Above the Line

When volunteering can cause tax liability

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As a lawyer, I am often reminded by the bar associations I belong to how important it is to pro bono work. “Equal access to the law” is the catchphrase, and in Illinois (though not yet in California) you have to report the number of hours you spend doing such work (or, in lieu of pro bono work, how much money you donated to legal aid groups). Although the information collected is not shared with the general public (Illinois does publish whether or not you have malpractice insurance, for example), it’s clear that the state is making a concerted effort to convince lawyers to take on non-paying or low-paying work to benefit society as a whole.

Altruistic as that is, it’s not always as simple as it seems. And sometimes, volunteer work can be downright expensive, especially if you’re the ‘take charge’ type. Take the case of Jefferson v. U.S., a recent Seventh Circuit case.

In Jefferson, a taxpayer worked on a volunteer basis for a day care center that received at least some funding from the United Way. The day care center hit a rough patch, and failed to pay payroll taxes. Long story short (you can read the details if you’re so inclined by following the above link), Jefferson did a number of significant things that worked against him in the long run: he helped the organization secure a loan, he hired an accountant to help manage finances, he had check-writing authority (he claimed to have written only two checks out of over 900, but both were to the IRS), he directed policy and he sat on the board.

The 7th Circuit decided that Jefferson’s involvement was enough to make him a ‘responsible person’ under Section 6672 (Specifically 26 U.S.C. Section 6672(a)). Jefferson argued that he was ‘an honorary and voluntary board member’ exempt from personal liability under Section 6672(e). That section was quoted by the Court, and reads as follows:

No penalty shall be imposed by subsection (a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under Subtitle A if such member—
(1) is solely serving in an honorary capacity,
(2) does not participate in the day-to-day or financial operations of the organizations, and
(3) does not have actual knowledge of the failure on which such penalty is imposed.

Of course, Jefferson’s biggest problem was paragraphs (b) and (c). He did, by virtue of getting the loans, hiring the accountant, and so on, participate in both the day-to-day and financial operations. Moreover, the court found that he was aware of the charity’s failure to pay payroll taxes. In shooting down Jefferson’s argument, the court cited to Bowlen v. United States, 956 F.2d 723, 728 (7th Cir. 1992) and found that, in order to be exempt under 6672(e), one could not, by definition, be a ‘responsible person’. As the Court noted, “[t]he term “honorary” suggests a lack of power, a lack of responsibility, and a corresponding lack of ability to do harm—factors that do not apply to the instant case.”

In the end, Jefferson was tagged with over $40,000.00 in payroll taxes. The message here is clear: if you are asked, or for professional reasons decide, to join the board of a non-profit group, be sure to check your ‘can do’ attitude at the door lest you, too, find yourself in a pickle. The more involved you get in the day-to-day, or financial, operations of the non-profit, the more likely you are to expose yourself to tax liability should that organization fail to pay their taxes when due.


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