The volunteer board chair of a nonprofit drug and alcohol treatment program who made start-up and bridge loans to the organization and paid $193,000 in unpaid withholding taxes has lost a suit to recover the funds he personally advanced to pay the taxes.  A federal District Court in Tennessee has held that he was a “responsible person” and personally liable to pay the taxes the organization failed to pay itself.  (Bunch v. Commissioner, E.D. TN, No. 2:10-CV-122, 3/8/12.)

Roy Don Bunch had been involved with Perceptions, Inc. and its affiliate Bendell Services from the beginning.  He served as chair of the board, provided rent-free office space, and played an active role in its financial management.  He made start-up loans and “bridge” loans when Bendell did not have enough money to pay its bills. Between February 2005 and August 2007, he loaned a total of $648,000, only some of which was repaid when Bendell had the funds to do so.  He took over paying the bills personally in 2007.

When the organization failed to pay its withholding taxes in 2006 and 2007, the IRS ordered him to pay personally.  After losing an appeal in which the IRS did not say why it considered him a responsible person, he filed for a refund.

Section 6672 of the Tax Code imposes personal liability on any person who is responsible for paying the withholding tax and willfully fails to turn the funds over to the government.  The test for determining responsibility, the Court said, is “essentially a functional one, focusing upon the degree of influence and control which the person exercised over the financial affairs of the corporation and, specifically, disbursements of funds and the priority of payments to creditors.”

Courts have developed a nonexclusive list of facts for consideration, the Court said: (1) the duties of the officer as outlined by the bylaws; (2) the ability to sign checks for the organization; (3) the identity of the officers or directors; (4) the identity of the individuals who hire or fire employees; and (5) the identity of the individuals in control of the financial affairs of the organization.  They have also considered whether the person has access to the books and records of the organization and whether the person has made personal loans to it.

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