Where the IRS Is Concerned, No Good Deed Goes Unpunished
October 1, 2004
Jonathan E. Strouse- Chicago
Volunteer director assessed entire tax liability of tax-exempt
organization.
A case decided last month by the United States District Court for the
Southern District of Texas illustrates the potential dangers that can accompany
¡§good acts¡¨ and serving on boards for little or no compensation.
Michael Holmes volunteered to be a director of Harvest Christian Academy, a
parochial school in Pasadena, Texas. The Academy¡¦s Board of Directors included
parents of students and members of the affiliated church. Mr. Holmes was
promoted to chairman of the board. He received no compensation for serving in
this capacity.
The Academy ran into financial difficulties and, as a result, failed to pay
its employees¡¦ withholding taxes for three consecutive quarters, a liability
exceeding $117,000. Mr. Holmes suggested various cutbacks to the board to free
up cash to pay the taxes, and claimed that the board rejected those suggestions.
Mr. Holmes was one of four signatories to the Academy¡¦s bank account, the others
being the Academy¡¦s administrator, its treasurer, and another director. Since
two signatures were required on Academy checks, Mr. Holmes had no ability to pay
the taxes by himself. Holmes claimed that he rarely signed any checks, and then
only when no one else was available to do so.
The Internal Revenue Service assessed Mr. Holmes and the Academy¡¦s treasurer
for the entire amount of the liability, and they sued for a refund. The court
rejected Mr. Holmes¡¦ claim, finding that both his volunteer status and his
inability to sign a check by himself were irrelevant. The court noted that Mr.
Holmes had signed several checks payable to other creditors of the Academy, with
knowledge of the pending tax liability and reasoned that he could have refused
to participate in the ¡§diversion of the funds.¡¨
Finally, the court had no problem with the Service¡¦s selectively assessing
Mr. Holmes with the entire liability. The court stated that he is permitted a
right to seek contribution from others, but in a separate suit. His liability
was a joint one for the entire amount owing.ƒn
For more information, contact Jonathan E. Strouse via e-mail at
jonathan.strouse@hklaw.com, or
call toll free, 1-888-688-8500.