Trust Fund Recovery Penalties for Preferential Payments to Creditors

In Newbill v. U.S., (4th Cir), a construction company ran into financial problems and its creditors assumed joint control of company assets under a surety agreement.  The construction company set aside payroll taxes, and the CEO was aware that its creditors were using the withholdings to pay company debts instead of the IRS.  Despite his knowledge of these facts, the CEO co-signed the company checks anyway with the creditors.  He argued that he did not have unilateral authority to sign checks and basically went along with the way the creditors directed the checks to be issued.  The company went out of business and instituted bankruptcy proceedings.

The 4th Circuit Court of Appeals upheld the IRS' assessment of the trust fund recovery penalty against the CEO personally to the tune of about $100,000 because he was a "responsible person," under the meaning of the tax code, who wilfully failed to pay the IRS payroll withholdings.  The CEO should have used all unencumbered coporate funds to pay the IRS.  While the CEO did not have unilateral authority to issue checks, neither did the creditor.  The court held that the CEO should have withheld his signature from the checks in protest to these preferential payments to non-governmental creditors.  It is unclear from the facts of the case whether the creditor was also assessed trust fund penalties.  To remember how "the IRS" thinks about your money, simply take out the space between the two words.  When you face tax problems, unencumbered funds are always "theIRS."

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