A recent Tax Court decision was reported that may be of interest to individuals potentially dealing with tax litigation. J. Frank Best, Certified Public Accountant and United States Tax Court Practitioner, works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.
Wife Who Spent Time Caring for Disabled Son Was Not a Responsible Person for Payroll Tax Purposes
The Tax Court held in Fitzpatrick v. Comm’r, T.C. Memo. 2016-199 that the wife of a silent owner of a restaurant and wine bar was not a responsible person and was not liable for trust fund recovery penalties with respect to unpaid employment taxes. The court noted that the woman spent most of her time taking care of her severely disabled son and her role at the restaurant was ministerial.
In 2004, James Stamps and Edward Fitzpatrick purchased the franchise rights to a wine bar and restaurant in Jacksonville, Florida, called the Grape. They agreed to be equal partners with James being the president and managing partner overseeing the business operations while Edward would be a silent partner and passive investor with some executive authority but no day-to-day duties.
Edward’s wife, Christina, has a high school education had no ownership interest in the business. Her primary responsibility during the years at issue was to serve as caregiver to her disabled son, Evan, who suffers from a rare metabolic disorder called citrullinemia. As a result of the disorder, Evan has severe autism, cerebral palsy, and limited mobility. He is required to take over 50 pills a day and cannot be left for any significant amount of time without adult supervision. Because of the substantial amount of attention Evan required, Christina was unable to devote significant effort to any business enterprise.
James and Edward formed Dey Corp., Inc. Dey Corp. purchased and operated the Grape franchise. James was the only person listed in the articles of incorporation as an officer and director. Shortly after James and Edward began engaging in preliminary business matters, James was unexpectedly hired for a short-term job at a beverage distributor in Puerto Rico. Therefore most of the preopening responsibilities fell upon Edward. Because of his busy schedule, Edward directed Christina to carry out some of those responsibilities. She opened bank accounts and engaged the services of Paychex, a payroll company. One of the services provided by Paychex was the payment of payroll taxes and electronically filing Forms 941, Employer’s Quarterly Federal Tax Return.
The Grape opened in March 2005 and was run primarily by James and a general manager he hired, Kris Chislett. Kris was responsible for carrying out the day-to-day business operations and was Paychex’s main contact during the periods at issue, and he maintained control over the payroll process.
Christina did not have a significant role at the Grape. Her main responsibilities were delivering checks, relaying electronic bank account balances to Kris, and delivering the business’ mail that was sent to her private mailbox. She occasionally transferred funds to and from the corporate bank account at the direction of James or her husband and sometimes issued checks at their direction for some of the business’ recurring monthly expenses. Christina made no operational decisions and did not have the background, education, or training to hold a management position at the Grape. Because no one was usually at Grape on the Tuesday morning the PayChex payroll package was delivered, Paychex started delivering the Grape’s payroll package to Christina and Edward’s home. It was usually necessary for Christina to sign the checks because Tuesday was Kris’s day off and there was no one else onsite available to sign the payroll checks. Christina was not responsible for and did not review statements included in the Paychex package.
Within a year of opening, the Grape was losing money. In 2008, Paychex attempts to withdraw money from the Dey Corp bank account to cover payroll taxes were rejected. Paychex continued to produce payroll checks and reference copies of Forms 941 and debit the funds from the Dey Corp bank account. However, it did not debit the payroll tax portion from the account, make payroll deposits on the business’ behalf, or file Forms 941. Christina was unaware these services had been canceled.
The Grape closed in 2011 and shortly thereafter, an IRS investigator went to the office of Dey Corp.’s CPA to discuss unpaid payroll taxes from the third quarter of 2008 through the closing of the restaurant. The CPA contacted Edward and Christina and notified them of the unpaid payroll taxes. This was the first time the couple had knowledge that federal payroll deposits had not been made for various quarters and that Forms 941 remained unfiled.
After conducting an investigation, an IRS officer recommended assessing trust fund recovery penalties (TFRPs) under Code Sec. 6672 against James, Kris, and Christina. Both James and Kris successfully administratively contested the assessments. James filed a request for abatement which was granted and Kris was granted relief by the IRS Office of Appeals. Christina challenged the liabilities during her CDP hearing but the IRS found her to be liable for the penalties which added up to over $150,000. Christina then took her case to the Tax Court.
Before the Tax Court, the IRS argued that Christina exercised substantial financial control over Dey Corp. and that at all times was a de facto officer of the corporation because she opened two corporate bank accounts, had signatory authority on both accounts, and signed checks on behalf of the corporation.
Christina argued that she lacked decision-making authority and did not exercise significant control over corporate affairs. She further asserted that despite her signatory authority, she was not a responsible person within the meaning of Code Sec. 6672 because she had a limited role in the business’ payroll process and merely signed payroll checks for the convenience of the corporation. According to Christina, James and Kris were responsible for running the corporation day to day and her duties were ministerial.
The Tax Court held that Christina was not a responsible person and thus was not liable for the TFRPs assessed against her. The court began by noting that liability for a TFRP is imposed only on (1) a responsible person who (2) willfully fails to collect, account for, or pay over the withheld tax. The court also commented on the credibility of the nine witnesses called to testify. The court found Christina and Edward, as well as a couple other witnesses to be credible. However, the court did not find the testimony of James, Kris, and another individual to be credible. The court also had little confidence in any of the documents the IRS obtained from Kris. The court found that the preponderance of the evidence showed that Christina’s role was ministerial and that she lacked decision-making authority.
The court also noted that Christina spent most of her time taking care of her disabled son and, that as a result of having to constantly lift Evan, she developed spinal stenosis which required periodic injections and epidurals. Consequently, she usually visited the corporation only once a week, on Tuesdays, for less than an hour each time.
Finally, the court said it was puzzled by the fact that James, the president of the corporation and a hands-on owner, and Kris, the day to-day manager, successfully evaded in the administrative phase any personal liability for the TFRPs.