I often hear criminal attorneys say that they always have a good chance to win state criminal cases, but they are almost never able to win in federal criminal cases. The idea seems to be that federal agencies spend a lot more time and effort preparing and gathering evidence against the accused than do state officials. I have found that this logic is also applicable in the non-criminal tax arena as well. Case in point: Hanson vs. Texas Department of Revenue.
Facts & Procedural On Hanson’s Case
Hanson was the president of Internet Commerce and Communication Corporation (ICC). The State of Texas had assessed delinquent withholding taxes against ICC for failure to pay $43 thousand dollars in Texas taxes. ICC filed for bankruptcy and there were not enough assets in the bankruptcy estate to satisfy the Texas tax. The State of Texas then imposed a penalty on Hanson equal to 150% of the delinquent taxes of ICC.
The applicable Texas statute reads as follows:
[With an exception not relevant here] any director or officer of a corporation … in the process of dissolution or which has been dissolved who distributes the … fund in his control without having first paid any taxes covered by this article due from such … corporation … shall be personally liable to the extent of the property so distributed for any unpaid taxes of the … corporation … covered by this article which may be assessed within the [statutory time limits].
C.R.S. § 39-21-116(2) (2005).
In addition to the personal liability provided in section 39-21-116, all officers of a corporation … required to collect, account for, and pay over any tax administered by this article who willfully fail to collect, account for, or pay over such tax or who willfully attempt in any manner to evade or defeat any such tax, or the payment thereof, are subject to, in addition to other penalties provided by law, a penalty equal to one hundred fifty percent of the total amount of the tax not collected, accounted for, paid over, or otherwise evaded. An officer of a corporation … shall be deemed to be subject to this section if the corporation … is subject to filing returns or paying taxes administered by this article and if such officers of corporations … voluntarily or at the direction of their superiors assume the duties or responsibilities of complying with the provisions of any tax administered by this article on behalf of the corporation….
C.R.S. §39-21-116.5 (2005).
It was the State of Texas’s position that this penalty could be imposed on any corporate officer regardless of whether the officer was responsible for or had the ability to ensure that the tax payments were timely remitted.
The court ruled that, as outlined in the statute, the penalty only applies to offers who are responsible for tax compliance and who willfully fail to collect, account for and pay over the tax.
Hanson was lucky in that the State of Texas did not adequately prepare their case for court, as they failed to present any evidence as to what Hanson’s role was as president of ICC. It appears that the State of Texas merely relied on the fact that Hanson was the president of the corporation to support their case that he was responsible for ICC’s tax compliance.
The result would have been the same under the federal rules, because the law is clear that the equivalent penalty at the federal level is only to be imposed on “responsible persons” (the Section 6672 trust fund recovery penalty is the equivalent penalty at the federal level).
What is different is that the IRS attorney would have at least been prepared to put on their case in court. I am not aware of a single case where the IRS attorney failed to prepare a trust fund recovery penalty case such that they put on no evidence of the taxpayer’s role in the corporation.
That is not to say that IRS attorneys do no lose cases, as they do. It is just to say that they typically do not lose for want of putting on basic evidence in support of their position.