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Company executive held liable for unpaid withholding taxes.

In 1987, Mr. O'Callaghan became president and a 41% owner of a restaurant corporation. The corporation hired a management firm to run the restaurant. While Mr. O'Callaghan did not personally hire the managers, he did sign the management agreement. In 1991, the restaurant terminated the agreement based on suspicions that the management firm was stealing from the restaurant. By August 1992, the restaurant had filed for bankruptcy and the IRS filed a tax lien for unpaid employee withholding taxes. In 1995, the IRS issued a tax assessment against Mr. O'Callaghan as the employer responsible for these unpaid taxes. He paid part of the assessment and sued for a refund; the IRS counter-claimed, seeking the unpaid taxes.

Result: For the IRS. Under Internal Revenue Code section 7501(a), an employer is responsible for withholding federal income and Social Security taxes from employees' wages and is liable for their payment. An individual can be held personally liable for any unpaid taxes if he or she is the "responsible person" for collecting and paying the taxes and is found to have "willfully" failed to comply with the statute.

The court found Mr. O'Callaghan was the responsible party, even though he did not oversee the day-to-day operations, hire any employees or write any checks on behalf of the restaurant (except for three issued in 1987). The court based its finding on Mr. O'Callaghan's status as president and 41% owner and the fact that his was the sole authorized signature on the restaurant's primary account (the checks were signed using a facsimile rubber stamp of his signature). In addition, Mr. O'Callaghan had signed the management agreement and obtained a $500,000 loan on the restaurant's behalf.

The court also found Mr. O'Callaghan had willfully failed to comply with the statute. Willfulness requires only a conscious, voluntary act, not an intent to defraud, and can include the failure to investigate or correct mismanagement after noticing that taxes have not been paid. In August 1992, Mr. O'Callaghan had discovered back taxes were due. At that time, he had instructed the restaurant's bankruptcy attorney to monitor the tax payments, and the attorney had assured him all taxes were being paid. Mr. O'Callaghan also had instructed the bookkeeper to ensure that all tax liabilities were paid. The court found these actions were not sufficient; Mr. O'Callaghan had left the responsibility to other parties--including a bookkeeper who previously had failed to pay the taxes--and had not taken any steps to make sure the taxes were in fact paid.

* O'Callaghan v. U.S., DCNY, no. 95 Civ. 10260
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Article Details
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Title Annotation:O'Callaghan v. United States
Author:Albanese, Maria Luzarraga
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Mar 1, 1997
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