By Nathan R. Olansen

Many business owners, CFOs, and other persons with authority over payroll, are unaware that failing to properly withhold and deposit payroll taxes for their employees can result in the imposition of personal liability equal to 100% of the uncollected payroll tax deficiency known as the “trust fund recovery penalty.” And, as determined by the Eleventh Circuit Court of Appeals (which covers Alabama, Florida and Georgia), acting at the direction of another governmental entity, will not prevent the imposition of the penalty.

In Myers v. U.S., 123 AFTR 2d 2019-1782, the Chief Financial Officer (CFO) of a media company in receivership was liable for the trust fund recovery penalty under Internal Revenue Code (IRC) Sec. 6672. The CFO was a responsible person who willfully failed to pay over the company's payroll taxes, and the Small Business Administration (SBA) receiver's instructions not to pay the taxes was not a defense to the penalty.

Background. Under IRC Sec. 6672, the IRS may impose a penalty on any person who:

  1. Is responsible for collecting, accounting for, and paying over payroll taxes; and
  2. Willfully fails to perform this responsibility.

The penalty is equal to 100% of the taxes due and owing (100% penalty), and "willfully" means voluntarily, consciously, and intentionally. A responsible person acts willfully if he/she knows that the trust fund taxes are not being paid and pays other business expenses, including net payroll, instead of paying the trust fund taxes.

Facts. The CFO worked for two companies owned by a parent corporation (Parent). The Parent corporation was licensed by the U.S. Small Business Administration (SBA) as a Small Business Investment Company (SBIC). Parent corporation violated the terms of its license, so the SBA sued to put Parent into receivership. As Parent's receiver, the SBA replaced the officers and directors of Parent and took over its management.

During this time, while the CFO had signature authority over the subsidiary companies' bank accounts, the subsidiaries failed to pay their trust fund taxes. According to the CFO, the SBA's agent told him not to pay the trust fund taxes but to pay other essential creditors instead.

CFO liable for trust fund recovery penalty. The Eleventh Circuit Court of Appeals held that IRC Sec. 6672 applies even when a government agency receiver tells a taxpayer not to remit trust fund taxes to the IRS. The CFO conceded that he would be liable for the unpaid taxes if Parent's receiver was a private entity. But, he argued, the IRS should be estopped from imposing the penalty on him because he was obeying the instructions of another government agency. The court rejected this argument holding that the SBA receiver stepped into the shoes of the private entity; therefore, IRC Sec. 6672 applied as if it was a private entity.

In his concurring opinion, Circuit Judge Jordan agreed that the CFO was liable for the penalty, but on the narrower grounds that the CFO's reliance on the receiver's instructions was not objectively reasonable. Any officers and agents conducting business under the authority of a U.S. court are subject to all federal taxes applicable to such business as if it were conducted by an individual or corporation. In addition, the SBA's liquidation procedures require an SBA receiver to make all appropriate filings with federal tax authorities. Thus, the CFO could not have reasonably relied on the SBA receiver's do-not-pay instructions as a defense to the penalty.