Thursday, December 13, 2012

6672 trust fund penalty - willfulness & employment tax

Linda J. Romano-Murphy v. Commissioner, TC Memo 2012-330 , Code Sec(s) 6302; 6330; 6672.

Case Information:

Code Sec(s):       6302; 6330; 6672
Docket:                Docket No. 27236-09L.
Date Issued:       11/29/2012
Judge:   Opinion by Morrison, J.


Reference(s): Code Sec. 6302; Code Sec. 6330; Code Sec. 6672

B. An Employer's Liability for Employment Taxes and FUTA


An employer is subject to federal taxes on wages paid to employees. An employer must pay a tax equal to 6.2% of wages for the Social-Security portion of the tax and 1.45% for the Medicare portion of the tax.  Sec. 3111(a) and (b). Another tax, computed at the same rates (6.2% and 1.45%), falls on employees.  Sec. 3101(a) (6.2% Social-Security tax on wages received by employees) and (b) (1.45% Medicare tax on wages received by employees). Both the tax on employers and the tax on employees are referred to as the FICA, “Federal Insurance Contributions Act”, tax. See McDonald v. S. Farm Bureau Life Ins. Co. 291 F.3d , 718, 721 (11th Cir. 2002). In addition, an employer must withhold the employee share of FICA from the wages paid and must pay the withheld [*56] amount to the IRS. Sec. 3102(a) (the employee share of FICA must be collected by the employer by deducting and withholding the amount of tax from wages as paid) and (b) (every employer required to deduct the employee share of FICA is liable for payment of the employee share of FICA). Moreover, an employer is obligated to withhold from wages amounts for the income taxes owed by its employees and must pay the withheld amount to the IRS.  Secs. 3402(a)(1) (”every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary [of the Treasury]"), 3403 (every employer that is required to deduct income tax is liable for payment of the deducted amount). Once net wages are paid to the employee, the IRS credits the employee with the taxes withheld, even if the employer does not pay over the withheld amount to the IRS. See Slodov v. United States, 436 U.S. 238, 243 [42 AFTR 2d 78-5011] (1978). The term “employment taxes” refers to all three of the employer's obligations that we have just discussed: (1) employer share of FICA, (2) employee FICA withholding, and (3) income-tax withholding.See supra part 2. The term “trust-fund taxes” refers to the last two obligations. See Pollack v. Commissioner, 132 T.C. 21, 25 n.10 (2009). [*57] Each calendar quarter, an employer must file a Form 941 reporting its employment-tax obligations for the quarter. 26 C.F.R.  secs. 31.6011(a)-4(a)(1) (2005) (income-tax withholding), 31.6011(a)-1 (2005) (FICA). With some exceptions that are not applicable to NPRN, the Form 941 is generally due one month after the end of the quarter. 26 C.F.R.  sec. 31.6071(a)-1(a)(1) (2011). The employment taxes must be paid on or before the date the Form 941 is to be filed. See sec. 6151(a) (a taxpayer who is required to file a tax return must pay the tax at the time and place fixed for filing the return). Thus, the taxes are due one month after the end of the quarter. If the taxes are not paid by the date payment is due, the employer is liable for a late-payment penalty. See sec. 6651(a)(2) (failure to pay the amount of tax shown on the return results in a penalty of up to 25% of the amount of tax shown on return).

Another federal tax on wages is the federal unemployment tax (”FUTA tax”). See sec. 3301(1). This is a 6.2% excise tax imposed on each employer with respect to wages paid to its employees. Id. Generally, the wages subject to the tax include “all remuneration for employment” that does not exceed $7,000 for the calendar year. Sec. 3306(b)(1). The employer must report its unemployment-tax liability on a Form 940, Employers' Annual Federal Unemployment Tax Return. 26 C.F.R. sec. 31.6011(a)-3(a) (2011). The Form 940 is generally due a month [*58] after the end of the calendar year. 26 C.F.R.  sec. 31.6071(a)-1(c) (2005). Even though the FUTA tax is imposed on wages, we do not use the term “employment taxes” to refer to the FUTA tax.

