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CFO Who Paid Creditors Before the IRS Liable for Payroll Taxes

(Parker Tax Publishing February 2019)

A district court granted summary judgment for the government on the liability of a company's chief financial officer (CFO) for trust fund recovery penalties under Code Sec. 6672 resulting from the company's unpaid payroll tax debt. The court found that the CFO was a responsible person who willfully failed to account for and deposit the payroll taxes because he signed checks to pay creditors other than the IRS for several years after learning of the company's unpaid tax debt. McClendon v. U.S., 2019 PTC 33 (S.D. Tex. 2019).


Dr. Robert McClendon founded Family Practice Associates of Houston, a professional medical association, in 1979. Richard Stephen was the chief financial officer (CFO) of Family Practice from 1995 to 2009. Stephen ran the practice's day-to-day operations, managed its finances, controlled its bank accounts, was responsible for preparing and filing payroll tax returns, maintained the books and records, paid creditors and determined the order of payment, and was authorized to hire and fire employees.

Family Practice began to accumulate tax debt in 2003. By 2009, it owed over $11 million in employee payroll taxes. Stephen knew of Family Practice's failure to file corporate tax returns or to make federal tax deposits. From 2003 to 2009, Stephen paid Family Practice's creditors, other than the government, after learning of the unpaid tax debt. In 2013, Stephen was convicted in a Texas state court of felony theft for embezzling money from Family Practice.

In 2011, the IRS assessed approximately $4.3 million in trust fund recovery penalties against Stephen under Code Sec. 6672. The government also assessed penalties against Dr. McClendon who, after paying a nominal portion of the assessment, sued the government for a refund and abatement of the penalties. The government counterclaimed against Dr. McClendon and Stephen to recover the assessments.

Observation: In McClendon v. U.S., 2018 PTC 173 (5th Cir. 2018), the Fifth Circuit vacated and remanded a prior district court decision granting summary judgment for the government on the issue of Dr. McClendon's liability for the trust fund recovery penalty. The Fifth Circuit found that Dr. McClendon was liable only for the amount of available unencumbered funds in Family Practice's accounts after he was aware of the unpaid withholding taxes and that Dr. McClendon presented competent evidence regarding whether the funds were sufficient to cover the tax obligation.

The government moved for summary judgment against Stephen, arguing that the undisputed facts showed he was liable under Code Sec. 6672 for the trust fund recovery penalties.


Businesses must withhold from employees' earnings the amount each employee owes for employment and incomes taxes. Employers hold the funds in trust for the government and are required to remit them to the government on a quarterly basis. Under Code Sec. 6672, any person responsible for collecting and paying over the tax who willfully fails to do so is liable for a penalty equal to the amount of the unpaid tax.

In Barnett v. IRS, 988 F.2d 1449 (5th Cir. 1993), the Fifth Circuit set forth a list of nonexclusive indicia of Code Sec. 6672 responsible-person status. Such indicia include whether the individual (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 and fire employees, (5) makes decisions as to the disbursements of funds and payment of creditors, and (6) possesses the authority to sign company checks. There may be, and indeed usually are, more than one responsible persons in any company. The willfulness element under Code Sec. 6672 requires only a voluntary, conscious and intentional act, not a bad motive or evil intent. Evidence that the responsible person (1) had actual knowledge that the business was delinquent on its withholding taxes but (2) used the business's unencumbered funds to pay the business's non-IRS creditors is sufficient to prove willfulness.

The government argued that, as the CFO of Family Practice, Stephen was a responsible person under Code Sec. 6672. The government also contended that Stephen acted willfully because he was aware of the duty to withhold, account for, and deposit the payroll taxes; knew that Family Practice failed to satisfy its tax obligation in 2003; and signed checks to pay creditors other than the IRS after learning of Family Practice's unpaid tax debt. Stephen did not respond to the government's motion.

The court granted summary judgment for the government, finding based on the record evidence that Stephen was a responsible person who willfully failed to pay Family Practice's payroll taxes from July 2003 to October 2008. The court found that Stephen met five of the Barnett factors during the years at issue and had effective power to pay the tax. The court noted that Stephen conceded he was Family Practice's CFO, managed the company's daily affairs, had the authority to hire and fire employees, paid creditors and determined the order of payment, was an authorized signatory on Family Practice's accounts, and was responsible for payroll and filing corporate tax returns. The court also found that Stephen admitted he determined Family Practice's financial policy and knew of the business's failure to satisfy its tax obligations.

Stephen willfully failed to pay the taxes owed, the court found, because he admitted he knew of the duty to pay the payroll taxes and was responsible for Family Practice's payroll. The court also noted that Stephen admitted he paid creditors other than the IRS. The court reasoned that because Stephen was aware of the unpaid tax debt, could have paid it, and made payments to creditors other than the IRS, there was no genuine dispute of material fact that his failure to satisfy the company's tax obligation was willful.

For a discussion of the Code Sec. 6672 trust fund recovery penalty, see Parker Tax ¶210,108.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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