A district court found a Texas physician responsible for paying a tax penalty on funds loaned to his own medical practice.

If a business fails to pay the withheld income and employment taxes of its employees, the Internal Revenue Service can go after “responsible persons”—those responsible for collecting and paying the taxes. The penalty on a responsible person (the trust fund recovery penalty) is 100 percent of the unpaid tax. For the penalty to apply to an individual, it must be shown that the individual’s failure to pay was “willful.”

The District Court for the Southern District of Texas found that Dr. Robert McClendon was a responsible person when he loaned $100,000 to his medical practice, Family Practice, to pay its employees. The payment was made at a time when Family Practice owed over $10 million in unpaid payroll and withholding taxes, due to embezzlement by its chief financial officer. The IRS assessed $4 million against Dr. McClendon as a responsible person. McClendon filed a motion for reconsideration pending the government’s counterclaim against the CFO, also a responsible person.

Image: Bloomberg News

Although McClendon conceded he was a responsible person, he argued that he acted morally and generously in using his own money to provide for Family Practice’s employees. However, the fact that he did so after knowledge of the taxes due the IRS meant that he acted willfully, according to the court. He had the burden to prove he was not a responsible person or did not willfully fail to pay the taxes owed. Since he failed to prove this at the summary judgment stage, the court denied his motion for reconsideration.

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Roger Russell

Roger Russell

Roger Russell is senior editor for tax with Accounting Today, and a tax attorney and a legal and accounting journalist.