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Another "integral agency" case!

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  • rlbaty50
    Anybody familiar with the Harvest Christian Academy in Pasadena, TX? ... Following my name below is a case concerning that school. The integral agency
    Message 1 of 2 , Jun 4, 2004
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      Anybody familiar with the Harvest Christian Academy in Pasadena, TX?
      It has a website at:

      > http://www.hcasaints.com/

      Following my name below is a case concerning that school.
      The "integral agency" connection may be indicated in the following
      observation from the case:

      > 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.

      While it is not indicated that the "affiliated church" is a church of
      Christ, the "integral agency" standard would appear to be met.

      So, we gotta wonder. . .didn't they have enough foresight to get all
      their employees ordained, exempted from Social Security and paid with
      tax free housing allowance dollars?

      It doesn't look like it. Instead, they ran up a tax tab and decided
      not to pay it. So, the directors were held liable for the unpaid
      taxes (at least the trust fund portion). I wonder if they are now
      exploiting 70-549 in order to make sure that doesn't happen again.

      Maybe someone will ask them and bring us a report.

      Sincerely,
      Robert Baty

      ####################################

      MICHAEL E. HOLMES AND FRED B. FLOYD,
      Plaintiffs,
      v.
      UNITED STATES OF AMERICA,
      Defendant.

      Release Date: MAY 11, 2004

      Opinion on Partial Summary Judgment

      1. Introduction.

      [1] 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.

      [2] 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.

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

      [4] 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.

      [5] 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.

      [6] 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.

      [7] 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. section
      6672. It moved for summary judgment against Holmes and Floyd. This
      court has already held that Floyd is personally liable.

      3. Responsibility.

      [8] 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. section
      6672(a); see also 26 U.S.C. sections 3102(a), 3402(a).

      [9] 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).

      [10] 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.

      [11] 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. section 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.

      [12] 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. section 6672(d).

      6. Conclusion.

      [13] 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.

      [14] Signed May 7, 2004, at Houston, Texas.

      Lynn N. Hughes
      United States District Judge

      ######################################
    • Tamara
      Interesting case, especially the joint and several liability issue. Best, Tamara ... From: rlbaty50 To: Maury_and_Baty@yahoogroups.com Sent: Friday, June 04,
      Message 2 of 2 , Jun 4, 2004
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        Interesting case, especially the joint and several liability issue.

        Best,
        Tamara
        ----- Original Message -----
        From: rlbaty50
        To: Maury_and_Baty@yahoogroups.com
        Sent: Friday, June 04, 2004 7:51 AM
        Subject: [Maury_and_Baty] Another "integral agency" case!


        MICHAEL E. HOLMES AND FRED B. FLOYD,
        Plaintiffs,
        v.
        UNITED STATES OF AMERICA,
        Defendant.

        Release Date: MAY 11, 2004

        Opinion on Partial Summary Judgment

        1. Introduction.

        [1] 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.

        [2] 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.

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

        [4] 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.

        [5] 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.

        [6] 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.

        [7] 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. section
        6672. It moved for summary judgment against Holmes and Floyd. This
        court has already held that Floyd is personally liable.

        3. Responsibility.

        [8] 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. section
        6672(a); see also 26 U.S.C. sections 3102(a), 3402(a).

        [9] 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).

        [10] 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.

        [11] 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. section 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.

        [12] 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. section 6672(d).

        6. Conclusion.

        [13] 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.

        [14] Signed May 7, 2004, at Houston, Texas.

        Lynn N. Hughes
        United States District Judge

        ######################################




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