Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research

Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software



Doctor Subject to Payroll Tax Penalty for Paying Employees Before IRS

(Parker Tax Publishing December 2016)

A family doctor, whose medical practice owed over $10 million in unpaid payroll and withholding taxes, was a responsible person and was liable for payroll tax penalties when he paid his employees before paying the IRS. The court rejected the doctor's argument that the $100,000 he loaned to his practice to pay his employees was "encumbered" and thus the payment was not a willful transfer of unencumbered funds to a creditor other than the IRS. McClendon v. U.S., 2016 PTC 484 (S.D. Tex. 2016).


Dr. Robert McClendon founded Family Practice Associates of Houston, a medical-service provider, in 1979. In 1995, Family Practice hired Richard Stephen, Jr., as its Chief Financial Officer. By 2009, Family Practice owed over $10 million in unpaid payroll and other withholding taxes. Dr. McClendon learned that these taxes were unpaid on May 11, 2009. Stephen pleaded guilty to three counts of felony theft of money that he embezzled from Family Practice. Family Practice stopped operating and remitted its remaining receivables to the IRS to pay toward the tax liability.

McClendon made a $100,000 personal loan to Family Practice for the restricted purpose of using the funds to pay the May 15, 2009, payroll. Family Practice used that loan to pay its employees. As a result of McClendon paying his employees before paying back payroll taxes to the IRS, the IRS assessed a total of $4.3 million in tax penalties under Code Sec. 6672. McClendon paid a small part, then sued for a refund and abatement of the remaining penalty amount.

Code Sec. 6672 Penalty

To ensure that payroll and withholding taxes are remitted to the Treasury Department, Code Sec. 6672(a) imposes a penalty on any person required to collect, truthfully account for, and pay over any payroll and withholding tax. Under this provision, the term "liability" is composed of two elements:

(1) that the taxpayer was a "responsible person," and

(2) that the taxpayer willfully failed to collect, account for, or pay over such taxes.

Several courts, including the Fifth Circuit (to which the instant case would be appealable), have held that in the case of individuals who are responsible persons both before and after withholding tax liability accrues, there is a duty to use unencumbered funds acquired after the withholding obligation becomes payable to satisfy that obligation and failure to do so when there is knowledge of the liability constitutes willfulness.

Taxpayer's Arguments

McClendon conceded that he was a "responsible person." However, he contended that he did not willfully fail to collect, account for, or pay taxes that Family Practice owed to the IRS. McClendon first argued that because he loaned the money to Family Practice on the understanding that it could use the money only to cover payroll, the funds were "encumbered." According to McClendon, because he loaned the money to Family Practice with the express restriction that it could use the money only to cover payroll, the funds were "encumbered" and willfulness is shown as a matter of law only by evidence that a responsible person directed "unencumbered" funds to a creditor other than the government.

McClendon also argued that he had reasonable cause to provide a way to pay the employees because "he acted morally and generously in using his own money to make sure Family's staff . . . were paid for the work they had performed."

District Court's Opinion

The district court began by citing Logal v. U.S., 195 F.3d 229, 232 (5th Cir. 1999), for the principle that willfulness is normally proved by evidence that a responsible person paid other creditors with knowledge that withholding taxes were due at the time to the United States. Payment of wages to employees, the court noted, counts as a payment to a creditor for purposes of this principle. According to the court, if a responsible person knows that withholding taxes are delinquent, and uses corporate funds to pay other expenses, even to meet the payroll out of personal funds he lends the corporation, he has acted willfully within the meaning of Code Sec. 6672.

Thus, the district court rejected McClendon's arguments and granted summary judgment to the IRS. The Fifth Circuit, the court concluded, has made clear that a taxpayer who consciously decides to use unencumbered funds to pay a creditor other than the government cannot benefit from the reasonable-cause defense. The court found no basis for a different result in McClendon's situation.

For a discussion of the responsible person penalty, see Parker Tax ¶210,108.

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.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

    ®2012-2017 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance