A recent Texas case clearly demonstrates how unforgiving the courts can be when it comes to unpaid employment taxes.
McClendon v. U.S.
In May of 2009, Dr. Robert McClendon learned that the Chief Financial Officer of his medical practice had been embezzling money from him, and that his practice owed roughly $10 million in unpaid employment taxes to the government. McClendon loaned $100,000 of his personal funds to the practice to pay his May 15, 2009 payroll, closed the practice and remitted its receivables to the IRS to help pay down the tax liability.
Tax penalties under 26 U.S.C. § 6672 were assessed at $4,323,343.70. McClendon paid a small percentage and then sued the government for a refund and abatement of the balance.
Trust fund taxes belong to the U.S.
Under 26 U.S.C. § 3102(a) and 26 U.S.C. § 3402(a), employees are obligated to withhold social security and income taxes from their employees' wages. These taxes are held in trust and must be paid over to the government, or the employer faces a penalty equaling the entire amount of the unpaid taxes.
The Section 6672 Penalty
The Section 6672 Penalty may be imposed on any "responsible person" who willfully fails to collect, account for, and pay over trust fund taxes. McClendon agreed that he was a responsible person for his practice, but argued that his failure to pay the back taxes to the IRS was not willful:
- First, McClendon claimed that his loan to the practice was limited to payroll payments, and that the funds were therefore encumbered. The court disagreed, ruling that allowing responsible persons to evade a finding of willfulness and liability through preferential lending arrangements would "undermine the purpose of § 6672 in assuring that trust fund taxes are paid to the government."
- Second, McClendon attempted to use the "reasonable cause" defense by arguing that he acted "morally and generously" by using his personal funds to pay the medical practice’s staff. The court did not accept this argument either, stating that good motives will not exonerate a taxpayer who "consciously decides to use unencumbered funds to pay a creditor other than the government."
The court acknowledged that Dr. McClendon's motives were admirable, but clearly stated that they were still not legally relevant.
San Francisco Employment Tax Attorneys
McClendon’s medical practice was finished by theft, mismanagement and a tax dispute. Tax issues have destroyed many businesses. Don’t let it happen to yours. Contact the employment tax attorneys at Moskowitz, LLP today.