In addition to its quarterly obligation to pay its employment taxes a month after the quarter has ended, an employer must make deposits of its employment taxes throughout the quarter. 26 C.F.R. sec. 31.6302-1(a) (2005). Employment taxes for purposes of the deposit requirement are defined by 26 C.F.R.  sec. 31.6302-1(e)(1) (2005) to include (1) “The employer tax under section 3111”, that is, the employer share of FICA, (2) “The employee portion of the tax withheld under section 3102”, that is, employee FICA withholding, and (3) “The income tax withheld under sections 3402 and 3405, that is, income-tax withholding. FUTA taxes are not included in this definition of employment taxes. Employers are classified by regulation as either monthly depositors or semiweekly depositors. 26 C.F.R. sec. 31.6302-1(a) (2005). A monthly depositor must make deposits monthly. 26 C.F.R. sec. 31.6302-1(c)(1) (2005). A semiweekly depositor must make deposits semiweekly. 26 C.F.R. sec. 31.6302-1(c)(2) (2005). The schedule for making semiweekly deposits is set forth in the regulation as follows:

An employer that is a semi-weekly depositor for a calendar year must deposit its employment taxes in an authorized financial institution on or before the dates set forth below: [*59] Payment dates/semi-weekly Deposit date periods Wednesday, Thursday and/or On or before the following Friday. Wednesday Saturday, Sunday, Monday and/or On or before the following Tuesday. Friday 26 C.F.R. sec. 31.6302-1(c)(2)(i) (2005). As explained supra part 2, NPRN is a semiweekly depositor.

Unless specifically exempted, taxpayers who deposit more than $200,000 a year in employment taxes and certain other taxes must use electronic funds transfer to make deposits of these taxes. This requirement is set forth by regulation:

Unless exempted under paragraph (h)(5) of this section, a taxpayer that deposits more than $200,000 of taxes described in paragraph (h)(3) of this section during a calendar year beginning after December 31, 1997, must use electronic funds transfer (as defined in paragraph (h)(4) of this section) to make all deposits of those taxes that are required to be made for return periods beginning after December 31 of the following year and must continue to deposit by electronic funds transfer in all succeeding years. *** 26 C.F.R. sec. 31.6302-1(h)(2)(ii) (2005). The taxes “described in paragraph (h)(3) of this section” include an employer's employment-tax liability. 26 C.F.R.  sec. 31.6302-1(h)(3) (2005) (electronic funds transfer requirement applies for taxes required to be deposited under 26 C.F.R. sec. 31.6302-1). "[P]aragraph [*60] (h)(5) of this section” (i.e., 26 C.F.R.  sec. 31.6302-1(h)(5) (2005)) provides that If any categories of taxpayers are to be exempted from the requirement to deposit by electronic funds transfer, the Commissioner will identify those taxpayers by guidance published in the Internal Revenue Bulletin. *** 26 C.F.R. sec. 31.6302-1(h)(2)(iii) (2005) provides that even a taxpayer that is not required by paragraph (h)(2)(ii) to make electronic deposits of the taxes described by paragraph (h)(3) may voluntarily make the deposits by electronic funds transfer. An electronic funds transfer is defined as “any transfer of depository taxes made in accordance with Revenue Procedure 97-33 *** or in accordance with procedures subsequently prescribed by the Commissioner.” 26 C.F.R.  sec. 31.6302-1(h)(4)(i) (2005). Rev. Proc. 97-33 states:

ELECTRONIC FUNDS TRANSFER (EFT). An “EFT” is any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, computer, or magnetic tape so as to order, instruct, or authorize a financial institution or other financial intermediary to debit or credit an account. [*61]  Rev. Proc. 97-33, sec. 3.06, 1997-2 C.B. 371, 372. 2 As we explain infra part II.A, we find NPRN was required to make its deposits of employment taxes by electronic funds transfer.

