A PRICE for Board Service

Introducing guest author, Stephen Tatum, Partner and Attorney with Cantey Hanger, LLP.
Service on tax-exempt boards is attractive to the public for a number reasons, allowing us to give back to our community. Most never think of potential liability arising from such service, or are satisfied that state law provides adequate protection for members of tax-exempt boards who act in good faith. The United States Court of Appeals for the Fifth Circuit recently affirmed a decision from a Federal District Court in Beaumont that could cause many members of tax-exempt boards to have second thoughts. The February 26, 2009 opinion on Verret v. USA, should provide individuals considering board service a new set of questions that should be answered before agreeing to accept a board appointment.

The facts in this case are important both for the purpose of demonstrating why the Court held the board chairman personally liable for payroll taxes unpaid by the hospital he served as chair of its board, and so that others can evaluate their own potential for liability in this situation.

• Doctor’s Hospital in Groves, Texas was a 501(c)(3) tax-exempt organization.
• The Hospital’s By-laws specified the Board of Trustees as voluntary and unpaid members of the community.
• Board Chair served from 1999 until resignation in 2002.
• In 2001 the Executive Director (ED) informed board that hospital had failed to pay withholding taxes totaling about $400,000.
• Funds were found to satisfy liability and board admonished ED that non-payment was unacceptable and not to occur again.
• Executive Director assures board that taxes were remitted, when in fact, they were not.
• Executive Director notifies board that Hospital was delinquent for the third and fourth quarter filings.
• Board did nothing to verify remittance.

The IRS found the board chair, the executive director and the chief financial officer to be “responsible parties” under § 6672 of the Internal Revenue Code. Among other things, the IRS assessed a penalty against the chair totaling $407,097.66 (equaling the amount of unpaid taxes), plus interest in the amount of $1,821.00. The board chair 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.

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 the Board Chairman was a responsible person subject to liability for the Hospital’s unpaid payroll taxes:
• The Bylaws of the hospital provided that the 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 only received oral assurances by executive director that taxes were paid.
• Board chair instructed executive director to pay the payroll taxes before he paid anyone else.
• Board chair was frequently present at the hospital and spoke with executive director almost every day.
• The Board could hire and fire employees, specifically the executive director.
• The board chair 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 the board chair was a responsible person along with senior management.

Next, the District Court found the board chair to have acted willfully after the first delinquency, for failing to “take responsible steps to ascertain whether the taxes had in fact been paid and to resolve any uncertainty regarding the issue.” Does this sound familiar? The alarming thing about this opinion is that with a few exceptions, the Board Chairman’s activities were 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. 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 tax-exempt organizations 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.

For more information see CANTEY HANGER LLP