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existence of significant, as opposed to absolute, control of the corporation's finances ... It is basically a factual inquiry.
Generally, such a person is one "with ultimate authority over expenditure of funds since such a person can fairly be said
to be responsible for the corporation's failure to pay over its taxes, " or more explicitly, one who has "Authority to
direct payment of creditors."
Responsibility for purposes of section 6672 is a matter of status, duty, and authority.... It is not necessary that an
individual have the final word as to which creditors should be paid in order to be subject to liability under this section.
Rather, it is sufficient that the person have significant control over the disbursement of funds.
For example, E.A. Cella (3), the treasurer of a bankrupt corporation, was personally liable to the government for
withheld taxes that were diverted to pay other creditors. The treasurer breached his duty to hold such collected taxes in
trust until they were paid to the government. Although the treasurer could not sign checks in excess of $1,000 without
the signature of another officer, such a limitation on his authority did not protect him from liability as the person
responsible for payment of taxes.
In another case (1), the taxpayer was not a responsible person during the entire quarter in which the corporation failed
to pay withheld taxes, but he had become a responsible person by the end of the quarter and, therefore, where he
preferred creditors (willfulness) over the government when the corporation had sufficient funds at the end of the quarter
to pay the taxes, he was liable for the unpaid taxes for the entire quarter.
It is also possible to be considered as a responsible person for the trust fund debt of a purchased corporation as seen in a
current case. In McCorvey vs. United States (8), Brian McCorvey acquired the assets of Atlanta Tape & Video, Inc. , in
October 1984. As president, he had signature authority on corporate accounts and was in charge of day-to-day
operations. He signed most of the corporation's checks and was responsible for collecting, accounting for, and paying
over withholding taxes. Prior to McCorvey's assumption of control, the company accrued
$7,552 in unpaid withholding liabilities. During McCorvey's tenure, Atlanta Tape incurred $14,310 in withholding tax
liability and paid more than $14,310 to the government. However, McCorvey did not designate how to apply the
payments, so the IRS first applied the payments to the previous unpaid liability. The IRS assessed responsible person
penalties against McCorvey. He filed for bankruptcy and sued for a determination of his tax liability.
Bankruptcy Judge Cotton held McCorvey liable for the penalties. Although the court did not list any factors which
showed willfulness, it dismissed as "without merit" McCorvey's argument that because Atlanta Tape paid all the
withholding liabilities that accrued during McCorvey's tenure that his failure to pay could not be characterized as
willful.
UNRELATED PARTY PENALTY
Furthermore, the 100% penalty may be asserted against an unrelated party, such as a bank, surety, or other third party
who has assumed control over the taxpayer's business and financial affairs.
In Clouse vs. U. S. (2), a stockholder and principal creditor of a corporation who was fully involved in the operations of
the corporation and who had knowledge of its precarious financial condition was found to be a responsible person and
thus, was held personally liable for unpaid withholding taxes. Clouse was one of the three original corporation's
directors, officers and shareholders of Octra Inc. (5). During the period involved, Clouse was authorized to sign checks
on behalf of Octra, Inc. and in fact exercised that authority. He also had the authority to hire and fire employees.
Clouse was also involved in the determination of which creditors should be paid. He prepared creditor's lists and took
part in determining priorities of payment. Based on these facts the court held that Clouse was a person responsible for
collecting, accounting for truthfully or paying over to the United States the withheld income and social security taxes
for Octra, Inc.
Clouse was willful throughout the period involved because he was aware that the payroll taxes were unpaid and he
preferred other creditors over the United States. He signed checks made payable to other creditors to keep Octra
operating and even preferred himself by taking rent, salary, and loan repayments rather than paying the United States.
Thus, Clouse was held liable for the 100 percent penalty for the failure to pay some $27,000 in withholding taxes for
the first and second quarters of 1980.
