Business owner liable for unpaid employment taxes despite lock-box

Despite a “lock-box” arrangement, a business owner was liable for unpaid employment taxes. A federal appeals court found that the individual had sufficient control over the business and also knew that the taxes were unpaid. The court upheld the trust fund recovery penalty imposed by the IRS.


The owner had borrowed money to finance purchase of the business. The contract allowed the lender to take “lock-box” control of the company’s financial activities if certain triggering events occurred. One of those events occurred, and the lender exercised its lock-box authority and its approval authority over all payments. The business then went bankrupt. The employment taxes were not paid.

The IRS determined that the individual was responsible for the unpaid taxes. The taxpayer lost in district court and claimed, on appeal to the Sixth Circuit, that the district court erred in its determination that he was both the responsible party and willful in the nonpayment of taxes.

Court’s analysis

The owner argued that the “lock-box” arrangement required him to relinquish financial control of his company to the lender, as well as implement lock-box supervision. The court found that his argument failed for two reasons. First, the owner had voluntarily entered into the loan agreement, ceding to the lender whatever authority the lender claimed. And second, the owner’s failure to pay the employment taxes was willful.

The court looked to an earlier decision, Bell, 2004-1 ustc ¶50,118]. In Bell, which held for the IRS, the court pointed out that the taxpayer was aware that taxes were not being paid. “Bell could have shut down the company, suspended operations, filed for bankruptcy … or simply violated his contract with [the bank that had the lockbox arrangement] …[the taxpayer in this case] could have done the same,” reasoned the court.

Karban, 2017-2 ustc ¶50,395