Board Chair Is Personally Liable
For Failure to Pay Withholding Taxes
Court says role as line of credit lender to nonprofit
shows significant and substantial control over finances
The volunteer board chair of a nonprofit drug and alcohol treatment program who made start-up and bridge loans to the organization and paid $193,000 in unpaid withholding taxes has lost a suit to recover the funds he personally advanced to pay the taxes. A federal District Court in Tennessee has held that he was a “responsible person” and personally liable to pay the taxes the organization failed to pay itself. (Bunch v. Commissioner, E.D. TN, No. 2:10-CV-122, 3/8/12.)
Roy Don Bunch had been involved with Perceptions, Inc. and its affiliate Bendell Services from the beginning. He served as chair of the board, provided rent-free office space, and played an active role in its financial management. He made start-up loans and “bridge” loans when Bendell did not have enough money to pay its bills. Between February 2005 and August 2007, he loaned a total of $648,000, only some of which was repaid when Bendell had the funds to do so. He took over paying the bills personally in 2007.
When the organization failed to pay its withholding taxes in 2006 and 2007, the IRS ordered him to pay personally. After losing an appeal in which the IRS did not say why it considered him a responsible person, he filed for a refund.
Section 6672 of the Tax Code imposes personal liability on any person who is responsible for paying the withholding tax and willfully fails to turn the funds over to the government. The test for determining responsibility, the Court said, is “essentially a functional one, focusing upon the degree of influence and control which the person exercised over the financial affairs of the corporation and, specifically, disbursements of funds and the priority of payments to creditors.”
Courts have developed a nonexclusive list of facts for consideration, the Court said: (1) the duties of the officer as outlined by the bylaws; (2) the ability to sign checks for the organization; (3) the identity of the officers or directors; (4) the identity of the individuals who hire or fire employees; and (5) the identity of the individuals in control of the financial affairs of the organization. They have also considered whether the person has access to the books and records of the organization and whether the person has made personal loans to it.
“Willfulness” is deemed to be present if “the responsible person had knowledge of the tax delinquency and failed to rectify it when there were available funds to pay the government,” the Court said.
Bunch admitted he was the responsible person when he took over paying the bills, but claimed he was not responsible before that point. The Court said he had not shown he was not responsible.
“Although Bunch had no ownership interest in the corporation, did not hire or fire employees or have check writing authority,” the Court wrote, “he clearly exerted significant and substantial control over the financial affairs of Perceptions by acting as a de facto line of credit for the corporation. Bunch made ‘start-up’ loans and ‘bridge’ loans to Perceptions throughout its existence, enabling him, if he chose, to exercise almost total control over the corporation, certainly to the extent of assuring payment of trust fund taxes. Bunch had the status, as Chairman of the Board and a director, and the authority and duty necessary to be a responsible person. In fact, he had the ability to force Perceptions out of business by simply withholding his periodic loans from the corporation. That he did not assume actual check writing authority until June, 2007, rather than indicating that he was not a responsible person, simply illustrates his ability to assume that responsibility at any time.”
The Court also found that he did not meet his burden of proving that he did not willfully fail to pay the taxes. It said that the record showed that Perceptions had access to sufficient funds to pay the taxes. “In fact, the amounts paid to Bunch personally in repayment of his loans to the corporation were more than sufficient to meet the company’s withholding tax liability. Even if Bunch did not have actual knowledge of the tax delinquency, his conduct in this case clearly constitutes the requisite recklessness to meet the willfulness element.”
YOU NEED TO KNOW
The IRS is really serious about the failure to pay over withholding taxes and is not reluctant to impose personal liability on those individuals “responsible” for the payments. It is one of the few reasons for which a volunteer director is likely to be personally liable, and a legitimate reason to lose sleep at night.
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