Responsible? Not My Call.

A recent trial court opinion from the Court of Federal Claims, Salzillo v. U.S. goes further than most other reported cases that I am familiar with in absolving an employee who exercised check signing authority from liability under Section 6672.

Salzillo was the Vice President of Finance and Chief Financial Officer of Star Food Processing, Inc. He was at all relevant times fully cognizant of all elements of the financial affairs of Star, including the fact that Star had failed to pay its federal payroll withholding. The IRS had assessed a Section 6672 "responsible person" penalty against Salzillo in the amount of $554,000.

Salzillo's principal contention was that, notwithstanding the fact that he had regularly made checks payable to suppliers and endorsed those checks in his capacity as the CFO of Star, he had no actual discretion to direct payments. In particular, he related an incident where he had paid employee withholding but his decision was countermanded by the CEO of the Company, Robbins. On that occasion, when Robbins learned that a supplier could not be paid because Salzillo had paid the withholding, "Robbins became irate and ordered Mr. Salzillo to wire the money to the meat supplier instead. He admonished Mr. Salzillo never to write a check to the IRS again." Salzillo's immediate subordinate testified that if Salzillo had "made any payments other than those directed to production related costs, Mr. Robbins would have threatened to fire him, but, given the company's dire circumstances, probably would not have done so."

The Court, while recognizing that virtually all company checks in the relevant time period had been indorsed by Salzillo, framed the issue as being whether Salzillo could have "by writing and mailing . . .a check [for the withholding], actually have transferred funds to the IRS in payment of the delinquent payroll taxes?" The Court found that, as a practical matter, he had no power to make payments to the Service.

In this regard, the Court made it clear that merely proving that he had been instructed not to pay the withholding would not have been sufficient to escape the Section 6672 net. Rather, it was the fact that Robbins:

so thoroughly controlled the extraordinarily limited finances of the company as to make it virtually impossible for Mr. Salzillo to send funds to the IRS without his actions being immediately detected and actual payment averted. Thus, the record reveals that, long before Mr. Salzillo became the so-called "chief financial officer," Mr. Robbins was constantly apprised of the company's precarious cash position, and that, as day-to-day needs arose, he allocated the scarcely available funds to maintain and maximize production. As prime indication of the depth and effectiveness of his controls, the record reveals – and IRS records confirm –- that when Mr. Salzillo attempted to pay the IRS $50,000 without obtaining Mr. Robbins' permission, the latter quickly detected the unauthorized use of funds and shifted money from the account in question to prevent the check drafted by Mr. Salzillo from being cashed by the IRS. Given the pervasive nature of Mr. Robbins' control, plaintiff had no reason to believe that subsequent attempts to pay the IRS would prove anything more than a hollow gesture.

The opinion is not listed on Court of Federal Claims' website either as a reported or an unreported opinion. However, I would be surprised if the Service did not appeal the case since it appears to run counter to most other reported decisions in this area. I also believe that, in the main, decisions in this area have been too automatic and reflexive. The true issue should always be the issue that the Court focused on here, namely, whether the taxpayer before the Court could have made a difference in whether the withholding was actually paid. If he or she was, effectively, powerless to act, there should be no penalty imposed under Section 6672. This should be the result even if the individual has check signing authority and actually directs payments to other creditors. The touchstone is whether, when the individual makes those payments to the creditors, he or she has the practical option to direct that the payments go to the taxing authority. If the individual lacks that power, there should be no penalty imposed.

Should the appellate court rule in Salzillo's favor, the practical effect would be enormous since the jurisdiction of the Federal Claims Court can be invoked in any Section 6672 contest once the taxpayer had made a partial payment of the tax due. The opinion represents a fairly taxpayer-friendly application of Section 6672 (which is to say a fairly restrictive interpretation of what constitutes a "responsible person" under the statute) and would likely attract to the Claims Court a fair portion of the contested claims in this area.