Fifth Circuit finds tax-exempt hospital’s chairman liable for trust fund penalty
Verret v. U.S., (CA 5 2/26/2009) 103 AFTR 2d ¶2009-576
In an unpublished per curiam decision, the Court of Appeals for the Fifth Circuit has affirmed a district court’s finding that the chairman of the board of a tax-exempt hospital was a responsible person liable for the Code Sec. 6672(a) trust fund penalty. The chairman, who could have ensured that the hospital paid its taxes, chose instead not to exert any authority over its business affairs.
Caution: The case once again demonstrates the perils faced by a taxpayer who becomes involved in a financially distressed company. As this case illustrates, the fact that a company is a tax-exempt entity will not shield a taxpayer who fails to carefully exercise his duties to make sure employment taxes are paid to IRS.
Background. Where an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for and paying over payroll taxes; and (2) willfully fails to perform this responsibility. (Code Sec. 6672(a))
Facts. The primary business of Community Healthcare Foundation (Foundation), a Code Sec. 501(c)(3) tax-exempt organization, was the operation of Doctors Hospital (Hospital). Under Hospital’s by-laws, the Foundation provided that the Board of Trustees, which was comprised of voluntary and unpaid members of the community, would act as the governing body of Hospital. The by-laws also provided for a Chairman of the Board and a Chief Administrative Executive Officer (CEO).
Stephen Verret served in various capacities on Hospital’s board during a 26-year tenure, including as Chairman of the Board from ’99 until his departure in 2002. In addition, a company in which Verret was a majority stockholder performed electrical services for Hospital, and his wife was employed by Hospital as Chief Operating Officer from January through March 2001. Verret also contracted with, and was paid by, a business involved in the operation and management of hospitals to help recruit specialized physicians and increase the hospital’s revenues.
Hospital failed to remit employment withholding taxes during the first part of 2001. While this outstanding tax liability was ultimately satisfied with borrowed cash appropriated to buy medical equipment, Hospital’s Executive Director David Cottey was informed by Verret, individually, and by the Board, collectively, that the payment of employment withholding taxes was of paramount importance. Under no circumstances, he was told, was he to fail to pay these taxes again. However, contrary to his repeated assurances throughout 2001, in November of 2001, Cottey told Verret and the Board that the income and FICA taxes for the employees were delinquent for the third and fourth quarters of 2001.
IRS found Verret, Cottey, and Hospital’s Controller and Chief Financial Officer to be liable as responsible persons. Cottey settled with IRS. Verret paid the assessment and sought a refund in the district court.
District court’s decision. The district court concluded that Verret clearly qualified as a responsible person under Code Sec. 6672. The by-laws clearly stated that the Board of Trustees had the final responsibility for Hospital’s administrative activities and professional services and for its operation. The uncontested facts showed that Verret: (1) served approximately 26 years in various capacities on Hospital’s Board; (2) held the position of Board Chairman during the relevant periods; (3) negotiated and personally guaranteed a $500,000 working capital loan for Hospital; (5) took steps to ensure payment of delinquent withholding taxes on the previous occasion after Cottey had failed to do so; (6) actively participated in recruiting physicians and developing a new source of revenue for Hospital; (7) conversed with Cottey on almost a daily basis; (8) signed Hospital’s Form 990 for ’99 and 2000; (9) possessed, along with the Board, the authority to hire and fire high level employees; and (10) was a signatory on all of Hospital’s checking accounts.
The district court also concluded that his failure to pay taxes was willful. If Verret didn’t know of Cottey’s failure to pay the tax liability during the third and fourth quarters of 2001, it was because he chose not to know. He could have exercised substantial control over the decision-making process to ensure that Hospital paid its taxes, but instead he chose not to.
Further, since the chairman wasn’t serving solely in an honorary capacity, the district court found that he didn’t qualify for the protection given voluntary board members under Code Sec. 6672(e).
Appellate court. The Fifth Circuit, affirming the district court, found that Verret was a “responsible person” under Code Sec. 6672. He became aware in November 2001 that the Hospital’s payroll withholding taxes for the third and fourth quarters of 2001 were outstanding and unpaid. He was not only Chairman of the Hospital’s Board of Directors but was also an essentially salaried and active paid consultant of the Hospital at a rate of $70,000 to $80,000 a year. He continued to receive this compensation and Hospital continued to pay its employees and creditors while he was aware that the Hospital’s third and fourth quarter withholding taxes were still outstanding. The Court noted that Verret didn’t argue on appeal that he was exempted from liability under Code Sec. 6672(e).
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