Down on the Abuse of Tax Havens by Individuals: The IRS is already engaged in significant efforts to track down and collect taxes from individuals illegally hiding income overseas. But to fully follow through on this effort, it will need new legal authorities. Current law makes it difficult for the IRS to collect the information it needs to determine that the holder of a foreign bank account is a U.S. citizen evading taxation. The Obama administration proposes changes that will enhance information reporting, increase tax withholding, strengthen penalties, and shift the burden of proof to make it harder for foreign account-holders to evade U.S. taxes, while also providing the enforcement tools necessary to crack down on tax haven abuse.
Current Law
• A Free Ride for Financial Institutions that Flout Reporting Rules: A centerpiece of the current U.S. regime to combat international tax evasion is the Qualified Intermediary (QI) program, under which financial institutions sign an agreement to share information about their U.S. customers with the IRS. Unfortunately, this regime, while effective, has become subject to abuse:
o ○ At Non-Qualifying Institutions, Withholding Requirements Are Easy to Escape: Currently, an investor can escape withholding requirements by simply attesting to being a non-U.S. person. That leaves it to the IRS to show that the investor is actually a U.S. citizen evading the law.
o ○ Loopholes Allow Qualifying Institutions to Still Serve as Conduits for Evasion: Moreover, financial institutions can qualify as QIs even if they are affiliated with non-QIs. As a result, a financial institution need not give up its business as a conduit for tax evasion in order to enjoy the benefits of being a QI. In addition, QIs are not currently required to report the foreign income of their U.S. customers, so U.S. customers may hide behind foreign entities to evade taxes through QIs.
o ○ Legal Presumptions Favor Tax Evaders Who Conceal Transactions: U.S. investors overseas are required to file the Foreign Bank and Financial Account Report, or FBAR, disclosing ownership of financial accounts in a foreign country containing over $10,000. The FBAR is particularly important in the case of investors who employ non-QIs, because their transactions are less likely to be disclosed otherwise. Unfortunately, current rules make it difficult to catch those who are supposed to file the FBAR but do not. And even when the IRS has evidence that a U.S. taxpayer has a foreign account, legal presumptions currently favor the tax evader — without specific evidence that the U.S person has an account that requires an FBAR, the IRS cannot compel an investor to provide the report or impose penalties for the failure to do so. This specific evidence may be almost impossible for the IRS to get.
• The IRS Lacks the Tools It Needs to Enforce International Tax Laws: In addition to the shortcomings of the QI program, current law features inadequate tools to crack down on wealthy taxpayers who evade taxation. Investors who withhold information about overseas investments face penalties limited to 20 percent of the amount of the understatement. The statute of limitations for enforcement is typically only three years - which is often too short a time period for the IRS to get the information it needs to determine whether a taxpayer with an offshore account paid the right amount of tax. And there are no requirements that U.S. individuals or third parties report transfers to and from foreign accounts, limiting the ability of the IRS to determine whether taxpayers are paying what they owe.
Example Under Current Law
• Through a U.S. broker, a U.S. account-holder at a non-qualified intermediary sells $50 million worth of securities.
• If the seller self-certifies that he is not a U.S. citizen and the non-qualified intermediary simply passes that information along to the U.S. broker, the broker may rely on that statement and does not need to withhold money from the transaction.
• As a result, a U.S. taxpayer who provides a false self-certification can easily avoid paying taxes, since the non-QI has not signed an agreement with the IRS, and the IRS may have limited tools to detect any wrongdoing.
Proposal
In addition to initiatives taken within the G-20 to impose sanctions on countries judged by their peers not to be adequately implementing information exchange standards, the Obama administration proposes to make it more difficult to shelter foreign investments from taxation by cracking down on financial institutions that enable and profit from international tax evasion. These measures - expected to raise $8.7 billion over 10 years - would:
• Strengthen the “Qualified Intermediary” System to Crack Down on Tax Evaders: The core of the Obama Administration's proposals is a tough new stance on investors who use financial institutions that do not agree to be Qualifying Intermediaries. Under this proposal, the assumption will be that these institutions are facilitating tax evasion, and the burden of proof will be shifted to the institutions and their account-holders to prove they are not sheltering income from U.S. taxation. As a result, the Administration proposes to:
o Impose Significant Tax Withholding On Transactions Involving Non-Qualifying Intermediaries: The Administration's plan would require U.S. financial institutions to withhold 20 percent to 30 percent of U.S. payments to individuals who use non-QIs. To get a refund for the amount withheld, investors must disclose their identities and demonstrate that they're obeying the law.
o Create A Legal Presumption Against Users Of Non-Qualifying Intermediaries: The Administration's plan would create rebuttable evidentiary presumptions that any foreign bank, brokerage, or other financial account held by a U.S. citizen at a non-QI contains enough funds to require that an FBAR be filed, and that any failure to file an FBAR is willful if an account at a non-QI has a balance of greater than $200,000 at any point during the calendar year. These presumptions will make it easier for the IRS to demand information and pursue cases against international tax evaders. This shifting of legal presumptions is a key component of the anti-tax haven legislation long championed by Senator Carl Levin.
o Limit QI Affiliations With Non-QIs: The Administration's plan would give the Treasury Department authority to issue regulations requiring that a financial institution may be a QI only if all commonly-controlled financial institutions are also QIs. As a result, financial firms couldn't benefit from siphoning business from their legitimate QI operations to illegitimate non-QI affiliates.
• Provide the IRS With The Legal Tools Necessary to Prosecute International Tax Evasion : The Obama administration proposes to improve the ability of the IRS to successfully prosecute international tax evasion through the following steps:
o Increase Penalties for Failing to Report Overseas Investments : The Administration's plan would double certain penalties when a taxpayer fails to make a required disclosure of foreign financial accounts.
o Extend the Statute of Limitations for International Tax Enforcement: The Administration's plan would set the statute of limitations on international tax enforcement at six years after the taxpayer submits required information.
o Tighten Lax Reporting Requirements : The Administration's plan would increase the reporting requirement on international investors and financial institutions, especially QIs. QIs would be required to report information on their U.S. customers to the same extent that U.S. financial intermediaries must. And U.S. customers at QIs would no longer be allowed to hide behind foreign entities. U.S. investors would be required to report transfers of money or property made to or from non-QI foreign financial institutions on their income tax returns. Financial institutions would face enhanced information reporting requirements for transactions that establish a foreign business entity or transfer assets to and from foreign financial accounts on behalf of U.S. individuals.
3. Hire Nearly 800 New IRS Staff to Increase International Enforcement: As part of the President's budget, the IRS would be provided with funds to support the hiring of nearly 800 new employees devoted specifically to international enforcement. The funding would allow the IRS to hire new agents, economists, lawyers and specialists, increasing the IRS' ability to crack down on offshore tax avoidance and evasion, including through transfer pricing and financial products and transactions such as purported securities loans. According to estimates by the IRS, every additional dollar invested in enforcement in recent years has yielded about four dollars in added tax revenues.



Tax Day,T.1International Tax Reform Needed to Discourage Offshore Economic Activity, Treasury Official Says, (Oct. 29, 2009)
Stephen Shay, Treasury deputy assistant secretary (International Tax Affairs), said on October 28 that international tax reforms are needed because the current rules provide too much incentive for businesses to engage in economic activity offshore. Shay spoke at the American Institute of Certified Public Accountants (AICPA) Fall Tax Division meeting in Washington, D.C.
The Obama administration’s international reform proposals (TAXDAY, 2009/05/05, W.1) take a balanced approach to address these concerns, Shay said. They include two prongs: an anti-tax evasion component; and structural changes that would affect deferral, the check-the-box rules and the foreign tax credit.
The just-introduced Foreign Account Tax Compliance Bill of 2009 (Sen 1934; TAXDAY, 2009/10/28, C.1) focuses on tax evasion. Although the bill is a product of Capitol Hill, the Treasury provided assistance, and the bill is consistent with a substantial portion of the administration’s budget proposals, according to Shay. The bill, which requires foreign financial institutions to report accounts maintained on behalf of U.S. residents, would be a substantial advance over current law, Shay declared. The proposed law focuses on financial institutions, not on countries.
As an incentive for information reporting, a failure to report would trigger 30-percent withholding. There is high compliance where there is information reporting, Shay noted. He believes it is likely that the bill will pass, although he does not foresee any action on tax reform before 2010.
The bill would also repeal the laws allowing bearer bonds and would require withholding on substitute dividends paid on credit swaps, Shay said. The bill does not contain the administration’s structural proposals, such as those affecting corporate classification.
An audience member suggested that the bill’s requirement for practitioners to report information about their clients raised attorney-client privilege concerns. Shay said that the Treasury was interested in getting comments about this and other proposals. He said there is a high threshold for requiring reporting but that it will affect some organizations.
Shay noted that the offshore bank account disclosure initiative was "very successful." It called attention to a problem and got more cases into the system. He also suggested it could lead to "appropriate prosecutions," although the initiative itself promised protection from criminal prosecution. He noted that disclosures under the initiative involved a wide range of situations, some honorable, others less honorable. The initiative was very healthy for the U.S. tax system and promoted fairness by requiring others to pay their fair share of taxes.

Thursday, October 29, 2009

Cannot rely on a taxpayer’s statement that there was an abandonment of property. A return preparer will have the duty to make sure that there is substantiation for the abandonment in order to avoid the 6694 penalty. 6694 was not an issue in this case but it could have been if there was a return preparer for the taxpayers in this case.
A married couple was liable for the accuracy-related penalty because the wife, as president and sole shareholder of an S corporation, failed to substantiate that she was entitled to an abandonment loss under section 165(a) that the corporation allocated to her, resulting in the taxpayers' understatement of tax. The S corporation did not maintain any books or records to substantiate the abandonment loss. It was "incredible" that the wife, who was a real estate agent, would not request written documentation with respect to the purchase of the partnership. Accordingly, she acted unreasonably and not with reasonable cause and good faith
C. and Renee M. Milton v. Commissioner., U.S. Tax Court, T.C. Memo. 2009-246, (Oct. 28, 2009), U.S. Tax Court, Dkt. No. 15875-08, TC Memo. 2009-246, October 28, 2009.

MEMORANDUM FINDINGS OF FACT AND OPINION
OPINION
We are asked to decide whether petitioners underreported the distributive share from RMI because RMI was not entitled to deduct an abandonment loss. Respondent argues that petitioner did not establish that an abandonment occurred entitling RMI to a deduction. Respondent also argues that the accuracy-related penalty should be imposed.
I. Abandonment Loss Deduction
We begin with the general rules for deducting abandonment losses. A taxpayer is entitled to deduct uncompensated losses during a given tax year. Sec. 165(a). Deductions are a matter of legislative grace, however, and the taxpayer must show that he or she is entitled to any deduction claimed. 4 Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). The Court need not accept the taxpayer's self-serving testimony when the taxpayer fails to present corroborative evidence. Beam v. Commissioner, T.C. Memo. 1990-304 (citing Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)), affd. without published opinion 956 F.2d 1166 (9th Cir. 1992).
A taxpayer must prove he or she owned the property abandoned to claim an abandonment loss deduction. JHK Enters., Inc. v. Commissioner, T.C. Memo. 2003-79. Petitioner has not proven that RMI owned the partnership interest it purported to abandon in 2005. There is no evidence that the conversations among petitioner, Mr. Purscelley, and his father resulted in RMI's owning a partnership interest in KM Welding. Petitioner has not provided an asset purchase agreement or any other document to substantiate the transaction. Petitioner even failed to substantiate that the funds were RMI's rather than hers individually. Moreover, the purported partnership interest in KM Welding was not listed as an asset on RMI's beginning-of-the-year balance sheet for 2005. We find that RMI did not own a partnership interest in KM Welding in 2005.
In addition, the taxpayer must also establish to claim an abandonment loss that he or she (1) intended to abandon the property and (2) took affirmative action to abandon the property. Citron v. Commissioner, 97 T.C. 200, 208-209 (1991). The intent to abandon and the affirmative action are to be ascertained from the facts and circumstances surrounding the abandonment. United Cal. Bank v. Commissioner, 41 T.C. 437 (1964), affd. per curiam 340 F.2d 320 (9th Cir. 1965). An abandonment occurs where the taxpayer has relinquished the asset as well as any future claims to the asset. Tsakopoulos v. Commissioner, T.C. Memo. 2002-8, affd. without published opinion 63 Fed. Appx. 400 (9th Cir. 2003). Some express manifestation of abandonment is required when the asset is an intangible property interest, such as a partnership interest. Citron v. Commissioner, supra at 209-210.
Petitioner testified that she intended to abandon her purported partnership interest in KM Welding to avoid damage to her reputation and to her business, RMI. The record does not contain any independent evidence, however, to support her alleged intent. There is no evidence, other than petitioner's self-serving testimony, that petitioner would be held liable for any debts of KM Welding. Moreover, petitioner did not provide any independent evidence of the financial health of KM Welding in 2005, the year RMI “abandoned” the partnership interest. Petitioner also did not provide evidence that KM Welding was not completing projects or timely paying its bills. In fact, KM Welding continued operations after 2005.
Furthermore, petitioner testified she decided, upon her CPA's advice, to abandon the purported partnership interest. Yet petitioner did not provide evidence of the conversations she had with her CPA. Additionally, she admitted at trial that if she received any profits from KM Welding in the future, she would report the income. Petitioner's remarks suggest that she believed there was still a possibility she would receive a return on her investment. Accordingly, we find that petitioner did not truly intend to abandon any interest in KM Welding.
Petitioner did not take any affirmative action in 2005 to abandon the purported partnership interest in KM Welding. Petitioner was unable to provide the date on which she abandoned the interest. Petitioner testified that she did not file any public document indicating that she was no longer associated with KM Welding. Additionally, there is no evidence that petitioner informed her purported partners that she was abandoning the partnership interest. We find that petitioner did not take sufficiently identifiable steps to abandon the interest in KM Welding to thereby be entitled to an abandonment loss deduction.
II. Accuracy-Related Penalty
We turn now to respondent's determination in the deficiency notice that petitioners are liable for the accuracy-related penalty under section 6662(a) and (b)(1). Respondent has the burden of production under section 7491(c) and must come forward with sufficient evidence that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
A taxpayer is liable for an accuracy-related penalty for any portion of an underpayment of income tax attributable to negligence or disregard of rules and regulations, unless he or she establishes that there was reasonable cause for the underpayment and that he or she acted in good faith. Secs. 6662(a) and (b)(1), 6664(c)(1). Negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the Code and includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
RMI did not maintain any books or records to substantiate the abandonment loss claimed on RMI's return for 2005. We find it incredible that petitioner, who is in the business of entering into contracts, would not request written documentation of the KM Welding transaction. Furthermore, uncorroborated self-serving testimony was the only evidence petitioner presented regarding the abandonment of the purported partnership interest in KM Welding. We find that petitioners acted negligently in failing to substantiate the abandonment loss, and respondent has met his burden of production.
Notwithstanding that petitioners were negligent, they may avoid the imposition of a penalty if they are able to show that there was a reasonable cause for, and that they acted in good faith with respect to, the underpayment. See sec. 6664(c). The determination of whether the taxpayer acted with reasonable cause and in good faith is made by taking into account all the pertinent facts and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioner testified that she abandoned the KM Welding partnership interest and claimed a loss deduction for 2005 on the advice of her CPA. We do not even have the name of her CPA, nor do we know what information petitioner provided to the CPA. Petitioner failed to give us adequate evidence that she acted in good-faith reliance. Accordingly, we hold that petitioners are liable for the accuracy-related penalty under section 6662(a) and (b)(1) for 2005.
In reaching our holding, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing and the concessions of the parties,
Decision will be entered under Rule 155.

