Title: Bailey v. Independent School Dist. No. I-29

State: oklahoma

Issuer: Oklahoma Supreme Court

Document:

BAILEY v. INDEPENDENT SCHOOL DIST. NO. I-292011 OK 37Case Number: 109031Decided: 05/03/2011THE SUPREME COURT OF THE STATE OF OKLAHOMA
NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN 
THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR 
WITHDRAWAL. 

DEBRA A. BAILEY, ELIZABETH L. BALLARD, PATTIPEG S. HARJO, DANIEL 
T. HARRIS, DEBORAH A. HILL, GARIANN JACOBS, BARBARA SUE MADOLE, TERESA McINTYRE, 
VICTORIA R.WOOD and PROFESSIONAL EDUCATORS OF NORMAN, 
Plaintiffs/Appellants,v.INDEPENDENT SCHOOL DIST. NO. I-29 OF CLEVELAND 
COUNTY, OKLAHOMA, a/k/a NORMAN PUBLIC SCHOOLS, Defendant/Appellee.
APPEAL FROM THE DISTRICT COURT OF CLEVELAND COUNTY
Honorable Tom Lucas, Trial Judge
¶0 If funds are available, the Education Leadership Oklahoma Act provides 
that a bonus be awarded to eligible teachers who attain national certification. 
Although in the past, the State Board of Education provided the full amount of 
the bonuses, as well as providing the additional amounts necessary for the 
payment of the employer withholding taxes, it did not do so in 2010. As a 
result, the employer withholding tax was deducted by local school districts from 
the amount which was sent. The teachers filed suit seeking declaratory relief 
because employer taxes were withheld from their bonus payments. The district 
court dismissed the action for failure to state a claim upon which relief can be 
granted. We hold that because the State was responsible for paying employer 
withholding taxes for the bonuses, the School District had to pay the employer's 
tax from the bonus allocations. 
AFFIRMED.
Richard B. Wilkinson, Oklahoma City, Oklahoma, for 
Plaintiffs/Appellants.Robert L. Pendarvis, Mary Robertson, Oklahoma City, 
Oklahoma, for Defendant/Appellee.
KAUGER, J.:
¶1 We must decide whether a school district may deduct employer withholding 
taxes from teacher bonuses paid pursuant to the Education Leadership Oklahoma 
Act

FACTS
¶3 Subject to the availability of funds, the State Department of Education 
(SDE) is authorized to provide an annual $5,000 bonus to teachers who attain 
National Board certification pursuant to the Education Leadership Oklahoma Act 
(Act). Prior to the 2007 - 2008 school year, the SDE provided the annual bonus 
directly to teachers who were eligible under the Act, and the payments 
were processed as 1099-MISC income for federal tax purposes. The SDE 
classified the teachers as independent contractors, apparently to avoid paying 
employer related withholding taxes. In 2007, the Internal Revenue Service (IRS) 
disputed the characterization of the teachers as independent contractors and 
determined that the annual bonus payments to teachers were wages and that for 
purposes of the bonus payments, the teachers were employees of the State. 
¶4 The IRS and the State of Oklahoma, on behalf of the SDE, eventually 
settled the matter.

¶5 Unlike the 2008 and 2009 letters, the SDE did not specify separate 
allocations for the bonus in 2010.

¶6 On September 1, 2010, nine teachers, Debra A. Bailey, Elizabeth, L. 
Ballard, Pattipeg S. Harjo, Daniel T. Harris, Deborah A. Hill, Gariann Jacobs, 
Barbara Sue Madole, Teresa McIntyre, Victoria R. Wood, and PEN (teachers) filed 
a petition for declaratory relief in the District Court of Cleveland County 
asserting that the employer contributions had been wrongfully deducted from the 
teachers' bonuses. They asked the court to enter a declaratory judgment 
declaring that the manner in which the School District paid the bonuses was 
contrary to the Oklahoma statutes and SDE directives. The School District filed 
a Motion to Dismiss on September 27, 2010, arguing that the School District 
could not be liable for the payment of bonuses pursuant to ELOA and that because 
the School District was required to discharge the SDE's tax obligations, 
declaratory judgment could not be rendered. On December 2, 2010, the trial court 
issued an order granting the School District's motion to dismiss for failure to 
state a claim upon which relief could be granted. 
¶7 The trial court found that because the School District could not be liable 
for bonus payments pursuant to statute, payment of the $5,000 bonuses was 
conditioned on the availability of funds. The court determined that the School 
District was required to use some of the allocated bonus money to fund the SDE's 
tax obligations. It also found that the School District was not a proper party 
and that there was no justiciable controversy. The teachers filed an appeal on 
December 21, 2010, and we retained the cause on January 24, 2011.
PURSUANT TO 
¶8 Federal law imposes an excise tax on every qualifying employer who has an 
employee. This excise tax is imposed on employers for the privilege of 
establishing and maintaining the relationship of employer and employee.7 The taxes are the sum of 
two rates - the old-age, survivors, and disability insurance tax at 26 U.S.C. 
§3111(a) and the hospital insurance tax in section (b).8 This statute is referred 
to as the Federal Insurance Contributions Act (FICA). These tax rates are the 
same as the employee's tax rate and employers and employees are responsible for 
their respective portions.9 

