What constitutes a responsible person?

IRC section 6672 imposes a penalty equal to the total amount of any federal payroll (trust fund) tax any person willfully evades, fails to collect or does not account for and pays over. In view of the section's scope, the courts broadly interpret "any person" to include officers, employees, partners and others with responsibility for the financial affairs of the business. In interpreting this section, the courts focus on two key elements that drive the penalty: the determination of who is a "responsible person" and whether or not he or she acted willfully. CPAs must properly advise employers and clients about the implications of section 6672.

A recent college graduate, Christopher Lyon was president, secretary-treasurer and sole director of the North Branch Coal Co. from January 1996 until North Branch ceased operations in spring 1997. He received a salary and commission based on the amount of coal the company mined. North Branch's bylaws stipulated the president was responsible for supervising its affairs and "shall sign or counter-sign all contracts and other instruments of the corporation."

In March 1999 the IRS assessed Lyon for more than $338,000 in trust fund taxes North Branch owed. After making a $500 payment, Lyon sued for a partial refund in a U.S. district court, asserting he was not the responsible party under section 6672. Following cross-motions, the district court granted summary judgment to Lyon after concluding he lacked actual authority and thus was not a responsible party. The IRS appealed.

Result. For the IRS. Christopher Lyon claimed he had assumed the various roles in the corporation at his father's direction. The father testified his son had lacked authority over general decision making and management of the company and actually had spent little time on corporate affairs. He did, however, deliver payrolls; accept the resignation of and reappoint a vice-president; sign the corporate annual reports and tax returns, including payroll returns; and execute various documents, including a credit agreement with a bank. Christopher Lyon also had been authorized to conduct all of North Branch's banking business. Lyon said he had signed documents when and where he was told to do so, without reading them. Accompanied by an accountant, he had met on several occasions with an IRS agent who explained the penalty and enforcement provisions of section 6672. After promising to pay the taxes, Lyon reneged, asserting his father was willing to accept the blame.

In reviewing previous decisions, the court noted the major element in determining a responsible person was whether that individual had the statutorily imposed duty to make the payments. Title alone was not sufficient; the determination had to be based on substance over form. The court formulated a list of factors to apply to an individual to judge whether the substance was sufficient to create the responsibility. These factors included officer title, payroll control, payables control, financial operations responsibility, check signatory power and its actual use, and hiring and firing ability.

In applying the factors, the court concluded Lyon had actual authority. Thus, the onus was on him to demonstrate he had been prevented from exercising that authority. Although Lyon's father had controlled the operations of the corporation, the younger Lyon had held "all the legal cards" and could have paid the taxes had he chosen to do so. The fact that he might have been fired for such action did not make him any less responsible.

Turning to the question of "willfulness," the court observed the issue turned oil whether the individual knew the payments were not being made. Since Lyon had met with the IRS and knew the liability existed and the corporation had paid other creditors during the period in question instead of the government, the court concluded Lyon's failure to pay was willful.

* Lyon v. Commissioner, CA-4, 2003 2 USTC [paragraph] 50,554.

Prepared by William J. Cenker, CPA, PhD, KPMG Professor of Accountancy, and Robert Bloom, PhD, professor of accountancy, John Carroll University, Cleveland.