In 1996, the Treasury Department established the Electronic Federal Tax Payment System (”EFTPS”). See IRS Information Release 2001-77, 2001 IRB LEXIS 313, at *1-*2 (Sept. 6, 2001). EFTPS is the system for making electronic funds transfers. Rev. Proc. 97-33, sec. 2.02, 1997-2 C.B. at 371. All taxpayers who make federal tax deposits or federal tax payments by electronic funds transfer must use EFTPS. See id. There are two primary payment options under EFTPS: (1) Automated Clearing House debit entry, and (2) Automated Clearing House credit entry. Id. The Automated Clearing House is a funds transfer system that “provides for the interbank clearing of electronic entries for participating financial institutions.” Id. An Automated Clearing House debit entry is “a transaction in which one of the Treasury Financial Agents, upon instructions from a taxpayer, instructs the taxpayer's financial institution to withdraw funds from the taxpayer's account for an FTD or FTP [federal tax deposit or federal tax payment] and to [*62] route the FTD or FTP to the appropriate [Department of the] Treasury account through the ACH [Automated Clearing House] system.” Id. sec. 3.04. (A Treasury Financial Agent is a financial institution that has been designated an agent of the Treasury Department. Id. sec. 3.11, 1997-2 C.B. at 372.) An Automated Clearing House credit entry is a “transaction in which a financial institution, upon instructions from a taxpayer, originates an FTD or FTP [federal tax deposit or federal tax payment] to the appropriate Department of the Treasury *** account through the ACH [Automated Clearing House] system.” Id. sec. 3.03. The third payment option under EFTPS is electronic tax application. Id. sec. 2.05. Electronic tax application, also referred to as “Same Day Payment”, is “a subsystem of EFTPS [the Electronic Federal Tax Payment System] that receives, processes, and transmits an FTD or an FTP [federal tax deposit or federal tax payment] and the related tax payment information for taxpayers that make same day payments through Fedwire value transfers, Fedwire non-value transactions, and Direct Access transactions [three types of electronic payments]. Id. sec. 3.07. Fedwire is the funds-transfer system owned and operated by Federal Reserve banks. See  Rev. Proc. 94-48, sec. 6.11, 1994-2 C.B. 694, 696. It does not include the Automated Clearing House System. Id. A taxpayer must submit an enrollment form before participating in EFTPS. Rev. Proc. 97-33, secs. 4.01, 4.05, 1997-2 [*63] C.B. at 372. When the enrollment process is completed, a Treasury Financial Agent notifies the taxpayer of enrollment in the system by sending the taxpayer a confirmation form, an information booklet, and a personal identification number.Id. sec. 4.04. It appears that taxpayers can make electronic transfers of funds without using EFTPS. IRS Information Release 2004-52, 2004 IRB LEXIS 166, at *1 (Apr. 9, 2004) (”There are three ways taxpayers can let technology help them pay their taxes: by authorizing withdrawals from their savings or checking accounts, through the Electronic Federal Tax Payment System (EFTPS) or by charging it to certain charge cards.”). However, electronic transfers outside EFTPS would presumably not qualify as electronic funds transfers for the purpose of 26 C.F.R.  sec. 31.6302- 1(h)(2)(ii) (2005). As we conclude infra part II.A., NPRN was required to make its federal tax deposits by using EFTPS. Furthermore, NPRN did make its federal tax deposits using EFTPS.

In 2001, the Treasury Department established EFTPS-OnLine. IRS Information Release 2001-77, 2001 IRB LEXIS 313, at *1. This system is the internet version of EFTPS. See IRS Information Release 2003-90, 2003 IRB LEXIS 320, at *1 (July 21, 2003). A taxpayer can participate in EFTPS without participating in EFTPS-OnLine. See IRS Information Release 2001-77, 2001 IRB LEXIS 313, at *4 (”EFTPS-Online has been in its pilot stage since October 2000. [*64] Like other methods of EFTPS the online option is a service offered free to , taxpayers by the U.S. Department of Treasury.” (Emphasis added.)). As we explain infra part II.A., we conclude that NPRN was not required to make its federal tax deposits through EFTPS-OnLine. Additionally, we conclude that NPRN did not make its federal tax deposits through the electronic federal tax payment system online. See infra part II.A.

An employer who is required by law or regulation to deposit employment taxes, and who fails to do so, is liable for a penalty under  section 6656(a). The amount of the penalty is a percentage of the underpayment. Id. An underpayment is defined as the amount of tax required to be deposited minus the amount of tax actually deposited on or before the date the deposit was required to be made.  Sec. 6656(b)(2). The percentage of the penalty depends on the length of the taxpayer's delay in making the deposit. See sec. 6656(b)(1). At least one court has concluded that an employer who is required to make deposits by electronic funds transfer, but who instead makes the deposits through a nonelectronic transfer, is liable for the failure-to-deposit penalty. F.E. Schumacher Co. v. United States, 308 F. Supp. 2d 819, 828 [93 AFTR 2d 2004-829] (N.D. Ohio 2004).

A deposit of a tax is treated as a payment of a tax made on the due date of the relevant tax return, determined without regard to extensions, or, if later, the [*65] date the deposit was made. 26 C.F.R. sec. 31.6302-1(i)(6) (2005). Thus, an employer's deposit of employment tax is relevant to determining not only the penalty for failing to deposit employment taxes,see sec. 6656(a), but also the penalty for failing to pay employment taxes,see sec. 6651(a)(2).