¶9 Prior to 2007, the SDE classified teachers as independent contractors for 
the purpose of awarding the bonuses. In 2007, the IRS disputed the 
classification and eventually determined that: 1) the bonuses were wages; 2) the 
teachers were employees of the SDE for bonus purposes, not independent 
contractors;10 and 3) the SDE and the teachers would have to pay 
employee and employer withholding taxes. The IRS also determined that the 
teachers were employees of the State for purposes of the bonuses.11 In order to avoid placing every teacher into the 
State's payroll system, in 2008 and 2009, the SDE sent the bonus payments, as 
well as the necessary employer withholding taxes, to the school districts. Since 
the IRS determination, the school districts have acted as intermediaries to send 
the funds to eligible teachers. 

¶10 Intermediaries or third parties can be held responsible for an employer's 
failure to pay employer withholding taxes. This liability arises from 26 U.S.C. 
§6672(a)12 which provides that persons other than the employer can 
be liable for an employer's tax contribution if they are responsible for 
collecting and accounting for the tax and wilfully fail to discharge that duty. 
This statute was enacted to provide the federal government with a method to 
collect unpaid taxes.13 Once an employee has had taxes withheld from their 
wages, the United States has no recourse to recoup money from the employee which 
was not remitted by the employer.14 This statute has been construed liberally by courts to 
impose liability on any "responsible person" who wilfully fails to remit 
employer withholding taxes.15 

¶11 In Commonwealth National Bank of Dallas v. United 
States, 665 F.2d 743 (5th Cir. 1982) the CEO of a company, the lending 
bank to that company, and the CEO of the bank were sued by the United States as 
"responsible persons" under 26 U.S.C. §6672(a)16 for failing to pay taxes withheld from employee wages. 
In that case, the officers of the lending company were executing payroll checks 
as well as checks for the employer withholding taxes, but they only honored the 
payroll checks even though the company's account was afforded a large overdraft 
varying between $98,500 and $237,000. The cause went to trial and the jury found 
both officers liable for the failure to pay the employer withholding tax 
contributions. Apparently, the lending bank's officers were found to be liable 
because they were primarily responsible for determining which of the company's 
creditors were paid. The jury determined that they each had a duty and 
responsibility to ensure the payment of the company's taxes. On appeal, the 
Circuit Court affirmed the decision of the trial court.17 

¶12 Many cases acknowledge that a "responsible person" need not be vested 
with routine duties of collection and payment; it is sufficient that they have 
the authority to avoid the default that gave rise to the violation.18 Here, the School District had the power to see that the 
taxes were paid and had significant, if not exclusive, control over the 
disbursement of the bonuses. The SDE had the responsibility to pay employer 
withholding tax contributions, and the School District, acting as a conduit, had 
a duty to remit the money to the IRS. 

¶13 The Act provides that bonuses are "subject to the availability of 
funds."19 In the past, the SDE sent enough money for the payment 
of the employer withholding tax contribution and the full amounts of the bonus. 
However, in 2010, the SDE did not send enough money to fully fund the bonuses 
and to pay the employer withholding tax contribution. This suggests that there 
were not sufficient funds available to do so. We recognize that the diminishment 
of the bonus is disappointing to the qualifying teachers, but it appears in this 
period of state budgetary shortfalls that the SDE determined that partial bonus 
was better than no bonus at all. The lack of availability of funds is 
illustrated by the recent amendments to the Act. Title 70 O.S. Supp. 2010 
§6-204.2, was amended during the 
2010 legislative session to suspend the payment of bonuses beginning June 30, 
2010, through June 30, 2012, for teachers who attain national board 
certification during that period.20

