Business owner responsible for employment taxes despite CPA embezzlement

Scott E. Vincent is the founding member of Vincent Law, LLC in Kansas City.

In Taylor v. Commissioner,¹ the tax court rejected the taxpayer’s argument that he was not a responsible person because of his learning disability with respect to mathematics and the company’s CPA committing embezzlement. The court focused on whether the taxpayer personally took responsibility for paying the employment taxes and his authority to control payment of the tax obligations rather than the taxpayer’s personal abilities.

Background 

The tax court noted that Rodney Taylor has degrees in political science, speech, and theater; is fluent in several languages; and has a management degree in international relations. He had previously worked for the Mississippi Economic Development Authority, a management consulting firm, and another business. In 1993, he formed Taylor & Co., Inc. 

During the periods in question, Taylor was CEO and sole shareholder of Taylor & Co., Inc., with authority to hire and fire employees and control Taylor & Co., Inc.’s bank accounts. According to Taylor, his professional success was attributable to his interpersonal skills, and he has a learning disability with respect to mathematics. He delegated a variety of business and personal financial responsibilities to employees and accountants, including a certified public accountant named Robert Gard. Taylor hired Gard to manage Taylor & Co., Inc.’s bookkeeping and accounting matters. 

Over several years, Gard embezzled $1 million to $2 million from Taylor & Co., Inc. The embezzlement was discovered in August 2013 and allegedly included funds that were allocated for some of the unpaid employment taxes in question. Taylor sued Gard and a bank that was used for the embezzlement scheme, and Taylor ultimately collected settlements from Gard’s insurance company and the bank. However, the recoveries were not used to pay any of the outstanding employment tax liabilities. Taylor used a portion of the settlement proceeds to pay personal expenses, and he paid himself a bonus in December 2013. In January 2014, Taylor transferred funds from Taylor & Co., Inc. bank accounts to a newly organized business entity. 

Code § 6672 provides a Trust Fund Recovery Penalty (TFRP) that can be assessed against any “responsible person” who willfully fails to collect, account for, and remit the “trust fund” portion of employment taxes that are withheld from payments to employees. After determining that Taylor & Co., Inc. had failed to collect and/or remit employment taxes, the IRS assessed a TFRP against Taylor as a responsible person with respect to Taylor & Co., Inc.’s trust fund employment taxes. 

After an unsuccessful administrative appeal, Taylor sought relief from the TFRP in tax court. Taylor argued he was not a responsible person under § 6672(a) because of his limited ability to comprehend mathematics. He further argued that Taylor & Co., Inc.’s failure to pay employment taxes was due to Gard’s embezzlement, that he did not willfully fail to pay the employment taxes, and that he had reasonable cause for failing to pay the employment taxes. 

Tax court opinion 

The tax court addressed the applicability of the TFRP under Code § 6672 in the context of Taylor’s specific factual circumstances and arguments. 

The court noted a responsible person is any person required to collect, account for, and pay over withheld taxes. Citing prior cases, the court explained the responsible person determination is a matter of status, duty, and authority rather than knowledge. The court found that an essential question is whether Taylor had sufficient control over Taylor & Co., Inc. affairs to ensure payment of the employment taxes. Key indicia of this control include holding corporate office, control over financial affairs, authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees. 

During the periods in question, the court found that Taylor clearly had and exercised control over Taylor & Co., Inc.’s affairs. He was Taylor & Co., Inc.’s CEO and sole shareholder, and he controlled Taylor & Co., Inc.’s financial affairs, including disbursing the company funds to himself and to a newly formed business entity. He also exercised authority to hire and fire employees, delegate tasks to employees, and pursue Taylor & Co., Inc.’s lawsuit against Gard for embezzlement. 

As noted, Taylor argued he was not a responsible person because he had limited ability to comprehend mathematical concepts and delegated accounting and tax matters to Gard, whose embezzlement resulted in Taylor & Co., Inc.’s failure to pay employment taxes. The court rejected this argument, finding the focus in the responsible person determination was Taylor’s authority to control the company’s payment of employment taxes, not whether he personally took responsibility for that duty. 

Taylor also argued he was not a responsible person because he did not willfully fail to pay Taylor & Co., Inc.’s employment taxes. The court noted that willfulness for purposes of § 6672 is indicated if Taylor used Taylor & Co., Inc. funds for purposes other than payment of employment taxes. Under this standard, the court found that Taylor’s failure to pay employment taxes was willful. Taylor was clearly aware of the unpaid employment taxes by September 2013 when Taylor & Co., Inc. sued Gard for embezzlement of funds that were allocated for employment taxes. However, after this date, Taylor transferred funds to a newly formed company and paid himself a substantial bonus. Taylor also used proceeds from the embezzlement lawsuits for purposes other than paying the employment taxes. 

Finally, the tax court rejected Taylor’s argument that he had reasonable cause for his failure to satisfy Taylor & Co., Inc.’s employment tax obligations. Citing prior case law, the court found that a reasonable cause defense cannot be asserted by a responsible person who knew withholding taxes were due and consciously used corporate funds to pay creditors other than the government.

Based on these findings, the tax court held that Taylor was a responsible person for purposes of the § 6672 Trust Fund Recovery Penalty. The court also found that the IRS satisfied the notice requirements for assessment of the TFRP penalty against Taylor. 

Conclusion 

The Taylor case is a good outline of the requirements for assessment of withheld employment taxes against a responsible person under Code § 6672. The case demonstrates the difficulty in arguing for relief for business owners and executives, even in sympathetic circumstances like Taylor’s learning deficiency and his CPA’s embezzlement. Finally, the case emphasizes the importance of prioritizing payment of employment tax liabilities once they arise, as Taylor’s uses of corporate funds for purposes other than payment of the withheld taxes clearly influenced the finding that he was a responsible person.

Endnotes

1 T.C. Memo. 2024-33.