Should an employer fail to withhold and pay trust-fund taxes,  section 6672 authorizes the government to collect an equivalent amount from the employer's officers or employees who are responsible for collecting the taxes. Such persons are commonly referred to as “responsible persons.” Slodov, 436 U.S. at 245-246 n.7. The penalty imposed by section 6672 is referred to as the “trust fund recovery penalty.” See Weber v. United States, 138 T.C. __, __ (slip. op. at 16) (May 7, 2012). The IRS determined that Romano-Murphy was a “responsible person” of NPRN who willfully failed to pay over its trust-fund taxes. It assessed against her the penalty for trust-fund taxes that were not paid over.

 Rev. Rul. 2004-41, 2004-1 C.B. 845 states: “If under state law the members of the LLC are not liable for the debts of the LLC, then absent fraudulent transfers or other special circumstances, the IRS may not collect the LLC's employment tax liability from the members, including by levy on the property and rights to property of the members.”Id. [*91] 2004-1 C.B. at 846. But the revenue ruling also states that “depending on the facts of a particular case, a member may be liable for the trust-fund recovery penalty under I.R.C. § 6672.” Id. Here, the IRS is not attempting to collect NPRN's employment taxes from Romano-Murphy in her capacity as a member of NPRN. Rather, it is attempting to collect the trust-fund-recovery penalty because it alleges that she is a responsible officer. This theory of liability is consistent with  Rev. Rul. 2004-41, supra.

IV. Willfulness

Once a person is demonstrated to be a “responsible person”, the burden is on that person to disprove willfulness. Malloy v. United States, 17 F.3d 329, 331 [73 AFTR 2d 94-1569] (11th Cir. 1994). A responsible person acts willfully if he or she “has knowledge of payments to other creditors” after becoming “aware of the failure to remit the withheld taxes.” Thosteson v. United States, 331 F.3d 1294, 1300 [91 AFTR 2d 2003-2468] (11th Cir. 2003). [*92] There are a variety of times during and after a quarter when a payment to a creditor and a failure to remit taxes can establish that the responsible officer acted willfully. For example: When wages are being paid. See Newsome v. United States, 431 F.2d 742, 746 [26 AFTR 2d 70-5078] (5th Cir. 1970) (”[A] corporate officer or agent has a duty to see that withheld funds are properly collected from the employees, are maintained during the quarter, and are paid over to the government at the end of the quarter. This duty, for purposes of section 6672 liability, is a continuing onewhich arises when the federal income and social security taxes are withheld from employees' wagesand ends when such funds are paid over to the United States.” (Emphasis added; fn. ref. omitted.)); Davis, 961 F.2d at 873 (”[L]iability as a responsible person attaches each time salaries are paid during the course of a quarter.”); Juan F. Vasquez, Jr., & Peter A. Lowy, Responsible Person and Lender Liability for Trust Fund Taxes—Sections 6672 and 3505,  639-3rd Tax Management (BNA), sec. II.H.1, at A-28 (”Because liability first attaches at the time wages are paid, not at some subsequent time when payment is due or the return is to be filed, responsibility can attach from the time of [*93] withholding through the payment due date and beyond.” (Fn. ref. omitted.)). When semiweekly deposits are due. Brown v. United States, 591 F.2d 1136, 1141 [43 AFTR 2d 79-895] (5th Cir. 1979) (”However, as we have already pointed out, Treasury regulations require withheld funds to be deposited during the quarter and do not merely impose a duty to pay them at the end of the period. *** [The corporate officer's] failure to make the withholding deposits required was itself `willful.”). When the quarterly employment-tax payment is due. See id. at 1140- 1142 (corporate officer took exclusive control over Sibwin, Inc.'s affairs on April 10, 1972; the court held that even if he was not a responsible officer when trust-fund taxes had been collected from the employees' wages during the first quarter of 1972, he was a responsible officer when payments of the trust-fund taxes became due on April 30, 1972; therefore the court held that he had a duty to pay over the trust-fund taxes and was liable for the penalty because he willfully failed to do so). After the quarterly payment date. See Newsome, 431 F.2d at 745 (”In many of these cases, a responsible officer's `willfulness' is [*94] established by the knowing preference of other corporate creditors over the United States after the due date for the corporation to remit the withheld taxes.” (Fn. ref. omitted.)).

