The Tax Court held that the wife of the partial owner of a corporation that owned a restaurant, who frequently signed payroll checks for the restaurant but otherwise had little or no involvement with the restaurant's operations, was not a responsible person for purposes of the Sec. 6672 trust fund penalty.
Christina Fitzpatrick was the wife of Edward Fitzpatrick. During the time at issue in her case, her primary responsibility was to take care of her son, who suffered from a rare metabolic disorder called citrullinemia and as a result was severely disabled. Because her son needed full-time care and supervision, Mrs. Fitzpatrick could not devote a significant amount of time to any business activities.
In 2004, Mr. Fitzpatrick and James Stamps decided to purchase franchise rights for Jacksonville, Fla., for a chain restaurant/wine bar called The Grape. The two were to be equal co-owners of the venture, with Stamps overseeing the business operations and Fitzgerald being a silent partner. The duo formed a corporation, Dey Corp. Inc., through which to run their restaurant.
Mrs. Fitzpatrick was not an owner of the corporation and generally had no involvement in the operations of The Grape. However, while the business was in the preopening stage, because Stamps and Mr. Fitzpatrick were out of town for training at The Grape franchise headquarters, Mrs. Fitzpatrick set up an account with a payroll service and opened a corporate bank account for Dey Corp.
Stamps oversaw the day-to-day operations of The Grape, but due to other work commitments in Trinidad, he was frequently out of town. At these times, the on-site manager of the restaurant was its general manager, Kris Chislett, with whom Stamps had constant contact when he was not in Jacksonville.
The payroll service delivered paychecks for The Grape's employees on Tuesday. During most of the time at issue, a courier delivered the paychecks to the Fitzpatricks' home, and they were picked up by an employee of The Grape or delivered to the restaurant by Mrs. Fitzpatrick. She was not responsible for and did not review the statements sent with the checks by the payroll service. Because Chislett did not work on Tuesdays, Mrs. Fitzpatrick also often signed the checks. Mrs. Fitzpatrick's other duties for The Grape included relaying electronic bank account balances to Chislett, delivering the business's mail that was sent to her private mailbox, and, at the behest of Stamps or Mr. Fitzpatrick, transferring funds to and from the corporate bank account and issuing checks for some of the business's recurring monthly expenses. However, she made no operational decisions for the business and was not involved in the operations of The Grape.
After opening, The Grape quickly soured and was losing money within a year. Chislett made the situation worse by spending large amounts of money for entertainment that did not increase sales. Over a period of years, the situation deteriorated, checks began to bounce, and eventually the business ceased paying its employment taxes and filing Forms 941, Employer's Quarterly Federal Tax Return, a fact of which Mrs. Fitzpatrick was not aware. After running The Grape for six years, Dey Corp. was forced to turn over its operations to the franchiser in 2011.
Two months after Dey Corp. stopped operating The Grape, the IRS began an investigation of the corporation's unpaid payroll taxes. The IRS notified the Fitzpatricks about the investigation, which was the first time they became aware of the payroll tax issues. After conducting her investigation, the IRS agent recommended assessing trust fund recovery penalties against Stamps, Chislett, and Mrs. Fitzpatrick.
The IRS issued proposed assessments against the three, but Stamps and Chislett sucessfully administratively contested the assessments. However, Mrs. Fitzpatrick did not receive her proposed assessment letter and thus did not contest the penalties administratively. The IRS subsequently assessed trust fund recovery penalties against Mrs. Fitzpatrick and filed a lien against her. After fruitlessly challenging the underlying liability in a Collection Due Process hearing, Mrs. Fitzpatrick filed a petition in Tax Court.
The Tax Court's Decision
The Tax Court held that Mrs. Fitzpatrick was not liable for the trust fund recovery penalties. The court found that the evidence showed that her role with Dey Corp. was ministerial in nature and that she had no decision-making authority for the corporation's financial affairs. Thus, she was not a responsible person for purposes of the Sec. 6672 trust fund recovery penalty.
Under Sec. 6672, "[a]ny person required to collect, truthfully account for, and pay over any [trust fund tax] who willfully fails to collect such tax, or truthfully account for and pay over such tax . . . shall . . . be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over." A person for these purposes is a person (who is referred to as a responsible person) as defined in Sec. 6671(b). Therefore, two elements must be met for the IRS to impose the trust fund recovery penalty against an individual: (1) He or she is a responsible person, and (2) he or she fails to collect, account for, or pay over the withheld tax.
Under Sec. 6671(b), a responsible person "includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs." Citing Mazo, 591 F.2d 1151 (5th Cir. 1979), the Tax Court stated that responsibility in this context is a matter of status, duty, and authority.
The IRS argued that Mrs. Fitzpatrick possessed all the recognized indicia of responsibility with respect to Dey Corp. and was therefore a responsible person. The IRS also asserted that Mrs. Fitzpatrick exercised substantial financial control over Dey Corp. and that at all times she 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.
Mrs. Fitzpatrick argued that she lacked decision-making authority and did not exercise significant control over Dey Corp.'s affairs. Despite her signatory authority, she asserted she was not a responsible person because she had a limited role in the business's payroll process and merely signed payroll checks for the convenience of the corporation. She claimed that Stamps and Chislett were responsible for running the corporation day to day and that her duties were ministerial.
With regard to whether Mrs. Fitzpatrick was a responsible person, the Tax Court averred that in determining an individual's status, duty, and authority, the test is one of substance and is not a mechanical application of a list of factors. In addition, the test must focus on actual control, not trivial duties performed by the individual.
After reviewing the documentary evidence and the credible testimony it had heard, the court determined that Mrs. Fitzpatrick lacked the authority to control the financial affairs of the business or exercise any significant authority over the disbursement of Dey Corp.'s funds and the duties. Rather, it found that Stamps and Chislett exercised control over the corporation's financial affairs and Mrs. Fitzpatrick served only in a support function.
The IRS attempted to characterize Mrs. Fitzpatrick as a savvy business person whose actions and prior work experience made her a de facto director. On the basis of the record, the Tax Court rejected this idea, stating that it was clear that Mrs. Fitzpatrick was not an officer, director, owner, or employee of the Dey Corp. at any time. The court noted that she had no day-to-day involvement in the affairs of The Grape, was at the restaurant only for short periods of time, had no authority over hiring and firing, and wrote and signed checks for the convenience of Dey Corp. Furthermore, the evidence showed that she spent most of her time caring for her disabled son and was in poor health.
With respect to the payroll, the court observed that even though Mrs. Fitzpatrick signed most of the payroll checks prepared by the payroll service, the duty was ministerial and done only for the convenience of Dey Corp. She had no duty to, and did not, oversee the employees, collect payroll information, compile payroll information, or remit the payroll information to the payroll service on behalf of the corporation. Rather, Chislett was responsible for carrying out those duties.
Both Stamps and Chislett testified at trial in the case, and the Tax Court makes it clear that it did not find either man's testimony credible. As noted above, although both men were issued proposed assessments for trust fund recovery penalties, they were let off the hook by the IRS—Stamps was granted an abatement and Chislett was granted relief by the IRS Office of Appeals. It is not exactly clear why the IRS chose to go easy on the people responsible for the unpaid trust fund taxes and to instead go after Mrs. Fitzpatrick. However, the court in a footnote stated that it did not believe the IRS revenue officer on the case conducted a thorough investigation and was actively misled by Chislett about Mrs. Fitzpatrick's role in the business.
Fitzpatrick, T.C. Memo. 2016-199