Academic journal article Journal of Accountancy

What Constitutes a Responsible Person?

Academic journal article Journal of Accountancy

What Constitutes a Responsible Person?

Article excerpt

IRC section 6672 imposes a penalty equal to the total amount of any federal payroll (trust fund) tax any person willfully evades, fails to collect or does not account for and pays over. In view of the section's scope, the courts broadly interpret "any person" to include officers, employees, partners and others with responsibility for the financial affairs of the business. In interpreting this section, the courts focus on two key elements that drive the penalty: the determination of who is a "responsible person" and whether or not he or she acted willfully. CPAs must properly advise employers and clients about the implications of section 6672.

A recent college graduate, Christopher Lyon was president, secretary-treasurer and sole director of the North Branch Coal Co. from January 1996 until North Branch ceased operations in spring 1997. He received a salary and commission based on the amount of coal the company mined. North Branch's bylaws stipulated the president was responsible for supervising its affairs and "shall sign or counter-sign all contracts and other instruments of the corporation."

In March 1999 the IRS assessed Lyon for more than $338,000 in trust fund taxes North Branch owed. After making a $500 payment, Lyon sued for a partial refund in a U.S. district court, asserting he was not the responsible party under section 6672. Following cross-motions, the district court granted summary judgment to Lyon after concluding he lacked actual authority and thus was not a responsible party. The IRS appealed.

Result. For the IRS. Christopher Lyon claimed he had assumed the various roles in the corporation at his father's direction. The father testified his son had lacked authority over general decision making and management of the company and actually had spent little time on corporate affairs. He did, however, deliver payrolls; accept the resignation of and reappoint a vice-president; sign the corporate annual reports and tax returns, including payroll returns; and execute various documents, including a credit agreement with a bank. Christopher Lyon also had been authorized to conduct all of North Branch's banking business. …

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