Footnotes


1
All section references are to the Internal Revenue Code in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.
2
Petitioner conceded Renee Milton, Inc. had $4,488.50 of unreported gross receipts or sales and it is not entitled to a deduction for outside services of $100,000. Respondent conceded that petitioners are entitled to $40,152 of other deductions.
3
Petitioners concede in their brief that the amount claimed should have been $90,000 rather than $100,000.
4
Sec. 7491(a) shifts the burden of proof to the Commissioner in certain circumstances provided the taxpayer complies with substantiation requirements, maintains all required records, and cooperates with the Commissioner's reasonable requests. Petitioners did not seek to shift the burden. In addition, petitioners have failed to substantiate the abandonment loss deduction and maintain the required records, and therefore we decline to shift the burden. See sec. 7491(a)(2)(A) and (B).




Other annotations:

There was no recognizable loss to any partner upon the informal dissolution of a partnership because business operations were not completely terminated. The two withdrawing partners formed a new partnership and retained the clients they had been serving, so that no forfeiture of partnership interests occurred.
E.F. Neubecker, 65 TC 577, Dec. 33,549.
An investor in an oil and gas limited partnership was not entitled to a deduction for theft absent proof that he sustained a loss during the year in question. He was denied an abandonment loss deduction because he did not forfeit his partnership interest.
R. Lapin, 60 TCM 59, Dec. 46,704(M), TC Memo. 1990-343. Aff'd, CA-9 (unpublished opinion 3/12/92).

Wednesday, October 28, 2009

IRS Small Business/Self-Employed Policies and Procedures for NFTLs first filed after CSEDs, Including Release and Refiling Considerations, SBSE-05-1009-018, (Oct. 20, 2009)
2009ARD 202-3




DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE WASHINGTON. D.C. 20224

SMALL BUSINESS/SELF-EMPLOYED DIVISION

October 14, 2009
Control Number: SB/SE-05-1009-018

Expires: October 9, 2010

Impacted: IRM 5.12.2.20

MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS

FROM: Frederick W. Schindler /s/ Laura Hostelley (for) Director, Collection Policy

SUBJECT: Policies and Procedures for NFTLs first filed after CSEDs, Including Release and Refiling Considerations

The purpose of this memorandum is to raise awareness and provide procedures for handling rare instances of Notices of Federal Tax Lien (NFTL) filed, for the first time, on a date later than the original Collection Statute Expiration Date (CSED). These filings occur because the CSED was extended or suspended and a NFTL was not filed prior to that original CSED. The Service used the term “Portland Liens” because the issue was identified in Portland, Oregon. Beginning with this memorandum, these liens are called NFTL After Original CSED (NAOC).

Attachment I: Example A - NAOC with Correct Refile Period Calculated

Example D - NAOC/NFTL in Timeline Format

I. Release of NAOC or NFTL
Expired CSEDs render the liability and underlying statutory lien legally unenforceable. On May 2, 2008 the Automated Lien System (ALS) released liens with expired CSEDs. ALS will continue to release liens when the final CSED expires on a module. Example D, referenced above, shows a release timeline after ALS receives module satisfaction from master file (MF) or determines that a CSED extension, previously received from MF, has expired even though the NAOC (or NFTL) refile period has not expired.

II. Effectiveness of Statutory and Notice of Lien (NAOC or NFTL)
The effectiveness of the notice provided by a NAOC (or NFTL) against third party creditors is distinguishable from the viability of the underlying statutory lien. The viability of the underlying statutory lien is tied to the assessment but circumstances may make its viability distinguishable from the assessment. Placing a date in column “e” of the NFTL causes the lien to self-release saving the Service resources devoted to releasing liens when CSEDs expire. If a CSED has been extended past the date in column “e” but no refile has occurred, the liability remains viable but the statutory lien and NAOC (or NFTL) have been extinguished. When the statutory lien has been extinguished a revocation of release is needed to reestablish it before a new NAOC (or NFTL) can be filed. If the statutory lien remains viable only a new NAOC (or NFTL) need be filed.

The underlying statutory lien is extinguished if :
a. The liability has been fully satisfied by payment

b. The liability becomes legally unenforceable due to no time remaining on the original statute collection period (or longer period if a suspension or extension)

c. A release occurs due to the self-releasing language on Form 668(Y)(c) even though the CSED has been extended or suspended


The NAOC or NFTL is valid if both :
a. The statutory lien is valid, and

b. The NAOC or NFTL refile period has not expired (whichever refile period applies section 6232(g)(3)(A) or section 6323(g)(3)(B) )


The NAOC or NFTL is not valid if either:
a. The statutory lien is not valid, or

b. The refile period has expired whether or not there is a date in column “e”


When a NAOC or NFTL is not valid, the Service must release that NAOC or NFTL within 30 days of the underlying liability becoming unenforceable or satisfied.

Attachment I: Example B - NAOC with Incorrect “Refile By” Date in Column “e”

Example D - NAOC/NFTL in Timeline Format

III. Repair Procedures for NAOC or NFTL with Expired Refile Period
No date in column “e”
If the CSED has not expired

File a new NAOC or NFTL

Attachment I: Example C - NAOC with NA for “Refile By” Date in Column “e”

Date in column “e”

If the CSED has not expired

File a revocation of release

File a new NAOC or NFTL

Attachment I: Example B - NAOC with Incorrect “Refile By” Date in Column “e”

For questions on the validity of NAOC or NFTL contact Advisory or Counsel.

IV. Table 1: Computing “Refile By” Dates for NFTL and NAOC

Refile Period
“Refile By” Date

IRC § 6323(g)(3)
Last Day for Refiling


From
Until
(a/k/a column “e”)


First 10 year period after assessment * **
The first day of a one year period ending with the date calculated to the right
10 years and 30 days after assessment
10 years and 30 days after assessment


Second period for refile
10 years after the date calculated above
10 years after the date calculated above
10 years after date calculated above


Third period for refile
20 years after date calculated in first row
20 years after date calculated in first row
20 years after date calculated in first row


REMINDER: Use the “refile by” date calculated using the table above even if the CSED precedes the “refile by” date.

* NOTE: If the first refile period begins in January, February, or March of a leap year, use IRM Exhibit 5.12.2-2 to obtain the refile period ending date. For questions on these calculations contact Area Counsel to ensure correct refile period calculation.

** NOTE: When encountering old cases, NFTL, NAOC, or judgments involving a tax liability assessed prior to the Revenue Reconciliation Act , effective November 5, 1990, contact Advisory and Counsel for assistance in determining the correct refile period.


If you have any questions, please call me or a member of your staff may contact Christine Kalcevic.

Attachment

cc: Director, Advisory, Insolvency, and Quality www.irs.gov

ATTACHMENT I
Example A NAOC with Correct Refile Period Calculated

1. Assessment date: 07-10-1998

2. Normal CSED: 07-10-2008

3. Prior to 07-10-2008 the Taxpayer submits an offer-in-compromise. The Service accepts the offer for processing by signing the completed Form 656 on 05-10-2008. Beginning on this date, the offer in compromise is pending. The Service accepts the offer in compromise on 11-10-2009.

4. During the time the offer-in-compromise was pending, the running of collection limitation period was suspended. In this case the collection limitation period was suspended for 18 months.

5. New CSED: 01-10-2010

6. NFTL (now known as “NAOC”) filed (for first time): 05-10-2009

7. Refiling Period: 08/10/2017 through 08/09/2018




Assessment
CSED
Original
Refile By
New
CSED
NAOC
Filed
ALS
Release
NAOC
Refile By



A
07-10-1998
07-10-2008
08-09-2008
01-10-2010
05-10-2009
01-10-2010
08-09-2018



Example B NAOC with Incorrect “Refile By” Date in Column “e”
Items 1- 6 are the same as Example A:

Assessment date: 07-10-1998

Normal CSED: 07-10-2008

Prior to 07-10-2008 the Taxpayer submits an offer-in-compromise. The Service accepts the offer for processing by signing the completed Form 656 on 05-10-2008. Beginning on this date, the offer in compromise is pending. The Service accepts the offer in compromise on 11-10-2009.

During the time the offer-in-compromise was pending, the running of collection limitation period was suspended. In this case the collection limitation period was suspended for 18 months.

New CSED: 01-10-2010

NFTL (now known as “NAOC”) filed for first time: 05-10-2009

“Refile by” date entered in column “e” is 08-09-2009 (incorrectly calculated by adding twelve months and thirty days to the original 10-year collection limitation period, thinking that was the end of the refile period)

Statutory lien is extinguished as a consequence of the self-release language contained on the NAOC. The lien is released as of 08-09-2009 even though the collection limitation period remains open until 01-10-2010.

Revocation of release filed (and mailed to taxpayer) 10-01-2009 to reinstate the statutory lien

New NAOC filed 10-02-2009 to reestablish the “notice” of lien against the four classes of creditors enumerated in section 6323(a) . See General Background. Thus, the new NAOC is effective as of 10-02-2009 in competing against these four interests. The effectiveness of the notice does not revert back to 05-10-2009, the date the NAOC was filed.

Correct Refiling Period is 08/10/2017 through 08/09/2018




Assessment
CSED
Original
Refile By
New
CSED
NAOC
Filed
ALS
Release
NAOC Refile By








05-10-2009
* 08-09-2009

B
07-10-1998
07-10-2008
08-09-2008
01-10-2010






* 10-02-2009
01-10-2010
08-09-2018


* Revocation required and filed 10-01-2009


Example C NAOC with NA for “Refile By” Date in Column “e”
1. Original Assessment: 04-23-1992

2. Normal CSED: 04-23-2002

3. 2 bankruptcies and the taxpayer's innocent spouse claim and appeal resulted in an 11-year CSED suspension to: 04-23-2013

4. Lien (NAOC) filed (for first time): 02-15-2004

5. Refile period: 05-24-2011 through 05-23-2012 (using the second ten year period after assessment)

6. NAOC shows “NA” in column “e” and the notice contains the standard self-release language used in NFTLs since 1982

7. NAOC not refiled during refiling period. The lien did not self-release because “NA” or nothing in column “e” makes the self-release language inoperable.

