Law360, New York (December 9, 2016, 9:33 PM EST) — The founder of a medical services provider asked a Texas federal judge on Friday to reconsider a $4.3 million tax judgment against him, arguing that he should only have to pay $100,000, the available funds he withheld from the Internal Revenue Service upon learning of his company’s tax liabilities.
Robert L. McClendon urged U.S. District Judge Lee H. Rosenthal to reconsider her November order granting summary judgment to the IRS and leaving him on the hook for $4,323,343.70 in tax penalties, which the government had assessed after it was revealed that McClendon’s medical practice owed over $10 million in unpaid payroll and other withholding taxes.
In pushing for reconsideration, McClendon asserted that once he learned about the unpaid taxes, he alerted the IRS and shut down his company, with the exception of loaning $100,000 to fund his employees’ final salaries. Because that $100,000 is the only amount McClendon paid to a creditor — rather than to the IRS — after learning about his company’s tax liabilities, that is all he should have to pay the government, according to the doctor’s reconsideration motion.
“If, as the opinion held, the payment of that $100,000 constituted ‘personal fault,’ then his liability must be limited to that ‘personal fault,’” Friday’s motion said. “Any contrary holding is a huge windfall for the IRS.”
According to Judge Rosenthal’s November order, McClendon founded Family Practice Associates of Houston in 1979, and in May 2009, he learned that his company owed over $10 million in unpaid employment taxes. The unpaid taxes were traced back to Richard Stephen Jr., Family Practice’s chief financial officer, who pled guilty to three counts of felony theft of money that he embezzled from the company, the order said.
Family Practice stopped operating and remitted its remaining receivables to the IRS to pay toward the tax liability, according to the order. McClendon made a $100,000 personal loan to the company, which Family Practice used to pay its employees, Judge Rosenthal noted.
McClendon “paid a small part” of the $4.3 million penalty and then sued for a refund and abatement of the remaining penalty amount, according to the November order.
In granting summary judgment to the IRS, Judge Rosenthal found that McClendon “acted willfully” when he failed to account for taxes owed to the agency.
“A responsible person has a duty to ensure that a taxpayer’s unencumbered funds are used to pay back taxes it owes the IRS, rather than to pay other creditors,” Judge Rosenthal said, rejecting McClendon’s contention that the funds he gave to Family Practice’s payroll were “encumbered.”
In asking Judge Rosenthal to reconsider her order, McClendon on Friday argued that Fifth Circuit authority limits his liability to only those funds deposited in Family Practice’s bank account and not paid over to the IRS after he knew of the unpaid tax liability.
“The United States presented no evidence of other available unencumbered funds paid to non-IRS creditors after May 2009,” McClendon said. “At most, Dr. McClendon is liable for the $100,000.00 he personally loaned to the company with the restriction that the loan would be used for the May 15, 2009, Family payroll, not the full $4,323,343.70 assessed by the IRS.”
Counsel for McClendon did not respond Friday to a request for comment.
The IRS does not comment on pending litigation.
The government is represented by John E. Fisher of the U.S. Department of Justice.
The case is McClendon v. United States of America, case number 4:15-cv-02664, in the U.S. District Court for the Southern District of Texas.
–Editing by Philip Shea.