Wilfulness” for trust fund penalty found both before and after actual knowledge of delinquency
Frohnaple v. U.S., (DC NC 3/8/2010) 105 AFTR 2d ¶ 2010-577
A district court's Magistrate Judge has concluded that the president of a failing company was liable for the trust fund penalty because he “wilfully” failed to pay over payroll taxes under Code Sec. 6672 , for periods both before and after he actually knew that payroll taxes hadn't been paid. His knowledge of the company's inability to meet its debts and cash flow problems, as well as red flags raised as to the integrity of financial information, imposed an affirmative duty on him to ensure that the payroll taxes were being paid.
Background. Where an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for and paying over payroll taxes; and (2) willfully fails to perform this responsibility. ( Code Sec. 6672(a) )
In determining whether there is “willfulness” for purposes of Code Sec. 6672 liability, courts have focused on whether the taxpayer had knowledge of non-payment or reckless disregard of whether the payments were being made. Thus, IRS can show willfulness by showing either actual knowledge of non-payment or reckless disregard as to non-payment. Courts have held that although mere negligence isn't enough to establish reckless disregard, gross negligence is. (Thomsen v. U.S. (CA 1 1989), 64 AFTR 2d 89-5752 )
IRS assessed a Code Sec. 6672 penalty against Frohnaple for the tax periods ending June 30, 2000, Sept. 30, 2000, Dec. 31, 2000, Mar. 31, 2001, and June 30, 2001, in the amount of roughly $515,600.

Willfulness found. The Magistrate Judge initially concluded that Frohnaple acted willfully for four of the five quarters at issue—the portion of the last two quarters of 2000 and the first two quarters of 2001—when he was specifically made aware that the payroll taxes had not been paid. On learning of Boling Group's failure to remit payroll taxes, he had an absolute duty to use all corporate funds to pay the currently accruing tax liability, as well as the outstanding tax liability. However, Frohnaple did nothing to ensure that the taxes were paid and, instead, made payments to other creditors. From August 2000 through January 2001, Boling Group's bank deposits totaled more than $1.7 million, none of which was used to pay the payroll taxes. Instead it was used to pay other creditors, as well as employee salaries, including Frohnaple's own salary. Frohnaple's failure to ensure that the delinquent taxes were paid with these funds meets the willful standard of Code Sec. 6672 as a matter of law.
The Magistrate Judge concluded that Frohnaple's reliance on statements by Boling Group's Controller Phyllis Younts (who started in September 2000) that she was “dealing with” the payroll taxes, without doing anything more to investigate and ensure that they were being paid, was simply more than mere negligence. By the time Younts was hired Frohnaple already knew that Boling Group was delinquent in its payment of the taxes and that it was floundering financially. By December 2000, he had questioned Younts' reliability; and he could have examined Boling Group's books to confirm the payments. The Magistrate Judge found that after Frohnaple became aware that the payroll taxes had not been paid by Dizon, he had a duty to exercise greater oversight over the finance department to independently ensure that the payroll taxes were being paid, and his failure to do so during Younts' tenure with Boling Group amounted to careless disregard.
Further, the Magistrate Judge also concluded that for the time period before Frohnaple became aware that the payroll taxes weren't being paid, Frohnaple's failure to confirm whether Boling Group was current with its tax obligations and his failure to take remedial action amounted to reckless disregard for the purpose of finding willfulness. Even if he was never specifically told until August 2000 that Boling Group was delinquent in paying employment taxes, his knowledge of the company's inability to meet its debts and its severe cash flow constraints before August 2000, as well as the red flags that had already been raised about Dizon by the outside accountant as to the integrity of the financial information, gave rise to a duty to confirm that Boling Group was meeting its payroll tax obligations. Frohnaple knew that Boling Group had ongoing financial difficulties, and as a result, Frohnaple extended numerous personal loans to Boling Group for more than $200,000. At least once, Frohnaple personally loaned Boling Group money to meet payroll, and he also knew that the ability to pay suppliers to keep up with production was an ongoing problem.

BARRETT, JR. v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 03/09/2010
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CHARLES W. BARRETT, JR., Petitioner-Appellant, v. UNITED STATES OF AMERICA, Respondent-Appellee.
AFFIRMED.
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§ 6672 Failure to collect and pay over tax, or attempt to evade or defeat tax.
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(a) WG&L Treatises General rule.
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. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
(b) Preliminary notice requirement.
(1) In general.
No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.
(2) Timing of notice.
The mailing of the notice described in paragraph (1) (or, in the case of such a notice delivered in person, such delivery) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days.
(3) Statute of limitations.
If a notice described in paragraph (1) with respect to any penalty is mailed or delivered in person before the expiration of the period provided by section 6501 for the assessment of such penalty (determined without regard to this paragraph ), the period provided by such section for the assessment of such penalty shall not expire before the later of—
(A) the date 90 days after the date on which such notice was mailed or delivered in person, or
(B) if there is a timely protest of the proposed assessment, the date 30 days after the Secretary makes a final administrative determination with respect to such protest.
(4) Exception for jeopardy.
This subsection shall not apply if the Secretary finds that the collection of the penalty is in jeopardy.
(c) Extension of period of collection where bond is filed.
(1) In general.
If, within 30 days after the day on which notice and demand of any penalty under subsection (a) is made against any person, such person—
(A) pays an amount which is not less than the minimum amount required to commence a proceeding in court with respect to his liability for such penalty,
(B) files a claim for refund of the amount so paid, and
(C) furnishes a bond which meets the requirements of paragraph (3) ,

no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until a final resolution of a proceeding begun as provided in paragraph (2) . Notwithstanding the provisions of section 7421(a) , the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2) .
(2) Suit must be brought to determine liability for penalty.
If, within 30 days after the day on which his claim for refund with respect to any penalty under subsection (a) is denied, the person described in paragraph (1) fails to begin a proceeding in the appropriate United States district court (or in the Court of Claims) for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the 30-day period referred to in this paragraph .
(3) Bond.
The bond referred to in paragraph (1) shall be in such form and with such sureties as the Secretary may by regulations prescribe and shall be in an amount equal to 11/2 times the amount of excess of the penalty assessed over the payment described in paragraph (1) .
(4) Suspension of running of period of limitations on collection.
The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court.
(5) Jeopardy collection.
If the Secretary makes a finding that the collection of the penalty is in jeopardy, nothing in this subsection shall prevent the immediate collection of such penalty.
(d) Right of contribution where more than 1 person liable for penalty.
If more than 1 person is liable for the penalty under subsection (a) with respect to any tax, each person who paid such penalty shall be entitled to recover from other persons who are liable for such penalty an amount equal to the excess of the amount paid by such person over such person's proportionate share of the penalty. Any claim for such a recovery may be made only in a proceeding which is separate from, and is not joined or consolidated with—
(1) an action for collection of such penalty brought by the United States, or
(2) a proceeding in which the United States files a counterclaim or third-party complaint for the collection of such penalty.
(e) Exception for voluntary board members of tax-exempt organizations.
No penalty shall be imposed by subsection (a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under subtitle A if such member—
(1) is solely serving in an honorary capacity,
(2) does not participate in the day-to-day or financial operations of the organization, and
(3) does not have actual knowledge of the failure on which such penalty is imposed.

The preceding sentence shall not apply if it results in no person being liable for the penalty imposed by subsection (a) .