Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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JEFFERSON v. UNITED STATES  (October 8, 2008)

Charles Jefferson served as the voluntary, uncompensated president of the board of directors of New Zion Day Care Center (“Center”). Velma Hayes was the paid director of the Center and ran its day-to-day operations. Jefferson had authority to direct the financial affairs of the Center. The United Way provided financial support to the Center . In early 1998, the United Way informed Jefferson that the Center was not paying its payroll taxes properly. The board ordered Hayes to pay any taxes due to the IRS. By 2000, the Center was in severe financial trouble. It did not pay income and FICA taxes from early 2000 through mid-2001. Hayes reported to the board at its monthly meetings that the Center was delinquent in its bills and tax liabilities. The United Way ceased its support of the Center, in part because of the tax issue. Jefferson arranged for the Center to borrow money to pay the delinquent taxes. In August, 2000, Jefferson co-signed two checks to the IRS for penalties and interest. In 2002, the IRS made assessments against both Hayes and Jefferson for the delinquent taxes. Jefferson filed suit to recover the $41,432 he paid pursuant to the assessment. The district court granted the United States’ motion for summary judgment. Jefferson appeals.

In their opinion, Judges Bauer, Williams, and Sykes affirmed. The Court addressed each of Jefferson’s arguments in turn: a) that he was not a “responsible person” under the statute, b) that his conduct was not willful, c) that he was exempt as an honorary board member, d) that the IRS was estopped because of its failure to develop explanatory materials as required by statute, and e) that the IRS failed to disclose evidence. The Court stated that a “responsible person” under Section 6672(a) of the Internal Revenue Code is a person who has enough authority over the organization’s finances to determine which debts will be paid. Jefferson had significant involvement in the Center’s financial affairs. The Court found that Jefferson was a “responsible person,” relying on his position on the board, his review of finances at monthly meetings, his securing of the loan to pay IRS penalties and interest, and his direction to Hayes to pay the taxes. On the “willful” issue, the Court observed that a person acts willfully when he acts in reckless disregard of a known risk that taxes are going unpaid. The Court recognized that the board had directed Hayes to pay the taxes but found that Jefferson had taken no steps to make sure that the taxes were, in fact, paid or that effective controls were in place. This made Jefferson’s conduct willful, even if he did not actually know the taxes were still unpaid. The Court rejected Jefferson’s honorary board member argument, noting that the statutory exemption only applied to board members who did not participate in the financial operations of the organization. Jefferson’s estoppel argument is that the government is required by law to develop explanatory materials relating to the circumstances under which a board member of a non-profit organization could be held liable for tax delinquencies. The Court agreed that the materials are required by law and that they were never developed. However, it refused to adopt a blanket rule that would make the assessment invalid as a result. Instead, the Court required a showing of prejudice, which it said Jefferson could not make. The Court rather summarily rejected Jefferson’s evidence argument, citing the substantial evidence of his liability and the fact that the evidence was relevant, if at all, only to collateral issues (e.g., his knowledge of the delinquencies).