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Corporate Director Cannot Seek Contribution from CFO for Withholding Tax Penalties.

(Parker Tax Publishing February 23, 2015)

A district court determined that a corporate director could not seek contribution from a CFO for penalties arising from his willful failure to pay over withholding taxes. Despite the fact that the CFO was "responsible person", such contribution is only available after penalties have been paid in full by the taxpayer. Happy v. McNeil, 2015 PTC 43 (W.D. Tex. 2015).


Jack Happy and Lowery McNeil were principals of Green Aggregates, Inc. Happy was a director and McNeil was president and CFO. For several consecutive quarters, Green Aggregates withheld income taxes and social security contributions from the wages it paid to its employees, but did not pay those funds to the IRS as required by law.

In 2007, Green Aggregates filed for bankruptcy owing more than $300,000 in withholding taxes to the IRS pursuant to Code Sec. 6672(a). The IRS subsequently assessed a penalty against both Happy and McNeil. Happy testified that he paid the IRS $15,000, and that the balance of the unpaid penalty was approximately $325,000.

Relying upon Code. Sec. 6672(d), Happy sought a judgment against McNeil for one-half of the $15,000 already paid, and also sought a declaratory judgment that McNeil is liable for one-half of all future payments made by Happy in satisfaction of the penalty. McNeil contended that Happy was entitled to no contribution at all until Happy paid his proportionate share of the outstanding penalty.


To be entitled to contribution under Code. Sec. 6672(d), the person from whom contribution is sought must be (1) a responsible person (2) who willfully failed to pay over withheld taxes. If more than one person is liable for a penalty Code Sec. 6672(a), each person who paid such penalty is entitled to recover from other liable persons an amount equal to the excess of the amount paid by such person over such person's proportionate share of the penalty (Code Sec. 6672(d)).

The court found that McNeil was a responsible person and that he acted willfully in failing to pay over the withheld taxes as he admitted to paying other creditors while knowing that withheld funds were due and owing to the IRS. However, the court concluded Happy was not presently entitled to contribution as, under the plain language of Code Sec. 6672(d), a responsible person who is liable for a penalty cannot seek contribution until he has paid his proportionate share of the penalty. As Happy had only paid $15,000 towards the $325,000 penalty, he had not paid an amount equal to or more than his proportionate share, and consequently was unable to seek contribution from McNeil under Code Sec. 6672(d).

For a discussion of withholding requirements and responsible persons, see Parker Tax ¶ 210,108 (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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