Sheila Persons was the controller and vice-president of Finance at Textron Elect

Question

Sheila Persons was the controller and vice-president of Finance at Textron Electronics from 1998 to October 2013, but all checks over $500 had to be jointly signed by Sheila and the president, Bud Baker. In 2012, Textron began having cash-flow and payroll difficulties, then the president, decided to stop paying the payroll taxes to the federal government and only pay the payroll and inventory acquisitions. Sheila counseled Bud against his decision not to pay taxes, and her objections also are duly recorded in the minutes of the meetings of the Board of Directors (the five management personnel). He ignored her advice, and continued to not pay taxes. Finally, in October 2013, the cash flow completely dried up, and Textron had to close. At this point, the IRS noted that the company owed $350,000 in withheld, but unpaid taxes. Bud and most of the other officers became personally bankrupt except Sheila because she is a wise money manager, and has a sizable personal net worth. Accordingly, the IRS has assessed the 100 percent penalty of Section 6672 against her. She has been billed by the IRS for the full $350,000.

Whether Sheila should pay for the $350,000 which is 100 percent penalty of unpaid taxes?(list the code and regulations)

Explanation / Answer

Brief of code and regulation - If a company fails to pay the employment taxes withheld by it to IRS, then IRS can assess the 100% penalty on unpaid taxes against any person responsible or several responsible persons. The purpose of the 100% penalty is to collect withheld but unpaid federal payroll taxes from individuals who had control over an employer’s finances.

For levying the penalty, the individual must: (1) be responsible for collecting, accounting for, and paying over withheld federal taxes and (2) willfully fail to pay over those taxes. Willful means intentional, deliberate, voluntary and knowing — as opposed to accidental. The mere authority to sign checks when directed to do so by a higher-up does not establish responsible person status. There must also be knowledge of and control over the finances of the business.

In the given case, Sheila is controller and VP of company, and she is just having authority to sign the checks. Moreover all the checks over $500 were signed jointly by Sheila and president. In the light of the above, regulation and code, it can be said that Sheila was not the individual resposible for collecting, accounting and paying the employment taxes. Moreover the fact that she counseled against the decision to not pay taxes and duly recorded such objections are proof that she was not wilfully involved in such activity.

As a result Sheila is not liable to pay penalty on unpaid taxes as such penalty cannot be levied on her being not resposible for collecting, accounting and paying such taxes. The U.S code section 6672 describes the penalty on such unpaid taxes and persons responsibel for same.

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