8. On 06-01-2012 a new NAOC filed and this includes 05-23-2022 as the refile by date in column “e”. The new NAOC protects the Service's priority position in relation to other creditors enumerated in section 6323(a) as of 06-01-2012, not 02-15-2004 (NOTE: Revocation of release was not filed because the underlying statutory lien remained viable)




Assessment
CSED
Original
Refile By
New
CSED
NAOC
Filed
ALS
Release
NAOC
Refile By








02-15-2004
*
*

C
04-23-1992
04-23-2002
05-23-2002
04-23-2013






○ 06-01-2012
04-23-2013
05-23-2022


○Second refile period ended 05-23-2012


PDF Version of Example DPDF Version of Example D

Monday, October 26, 2009

USTC Cases, George M. Vanicsko v. United States of America., U.S. District Court, E.D. Pennsylvania, 2009-2 U.S.T.C. ¶50,699, (Sept. 30, 2009
The vice-president of a painting company was a responsible person under section 6672 liable for the trust fund recovery penalty. The individual co-founded the company and was associated with it throughout its existence. He exclusively supervised employees, managed projects, made hiring and firing decisions, had the authority to contractually bind the company, borrow money on its behalf, and had unrestricted access to its bank account. The president’s exercise of greater control over the company’s finances did not absolve the individual of his liability as a responsible person. Further, the individual acted willfully because he had actual knowledge that the company’s withholding taxes were not being paid and failed to exercise his authority to ensure their payment.

U.S. District Court, East. Dist. Pa.; CIV. 07-1087, September 30, 2009.

The Internal Revenue Code requires employers to withhold from the wages of their employees income and social security taxes and to hold such taxes in trust for the United States. 26 U.S.C. §§ 3102, 3402, 7501. Section 6672 permits the United States to assess a trust fund recovery penalty against certain persons who fail to collect or turn over such funds to the IRS. Specifically, the statute provides:
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.
26 U.S.C. § 6672(a). Tax assessments by the United States are presumptively correct. Brounstein v. United States, 979 F.2d 952, 954 (3d Cir. 1992) (citing Psaty v. United States, 442 F.2d 1154, 1160 (3d Cir. 1971)). Once the United States introduces certified copies of the assessment to the district court, the burden shifts to the taxpayer to disprove liability. Id. To disprove liability under § 6672, a taxpayer must establish either “(1) that he was not a responsible person within the meaning of the statute, or (2) that he did not willfully fail to pay the amount due to the IRS.” Id.
Here, there is no dispute that the United States assessed the trust fund recovery penalties against the plaintiff and that VW Painting owed taxes in the amount of $368,608. The only material dispute relates to whether (1) the plaintiff was a “responsible person” within the meaning of § 6672, and (2) whether the plaintiff “willfully” failed to turn over the trust fund taxes due.
A. “Responsible Person” Under § 6672
The plaintiff has failed to provide evidence from which a rational fact-finder could conclude that he was not a “responsible person” of VW Painting during the relevant periods. A “responsible person” is one “required to collect, truthfully account for or pay over any tax due to the United States.” Greenberg v. United States, 46 F.3d 239, 242-43 (3d Cir. 1994). “Responsibility is a matter of status, duty, or authority, not knowledge,” and requires that a person have significant, though not necessarily exclusive, control over the company's finances before liability can be imposed. Id. (quoting Brounstein, 979 F.2d at 954) (internal quotations omitted). The question of significant control over the company's finances is answered in light of the totality of the circumstances; no single factor, or the absence thereof, is determinative. Barnett v. IRS, 988 F.2d 1449, 1455 (5th Cir. 1993). In determining whether an individual is a responsible person, courts consider:
“(1) contents of the corporate bylaws, (2) ability to sign checks on the company's bank account, (3) signature on the employer's federal quarterly and other tax returns, (4) payment of other creditors in lieu of the United States, (5) identity of officers, directors, and principal stockholders in the firm, (6) identity of individuals in charge of hiring and discharging employees, and (7) identity of individuals in charge of the firm's financial affairs.”
Greenburg, 46 F.3d 239 at 243 (quoting Brounstein, 979 F.2d at 954-55).
Here, the United States has presented a certified copy of the notice of assessment, as well as substantial undisputed evidence with respect to the above factors. The undisputed evidence shows that the plaintiff had significant status, duties, and authority at VW Painting. The plaintiff was a co-founder of VW Painting and was associated with the company from its inception to closing. For about eight years, VW Painting operated out of the marital home of the plaintiff and Rosemary Vanicsko, and then they jointly made the decision to relocate the company to a jointlyowned property in 2000. The plaintiff identified himself as vice-president of VW Painting in signed correspondence, in signed financial statements, on state income tax returns, and other legal documents. He supervised the employees in the field and managed the projects - no other employee at VW Painting was tasked with that responsibility. He also made hiring and firing decisions either alone or jointly with Rosemary Vanicsko.
Furthermore, the plaintiff had significant control over VW Painting's finances. The plaintiff's claim that he was not responsible for the financial affairs of the company and had little control over the company's purse strings is belied by the overwhelming, undisputed evidence to the contrary. The plaintiff had the authority to negotiate contracts, modify contracts, and sign proposals for VW Painting's projects. The plaintiff regularly calculated the amount of payments owed by contractors, signed applications for payments, and prepared the invoices. He approved invoices for payment relating to materials and equipment. The plaintiff had the authority to sign liens against contractors, bind VW Painting to various contracts, and sign settlement agreements on behalf of the company. He had the unrestricted ability to make payments from the bank account of VW Painting through the use of a debit card. The plaintiff also had authority to borrow money on VW Painting's behalf and made personal loans to the company.
The plaintiff argues that his wife, Rosemary Vanicsko had control over VW Painting's bookkeeping and accounting, that she collected and paid the employees' withholding taxes, and that she was the “responsible person” under § 6672. 3 However, it matters not that Rosemary Vanicsko may have had greater control over the company's finances, as long as the plaintiff had significant status and control as well. See Greenburg, 46 F.3d at 243 (“While a responsible person must have significant control over the corporation's finances, exclusive control is not necessary.” (internal quotations omitted)). Moreover, liability attaches to the plaintiff regardless of whether he actually exercised his authority, as long as the plaintiff had such authority. See Muck v. United States, 3 F.3d 1378, 1381 (10th Cir. 1993) (“The existence of such authority, irrespective of whether that authority is actually exercised, is determinative.”); Barnett, 988 F.2d at 1455 (“That another person in the company has been delegated the jobs of withholding and paying employees' taxes and generally paying creditors is beside the point. The crucial inquiry is whether [the] party … by virtue of his position in (or vis-a-vis) the company, could have had ‘substantial’ input into such decisions, had he wished to exert his authority.” (footnote omitted)). Indeed, the undisputed evidence described above shows that the plaintiff had significant status, duties, and authority within VW Painting and, even if he did not exercise day-to-day control of its finances, the plaintiff had the ability to exert significant control.
Therefore, I find that, as a matter of law, the plaintiff was a “responsible person” of VW Painting within the meaning of § 6672 during the relevant periods.
B. “Willfully” Failing to Turn Over Taxes Under § 6672
The plaintiff has also failed to provide evidence from which a rational fact-finder could conclude that he did not “willfully” fail to pay the trust fund taxes owed by VW Painting during the relevant periods. Under § 6672, willfulness is defined as:
“‘a voluntary, conscious and intentional decision to prefer other creditors over the Government.’ A responsible person acts willfully when he pays other creditors in preference to the IRS knowing that taxes are due, or with reckless disregard for whether taxes have been paid.” In order for the failure to turn over withholding taxes to be willful, a responsible person need only know that the taxes are due or act in reckless disregard of this fact when he fails to remit to IRS. “Reckless disregard includes failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid.” The taxpayer need not act with an evil motive or bad purpose for his action or inaction to be willful.
Greenburg, 46 F.3d at 244 (quoting Brounstein, 979 F.2d at 955-56) (internal citations omitted).
Here, the undisputed evidence shows that the plaintiff had actual knowledge of VW Painting's tax liabilities and failed to investigate or correct the situation. The plaintiff was, as described above, a “responsible person” required to pay the taxes owed by VW Painting. 4 At the latest, he had actual knowledge of VW Painting's tax liabilities in 2001, when he attended a meeting at the IRS where VW Painting's tax liabilities were discussed. After learning that the tax liabilities were not paid, the plaintiff took no direct action to ensure they were being paid. The plaintiff continued to receive checks from VW Painting indicating that taxes were being withheld from his wages, and he did nothing. This conduct constitutes “willful” behavior within the meaning of § 6672, and I find that, as a matter of law, the plaintiff “willfully” failed to turn over the taxes owed by VW Painting during the relevant periods.




