Stephen K. Verret v. United States of America

I've said it before, I'll say it again, many Board Members of large and small nonprofits do not understand the full extent of their liability. As Stephen Tatum of Cantey Hanger, LLP, illustrates from a a recent Fifth Circuit case, officers of an organization are equally responsible for, among other things, tax liability. It's simply not good enough to "urge" the executive to do something, Board Members must follow through, ask for proof or even take matters into their own hands. Maybe it's time for a liability check-up for your organization? Bunnie

Stephen K. Verret v. United States of America

by Stephen Tatum, Attorney, Cantey Hanger, LLP

Doctor’s Hospital in Groves, Texas was a 501(c)(3) tax-exempt organization, the Board of Trustees of which were specified by the Hospital’s By-Laws as voluntary and unpaid members of the community. Stephen K. Verret was on the board for almost 26 years. From 1999 until his resignation in 2002, Verret served as Chair of the Hospital’s board.

In early 2001 and again at the end of 2001, the hospital’s executive director David Cottey told the board that the hospital had failed to pay withholding taxes. Funds were found to satisfy the first tax liability.

Other than urging Cottey to pay the taxes and initiating a search for his replacement, Verret and the board did nothing to see that the second tax delinquency was paid.

The IRS found Verret, Cottey and the Hospital’s Chief Financial Officer, Angela Massey, to be “responsible parties” under § 6672 of the Internal Revenue Code. Among other things, the IRS assessed a penalty against Verret totaling $407,097.66 (equaling the amount of unpaid taxes), plus interest in the amount of $1,821.00. Verret paid the penalty and brought this lawsuit to recover the money. The District Court granted the government’s summary judgment and the Fifth Circuit affirmed.[1]

Section 6672 of the Internal Revenue Code (“IRC”) imposes a penalty on any “person required to collect, truthfully account for, and pay over any tax . . .” If someone willfully fails to collect and pay a tax, a penalty equal to the amount of the unpaid tax, itself referred to as a “tax” is assessed on “persons” deemed responsible for paying the tax under the IRC. A “person” includes “an officer or employee of a corporation … who as such officer [or] employee . . . is under a duty” to account for, collect and pay the tax. Courts view the concept of “responsible person” very broadly.

Among other findings, the Court found the following facts to establish that Verret was a responsible person subject to liability for the Hospital’s unpaid payroll taxes.

· The Bylaws of the hospital provided that its Board had final responsibility for administration.

· The Executive Director was required to make reports to the Board regarding personnel, staff and budget matters at each Board meeting.

· After the first failure to pay withholding taxes, the Board received oral assurances by Cottey that taxes were paid.

· Verret instructed Cottey to pay the payroll taxes before he paid anyone else.

· Verret was frequently present at the hospital and spoke with Cottey almost every day.

· The Board could hire and fire employees, specifically Cottey.

· Verret had the authority to sign company checks.

Despite testimony from Hospital employees that the responsibility for tax payments lay with senior management, the trial court found that Verret was a responsible person along with Cottey and Massey.

Next, the District Court found Verret to have acted willfully after the first delinquency, “Verret failed to take responsible steps to ascertain whether the taxes had in fact been paid and to resolve any uncertainty regarding the issue.”[2]

Does this sound familiar? The alarming thing about this opinion is that with a few exceptions like the consulting contract, Verret’s activities are not much different from what any Board chair would do in these circumstances.

The Court’s reliance on the language of the bylaws is also of concern. My suspicion is that most bylaws place ultimate responsibility for the operation of any organization with a board of directors, which can delegate authority. Further, Board chairs are likely on most CEO’s phone call list at least once a week.

Board Chairs of not-for-profits should consider having bylaws and tax payment procedures audited if there is any doubt at all regarding dealing with the IRS. Otherwise, they may be rudely awakened with a tax bill.

[1] The single paragraph appellate court opinion largely adopted the trial court’s reasoning in Verret v. United States, 542 F. Supp. 2d 526 (E.D. Tex. 2008), so for purposes of looking more deeply into the potential for personal liability arising from board service, read the trial court’s opinion.
[2] i.e., Failing to ask for canceled checks to show that taxes had been paid.

Contact Stephen Tatum at http://www.canteyhanger.com/