Court Agrees with IRS That Hospital CEO Is Personally Liable for Unpaid Payroll Taxes

Health care cases that our lawyers see most often involve whistleblowers who know of violations of the False Claims Act. While we also pursue many IRS violations under the IRS Whistleblower Program, the health care industry is not the source of most of those claims.

In perhaps a new trend, last week a federal court in Florida agreed with the IRS that a hospital CEO is personally liable for failing to pay over to the IRS close to $2 million in payroll taxes. (Doulgeris v. United States, M.D.Fla., August 03, 2009).

Earlier this year, the chairman of the board of a tax-exempt hospital was held personally liable for the hospital’s failing to collect and pay to the IRS payroll taxes, as the Fifth Circuit Court of Appeals affirmed that decision. (Verret v. United States, 5th Cir., 2009). The board chair, however, had extensive involvement in the operations of the entity.

Payroll tax fraud thus appears to remain an IRS priority. The reasoning of the Florida federal judge explains how the CEO was found personally liable for unpaid payroll taxes;

When a person who is responsible for paying to the government funds withheld for the purpose of payroll taxes, willfully fails to turn those funds over to the government, he may be held personally liable for the amount that is not paid over. 26 U.S.C. § 6672. The government has the burden of demonstrating by a preponderance of the evidence that the person in question was a responsible person under the law; if the government so demonstrates, the burden shifts to the responsible person to show that he did not act willfully in failing to pay over the taxes. Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir.1987).

In this context, a person acts “willfully” if he voluntarily, consciously, and intentionally uses, or causes to be used, funds withheld for payroll taxes for purposes other than the payment of those taxes. Malloy v. United States, 17 F.3d 329, 332 (11th Cir.1994). Willfulness is demonstrated when it is shown that an officer decided to use the money withheld for payroll taxes to pay suppliers or other creditors when he knew that payroll taxes were due and owing to the government. Id. Even acting “with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the Government, such as by failing to investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted,” can constitute willful failure to pay. Id. (citations omitted) (emphasis in original). Delegation of financial responsibility to another person is insufficient to disprove willfulness. Mazo v. United States, 591 F.2d 1151, 1155 (5th Cir.1979). In other words, if an officer has a responsibility to pay over taxes to the government, he cannot absolve himself of that responsibility by leaving it for someone else to fulfill. Hornsby v. Internal Revenue Svc., 588 F.2d 952, 953 (5th Cir.1979).

There is no dispute that Plaintiff was the president and CEO of GHCH during the tax quarters in question. He admits that he knew that the payroll taxes collected from hospital employees had not been turned over to the government in their entirety for the quarters ending in March and June 2003. He acknowledges that he had the authority to make payments on behalf of the hospital. In fact, Plaintiff admits that he signed checks totaling over 2.9 million dollars ( see Gov’t Ex. 26), paying other creditors, rather than the government, while he knew that payroll taxes were delinquent. Thus, he decided to use the money withheld for payroll taxes to pay suppliers or other creditors when he knew that payroll taxes were due and owing to the government.

Further, even if Plaintiff did not make out the checks he signed, his signature was necessary to give the checks value, and thus his signature “cause [d] [the payroll tax funds] to be used … for purposes other than the payment of taxes.” Significantly, Plaintiff admits that he had the power to directly transfer hospital funds to the government to make payroll tax payments, and that he did so when Mr. Jonas was out of town. (Doc. 60, p. 177.) The fact that Plaintiff had the power to pay the taxes but had generally left financial decisions to Mr. Jonas is insufficient to absolve Plaintiff of his responsibility to see that the taxes were paid.

Based on the facts in evidence, it is clear that Plaintiff willfully enabled hospital funds to be used for purposes other than paying taxes owed to the government while he knew that such taxes were owing and was able to effect their payment. Thus, even making all inferences in favor of Plaintiff, there is insufficient evidence by which a reasonable jury could find for Plaintiff on the issue of willfulness. Therefore, as a matter of law, Plaintiff was willful in failing to pay over the payroll taxes for the fiscal quarters in question.


Doulgeris v. United States
, (M.D.Fla.,2009)