The treasurer of a bankrupt corporation was personally liable to the government for withheld taxes that were diverted to pay other creditors. The treasurer breached his duty to hold such collected taxes in trust until they are paid over to the government. Although the treasurer could not sign checks in excess of $1,000 without the signature of another officer, such a limitation on his authority did not protect him from liability as the person responsible for payment of taxes. Further, the government was not bound by a hold-harmless agreement executed in favor of the treasurer by the other corporate officers.
E.A. Cella, DC, 80-1 ustc ¶9369.
Taxpayer was not an officer, director or employee of a toy company financed by her father and therefore was not liable for unpaid employment taxes of the company.
S. Philipson, DC, 55-1 ustc ¶9466.
Although the claimant denied that he was a director, officer or shareholder of the corporation, the weight of the evidence showed that he (1) hired and controlled employees of the corporation, (2) controlled the financial and business aspects of the corporation, (3) signed IRS forms, (4) engaged in other activities tending to show his direction and control over corporate funds, and (5) had the corporation formed.
J. Labowitz, DC, 73-1 ustc ¶9155, 352 FSupp 202.
A district court reversed a bankruptcy court's finding that the chairman of the board of two corporations was not a responsible person with respect to the collection and paying over of withholding and social security taxes. Because the taxpayer had, at all times, the power to see that such taxes were paid, the bankruptcy court's decision was clearly erroneous. The bankruptcy court's finding that the taxpayer did not willfully fail or refuse to pay the taxes in question was also clearly erroneous. After she became aware that the taxes had not been paid, she paid other creditors in preference to the government.
T.L. Woodson, DC Mich, 83-1 ustc ¶9258, rev'g BC- DC, 81-2 ustc ¶9791, 15 BR 185.
The determination of the liability (a corporate officer) for the payment of withheld taxes is an issue to be decided on the facts of the case. Thus, the court was compelled to dismiss both the government's and the taxpayer's motions for summary judgment.
B.H. Hoeniger, DC, 76-1 ustc ¶9296.
A corporate officer who paid the corporate liability for FICA taxes under the mistaken assumption that he was personally liable for their payment was entitled to a refund of the taxes and penalties paid.
E.B. David, DC, 83-1 ustc ¶9259.
After he failed to appear at trial, a district court sustained a 100% penalty against a president and treasurer of a photographic equipment business for his failure to pay over or collect employment taxes. However, an individual who had acted as general manager was not jointly liable for the penalty, since there was not sufficient evidence to suggest that he either preferred other creditors over the government or that he had financial responsibility over corporate affairs beyond that of depositing funds in a corporate account. As a result, the court sustained the penalty assessed against the president, but it dismissed the government's claim against the general manager.
R. Sparkman, DC Calif., 84-2 ustc ¶9983.
In reversing the Claims Court, the court of appeals held that a corporation's chairman of the board was not liable for the 100-percent penalty for failure to collect and pay withholding taxes because (1) he was not a responsible person who had a duty to collect, account for, and pay over taxes, since there was no evidence that he had or exercised control over such functions and (2) he did not act willfully in failing to withhold taxes because there was no evidence that he had actual knowledge of the nonpayment of taxes due after the first two quarters of the year until the eve of the corporation's bankruptcy. Since the taxpayer was not a responsible person and did not fail willfully to execute a duty to collect and pay taxes, the part of the judgment relating to the IRS's allocation of certain tax payments was vacated as moot.
D.J. Godfrey, Jr., CA-FC, 84-2 ustc ¶9974, 748 F2d 1568, rev'g ClsCt, 83-2 ustc ¶9635.
For withholding tax purposes, an individual who acquired a company in bleak financial condition and assumed unpaid liabilities had control over such company and was a responsible person. The facts that (1) the list of liabilities assumed did not include reference to unpaid pre-acquisition withholding tax liabilities and (2) such individual subsequently entered into an agreement with a bank to handle receipts and payments were insufficient to relieve such individual of his status as a responsible party. However, a question of material fact existed regarding whether such individual intentionally failed to pay taxes due.
H. Bonnabel, DC N.J., 90-2 ustc ¶50,481.
Mere titular officers of a corporation were not responsible parties and, even if they were, there was no showing that they willfully failed to pay the taxes due.
R.E. Couture, DC, 74-2 ustc ¶9706.
The son of the president of a restaurant corporation was not liable for the unpaid employee withholding taxes of the corporation because he was not a responsible person obligated to withhold and pay over taxes. Even though he managed some of the company's restaurants and was authorized to sign checks, he could not disburse funds except in emergency situations, and he did not have authority to pay creditors. In addition, although he held the office of Secretary/Treasurer and technically owned 10 percent of the stock of the corporation, he did not control that interest, had no authority to sell the stock, and was completely accountable to his father. Finally, even if it had been determined that he was a responsible person, he lacked authority to pay the taxes and other debts of the corporation and, therefore, could not be found to have willfully failed to carry out that responsibility.
E.D. Goodick, DC La., 92-1 ustc ¶50,279.
Individual financial backers who loaned money and obtained lines of credit for a corporation were responsible persons and, therefore, were liable for penalties for failure to pay over withheld income taxes. The backers had the ability to decide where corporate funds were spent and, in fact, exerted this control at least once. They had check-writing authority and could pull their financial support at any time their wishes were not fulfilled. Moreover, the backers' failure to pay the taxes was willful because they knew of the corporation's obligation to pay the taxes. In addition, the corporate officer, who operated the company on a day-to-day basis, was also liable for the taxes as a responsible person. Even though the officer intended to pay the taxes in the long run, he preferred to use current cash flows to carry on the corporation's operations and not to pay over the withheld taxes.
C.D. Webster, DC Md., 94-1 ustc ¶50,008.
A corporation in bankruptcy that was in the business of providing security guards to its customers was the employer of these guards because it had control over the guards and the funds used to pay them. It was responsible for the payment of employment taxes regarding these employees, and this obligation could not be avoided by delegating that function to another. However, the government's tax claim for the penalty for the failure to pay over withheld taxes was disallowed with leave to file an amended claim, because it failed to identify a particular person as the responsible person liable for the corporation's FICA and FUTA obligations and did not specify whether the unpaid FICA amounts were attributable to the debtor's portion or the employees' share.
Professional Security Services, Inc., BC-DC Fla., 94-1 ustc ¶50,148.
Summary judgment was denied where material issues of fact existed as to whether a corporate officer should be classified as a responsible person. The corporate officer had authority to sign corporation checks and could be deemed a person responsible for paying withholding taxes. Further, there was evidence that the officer was aware that the corporation was delinquent in paying over withholding to the IRS.
J.P. Ladwig, DC Ill., 94-1 ustc ¶50,192.
Married individuals were not responsible persons during the time that a company's tax delinquency accrued and, therefore, were not required to pay over federal income taxes and social security taxes withheld from employees' wages. They lacked control over the decision-making process by which the corporation allocated funds to other creditors instead of paying its withholding tax obligations.
M.L. Michaud, FedCl, 97-2 ustc ¶50,972, 40 FedCl 1.
The president of a bankrupt company who willfully failed to pay over his company's payroll withholding taxes was a responsible person with respect to the trust fund recovery penalty. The president acknowledged that he was a responsible person under the statute. However, whether two other company officers were responsible persons was questionable. Although one of the officers served as chief financial officer and both had check-writing authority, the president exerted such command over the finances of the company that a reasonable fact-finder could conclude that neither officer had significant control over the company's finances.
R.S. Hudson, DC Pa., 99-2 ustc ¶50,914.
A bankrupt attorney who was the president and sole shareholder of his law corporation was liable for the trust fund recovery penalty in connection with the corporation's failure to collect and pay over employment taxes.
D.A. Smith, DC Hawaii, 99-2 ustc ¶50,998. Aff'g 99-1 ustc ¶50,278.
The president and vice president of a corporation who failed to remit withholding taxes to the IRS were determined to be "responsible persons" liable for the trust fund recovery penalty. In addition to being corporate directors and officers, the individuals owned stock in the corporation, were responsible for daily management operations, hired and fired employees, and had the authority to sign checks and pay the corporation's taxes.
D.C. Stull, DC Tex., 2000-1 ustc ¶50,168. Aff'd, per curium, CA-5 (unpublished opinion), 2001-1 ustc ¶50,333, 252 F3d 436.
A corporate director who lacked control over the company's tax deposits and payments did not qualify as a responsible person liable for the trust fund recovery penalty. Although he made deposits and tax payments at a bank under the direction of the corporate president and was aware of the company's payroll tax delinquencies, he had no decision-making authority regarding the payment of creditors.
M.D. McGlaughlin, DC Md., 2000-1 ustc ¶50,183.
Questions of fact precluded summary judgment on the government's claim for the trust fund recovery penalty against the sole owner of a real estate appraisal business who was on maternity leave during the quarters at issue. Because her level of involvement with company during her maternity leave was in dispute, it could not be determined on summary judgment that she was a responsible party.
P. Ranson, DC Wash., 2001-1 ustc ¶50,161.
A federal district court applied improper legal standards to reach its determination that an individual was not a responsible person. The district court erroneously focused its inquiry on whether the taxpayer had knowledge of the unpaid taxes, the taxpayer's functional responsibility, and the fact that another individual had greater control of corporate affairs. That the taxpayer had significant control over the company's affairs was sufficient for him to qualify as a responsible person.
D.M. Chapman, CA-9 (unpublished opinion), 2001-1 ustc ¶50,380, 7 FedAppx 804, rev'g and rem'g and unreported District Court decision.
The former owner of a plumbing business who transferred 80% of the ownership in the business to his children was deemed to be a responsible person for purposes of the trust fund recovery penalty. The individual was still a 20% owner in the business, had check-signing authority, was often asked to co-sign checks for the business and continued to work to determine the bids the company would make. Moreover, he loaned money to the company when it was in financial difficulty and had considerable influence over how his children ran the business.
M.E. Pitts, DC Ariz., 2001-1 ustc ¶50,419.
The president and CEO of two trucking corporations, who was assessed penalties for his failure to turn over withholding taxes, was a responsible person under Code Sec. 6672. The undisputed evidence established that he had the authority to instruct his manager to pay the taxing authorities, had significant control over the finances of the corporations, retained the authority to sign checks on behalf of the corporation, and possessed the authority to hire and discharge employees. The taxpayer's argument that he delegated these duties and did not have day-to-day financial responsibilities was unpersuasive.
R.C. Bolus, Sr., DC Pa., 2001-2 ustc ¶50,644.
An individual who was the sole shareholder of one credit bureau and the president and CEO of a second bureau, both of which failed to pay over withholding taxes, qualified as a responsible person who willfully failed to collect, account for, or remit the funds to the IRS. Thus, he was liable for the assessed trust fund recovery penalties. No triable issues of fact existed as to the individual's liability for the penalties.
W.K. Hankins, DC Ind., 2001-2 ustc ¶50,692.
A third-party defendant's motion for summary judgment in connection with the IRS's assessment of a trust fund recovery penalty against him due to a corporation's failure to pay over employment taxes was denied. He unsuccessfully contended that he was not a responsible person because he was not an employee, officer or shareholder of the corporation. However, he served as corporate counsel and as the entity's chief financial officer. He also directed the president to make payments to various creditors, including tax payments to the IRS, was involved in the preparation and filing of the company's payroll tax returns, prepared corporate tax returns and was responsible for ensuring that the payroll tax deposits were made.
D.K. Scheingold, DC N.J. (unpublished opinion), 2002-2 ustc ¶50,510.
The chairman of a corporation was liable for the trust fund recovery penalty in connection with the corporation's failure to pay over employment taxes. He qualified as a responsible person because he had the authority to sign checks, hire and fire employees, participate in management, determine corporate financial policy, and authorize the payment of bills. He also discussed corporate business with other company officers on a weekly basis and was the corporation's majority shareholder, a member of its board of directors, and a guarantor of corporate loans.
C.S. Perlman, DC Fla., 2002-1 ustc ¶50,346.
The founder and president of a corporation was a responsible person with liability to pay the IRS's assessment of unpaid employment and withholding taxes, plus interest and penalties, for one tax year. He held the position of president of the company and attended its board meetings, he was generally responsible for the operation of the company and possessed the authority to sign checks and approved the check signing of the only other company employee with checking signing authority. Furthermore his decision not to pay over or withhold the employment taxes was willful. He made the decision to pay other creditors in preference to the IRS knowing that taxes were due and he failed to take corrective actions.
G. Sutton,, DC Tex., 2002-2 ustc ¶50,552, 194 FSupp2d 559.
The president of a corporation was considered the responsible person with liability to pay the assessment of unpaid taxes, plus interest and penalties, for two tax years. He was the highest-ranking officer and had substantial authority to direct operations. Moreover, he signed the payroll tax returns and had signature authority on corporate accounts. He paid other creditors in preference to the IRS knowing that taxes were due and failed to take corrective actions. That he resigned from his position of president was meaningless as he exercised control in all relevant areas both before and after the purported resignation.
L.A. Mitchell, DC N.J. (unpublished opinion), 2002-2 ustc ¶50,537. Aff'd, CA-3 (unpublished opinion), 2004-1 ustc ¶50,113, 82 FedAppx 781.
The CFO of a bankrupt airline company was a "responsible person," who willfully failed to file quarterly excise tax returns and pay the accompanying tax to the government. The CFO held a corporate office, possessed control over the financial affairs of the airline company, possessed the authority to disburse corporate funds, and possessed the ability to pay the excise taxes without the approval of the company's Board. There was a material issue of genuine fact, however, as to whether the controller of the company had the requisite corporate decision making authority within the company to be considered a responsible person with regard to the delinquent excise taxes. Although the controller applied for credit on behalf of the company and signed promissory notes that bound the company, he was not in charge of the department that was responsible for tracking the excise taxes and he was not involved in overall day-to-day operations of the company.
D.R. Ferguson, DC Iowa, 2004-1 ustc ¶50,247, 317 FSupp2d 945.
The bankruptcy court erroneously held that the president and sole shareholder was not a responsible person for purposes of the trust fund recovery penalty. Although the taxpayer did not run the day-to-day operations of the corporation, she had sole authority to right checks for the company. The bankruptcy court's conclusion that the taxpayer was not a responsible person was strongly based on the lack of authority or power over daily management of the company. However, the taxpayer's status as president, sole shareholder and her authority to sign checks was sufficient to make her the responsible person.
E.L. Marino, DC Fla., 2004-1 ustc ¶50,262, 311 BR 111, rev'ing BC-DC Fla., 2004-1 ustc ¶50,261.
A president and fifty percent shareholder of an employee leasing company was liable for the trust fund recovery penalty in connection with his company's failure to pay employee withholding taxes. Evidence established that the taxpayer was a responsible person because he had check signing authority, even though he claimed that he did not often exercise such authority, and had the authority to manage and direct the employees of the company. The taxpayer also had the authority to hire and fire all levels of employees, which he displayed when he fired his business partner, who was also a fifty percent shareholder.
S. Farkas, FedCl, 2003-2 ustc ¶50,574.
A debtor who served as vice-president of a general contracting business was a responsible person as a matter of law. He had significant authority over the employees, as well as over the finances of the company during the tax periods in issue. Questions remained regarding whether he willfully failed to pay over the withholding taxes.
V.K. Pugh, BC-DC Nev., 2004-2 ustc ¶50,352, 315 BR 889.
A debtor's objection to the IRS's claim for the trust fund recovery penalty assessed against him was denied because he was determined to be a responsible person who willfully failed to pay over withheld taxes. The debtor stipulated that he was a responsible person and his failure to remit the withheld taxes was willful because he was aware of the company's employment tax deficiency yet chose to pay creditors other than the government. The fact that the debtor was told by the company's owner not to pay the taxes and that he might have been fired had he disobeyed orders did not excuse his liability for nonpayment.
L. Borman, BC-DC Fla., 2005-1 ustc ¶50,109.
An individual was liable for the trust fund recovery penalty, during the time he was no longer president of the corporation. The taxpayer admitted to being the chairman of the board, the sole director, vice president, secretary, and treasurer. Between himself, his spouse and his children, he controlled about 50 percent of all outstanding stock and he has controlling interest in the corporation. At all times, the interim president served at his will. Undoubtedly, the taxpayer was a "responsible person" liable to pay the trust fund taxes.
D.J. Frank, BC-DC N.C., 2005-1 ustc ¶50,222.
The manager of a casino was not a responsible person for purposes of the trust fund recovery penalty since he had no authority over payroll or tax matters. Although he supervised department managers and was otherwise responsible for the day-to-day operations of the casino, the manager did not have significant decision-making authority over the financial affairs of the company to be responsible for payroll taxes. Authority to decide which checks were to be written, and to whom, rested in the sole shareholder, director and corporate officer of the casino.
B.E. Dewing, DC Nev., 2005-1 ustc ¶50,275.
The chief financial officer of a bankrupt company was not a responsible person for purposes of imposition of the trust fund recovery penalty, despite have check-signing authority, because the company president had absolute control over all of the company funds. The company president reviewed the cash flow balance daily, authorized the creditors to be paid and even wired funds to another creditor to prevent the IRS from obtaining the funds after the CFO sent the IRS a check without the president's knowledge.
J.D. Salzillo, FedCl, 2005-1 ustc ¶50,324, 66 FedCl 23.
The sole owner and president of a corporation was a responsible person who willfully failed to pay the corporation's employment tax liabilities for purposes of imposing the trust fund recovery penalty. He signed Form 941 employment tax returns on behalf of the corporation, could independently sign checks on behalf of the corporation and signed a sworn statement that he was solely responsible for all tax debts incurred by the corporation. The taxpayer's failure to pay the taxes was willful because he knew of the tax liabilities, but chose to pay other expenses.
G. Kraljevich, DC Mich., 2005-1 ustc ¶50,372, 364 FSupp2d 655.
An individual was determined to be a responsible person with respect to unpaid employment taxes. The taxpayer, who was involved in the operation of two companies until the time a surety company assumed control, did not present any evidence contradicting that he was a responsible party for tax liability under Code Sec. 6672. Instead, the evidence reflected that the majority of the unpaid employment taxes accrued prior to the time the surety company assumed control. Furthermore, whether the surety was responsible for the unpaid employment taxes had no bearing on whether the taxpayer was a responsible person for purposes of tax liability.
J. Dowdy, DC Tex., 2005-2 ustc ¶50,517.
The IRS was granted summary judgment against the former president of a non-profit corporation for trust fund recovery penalties under Code Sec. 6672. The taxpayer had significant control of the corporation's finances, had check writing authority, and was responsible for ensuring that the company paid its trust fund taxes. Further, once the taxpayer became aware of the deficiency, he failed to ensure its payment before any other creditors were paid. Such a failure is willful and subjects the responsible person to trust fund recovery penalties under Code Sec. 6672.
Reverend R. W. Schlicht, DC Ariz., 2005-2 ustc ¶50,527.
An electrical contractor was liable for penalties under Code Sec. 6672 for failing to pay over federal employment taxes owed by two corporations that he formed. Despite having relinquished his management role to family members, he was a "responsible person" for purposes of Code Sec. 6672 liability because he kept the title of president and retained authority to control the company, even if he did not exercise that authority. Specifically, the taxpayer had full check writing authority, full access to company books and records, and the opportunity to exercise substantial financial control over company affairs.
J.F. Grillo, BC-DC N.J, 2005-2 ustc ¶50,625.
The founder, president and principal stockholder of a company was determined to be a responsible person with respect to unpaid employment taxes. The failure of the taxpayer's accountant and tax specialist to properly designate amounts paid to offset these liabilities did not mean that the IRS should be equitably estopped from collecting under Code Sec. 6672, as the taxpayer mistakenly argued. The trust fund recovery penalty is separate and distinct from the legal obligation imposed on the employer to collect and remit the trust fund taxes. Since the taxpayer did not present any evidence to the contrary, he was found to be a responsible person who willfully failed to pay the owed employment taxes.
J.A. Lencyk, DC Tex., 2005-2 ustc ¶50,630, 384 FSupp2d 1028.
A 100-percent trust fund penalty was reduced to judgment since the taxpayer was the responsible person even though he did not have day-to-day control of the company. Rather his status as CEO, president and sole shareholder gave him sufficient control to be the responsible person for trust fund purposes.
R. Sage, DC N.Y., 2006-1 ustc ¶50,175, 412 FSupp2d 406.
The president of a tax-exempt organization was not entitled to a refund of the federal employment and withholding taxes he paid from his personal funds. As president of the board of directors for almost 20 years, he had check-signing authority and control over the organization’s financial affairs. Further, he exhibited a reckless disregard of a known risk that the organization was not making required trust fund payments to the IRS and he made no effort to ascertain the status of the organization's tax payments.
C.E. Jefferson, DC Ill., 2007-1 ustc ¶50,304, 459 FSupp2d 685.
A company’s vice president of operations was denied a refund of a trust fund recovery penalty assessed against her for her employer’s failure to pay backup withholding taxes. She was a responsible person because her own testimony about her duties and responsibilities and her undisputed check-writing authority established that she could have prevented the company from paying other creditors instead of paying the taxes. She enjoyed exclusive check-writing authority and was responsible for collecting, accounting for, and paying over the withheld taxes. She was in a position to use her ability to prioritize creditors and her check-signing authority to impede the flow of business to the extent necessary to ensure the payment of taxes and nothing in the company’s business model prevented her from paying the taxes. In addition, the undisputed evidence clearly established that the willfulness requirement was met.
N.A. Cook, DC Ind., 2007-1 ustc ¶50,333.
A trust fund recovery penalty was correctly assessed against the chief financial officer of a bankrupt airline company because he was a responsible person who willfully failed to pay the company’s excise taxes. The individual was authorized to sign checks and disburse corporate funds on behalf of the company and had the authority to pay the company’s excise taxes without board or management approval. The board never explicitly instructed him to not pay the excise taxes but he chose not to do so in order to pay other company expenses.
R. Musal, DC Iowa, 2006-1 ustc ¶50,207, 421 FSupp2d 1153. Aff'd sub nom. D.R. Ferguson, CA-8, 2007-1 ustc ¶50,481, 484 F3d 1068.
The CEO and board chairman of a motorcycle company was not entitled to a refund of a portion of the trust fund recovery penalty he paid to the IRS in satisfaction of the company’s unpaid payroll withholding taxes. Testimony of the CEO and the company’s chief operating officer and financial director established that the CEO was a responsible person who willfully failed to pay the company’s taxes. He had overall authority, including raising capital and hiring, was involved in the day-to-day management of the company, had the authority to issue checks, and determined which creditors to pay and when to pay them. Further, he instructed the company’s financial director that bills pertaining to utilities were to be paid first; thus, checks were issued to other creditors but not to the government.
R.K. Hagen, DC Md., 2007-1 ustc ¶50,510, 485 FSupp2d 622.
An individual who held no ownership or entrepreneurial stake in debtor corporations was not a responsible person with regard to those corporations' failure to pay over withheld federal taxes. She could not sign checks without the prior authorization of the president and sole shareholder of the corporations and had no power or authority to hire or fire employees. Although she was the secretary of the debtor corporations, the duties that she performed were ministerial and administrative in nature. All of the authority and control over the corporations' administration and finances resided with the president, and the tasks she performed were executed solely upon his instructions.
L.M. Benitez, DC PR, 2006-2 ustc ¶50,598.
The sole corporate officer of a construction company was a responsible person who willfully failed to pay over federal withholding taxes. The officer continued to write checks, sign returns and act on behalf of the corporation after the date he claimed an insurance company took over control under an indemnity agreement. However, the officer’s wife was not liable for the unpaid taxes because there was no evidence that she was an officer or director of the construction company. Her involvement was limited to occasional business purchases and as a signatory with her husband on the indemnity agreement.
G. Hartman, BC-DC Pa., 2007-2 ustc ¶50,747, 375 BR 740.
The chairman of a corporation was a responsible person who willfully failed to collect, account for and pay over the withheld income and employment taxes of the corporation. The IRS’s evidence showed that he had the ability to sign checks, hire and fire employees, and sign the corporation’s tax returns. He owned stock in the corporation, was ultimately responsible for making financial decisions and directed payment to the corporation’s creditors despite knowledge of the corporation’s unpaid employment taxes. However, a genuine issue of material fact existed as to whether another corporate officer, the CEO, had sufficient authority over the corporation's financial affairs to be considered a responsible person for purposes of the trust fund recovery penalties.
R.C. Savona, DC Calif., 2007-2 ustc ¶50,788.
The CEO and the Chief Financial Officer of a trucking company were both responsible persons who were jointly and severally liable for the trust fund recovery penalties in connection with the company’s failure to pay its federal employment tax obligations. Both officers acted willfully when they made numerous voluntary and intentional payments to creditors despite having knowledge that the employment taxes were unpaid. Both exercised significant control over the disbursement of company’s funds, had active day-to-day involvement in the business and had full authority to sign checks and Form 941 tax returns.
J.M. Horovitz, DC Pa., 2008-1 ustc ¶50,186, 543 FSupp2d 441.
The founder, shareholder and officer of a corporation was liable for the trust fund recovery penalty because he exercised significant control over the corporation’s day-to-day activities and participated in the decision to hire or fire management employees and accountants in charge of the corporation’s payroll operations. He also reviewed weekly and monthly financial statements, personally guaranteed payments to vendors and directed checks to be written and expenses to be paid.
C.B. Erwin, DC N.C., 2008-1 ustc ¶50,258.
The owner and the bookkeeper of a limited liability company (LLC) were liable for trust fund recovery penalties in connection with the operation of a restaurant. The owner was a responsible person because she organized the LLC, entered into a lease agreement for the restaurant, obtained a liquor license and failed to make a timely election for the LLC to be taxed as a corporation. Further, the bookkeeper was also a responsible person because he had the authority to sign checks for the restaurant, to make and authorize bank deposits, to identify and calculate the amount to be withheld for federal payroll taxes, to authorize payment of federal tax deposits and to authorize payroll checks. Moreover, he acted willfully because he knew about the delinquent taxes and voluntarily paid other creditors before paying the government.
D.M. Seymour, DC Ky., 2008-2 ustc ¶50,406.
An individual who was the president, director, Chief Executive Officer and majority shareholder of a corporation was liable for the trust fund recovery penalty assessed against him in connection with the corporation’s unpaid withholding taxes. The individual was a "responsible person" with respect to the corporation because he had complete authority over every aspect of the corporation’s finances, including the sole authority to hire and fire employees, take out loans, sign contracts and checks, withhold income and FICA taxes from wages and pay those taxes to the government.
J.C. Tornes, DC Ohio, 2008-2 ustc ¶50,431.
The majority stockholder of two retail optometry companies was not entitled to a refund of the trust fund recovery penalty he paid to the IRS in satisfaction of the companies' unpaid withholding taxes. The individual was a responsible person because he exercised significant control over the companies’ finances, had check-signing authority and the authority to sign the companies’ employment tax returns. Furthermore, more than one person can be a responsible person with respect to liability for unpaid taxes.
L.H. Joel, DC Ky., 2008-2 ustc ¶50,451.
The director, shareholder and secretary-treasurer of a closely held corporation was liable for the trust fund recovery penalty assessed against her in connection with the corporation’s unpaid withholding taxes. The individual was a responsible person because she was involved in the corporation’s business operations, had check signing authority, attended meetings to discuss the corporation’s cash-flow problems, had access to the corporation’s financial records and books and knew of the corporation’s tax problems. Although her responsibilities did not typically include the payment of withholding taxes and she did not believe that it was within her control, she had the power to pay the corporation’s withholding taxes.
N. Noronha, DC Ky., 2008-2 ustc ¶50,554.
The president of a company was liable for the trust fund recovery penalties assessed against him. The individual was the responsible person with respect to the company since he had the sole authority to write and sign checks on corporate accounts and to hire and fire personnel.
C.C. Anuforo, DC Minn., 2008-2 ustc ¶50,584.
The owner of a company was liable for the trust fund recovery penalty (TFRP). The individual maintained the company’s books, prepared its financial statements, authorized payment of its bills and payroll, reviewed federal income tax returns and prepared and signed federal payroll tax returns. He acted willfully because he had reason to know that the taxes were not being paid and failed to exercise his authority to ensure their payment. Despite knowledge of the tax deficiencies, he regularly directed that payments be made to creditors other than the IRS.
S.O. Johnson, DC Ill., 2008-2 ustc ¶50,585.
The president of the board of directors of a tax-exempt organization was not entitled to a refund of federal employment and withholding taxes he paid from his personal funds. Although his position was voluntary and uncompensated, and although he was not involved in the day-to-day operations of the day care center, the individual had enough involvement in and control over the organization’s financial affairs to qualify him as a "responsible person" within the meaning of Code Sec. 6672.
C.E. Jefferson, CA-7, 2008-2 ustc ¶50,587.
The owners of three companies and their employee, a certified public accountant (CPA), serving as the vice president of finance for those companies, were all responsible persons for purposes of the trust fund recovery penalty. The owners were the founders, officers, board members, and equal shareholders of each of the three companies. They had check-signing authority, could hire and fire employees, could exercise control over the companies’ finances, including the payment of payroll taxes, and were intimately involved in running the companies. Although the CPA/employee had no check-signing authority, he supervised the accounting department, oversaw the preparation of checks, including payroll and federal tax deposit checks and had the authority to direct the accounting department to draft checks to the IRS instead of to other creditors. Further, the individuals acted willfully when they made payments to other creditors despite knowing that the trust fund taxes remained unpaid.
S.P. Davis, Sr., DC La., 2008-2 ustc ¶50,613, Motion to reconsider den'd, 2009-1 ustc ¶50,375.
The secretary and treasurer of a corporation was liable for the trust fund recovery penalty assessed against him in connection with the corporation's unpaid withholding taxes. The individual was a "responsible person" because he exercised significant control over the day-to-day management of the corporation and over the company’s payroll, had the power to write checks on behalf of the corporation, had the authority to hire and fire employees, sign corporate income tax and payroll tax returns and to determine which creditors to pay and when.
W.M. Cheatle, DC Va., 2009-1 ustc ¶50,139, 589 FSupp2d 694.
Unpaid employment tax assessments against the president and vice-president of two health care companies were reduced to judgment. The individuals were responsible persons because they had the authority to sign checks, hire and fire employees, determine corporate financial policy, and authorize the payment of bills.
J.A. Rineer, DC Tex., 2009-1 ustc ¶50,149, 594 FSupp2d 732.
An individual who assumed the role of chief executive officer (CEO) of a holding company was a responsible person liable for the unpaid employment tax obligations of a wholly-owned subsidiary for two assessment periods at issue. On becoming a CEO, he also became a "responsible person" within the meaning of the trust fund provisions because he had the authority to control the financial affairs of the subsidiary. He was not relieved of that responsibility even though he took control after the holding company decided to cease paying the subsidiary’s trust fund taxes. However, the individual was not responsible with respect to unpaid tax obligations for a period when he was merely a member of the board of directors and had no official role in the subsidiary’s operations or any direct control over payment of the subsidiary’s taxes.
B.A. Haslett, DC Alas., 2009-1 ustc ¶50,225.
The general manager of a printing company was a responsible person liable for the company’s unpaid employment taxes for the two tax years at issue. The individual’s power to ensure that the taxes were paid was evidenced by his control over the company’s day-to-day operations, accounting and finance functions, independent check-signing authority and his unrestrained authority to electronically pay the payroll taxes. Moreover, the district court correctly refused to instruct the jury that a capital infusion into the business was a necessary indicia of responsibility or that only the owner of a closely held corporation was a responsible person or that the reasonable cause exception to the willfulness requirement applied. The reasonable cause defense was not available because the individual failed to pay the taxes even after he was directly instructed to keep the taxes current and despite his knowledge of the tax deficiencies and that other creditors were being paid. Further, the jury instructions also properly stated that a superior’s order to pay other creditors did not negate the individual’s status as a responsible person.
R.A. Smith, CA-10, 2009-1 ustc ¶50,263, 555 F3d 1158.
The principal officer and majority shareholder of four companies was a responsible person for purposes of the trust fund recovery penalties assessed against him in connection with the companies’ unpaid withholding taxes. The individual had the authority to sign checks and federal tax returns, hire and fire employees and exercised significant control over the disbursement of the companies’ funds. Furthermore, the relevant tax period wherein the IRS assessed the trust fund recovery penalties ended prior to the conversion of the companies’ bankruptcy proceedings, and before the alleged termination of his role as an officer and shareholder.
J.C. Kavanaugh, DC Pa., 2009-1 ustc ¶50,368.
The majority shareholder of a home health care corporation was liable for trust fund recovery penalties. For purposes of imposing the penalties, the notice requirement was satisfied by a proper mailing of IRS Letter 1153 to the taxpayer's last known address. Actual receipt of the notice was not required. As the majority shareholder, officer and employee of the corporation who had the authority to hire and fire employees, write checks and manage the corporation, the taxpayer possessed six indicia of a responsible person. While initially unaware of the bookkeeper's failure to remit employment taxes, once she became aware of the failure, she continued to authorize payments to other creditors. Accordingly, her failure to pay over employment taxes was willful and the defense of reasonable cause was not available to her.
M.M. Mason, 132 TC —, No. 14, Dec. 57,807.
The controller and Chief Financial Officer (CFO) of a company was liable for trust fund recovery penalties assessed against him in connection with the company’s unpaid employment taxes. The individual was a responsible person because he exercised significant control over the day-to-day management of the company and over the company’s payroll, had the power to write checks on behalf of the company, had the authority to hire and fire employees, had access to the company’s books and records, prepared the company’s quarterly tax returns and had input on which creditors to pay and when. Further, he acted willfully because he was aware throughout the period of his employment that the company’s withholding taxes were not being paid and failed to exercise his authority to ensure their payment.
D.C. Milchling, DC Md., 2009-2 ustc ¶50,499.

The president of the company was a responsible person, but his lack of knowledge that withheld taxes were not being paid over might have diminished the willfulness of his action. Therefore, the case was remanded.
R.J. Kalb, CA-2, 74-2 ustc ¶9760, 505 F2d 506.
In ruling that the major shareholder in two corporations could not be held liable for the corporations' unpaid withholding taxes, the court held that the IRS could not prove that the shareholder acted willfully in failing to pay the taxes since he did not actually know of the tax delinquencies.
M.J. Premo, BC-DC Mich., 90-2 ustc ¶50,396.
In a charge to a jury, the court instructed that a responsible person has not willfully failed to collect and pay over taxes if he prefers other creditors at a time when he does not know that the taxes have not been paid over. The court further instructed the jury that such a person willfully fails to pay taxes when he learns that the taxes have not been paid and he continues to pay other creditors.
R.S. Chappell, DC, 75-1 ustc ¶9296. Aff'd CA-7 (unpublished opinion 11-18-75).
A company's newly hired Chief Financial Officer was liable for the company's unpaid employment taxes even though he was unaware of the unpaid amounts. Having been aware of the company's inability to pay debts owed to creditors other than the IRS, he should have investigated the company's ability to pay the IRS. Later, he should not have capitulated to directives from the company's president and a leading creditor of the company to refrain from making the payments.
M. Sederoff, BC-DC Calif., 90-2 ustc ¶50,558.
A president of a corporation was a responsible person liable for unpaid federal employment taxes to the extent of unencumbered funds received by the corporation after he learned of the nonpayment (i.e., after the corporation's failure to pay became willful with respect to the president). The fact that the president paid other creditors before the IRS with unencumbered funds received after he acquired knowledge of the nonpayment constituted willfulness as a matter of law. The bankruptcy court's conclusion that a responsible person is liable for the penalty only to the extent of unencumbered funds on the date that the failure to pay became willful was reversed. The court distinguished Slodov ( ¶39,780.69, above), in which a responsible person was held not liable for the trust fund tax incurred before he became a responsible person (rather than before the failure to pay became willful). The president's liability extended to delinquent taxes incurred before he had actual knowledge of the delinquency because he was involved with the corporation at all relevant times and the situation involved different policy interests than Slodov.
W.A. King, DC Ala., 95-1 ustc ¶50,241.
A construction firm's director-treasurer was liable where he was aware that the taxes were not being paid.
Messina, DC, 65-1 ustc ¶9370.
An officer-stockholder of two corporations was not liable for unpaid withholding and Social Security taxes owed by one corporation where he relied on an employee of the corporation to pay the taxes, but he was liable for the taxes owed by the successor corporation since he was then aware of the fact that the employee had failed to properly pay the taxes due from the predecessor corporation.
R.D. Leuschner, Sr., CA-9, 64-2 ustc ¶9742, 336 F2d 246.
Although an officer of a bankrupt corporation qualified as a responsible person, his knowing failure to pay over the taxes, without more, was insufficient to establish that he willfully attempted to evade or defeat the tax.
F.P. Macagnone, BC-DC Fla., 98-2 ustc ¶50,624, 224 BR 212.
On reconsideration, the bankruptcy court found that it did not err in placing the burden of proof on the IRS to show that the taxpayer was a responsible person.
F.P. Macagnone, BC-DC Fla. 99-1 ustc ¶50,276, 228 BR 784.
The Bankruptcy Court erred in determining that the government's failure to prove that a bankrupt responsible person willfully failed to collect and pay over employment taxes relieved him of liability for the trust fund recovery penalty. According to well-established precedent in the U.S. Court of Appeals for the 11th Circuit, an individual who has been determined to be a responsible person bears the burden to disprove willfulness.
F.P Macagnone, DC Fla., 99-2 ustc ¶50,681. Rev'g and rem'g BC-DC Fla. 99-1 ustc ¶50,276, 228 BR 784.
On remand, the bankruptcy court held that the responsible person/debtor was not liable for the trust fund recovery penalty for failure to collect and pay over employment taxes. This was affirmed on appeal. The officer did not show reckless disregard for a known or obvious risk by failing to determine whether funds withheld from employees' wages were remitted to the government. Despite the taxpayer's failure to inquire about the status of the employment taxes after his business encountered financial difficulties, absent a history of delinquency, his failure to do so was not reckless.
F.P. Macagnone, DC Fla., 2000-2 ustc ¶50,551. Aff'g BC-DC Fla., 2000-1 ustc ¶50,207.
The son of the president of a corporation was a responsible person where he had check writing authority, controlled the daily operations of the company, and was considered a substantial stockholder and at least a de facto vice-president. The failure to pay was willful because he caused payments to be made to other creditors when he knew that such funds were owed to the government. The duty of a responsible person to pay over withheld tax to the government may not be contravened by a superior's contrary instructions.
J. Bernard, BC-DC La., 91-2 ustc ¶50,516.
A president and major shareholder of a corporation was the responsible officer liable for willfully failing to pay withholding and social security taxes of the corporation's employees. The taxpayer contended that because he lacked knowledge of the corporation's failure to pay taxes until after they were due, his subsequent use of corporate revenues to compensate creditors rather than to pay the delinquent taxes did not evince willfulness. Since this argument was inconsistent with the definition of willfulness promulgated by the Supreme Court and other courts of appeals, it was rejected.
D.O. Davis, CA-9, 92-1 ustc ¶50,292, 961 F2d 867. Cert. denied, 113 SCt 969.
An officer of a corporation who had the authority to decide whether corporate funds should be expended was a responsible person. The taxpayer did not carry his burden of proving that he did not act willfully in failing to timely pay the taxes. The taxpayer, who forced his role of authority on the other shareholders, had a duty to insure prompt payment of the corporate tax liability. Because the taxpayer was aware of a previous tax delinquency, as well as of the inadequate performance of the acting financial manager, he could not escape culpability by delegating the payment of taxes to the manager or by disregarding his own obligations.
R.M. Guito, Jr., DC Fla., 92-1 ustc ¶50,231.
A supervisor of a trucking company was a responsible person liable for willfully failing to pay over withholding taxes. The evidence indicated that the taxpayer willfully failed to pay over the taxes. His signing of the paychecks and the withholding tax form indicated that he should have known of his responsibility.
W.E. Whiteside, ClsCt, 92-2 ustc ¶50,436.
A president of a corporation did not willfully fail to withhold and pay employment taxes for the two calendar quarters prior to his resignation, even though, as president, he had final authority regarding the payment of creditors and directly supervised the person actually responsible for paying the taxes. The taxpayer had no knowledge of any nonpayment nor did he recklessly disregard whether the taxes were paid. Moreover, upon discovery of the nonpayment, a payroll tax deposit was made. Since the IRS offered no evidence to rebut the evidence of payment, there was no genuine issue of material fact, and the taxpayer's motion for summary judgment was granted.
J.M. Cohen, DC Calif., 93-1 ustc ¶50,350. Aff'd, CA-9 (unpublished opinion 3/24/94).
The chief executive officer (CEO) of an airline carrier in bankruptcy did not "willfully" fail to collect, account for, or pay over taxes. The CEO was not liable for a penalty assessment for taxes accrued before his appointment, and his knowledge of prior tax deficiencies did not establish willfulness with respect to future deficiencies. His attendance at a hearing before the bankruptcy court during his brief tenure as CEO did not provide him with an awareness of current unpaid payroll taxes. There was no evidence that he was anything more than an observer at the hearing or that current delinquencies were discussed there in any detail. In addition, there was nothing in the airline's records that would have alerted him to any substantial deficiency in the payment of currently accruing taxes.
B.A. Cooke, DC Calif., 93-1 ustc ¶50,294.
A corporate president and director was liable for the penalty for unpaid withholding taxes. Although he claimed to have no knowledge of the corporate vice president's failure to pay over the withholding taxes at issue, he did know of a prior, relatively small tax delinquency levied against his company, took no steps to confirm or ensure that this tax delinquency and future taxes were being paid and signed smaller checks to other creditors during the same time period.
P.J. Strunk, DC Iowa, 94-1 ustc ¶50,110.
A corporate officer was not liable for the 100% penalty because he did not willfully fail to pay over withholding taxes. At the time of his resignation from the parent of his employer, the parent corporation was current in paying its taxes, and, after his resignation, he lacked actual knowledge of the nonpayment of taxes and was not responsible for preparing the corporation's tax returns.
M.P. Running, CA-7, 93-2 ustc ¶50,568.
An officer-stockholder of a condominium management company was liable for the trust fund recovery penalty with respect to withholding taxes owed by the predecessor corporation because he willfully failed to pay over the taxes. Even though he did not have actual knowledge of a failure to pay the tax, the officer was put on notice of the obvious risk that the taxes were not paid and acted with reckless disregard to that risk. The officer restructured the company to circumvent any responsibility for the unknown liabilities. His reliance on the bookkeeper's and owner's assessment of the predecessor corporation's state of affairs did not absolve him from making inquiries as to the actual tax liability.
S.A. Malloy, CA-11, 94-1 ustc ¶50,145.
A corporation's president and majority shareholder was liable for the trust fund recovery penalty because his failure to pay over withheld taxes was willful. He could not avoid liability for the penalty on the ground that, since the jury did not specifically find that he had actual knowledge of the delinquency before resigning and surrendering his stock, he did not act willfully. Willfulness includes the reckless disregard for an obvious or known risk of nonpayment. Also, the evidence did not support the president's contention that his ownership of the corporation had ceased before he discovered the unpaid taxes; thus, a jury instruction regarding his failure to make payment with available corporate assets after discovering the delinquency was valid. Moreover, the jury was properly instructed that a person who is responsible for withholding taxes cannot escape that obligation by delegating it to others.
J.N. Hauf, DC N.Y., 97-2 ustc ¶50,645.
An employer was liable as a responsible person for his failure to collect and pay over employment taxes owed by his wholly owned corporation. The willfulness requirement was satisfied because, after the IRS had sent several notices of delinquency, the company received unencumbered funds and used those funds to pay employee claims rather than the delinquent employment taxes.
C.G. Vaglica, CA-5, 94-1 ustc ¶50,114.
An owner and officer of a corporation was liable for the trust fund recovery penalty. He willfully failed to pay the taxes since he knew about the tax liability but continued to pay creditors and employees ahead of the government. The officer's claim that he was not liable for taxes attributable to periods prior to the date he acquired knowledge of the tax liability was rejected because he had a legal duty to make up any prior deficiency once he obtained knowledge of it. Moreover, a lender's alleged refusal to allow the corporation to pay the taxes did not insulate the officer from liability because the corporation voluntarily entered into the lending arrangement and continued to operate and pay employees, thereby incurring new tax liabilities. The individual also could not rely on assurances of others that the taxes would be paid.
J.D. Durham, DC Okla., 94-2 ustc ¶50,331.
The volunteer chairman of the board of directors of a not-for-profit organization who volunteered his time to the organization was liable as a responsible person for the trust fund recovery penalty. He willfully failed to pay withholding taxes because he signed checks to pay creditors other than the government, and the organization had unencumbered funds in an amount sufficient to pay the taxes. The taxpayer was on notice of substantial cash shortfalls and improprieties in the financial management of the organization, and his failure to investigate and correct such mismanagement was reckless and constituted willful conduct.
H. Wright, DC N.Y., 96-1 ustc ¶50,114.
A corporate vice president's reckless disregard of the obvious risk that the taxes would not be paid to the government constituted willfulness as a matter of law. Once he became aware of the payroll tax delinquencies, he had a duty to investigate or correct the problem. Another officer's assurances of payment did not relieve him of that duty.
W.C. Kelver, DC Colo., 98-2 ustc ¶50,766.
Although he may have been negligent, a responsible person was not liable for the trust fund recovery penalty because the failure to pay withholding taxes was not reckless, and, therefore, was not willful. First, he had little responsibility for finances and taxes. He was not involved in preparing company tax returns, nor did he exercise primary authority over check writing and bill paying (except for those arising at construction sites). Second, he had no knowledge of past or present tax deficiencies or other indications that the taxes were unpaid. Since the taxpayer resigned after learning of the unpaid taxes, his failure to pay the taxes at that point did not constitute willfulness.
P.E. Abel, DC Pa., 96-2 ustc ¶50,498.
A corporate president and chairman of the board of directors was a responsible person subject to the trust fund recovery penalty. For some of the quarters at issue, willfulness was established by the president's admissions that he was aware of the delinquency, reviewed the corporation's payroll tax returns, and signed the company's Forms 941, Employer's Quarterly Federal Tax Return, all of which reflected a balance due. For other quarters, the admissions were vaguely phrased and did not clearly state that the president was aware of the deficiencies for those quarters. Nonetheless, those admissions established the president's knowledge of the deficiencies for those quarters. The admissions regarded conversations with the company's outside accountant, review of the payroll tax returns, and the president's authority over financial decisions. Additionally, the president admitted that he authorized payment of company expenses other than the taxes.
A. Hutchinson, DC Tex., 97-2 ustc ¶50,795.
A president failed to meet his burden of disproving willfulness. There was evidence that he was aware of the corporation's cash flow problems and recklessly disregarded the risk of nonpayment of taxes, and he made no effort to prove that funds deposited into and withdrawn from corporate accounts during one of the quarters at issue were encumbered and, thus, unavailable for taxes.
E. Rojo, BC-DC Fla., 97-2 ustc ¶50,789.
Sufficient evidence existed to support a jury verdict that a president and CEO of a corporation was a "responsible person" who willfully failed to pay the corporation's withholding taxes. Accordingly, he was liable for the trust fund recovery penalty. His contention that he lacked control of the corporation's finances and was unable to make the appropriate tax payments was rejected. The taxpayer was aware of the delinquent taxes and that the corporation had sufficient funds to pay the delinquent taxes in full. However, he used the corporation's funds to pay other creditors.
M.P. Logal, CA-5, 99-2 ustc ¶50,988. Aff'g DC Tex., 98-2 ustc ¶50,716.
A corporation's majority shareholder was found to have willfully failed to see that the withheld federal taxes were paid when he had notice and acted in reckless disregard of a known risk that the funds may not be remitted to the government. Since the taxpayer had personally borrowed the funds to pay an earlier tax deficiency, he was on notice that the corporation's president had mismanaged the company and could not be trusted to pay the taxes. His failure to take a more active role in securing payment constituted willful failure to pay over withheld taxes.
P.M. Larson, DC Wash., 99-2 ustc ¶50,787.
The president and vice president of a corporation who failed to remit withholding taxes to the IRS acted willfully by paying other creditors and employees ahead of the IRS after becoming aware of the corporation's unpaid tax liabilities.
D.C. Stull, DC Tex., 2000-1 ustc ¶50,168. Aff'd, per curiam, CA-5 (unpublished opinion), 2001-1 ustc ¶50,333.
The president of a corporation that failed to remit payroll taxes to the IRS qualified as a responsible person for purposes of determining liability for the trust fund recovery penalty. The officer, who had been hired to revive the financially strapped corporation, acted willfully in failing to pay over the taxes because he had knowledge of the tax delinquency and deliberately paid other creditors ahead of the IRS.
W.W. Borland II, DC Mich., 2000-1 ustc ¶50,458.
The president and majority shareholder of a corporation who was found to be a responsible person willfully failed to pay his corporation's employment taxes. The taxpayer paid off a tax lien that his bank had placed on his corporation's line of credit despite having actual knowledge of the tax deficiencies.
E.D. Battles, BC-DC Ala., 2000-1 ustc ¶50,536.
Related officers and a consultant of a bankrupt corporation who were deemed to be responsible persons within the meaning of Code Sec. 6672 acted willfully in their failure to remit withheld employment taxes and, thus, were liable for the trust fund recovery penalty. Each individual had knowledge of or were involved in settlement discussions with the IRS concerning the corporation's employment tax liability.
W. Mahler, DC Conn., 2000-2 ustc ¶50,808, 121 FSupp2d 179. Aff'd, on another issue, CA-2 (unpublished opinion), 2002-1 ustc ¶50,292.
The conduct of a bankrupt corporation's president, who qualified as a responsible person for purposes of determining his liability for the trust fund recovery penalty, was deemed to be willful because he failed to pay the IRS ahead of other creditors despite knowing the company was delinquent.
A. Bruno, DC Ill., 2000-2 ustc ¶50,831.
The president and sole officer of a closely held corporation willfully failed to pay over withheld employment taxes to the IRS. She admitted that she was aware of the corporation's failure to pay over the taxes and that she paid other creditors ahead of the IRS. Thus, she had no reasonable cause for failing to remit the taxes.
J.C. Luce, DC Ohio, 2000-2 ustc ¶50,847, 119 FSupp2d 779.
A vice-president of a defunct corporation qualified as a responsible person and was not entitled to a refund of payments issued in partial satisfaction of a trust fund recovery penalty assessed against him individually in connection with the corporation's failure to pay over withheld employment taxes. The taxpayer had extensive control over the financial affairs of the business including the ability to sign checks and pay bills. Moreover, his conduct was willful in that he knew that the withholding taxes were not being paid and that available funds were being used to pay other creditors in preference to the IRS.
H.W. Fisher, DC Okla., 2001-1 ustc ¶50,159.
A bankrupt corporate officer's objection to the IRS's claim for the trust fund recovery penalty assessed against him was denied because he was properly deemed a responsible person within the meaning of Code Sec. 6672. The debtor had extensive control over the corporation's financial affairs, including check signing authority and the ability to pay bills. Further, his conduct was willful in that he knew the withholding taxes were not being paid and that available funds were being used to pay other creditors, including himself, in preference to the IRS.
W. Karnofsky, BC-DC Fla., 2001-1 ustc ¶50,170.
The president, director and sole shareholder of a bankrupt contracting business who qualified as a responsible person and who willfully failed to remit employee withholding taxes to the government was liable for the trust fund recovery penalty. Although he withheld the taxes from his employees' wages during the 10 quarters at issue and knew that the taxes were due and owing, he failed to remit payment to the IRS. Instead, he used corporate funds to pay wages to such employees as himself, his wife and his son, and he paid a broad array of other creditors ahead of the IRS.
L.B. Breaux, DC La., 2001-1 ustc ¶50,255.
A corporate accountant who was deemed to a responsible person was liable for the trust fund recovery penalty because she had knowledge of the unpaid employment taxes, yet paid off debts to other creditors before the government. That she was directed by the corporation's CEO not to pay the outstanding employment taxes was irrelevant to her knowledge of them.
B. Frey, DC Tex., 2001-1 ustc ¶50,417. Aff'd, per curiam, CA-5 (unpublished opinion), 2002-2 ustc ¶50,690, 34 FedAppx 151.
Although the partial owner of a closely held business qualified as a responsible person, he was not liable for the trust fund recovery penalty because he did not willfully attempted to evade or defeat payment of employment taxes. The individual's daughter was the business's bookkeeper and managed its finances, including the payment of employment taxes. The individual did not know of the unpaid amounts, and would not be expected to have checked on those payments.
M.E. Pitts, DC Ariz., 2001-1 ustc ¶50,419.
The conduct of an individual who was conceded to being a responsible person with respect to one of three related businesses, was deemed to be willful; thus he was liable for the trust fund recovery penalty. The IRS's levying of the business's assets did not relieve him of his liability as a responsible person, which was separate and distinct from the business's liability, or negate his knowledge that employment taxes were not being paid.
S. Rocha, DC Ore., 2001-1 ustc ¶50,425, 142 FSupp2d 1277.
The owner and former president of a bankrupt corporation was not liable for the trust fund recovery penalty because he did not willfully fail to pay his company's employment tax delinquency. While the individual conceded he was a responsible person within the meaning of Code Sec. 6672, he had no reason to know that his company was in arrears since he turned over control of his company when it was in good standing. Moreover, he took immediate action when he became aware of its failure to remit payroll taxes to the IRS, retaking control of the company, ensuring that it remained current with its tax obligations and making arrangements for paying past-due taxes. Moreover, he did not favor other creditors above the IRS.
R.D. Nutt, DC Fla., 2003-1 ustc ¶50,395, aff'g BC-DC Fla., 2002-2 ustc ¶50,753.
A trust fund recovery penalty was imposed against an individual for failure to pay over employment withholding taxes for one tax year. The taxpayer had significant day-to-day control and decision-making authority over the operations and financial affairs of the company, which was supported by his ability to decide which creditors to pay, unrestrained check-writing authority, and access to corporate books and records. Consequently, he was a responsible person under Code Sec. 6672. Moreover, the taxpayer knew that the company was not paying employment taxes and took no steps to ensure that the taxes would be paid. As a result, the taxpayer's failure to collect, account for, or pay over the company's withholding taxes was deemed willful.
H.N. Werkheiser, DC Pa., 2002-1 ustc ¶50,212.
A corporate president was deemed to be a responsible person in connection with the corporations failure to pay over employment taxes. In addition to being the corporation's president, he was the chairman of the board, majority shareholder and actively involved in the day-to-day activities of the corporation. That he employed an individual to lead the corporation's financial department was insufficient to relieve him from liability because he had supervisory control of that individual.
F.T. Johnson, Jr., DC Md., 2002-1 ustc ¶50,267, 203 FSupp2d 416. Aff'd, per curiam, CA-4 (unpublished opinion), 2003-1 ustc ¶50,345, 50 FedAppx 113. Cert. denied, 10/6/2003.
The wife of the owner of a sole proprietorship willfully failed to pay the outstanding employment tax liability of the business. The taxpayer, who was a responsible person, stipulated that she knew the business was delinquent on its withholding obligations during the tax quarters in issue, yet she continued to draft and sign checks to pay other creditors, payroll and personal expenses.
D.M. Keohan, DC Mass., 2002-1 ustc ¶50,279.
The failure of a corporate vice president, who was a responsible person, to withhold or pay over employment taxes was willful. Following his receipt of the notice of deficiency regarding the corporation's unpaid tax liability, he was aware that the corporation was paying creditors other than the government. In addition, he continued to sign payroll checks and he favored payment of the corporation's debts that were owed to him over the payment of the deficient withholding taxes.
B. Crutcher, DC Ala., 2002-1 ustc ¶50,289.
A corporate president was liable for the trust fund recovery penalty in connection with the corporation's failure to pay over its employment tax liability. The taxpayer's failure to pay over the taxes at issue was willful. He knew of the corporation's liability for employment taxes but paid net wages to employees knowing that payroll taxes would not be paid over to the government. The taxpayer unsuccessfully contended that his actions were not willful because he acted on orders of the bankruptcy court to use the company's available funds for environmental cleanup and operating expenses. The bankruptcy court, however, did not compel him to avoid paying the corporation's employment tax obligations.
D.F. Cook, FedCl, 2002-1 ustc ¶50,328.
The chairman of a corporation was liable for the trust fund recovery penalty because he was a responsible person who willfully failed to remit his company's employment taxes. He failed to fulfill his obligation to apply unencumbered corporate funds to pay its tax liabilities despite his knowledge that the taxes were unpaid. His self-serving statements that he lacked such knowledge were insufficient to satisfy his burden of proving that he had not acted willfully. In addition, he devoted corporate funds to purposes other than payment of the withholding taxes.
C.S. Perlman, DC Fla., 2002-1 ustc ¶50,346.
A corporate vice president's failure to pay withholding taxes was willful. The record indicated that he continued to make payments to other creditors after learning of the corporation's failure to pay employment taxes.
D.W. Parr, DC Tex., 2002-1 ustc ¶50,376.
A responsible person who willfully paid other creditors of his delinquent corporation ahead of the IRS was liable for the trust fund recovery penalty. The individual, who was a corporate officer who owned stock in the company, acted willfully in failing to remit the company's withholding taxes because he was aware that other parties were being paid ahead of the IRS. His failure to make the payments on orders of the second responsible person and his approval of payments to other creditors in order to keep the company going and to preserve its ability to repay the delinquent taxes did not relieve him of liability for the penalty.
