Co-owners and VP all responsible for payroll tax payments

Four taxpayers were 25% owners of a corporation. The VP for finance, a CPA, reported directly to the board. The owners had signature authority; two usually signed all checks after the finance/accounting department prepared them. The owners all had full-time occupations, two outside the corporation, two inside but unrelated to the corporation’s finance/accounting.

About one year before its filing (the corporation went bankrupt and was liquidated), the VP became aware that the corporation’s payroll taxes were in arrears and, about 6 months later, the outside owners became aware of it.  They instructed the VP to begin discussions with the IRS.  The IRS assessed all 5 taxpayers for the payroll taxes withheld from the employees.

Ruling: For the IRS. A person without the precise responsibility to withhold or pay employment taxes can still be a responsible person if the person:

1. is an officer or member of the board of directors;
2. owns a substantial amount of stock in the company;
3. manages the day-to-day operations of the business;
4. has the authority to hire or fire employees;
5. makes decisions as to the disbursement of funds and payment of creditors;
6. possesses the authority to sign company checks.

No single factor is definitive.  Each owner had most of these factors and could not avoid liability by hiring others to run the accounting and finance department. Each owner could have exercised control over payment of the taxes had he so chosen. The VP was a responsible person because he was responsible for preparing all checks which the owners then signed. [Davis Sr. v. United States, No. 5:06-cv-00158, Oct. 7, 2008, W. D. La.]