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Taxpayer Can't Lay Blame for Failure to Pay Employment Taxes on Deceased Partner

(Parker Tax Publishing June 2018)

The Third Circuit affirmed a district court and held that a 50 percent partner in an architectural company was a responsible person and thus was liable for trust fund penalties relating to the nonpayment of employment taxes for years 2007-2009. The court rejected the taxpayer's argument that payment of the taxes was the responsibility of his deceased business partner. Commander v. Comm'r, 2018 PTC 151 (3d Cir. 2018).

Darren Commander, along with his now-deceased business partner Kenneth Skerianz, formed two New Jersey LLCs - Darken Architectural Woodwork Installation and Metropolitan Architectural Woodwork - to fabricate and install architectural woodwork. Commander and Skerianz were each 50 percent owners of Darken, and the company's only officers. The operating agreement gave them joint managerial control of the company and prohibited either one from engaging in major financial transactions without the other's approval. Commander's title was "managing member."

Commander oversaw Darken's business, and Skerianz oversaw the woodwork installation in the field. Both Commander and Skerianz had signing authority on Darken's bank accounts. Commander frequently signed checks, including payroll checks, during the years 2007- 2009. Darken had a stamp of Commander's signature, and Commander regularly directed the employee who handled payroll to issue checks with his signature to employees and creditors. Commander admitted that he decided which bills to pay if there were insufficient funds to pay them all. Darken also had an outside accountant, Frank Dragotto, who prepared Darken's corporate income and employment tax returns. Once Dragotto prepared the returns, he discussed them with Commander and Skerianz before filing.

From 2007-2009, Darken did not fully pay its federal payroll taxes. Commander was aware that employers are required to withhold income and social security taxes from their employees' wages. He also became aware at some point during this time period that Darken owed taxes. Further, he said that "every year we were in business we had some tax issue." Darken paid Commander and Skerianz about $4,000 a week during the period that payroll taxes were delinquent.

Commander said that he first learned that the payroll taxes were not being paid when an IRS agent came to the office. Commander then tried to work with the IRS to pay the delinquent taxes. Dragotto corroborated that Commander was kept apprised of Darken's ongoing tax struggles. Following an administrative investigation, the IRS determined that both Commander and Skerianz were "responsible persons" who had willfully failed to pay over the trust fund taxes. It assessed trust fund recovery penalties against both of them under Code Sec. 6672. After Skerianz died, he was dismissed as a defendant.

The IRS took the case to a district court and sought summary judgment against Commander for $468,000 for 2007, $620,000 for 2008, and $502,000 for 2009. Commander argued that he was not liable for the penalties because he was not a responsible person under Code Sec. 6672. Commander also argued that his failure to pay over the taxes was not willful. In an attempt to manufacture a dispute of material fact, Commander submitted an affidavit in opposition to summary judgment, to the effect that he misspoke in his deposition and meant to say that he later learned of the tax delinquencies between 2007- 2009.

The district court granted the IRS summary judgment, holding that Commander was a responsible person because he was a 50-percent owner, he was one of only two officers, he had check-signing authority, and he exercised his power to pay Darken's bills and sign paychecks. The district court noted that Commander said in a deposition that he learned between 2007 and 2009 that the taxes were not being paid, and that he received regular updates on communications with the IRS regarding the delinquencies. The court concluded that Commander was willful because he paid other creditors after having actual knowledge that the payroll taxes were not being paid, and because he acted with reckless disregard for whether the taxes were being paid.

With respect to Commander's affidavit, the district court said that conclusory, self-serving affidavits are insufficient to withstand a motion for summary judgment. Commander appealed to the Third Circuit.

On appeal, Commander argued that he was not responsible for Darken's payroll or tax contributions because those responsibilities were entirely Skerianz's. He also asserted that summary judgment was inappropriate because he was "never given the opportunity to state his own recollection of the facts," as he would have at trial, and that he was denied the testimony of witnesses who would have corroborated his claims.

The Third Circuit affirmed the district court's holding that Commander willfully caused the trust fund taxes to not be paid. The court noted that willfulness under Code Sec. 6672 is a voluntary, conscious and intentional decision to prefer other creditors over the government. It may also be established, the court said, if the responsible person acts with reckless disregard of a known or obvious risk that withheld taxes may not be remitted to the government. Reckless disregard includes a failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid. Willfulness, the court observed, need not be in bad faith, nor does it require actual knowledge of the tax delinquency.

The Third Circuit agreed with the district court's conclusion that Commander's behavior was willful because he permitted Darken to pay other creditors after he knew that the taxes were in arrears. The record demonstrated to the court that Commander had actual knowledge the taxes were due, that he stated that Darken had tax issues every year it was in business and that each time Dragotto received a notice from the IRS, everyone was made aware of the issue. Despite this knowledge, the Third Circuit observed, Darken paid Commander and Skerianz about $4,000 a week throughout the delinquency.

For a discussion of the trust fund recovery penalty under Code Sec. 6672, 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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