P. Thosteson, CA-11, 2002-2 ustc ¶50,649, 304 F3d 1312.
The First Circuit affirmed special jury verdicts that an individual could be held liable for a company's debt. The taxpayer was a responsible person with respect to the company's unpaid employment taxes and the trust fund recovery penalty, and his failure to pay over the taxes was willful. The "effective power" and "significant control" tests for the responsible person prong of liability constituted a proper standard of proof, despite the taxpayer's argument that he had a tenuous and indirect formal connection to the business. There was evidence that the taxpayer retained managerial control of the company and had knowledge of nonpayment of the employment taxes. Moreover, he failed to show that he investigated or corrected mismanagement of funds that allowed other creditors to be paid ahead of the IRS. Thus, the district court did not abuse its discretion in denying a new trial.
J.V. Stuart, CA-1, 2003-2 ustc ¶50,585, 337 F3d 31.
The president and sole owner of a roofing construction company was the responsible officer liable for the corporation’s unpaid payroll taxes. The taxpayer contended that he lacked knowledge of the corporation's failure to pay taxes until after they were due. Moreover, his subsequent use of corporate revenues to compensate creditors rather than to pay the delinquent taxes was done in an attempt to increase the ultimate payout to the IRS. Basing its decision on the credibility of presented testimony, the Bankruptcy Court concluded it was not plausible that the individual did not know that the payroll taxes were not being paid. At the very least, the court concluded that he recklessly disregarded whether the taxes were being paid.
C.R. Howard, BC-DC N.C., 2003-2 ustc ¶50,683, 301 BR 456.
An officer of a bankrupt corporation that failed to pay over withholding taxes was a responsible person liable for the trust fund recovery penalty. As the entity's majority shareholder and chief operating officer, he ran the company and controlled its financial affairs. Also, he knew about the tax delinquencies and voluntarily paid other creditors ahead of the government. His contention that the company's relationship with its lending institution deprived him of control over the funds was rejected. Disbursement of the corporate funds was not "encumbered" by the contractual obligations with the lender. Thus, the officer acted willfully in failing to remit the taxes.
R. Bell, CA-6, 2004-1 ustc ¶50,118,355 F3d 387.
The CFO and controller of a bankrupt airline company willfully failed to pay airline ticket excise taxes to the government since both had knowledge that the taxes were not being paid over to the government.
D.R. Ferguson, DC Iowa, 2004-1 ustc ¶50,247.
A debtor's objection to the IRS's claim for the trust fund recovery penalty assessed against him was denied because he was determined to be a responsible person who willfully failed to pay over withheld taxes. The debtor stipulated that he was a responsible person and his failure to remit the withheld taxes was willful because he was aware of the company's employment tax deficiency yet chose to pay creditors other than the government. The fact that the debtor was told by the company's owner not to pay the taxes and that he might have been fired had he disobeyed orders did not excuse his liability for nonpayment.
L. Borman, BC-DC Fla., 2005-1 ustc ¶50,109.
A 100-percent trust fund penalty was reduced to judgment since the taxpayer was determined to be the responsible person who willfully failed to pay over trust fund taxes. The sole exception did not apply because he knew of the debt to the IRS and continued to use funds to pay other creditors.
R. Sage, DC N.Y., 2006-1 ustc ¶50,175, 412 FSupp2d 406.
Despite recurring health problems and absences from work, a CEO was a "responsible person" who willfully avoided tax obligations under Code Sec. 6672. The taxpayer's behavior was willful because he consciously and intentionally preferred another creditor over the United States; factual issues as to prior ignorance of non-payment then became irrelevant. Furthermore, allowing a responsible person to discount his liability based on the amount he actually wrongfully diverted to other creditors is inconsistent with the language of the statute.
D. S. Savage, DC-Calif., 2006-1 ustc ¶50,202.
The chairperson of a corporation's board of directors and the corporation's largest shareholder was a "responsible person" for purposes of the corporation's unpaid employment taxes and was liable for the trust fund recovery penalty. He satisfied the willfulness requirement because he knew of the corporation's unpaid taxes and made no effort to urge other members of the board to pay the IRS, rather than the other creditors.
T.C. Turner, DC Wash., 2006-1 ustc ¶50,238.
For the periods after an individual signed a check for partial payment of unpaid withholding taxes that accompanied the federal withholding tax form, his claim of ignorance of the company's withholding tax problems was not credible. Since he was either aware that other liabilities were being satisfied in preference to withholding taxes or recklessly disregarded that information, he willfully failed to pay the federal withholding taxes of the company.
D.J. Thatcher, DC Pa., 2006-1 ustc ¶50,334.
The manager of a grocery store was determined to be a responsible person with regard to the store’s failure to pay over withholding taxes. Despite being the person responsible for the submission of withheld payments, and personally making such payments in the past, the individual did nothing to ensure that the taxes were in fact fully paid for the period at issue, although more than enough liquidation proceeds were generated from the closure of the store to pay the taxes.
J.H. Harold, CA-6 (unpublished opinion), 2006-2 ustc ¶50,525, aff'g an unreported DC Ohio decision.
A bankrupt airline company’s chief financial officer willfully failed to pay the company’s excise taxes. The individual was fully aware of the company’s financial condition and of the nonpayment of excise taxes but he continued to direct payments to other creditors.
R. Musal, DC Iowa, 2006-1 ustc ¶50,207, 421 FSupp2d 1153. Aff'd sub nom. D.R. Ferguson, CA-8, 2007-1 ustc ¶50,481, 484 F3d 1068.
A trust fund recovery penalty (TFRP) assessed against a responsible person after he was discharged from bankruptcy was reduced to judgment. The individual was a responsible person because he controlled the business’s finances and he recklessly failed to ensure that the withheld taxes were paid over to the government by the employee to whom he had delegated that responsibility.
D.H. Klohn, DC Fla., 2008-1 ustc ¶50,228.
The Board Chairman of a tax-exempt hospital was not entitled to a refund of the trust fund recovery penalty. The individual was a responsible person because he actively participated in the day-to-day management of the hospital, Also, the individual acted willfully because he had reason to know that the taxes were not being paid and failed to exercise his authority to ensure their payment. The fact that the primary responsibility for paying the taxes rested with another did not excuse him since the trust fund recovery penalty is a joint and several liability. Finally, the individual did not qualify for exemption from the penalty under Code Sec. 6672(e) because he did not serve solely in an honorary capacity as Chairman of the Board.
S.K. Verret, DC Texas, 2008-1 ustc ¶50,248, 542 FSupp2d 526, Aff'd per curiam, CA-5 (unpublished opinion), 2009-1 ustc ¶50,248, 312 FedAppx 615.
The founder, shareholder and officer of a corporation was liable for the trust fund recovery penalty assessed against him in connection with the corporation’s unpaid withholding taxes. The individual was a “responsible person” with respect to the corporation, and had acted willfully because he had reason to know that the taxes were not being paid and failed to exercise his authority to ensure their payment. Despite knowledge of the tax deficiencies, he regularly directed that payments be made to creditors other than the IRS.
C.B. Erwin, DC N.C., 2008-1 ustc ¶50,258.
An individual who was the president, director, Chief Executive Officer and majority shareholder of a corporation was liable for the trust fund recovery penalty assessed against him in connection with the corporation’s unpaid withholding taxes. The individual was a "responsible person" with respect to the corporation and acted willfully because he was aware of the tax debt, yet authorized and made payments to other creditors.
J.C. Tornes, DC Ohio, 2008-2 ustc ¶50,431.
The majority stockholder of two retail optometry companies was not entitled to a refund of the trust fund recovery penalty he paid to the IRS in satisfaction of the companies' unpaid withholding taxes. The individual continued to sign payroll checks, paying employees, rather than ensuring payment of the taxes, even after he became aware of the companies’ delinquent tax obligations.
L.H. Joel, DC Ky., 2008-2 ustc ¶50,451.
The director, shareholder and secretary-treasurer of a closely held corporation was liable for the trust fund recovery penalty assessed against her in connection with the corporation’s unpaid withholding taxes. The individual was a responsible person who acted willfully when she repeatedly failed to examine the corporation’s documents and request more information from the IRS despite having knowledge of the corporation’s unpaid withholding taxes. She had the power to pay the corporation’s withholding taxes and could not rely on her Indian culture to explain her failure to question her husband’s business practices and pay the corporation’s taxes once she became aware of them.
N. Noronha, DC Ky., 2008-2 ustc ¶50,554 (aff'g an unreported Bankruptcy Court decision).
The owner of a company was liable for the trust fund recovery penalty (TFRP). The individual maintained the company’s books, prepared its financial statements, authorized payment of its bills and payroll, reviewed federal income tax returns and prepared and signed federal payroll tax returns. He acted willfully because he had reason to know that the taxes were not being paid and failed to exercise his authority to ensure their payment. Despite knowledge of the tax deficiencies, he regularly directed that payments be made to creditors other than the IRS.
S.O. Johnson, DC Ill., 2008-2 ustc ¶50,585.
The president of the board of directors of a tax-exempt organization was not entitled to a refund of the federal employment and withholding taxes he paid from his personal funds. The individual’s actions were willful because he ignored signs that the center’s taxes were not being paid. While he asserted that he was not aware of the organization’s ongoing failure to remit payroll taxes, he had access to the reports made available at the organization’s office, and he was aware that at one time taxes had not been paid and penalties had been assessed. Additionally, although he had instructed a director to timely remit withheld taxes to the IRS, he did not ensure that the payments were actually made.
C.E. Jefferson, CA-7, 2008-2 ustc ¶50,587 aff'g DC Ill. 2007-1 ustc ¶50,304, 459 FSupp2d 685.
The owners of three companies and their employee, a certified public accountant (CPA), serving as the vice president of finance for those companies, were all responsible persons for purposes of the trust fund recovery penalty. The individuals acted willfully when they made payments to other creditors despite knowing that the trust fund taxes remained unpaid. Further, the involuntary bankruptcy proceeding instituted for one of the companies did not strip the owners’ of control and authority to pay that company’s withholding tax obligations.
S.P. Davis, Sr., DC La., 2008-2 ustc ¶50,613, Motion to reconsider den'd, 2009-1 ustc ¶50,375.
The secretary and treasurer of a corporation was liable for the trust fund recovery penalty assessed against him in connection with the corporation's unpaid withholding taxes. The individual, a "responsible person," had acted willfully because he authorized payments to nongovernmental creditors even after he became aware of the delinquent tax obligations.
W.M. Cheatle, DC Va., 2009-1 ustc ¶50,139, 589 FSupp2d 694.
Unpaid employment tax assessments against the president and vice-president of two health care companies were reduced to judgment. The individuals were responsible persons because they had the authority to sign checks, hire and fire employees, determine corporate financial policy, and authorize the payment of bills. Further, their decision not to pay the payroll taxes was willful because they knew about the companies’ unpaid payroll taxes, but they paid employees, including themselves, and other creditors in preference to the IRS.
J.A. Rineer, DC Tex., 2009-1 ustc ¶50,149, 594 FSupp2d 732.
The controller and Chief Financial Officer (CFO) of a company was a responsible person and liable for trust fund recovery penalties assessed against him in connection with the company’s unpaid employment taxes. He acted willfully because he was aware throughout the period of his employment that the company’s withholding taxes were not being paid and failed to exercise his authority to ensure their payment. Despite full knowledge of the unpaid tax obligations, the individual continued to prepare checks to pay employee salaries and nongovernmental creditors.
D.C. Milchling, DC Md., 2009-2 ustc ¶50,499.
The president/CEO of a hospital was liable for the trust fund recovery penalties assessed against him in connection with the hospital’s unpaid employment taxes. The individual was a responsible person with respect to the hospital and acted willfully in failing to remit the hospital’s withholding taxes. Despite having knowledge that the payroll taxes collected from hospital employees had not been remitted to the government in their entirety and possessing the authority to make payments on behalf of the hospital, the individual signed checks to pay suppliers and nongovernmental creditors; thereby willfully enabling hospital funds to be used for purposes other than paying taxes.
J. Doulgeris, DC Fla., 2009-2 ustc ¶50,544.