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Johnson v. United States, No. 12-1739

Decided: November 5, 2013

The Fourth Circuit affirmed the district court’s grant of summary judgment against Mary Johnson (“Mrs. Johnson”) and her husband, Ford Johnson (“Mr. Johnson”), individually, to reduce to judgment the remaining balance of the trust fund recovery penalties assessed against them.

Mr. Johnson formed a non-profit corporation, Koba Institute, Inc. (“Koba Institute”) in 1969 to perform various government contracts in conjunction with Koba Associates, Inc. (“Koba Associates”), a for-profit corporation that he owned and managed. Koba Associates failed to pay its payroll taxes in the mid-1990s and the IRS assessed trust fund recovery penalties against Mr. Johnson. This ultimately led Mr. Johnson to close Koba Associates and severely limited his ability to obtain credit for Koba Institute. Subsequently, Mr. and Mrs. Johnson restructured Koba Institute so as to facilitate its continued existence. As part of that restructuring, in 1998, Koba Institute converted to a for-profit corporation under Maryland law, with Mrs. Johnson as its sole shareholder, chair of its board of directors, and president. Koba Institute’s payroll account expressly provided that Mrs. Johnson had the power to sign singularly on that account. This enabled Koba Institute to operate unencumbered by a lien. However, because Mrs. Johnson was the primary caregiver of the couple’s children, Mrs. Johnson delegated and entrusted her authority in the corporation to Mr. Johnson, and thereafter elected him president of Koba Institute in 2001 despite a contrary bylaw requirement. Mrs. Johnson’s actual involvement at Koba Institute was limited during the period between 2001 and 2004, only coming to work once per month. Yet, she received a significant annual salary, as well as a corporate car and cell phone. Given her limited involvement in the corporations daily operation, Mrs. Johnson only signed checks that Mr. Johnson had already approved.

Near the end of 2004, however, Mrs. Johnson received a notice from the IRS that Koba Institute had not paid its payroll taxes for several quarters from 2001 to 2004. Upon learning this, Mrs. Johnson fired the finance director and directed Mr. Johnson to personally handle all future tax payments and to provide her with visual proof of all withholding tax payment made subsequently. Additionally, with regard to the payroll account, Mrs. Johnson no longer required instruction from Mr. Johnson before writing checks herself from the payroll account for payment of the taxes. Koba Institute then began paying its post-2004 payroll taxes in full. However, it did not pay the outstanding delinquent payroll taxes although it continued to pay its other business debts. Subsequently, the IRS assessed trust fund recovery penalties against Mr. and Mrs. Johnson individually, pursuant to 26 U.S.C. § 6672. On March 30, 2009, Mrs. Johnson filed suit seeking a refund of the portion of the penalty that she had paid, asserting that the assessment against her was erroneous. The Government filed a counterclaim against both of the Johnsons in order to reduce its assessments to judgment. The district court granted the Government’s motion for summary judgment. This appeal followed.

On appeal, the Fourth Circuit first summarily affirmed the district court’s judgment with respect to Mr. Johnson. Next, it addressed Mrs. Johnson’s contention that the district court erred in granting summary judgment against her because she was not a “person responsible” for Koba Institute’s withholding tax payments, and, alternatively, because she did not “willfully” fail to pay over those taxes. The court, however, disagreed. Finding that, despite delegating her authority to Mr. Johnson, Mrs. Johnson remained a “responsible person” because she maintained effective power to pay the trust fund taxes and to direct the corporation’s business choices during the relevant tax periods as evidenced by her conduct upon receiving notice of delinquency from the IRS. Having found that Mrs. Johnson was a “responsible person,” the court then found that her conduct was “willful” because Koba Institute continued to make payments to other creditors using unencumbered funds following Mrs. Johnson’s receipt of the IRS notice while the payroll taxes for numerous quarters during the relevant tax period remained unpaid. Consequently, the Fourth Circuit affirmed.

Full Opinion

-W. Ryan Nichols