There is authority for the proposition that a failure to remit trust-fund taxes to the United States is not willful where the responsible person made a reasonable effort to remit the funds but was thwarted by circumstances outside that person's control. Feist v. United States, 607 F.2d 954, 961 [44 AFTR 2d 79-5843] (Ct. Cl. 1979); Finley v. United States, 123 F.3d 1342, 1348 [80 AFTR 2d 97-6321] (10th Cir. 1997) (en banc). This is referred to as the reasonable-cause defense. Thosteson, 331 F.3d at 1301. An example of the reasonable-cause defense is when a responsible person made arrangements to pay the trust-fund liability through a bank only to find that the bank kept the payment for its own use instead of turning the payment over to the IRS. See Rykoff v. United States, 40 F.3d 305, 306 [74 AFTR 2d 94-6999] (9th Cir. 1994). A limitation on the reasonable- cause defense is that the efforts of the responsible person to pay trust-fund taxes to the IRS are irrelevant if the person also decided to make payments to other creditors despite knowing that the trust-fund taxes had not been paid. See Thosteson, 331 F.3d at 1301 (stating without resolving whether the reasonable- cause defense exists under the law of the Eleventh Circuit, that such an exception is not applicable to a responsible person who “consciously decided to make [*95] payments to creditors other than the government even though he knew that the withholding taxes had not been paid”); Feist, 607 F.2d at 961, 962 (reasonable- cause defense available only because corporate treasurer did not “prefer other creditors”).

A successful attempt to pay trust-fund taxes can also affect a responsible person's liability for the trust-fund-recovery penalty. If the tax is actually paid, there is no liability. See Brown, 591 F.2d at 1141 (corporate officer's “use of the withholding trust funds for other purposes in the interim made him liable for a  Section 6672 penalty if the tax was not in fact paid” (emphasis added)). However, there is a timing question: how late can the tax payment be for the responsible person to be relieved of liability? InNewsome, the former Fifth Circuit suggested that a payment made by the quarterly payment deadline—a month after the end of the quarter—could be sufficient to absolve the responsible person of liability. 431 F.2d at 746 (”Of course, the officer is only liable under 6672 if the corporation does not pay over the withheld taxes at the date prescribed in the regulations.”). In this case, the IRS acknowledges that remittances made by the dates that the semiweekly deposits were due would have been sufficient to absolve Romano-Murphy of liability. The acknowledgment to which we refer is found on page 57 of the IRS's answering brief. [*96] In summary: A responsible person who knows that other creditors are being paid while the trust-fund taxes have not been paid is subject to liability for the penalty. See Thosteson, 331 F.3d at 1300. There may be a “reasonable-cause defense” if the responsible person took reasonable efforts to make a payment to the United States and, because of circumstances outside the person's control, the payment was not made. See Feist, 607 F.2d at 961; Finley, 123 F.3d at 1348.

However, reasonable efforts at payment are to no avail if the responsible person pays other creditors. See Thosteson, 331 F.3d at 1301. In any event, a successful attempt to pay the trust-fund taxes, if made soon enough, relieves the responsible person of liability under  section 6672. Brown, 591 F.2d at 1141; Newsome, 431 F.2d at 746.

With these principles in mind, we find that Romano-Murphy knew that NPRN was using the taxes withheld from its employees' wages for corporate purposes instead of reserving them for payment of its trust-fund taxes. During the entire second quarter of 2005 (the quarter for which the trust-fund-recovery penalty was assessed), Romano-Murphy knew that the trust-fund taxes were not [*97] being remitted to the IRS by NPRN. During the entire quarter, she had the authority to remit the trust-fund taxes to the federal government, but she failed to do so. Instead, she wrote checks to other creditors (and supervised the writing of checks to other creditors).

. We do not understand her to be arguing that the assumption of liabilities by NAC actually operated to relieve her of her section-6672 liability. [*102] Such an argument would be invalid. Under section 6672 Romano-Murphy is liable for a penalty, and that section provides no mechanism for her to shift her responsibility for the penalty to someone else. See Collins v. United States, 92-2 U.S. Tax Cas. (CCH) para. 50,351 (E.D. Mo. 1992); Markel v. United States, 70-2 U.S. Tax Cas. (CCH) para. 9702 (W.D. Tex. 1970). (212) 588-1113

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