Wednesday, July 18, 2012
Tarpoff, Payroll Taxes and Responsible Person Penalties
John Tarpoff was the head cattle buyer at Gateway Beef, LLC (Gateway). Gateway was formed in 2003 by Gateway Beef Cooperative and Brach’s Glatt Meat Markets (Glatt). Glatt was owned by Sam Brach (Brach). The co-op sold cattle to Gateway, which then produced kosher beef for Glatt.
In addition to buying cattle, Tarpoff did the following:
· Filed Gateway’s articles of incorporation, signing as “organizer’
· Was a signatory on two Gateway checking accounts
o When opening the accounts, he presented company resolutions which he signed above lines that said “secretary” or “member.”
· With the resolutions he could open accounts and withdraw funds
Brach was the wallet and financed Gateway. The bookkeeper, Marsha Caughron (Marsha), handled accounts receivable and payable, payroll, and some sales. She received all the mail, including bills and any notices from the IRS. She would print checks, attach the bills and initially send them to Brach. He would sign some, sometimes not all, and send them back. Brach was pretty strict that nothing could be paid without his permission.
Procedures changed and Tarpoff started signing all Gateway checks from January to May 2004 and most checks after that through July 2004. Once again, he signed nothing without Brach’s permission. Some of the checks he signed were for delinquent 2003 taxes, although he could not easily recognize them as such. He would review invoices to be sure they matched the check, but that was pretty much all. He did not even know whether Gateway had sufficient funds to cash the checks. Remember: he was the head cattle buyer, not the accountant.
Tarpoff explained to the Court:
Whatever checks were given to me, I would look at them, glance at them and sign them.”
He could not recall ever refusing to write or sign a check.
Gateway was a shooting star, living a short life and burning through a lot of money. At some point, Brach stopped paying the payroll taxes. The bookkeeper, Marsha, would calculate the taxes, attach checks and send them to Brach. Brach would not sign or return the checks. When she pressed, he told her to speak with his accountant, Michelle Weiss. Brach also instructed Marsha to fax all IRS notices to Michelle. Tarpoff was unaware of these faxes.
Tarpoff wrote at least 10 checks that bounced. One (for approximately $49,000) must have been pretty important, as he tried to get it paid. Meeting with resistance, he paid it out of personal funds. He said this was the only bad check he was aware of. He was never repaid his $49,000 and ultimately had to refinance his home because of it.
Gateway finally folded in July 2004. Tarpoff left. After learning that some vendors had not been paid, he suspected shenanigans with the payroll taxes. He was informed that Brach had not paid the taxes and the bookkeeper (Marsha) told him she had been receiving IRS notices. That was the first he learned of the matter.
The IRS came in. They wanted the payroll taxes. They also wanted almost $67,000 in penalties from Tarpoff for quarters March and June, 2004.
The IRS said that Tarpoff was responsible because:
· He held himself out as secretary or manager.
· He attended board of directors meetings.
· He was the organizer of Gateway Beef, LLC.
· He could open accounts and withdraw funds.
· He signed over 1,800 checks.
· He could hire and fire employees.
· He could refuse to sign checks.
· He invested approximately $50,000.
· He knew the government had not been paid.
· Even if he did not know the government had not been paid, he could have deduced it. He had paid payroll taxes in the past (at another company), and he signed enough checks to realize that all taxes had not been remitted.
· The company was losing money; he was in a position to know and review the books and records to be sure taxes were being paid.
· He used monies to pay creditors ahead of the government
The Court held the following:
· Other than puffery, the only evidence of officer status was preprinted checks. He did not write any business title himself.
· He never attended a board of directors meeting.
· He only looked at the checks and invoices to see that they matched. He could not pay anything without Brach’s permission.
· He could interview prospective employees and he handled relations with the union, but he could not hire or fire without Brach’s permission.
· Perhaps he could have refused to write checks, but Brach would have signed instead. Brach had previously signed checks.
· He did not “invest” $50,000. To the contrary, he had so little control he could not get his own money back.
· He did not know about the payroll issues and did not receive IRS notices. They went instead to the bookkeeper and then to Brach’s accountant.
· Saying that he knew in general about an employer’s responsibilities over payroll taxes is not the same as saying he willfully and consciously failed to remit Gateway taxes.
· There was no evidence he knew the company was losing money, and he did not have authority to look at the company books.
· He paid creditors ahead of the government because he did not know about the payroll taxes until after he left Gateway.
Tarpoff finally won, but in Court and after much time and expense.
I am curious why the IRS did not go after Brach. From reading the case it seemed quite clear that he had more control than Tarpoff. The IRS thought they saw the fact pattern they like: looks like an officer, makes business decisions, pays bills, writes checks, decides who gets paid, “in the loop” enough to know that the IRS is getting ignored.
From what I see Tarpoff was in a terrible position. He was associated with a money pit, had responsibility but no authority, was intimidated by a boss (Brach), reached into his own wallet (I can only imagine he was preserving his business reputation) and lost the money, and at the end was hounded by the IRS. Frankly, I am cynical about Brach’s behavior in this matter, as I sense that Tarpoff was set-up as a “fall guy.”
If there was a truck or dog or past girlfriend in the story, one could write a country song.
Seriously, be very careful if you have some of the “sexy” fact patterns the IRS likes and you are somehow associated with payroll at a struggling company. The IRS has a track record on this issue. You do not want to run on this track. In some areas you can work with the IRS. This is not one of them.