Can you be on the hook for unpaid payroll taxes if you are a volunteer director for a nonprofit? What if you do not have authority to write checks?
Let’s take a look at the recent (March 8, 2012) U.S. District Court decision Bunch v Commissioner.
Perceptions, Inc. was a Tennessee nonprofit formed in 2004, Perceptions provided supportive living service for developmentally disabled clients. The incorporators and initial directors were replaced by Roy Don Bunch (Bunch) and two others. Documents filed with Tennessee listed Bunch as the chairman of the board. He was also the registered agent.
Bunch was benevolent with Perceptions. He allowed it to use one of his properties rent-free. He also made start-up loans and – later – bridge loans when Perceptions did not have sufficient money to pay its bills. His generosity was not insignificant. Between February, 2005 and August, 2007, Bunch made loans of approximately $648,000.
When Perceptions had money, it would repay him. Between 2006 and 2007 Bunch was repaid approximately $558,000.
Bunch never received a paycheck. He never hired or fired employees. He never asked to see the books. He never asked if taxes were being paid. He did speak up in December, 2006 when he learned that Perceptions was thinking about employee raises. His question was reasonable: we are almost bankrupt. Why are we talking about raises? No raises were given, but Bunch’s hopes for a Congressional career were jettisoned.
In December, 2006 Bunch learned that quarter 3, 2006 employment taxes were unpaid. He loaned money to Perceptions to pay these taxes.
In June, 2007 he finally gave up and took over financial responsibility, including writing checks. He was hoping to make Perceptions a viable business. Payroll was met, providers were paid and Bunch was repaid on his loans. Perceptions however did not pay its current or back employment taxes.
The IRS finally shows up wanting to know what is going on. In March, 2008 the IRS decides that Bunch is a “responsible person” for the second and fourth quarters of 2006 and all of 2007. You do not want to be a “responsible person,” as this means the IRS is coming after you. The IRS wanted almost $194,000 from Bunch.
Bunch was an inquisitive sort. His attorney asked the IRS for their basis in concluding that Bunch was a “responsible person.” The IRS sent the attorney copies of an interview questionnaire but no reasoning or other basis for their determination.
Bunch filed an appeal on April 25, 2008.
Summer comes. Fall comes. Winter comes. In January, 2009 Bunch received a letter from IRS Appeals. They want affidavits and documents, which he provides. What he did not receive, however, is the basis on which the IRS concluded he was a responsible person.
Spring comes. Summer comes. In September the IRS tells him to pay the penalties. They again fail to tell him why.
In October, 2009 Bunch filed a Request for Abatement. He attaches and documents everything.
The IRS tells him his claim would open for review on January 10, 2010. Two weeks later – January 25 – Bunch receives the IRS’ denial of his claim. Bunch can almost hear the tires squealing as the IRSmobile speeds away. The IRS still failed to tell him why he was responsible.
On February 9, 2010, Bunch sends the IRS almost $194,000. He then files a court motion. He wants his money back. And to find out why he is responsible.
In court Bunch admits that he was a responsible person as of June 22, 2007, when he took over financial responsibility for Perceptions. He disagreed that he was a responsible person before that date. He had a point. One of the key indicators is whether the person in question had discretion over cash disbursements, including signature authority. A bookkeeper who pays what he/she is instructed to pay would not be a responsible person, whereas his/her boss could be.
The court disagreed with Bunch. It did not matter that he did not hire or fire, have ownership, get paid or write checks. The court reasoned that he had authority as a director and significant financial authority because he lent a lot of money to Perceptions. In fact he could have forced Perceptions out of business by simply not loaning them money. The court did not care that he did not know or did not exercise authority. The court reasoned that he could have, and “could have” was sufficient.
Bunch was a responsible person for all periods. The IRS could keep his $194,000.
Yipes!
My take: sadly, I have to agree with the court. There is a long-standing tax doctrine that one cannot intentionally stick his/her head in the sand and claim ignorance. Bunch was involved enough to lend Perceptions money on an almost-monthly basis. As a director, he had the right to ask why, where the money was going, what bills were being paid and – importantly – what bills were not being paid. He already had one fright with unpaid employment taxes, and it was not unreasonable for a director to oversee that such taxes not be overlooked in the future.
The difficult part here is separating his duty as a director from his obvious generosity with the charity. As director he had authority to inquire, berate and insist. Events came to his attention which reasonably required him, as director, to get involved. It was not reasonable for a director to turn a blind eye. He was a tremendous benefactor, but not a very good director. Had he just been a benefactor, I doubt the court would have arrived at the same decision.
On April 6 Bunch filed a motion seeking to alter or amend the court’s decision. We’ll see how it turns out, but I doubt he will be pleased.
