HOLMES v. U.S

LYNN HUGHES, District Judge

1. Introduction.

A private school had financial problems and decided not to pay its employees' withheld taxes. The government secured a judgment against a director personally for the taxes, and it wants to hold another jointly responsible for them. Because of his control over the finances, the second director is also liable.

2. Background.

Harvest Christian Academy is a parochial school in Pasadena, Texas. It is incorporated, and its board of directors includes parents of students and members of the affiliated church. The board has had approximately six directors.

Michael Holmes began as a director and was promoted to chairman of the board. He was not compensated for either job.

In 1998, the school suffered a substantial drop in enrollment. The loss of tuition made the school insolvent. The directors chose to pay some creditors while negotiating with others. The board's goal was to keep the school open as long as possible.

The school's checks required two signatures. Holmes, Fred Floyd, another director and Patricia Gehret, the school administrator, were signatories. Holmes claims that he rarely signed checks and only did so when the others were not available.

Because of its financial problems, the school did not pay its employees' withheld taxes for the last quarter of 1998 and the first two quarters of 1999. Floyd, who was also the treasurer, told Holmes about the tax liability from the beginning. Holmes discussed it with the board, and he suggested cutbacks to free up cash to pay the taxes. He claims that the board rejected his ideas. The total trust fund liability for the three quarters is $117,476.03.

In August 2001, the Internal Revenue Service assessed Floyd and Holmes the full amount. Almost two years later, Floyd and Holmes sued, arguing that they are not liable and that the service abused its discretion by not assessing other board members and principals for the taxes. The service counterclaimed, arguing that Floyd and Holmes are jointly liable under federal law. See 26 U.S.C. § 6672. It moved for summary judgment against Holmes and Floyd. This court has already held that Floyd is personally liable.

3. Responsibility.

Under federal law, a company's agent who is responsible for the collection and payment of employment taxes is liable to the government for the amount of the taxes unpaid. See 26 U.S.C. § 6672(a); see also 26 U.S.C. § 3102(a), 3402(a).

A "responsible person" has some authority over the payment of the taxes, like paying them himself, ordering their payment, or having some control over the company's treasury. See Barnett v. Internal Revenue Service, 988 F.2d 1449, 1456 (5th Cir. 1993); Braden v. United States, 318 F. Supp. 1189 (S.D. Ohio 1970).

Holmes, as chairman of the board, had enough responsibility to be personally liable for the unpaid taxes. He knew about the tax burden — he signed a return showing that no tax deposits were made for three months. Also, he signed several checks to some of the school's creditors instead of paying the withheld taxes. He could have seen that the taxes were paid but chose not to.

4. Orders.

Holmes claims that his concern over the use of the withheld taxes was ignored or rejected by the board, due in part to the lobbying of Gehret. As chairman, he could have protested the use of the funds or refused to follow the directive. Further, that the school required two signatures on its checks is not a defense; it simply shows that at least two people were jointly in control. See Brown v. United States, 464 F.2d 590, 591 (5th Cir. 1972). Also, Holmes is not immune from liability because he was a volunteer for the school. See 26 U.S.C. § 6672(e). He had a real position, he was involved in the financial operations of the school, and he knew about the obligation to the government. His titles, positions, and jobs were not honorary.

5. Selective Liability.

The service may sue any or all of the school's agents who it thinks are liable for the taxes because the liability is joint. See Kelly v. Lethert, 362 F.2d 629 (8th Cir. 1966). The statute allows Holmes to sue other agents for contribution, but he must seek it in another suit. See 26 U.S.C. § 6672(d).

6. Conclusion.

Along with Floyd, the government will recover jointly from Holmes the balance of the unpaid employment taxes because he actively participated in the diversion of the funds. Others may share in the responsibility.