TaxNewsFlash-Exempt Organizations

October 8, 2008
No. 2008-97

PRINTABLE VERSION

Seventh Circuit Affirms Day Care Facility’s Board President Is Personally Liable for Payroll Taxes

The U.S. Court of Appeals for the Seventh Circuit today issued a decision affirming that the president of the board of directors of a day care facility—that was funded in part by the United Way—was personally liable for payroll taxes not remitted to the IRS during his tenure. Jefferson v. United States, No. 06-4082 (7th Cir. October 8, 2008).

For an electronic version of the 16-page decision: Jefferson

Overview

An individual (Jefferson) served from the early 1980s until 2001 as president of the board of directors of a day care facility which had failed to remit federal payroll taxes to the IRS.

Jefferson’s position as board president was voluntary and uncompensated. He and the other board members were responsible for the direction of the day care, while another individual (Hayes) was the paid director of the center from 1982 until 2001 and ran the day-to-day operations.

As a board member, Jefferson had the authority to direct and authorize payment of the center’s bills, to authorize payment of its federal tax deposits, to determine its financial policy, and to obtain loans for the center (including one he obtained in 1998 for a new day care building). Jefferson was a signatory on the center’s bank accounts and he co-signed checks on behalf of the day care center. The day care center was funded in part by the United Way organization.

The day care facility in the late 1980s had failed to remit payroll taxes, and the delinquency was resolved. By 2000, the center’s financial condition was precarious, and it failed to pay income and FICA taxes for its employees from April 2000 to June 2001. Hayes informed the board, including Jefferson, at its monthly meetings that the day care was unable to pay its bills and tax liabilities. Hayes maintained a file with the financial reports in her office . Jefferson was aware of this file and instructed board members to review the financial reports at each meeting before they were accepted by a majority vote.

The IRS made assessments against Jefferson and Hayes for the delinquent tax payments. Jefferson paid a portion of the taxes and then filed suit in federal district court to reclaim the funds. The court granted the government’s motion for summary judgment, finding that Jefferson was a “responsible person” under section 6672 and that he “willfully” failed to pay taxes. The court also found that Jefferson did not qualify for the “honorary member” exception of section 6672(e) because he was not serving in an honorary capacity at the day care center.

On appeal, the Seventh Circuit affirmed.

For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or rspeizma@kpmg.com

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