President did not willfully fail to pay trust-fund taxes

The CEO and president of a defunct manufacturer did not willfully fail to pay over trust fund taxes. The two corporate officers took reasonable steps to ensure the timely payment of the trust-fund taxes and reasonably believed the taxes were being paid. Contrary to the district court’s holding, the corporation’s officers were not reckless because they did not independently verify their auditor’s reports or the controller’s account of the business’s tax status.
The two officers hired an assistant controller and a CFO who oversaw the controller’s work after they discovered that the controller had made late trust-fund deposits. They also hired an independent, professional CPA firm to assist in tax matters and to conduct full-scope audits, which also demonstrated that they took reasonable steps to comply with all of the business’s tax obligations, including the timely payment of trust-fund taxes.
There was no evidence that it was unreasonable for the two officers to rely on their auditor’s competence. Moreover, the two officers did not have any indication of errors or inaccuracies in the audit reports until after they became aware of the nonpayment; therefore, their reliance on the auditors’ reports was reasonable. Further, the CPA firm did not detect the controller’s suspect financial accounting after having performed a full-scope audit and it took several months for a crisis management firm to determine the exact amount of the tax liability. Thus, the officers did everything possible short of personally contacting the IRS to verify the status of the trust-fund liability or firing the controller when they first learned of the late payments.
Finally, the officers did not have the ability to pay the IRS, let alone themselves, once they actually knew or had reason to know of the trust-fund deficit because by then the company’s finances had been taken over by the crisis management team. T. Jenkins, CA-FC, 2012-1 ustc 50,394, distinguished. Vacating and remanding an unpublished DC Mich. decision. Related decision at CA-6, 2012-2 ustc 50,544. (R. Byrne, CA-6, 2017-1 ustc 50,228.)
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