STATE AND LOCAL TAXATION

July 2000

PERSONAL LIABILITY FOR UNPAID STATE WITHHOLDING TAXES

By Eric Rothenburg

In In re Irwin Goodfriendk (Tax Appeals Tribunal, DTA No. 813674), the petitioner thought that he was not personally responsible for paying the taxes and penalties ($15,799 and $7,762, respectively) incurred by his client, 305 Restaurant Corp. The basic question was whether or not the petitioner, a CPA, was an officer and a responsible person with regard to withholding and sales taxes.

The petitioner's accounting practice is primarily in the restaurant industry. He became a shareholder in 305 Restaurant Corp. and agreed to solicit his clients to invest in this entity. The petitioner was secretary and treasurer of the corporation and a member of the board of directors.

The petitioner's accounting firm was employed as the outside accounting firm. The accounting duties and functions of the petitioner in running the business included the following:

* Authorized check signer on each of the corporation's checking accounts. This included checks to vendors, payroll checks, and checks submitted with tax returns.
* Preparer of various state withholding and sales tax returns and, at times, signer of these returns
* Signer of Form CT-6 to switch the entity to a subchapter S corporation
* Administrator of the corporation's workers' compensation renewal policies.

The petitioner was also designated as the tax matter's person (TMP) on the 1120S return.

The basic question arising out of this is whether the petitioner was just an investor while his accounting firm prepared various tasks on behalf of the corporation or whether he had significant influence and control over the day-to-day operations of the corporation. Issues to be considered are the right to hire and fire employees, day-to-day knowledge of the corporation's financial management and operations, the authority to sign tax returns, and the authority to write checks.

Even though the petitioner was not involved in administrative dealings, such as the hiring and firing of employees or ordering food and supplies for the restaurant, he played an important role in the operation of the financial aspects of the restaurant.

Given this information, the court affirmed that the petitioner was in fact a responsible person and officer of the corporation. Even though he was not involved in day-to-day management, he did maintain control over the financial aspects of the corporation, causing him to be personally liable for unpaid state withholding and sales taxes incurred by the corporation. *

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