CONCLUSION
¶14 Pursuant to an IRS determination, insofar as the bonuses are concerned, 
the teachers are employees of the SDE, and the State is responsible for the 
payment of employer withholding tax contributions for the payment of these 
bonuses. Because the SDE was responsible for paying the employer withholding tax 
contributions, and the School District acted as a conduit for the SDE, the 
School District had a duty to pay the employer withholding tax contributions 
from the monies sent by the State for the payment of the bonuses to the 
teachers. It was not required to pay the full amount of the bonus if the funds 
were unavailable. 
AFFIRMED.
ALL JUSTICES CONCUR.
FOOTNOTES

1 Title 70 O.S. Supp. 2007 
§6-204.2 provides in pertinent 
part:

A. Subject to the availability of funds, the Oklahoma Commission for Teacher 
Preparation and the State Board of Education are authorized to establish the 
Education Leadership Oklahoma program.
B. The purposes of the Education Leadership Oklahoma program are:
1. Provide teachers throughout the state information about National Board 
certification and the Education Leadership Oklahoma program scholarships and 
services;
2. Provide technical assistance and National Board certified mentors to all 
teachers seeking National Board certification upon request;
3. Provide scholarships, pursuant to the Education Leadership Oklahoma Act 
and Oklahoma Commission for Teacher Preparation rules, for teachers seeking 
National Board certification;
4. Provide a bonus to teachers who achieve National Board certification 
pursuant to the Education Leadership Oklahoma Act and State Board of Education 
rules;
5. Reward teachers who achieve National Board certification without the 
financial support of the Education Leadership Oklahoma program by awarding them 
the application fee and the amount of the scholarship given to Education 
Leadership Oklahoma participants pursuant to this section and commission rules; 
and
6. Provide recognition to National Board certified teachers. . .
E. Subject to the availability of funds appropriated by the Legislature for 
the purposes of this subsection, the application fee for National Board 
certification shall be paid for scholarship recipients by the Commission, and 
scholarship recipients shall be provided a scholarship in the amount of Five 
Hundred Dollars ($500.00) to cover other expenses associated with obtaining 
National Board certification.
F. It is the intent of the Legislature that the Oklahoma Commission for 
Teacher Preparation contract with Southeastern Oklahoma State University to 
establish Education Leadership Oklahoma program training in higher education 
teacher preparation programs in the state to assist teachers in meeting the 
requirements to obtain National Board certification.
G. All teachers seeking National Board certification shall be eligible to 
participate in Education Leadership Oklahoma program training to assist them in 
meeting the requirements of the National Board certification process, free of 
charge.
H. The Oklahoma Commission for Teacher Preparation shall promulgate rules for 
the selection of scholarship recipients, the selection and utilization of 
alternates, the payment and reimbursement of application fees, and the issuance 
of scholarships.
I. Subject to district board of education policy or collective bargaining 
agreement, additional professional leave days may be granted to teachers seeking 
National Board certification for National Board certification portfolio 
development. During the two (2) days of the additional professional days granted 
to teachers for National Board certification portfolio development, a substitute 
teacher shall be provided by the school district at no cost to the teacher.
J. The State Board of Education shall provide all teachers who attain 
National Board certification a bonus in the amount of Five Thousand Dollars 
($5,000.00) annually no later than January 31 for as long as they maintain their 
National Board certification and are teaching in the classroom full-time in an 
Oklahoma public school. No school or school district shall be liable for payment 
of bonuses pursuant to this section.
K. The bonus shall not be included in the calculation of the teacher's salary 
for purposes of meeting the district or statutory minimum salary schedule or for 
purposes of compensating Oklahoma Teachers' Retirement System contributions or 
benefits.
L. The State Board of Education shall promulgate rules for the provision of 
the bonus pursuant to this section to include, but not be limited to, a process 
by which a National Board certified teacher will verify that:
1. The National Board certification has not lapsed; and
2. The teacher is still a full-time teacher.
M. It is the intent of the Legislature that the Oklahoma State Regents for 
Higher Education incorporate the National Board certification portfolio 
development into all programs in education leading to a master's level 
degree.
N. Upon implementation of this subsection as provided for in subsection O of 
this section, the State Board of Education shall provide all teachers who attain 
National Board certification a bonus in the amount of Seven Thousand Dollars 
($7,000.00) annually no later than January 31 for as long as they maintain their 
National Board certification and are full-time teachers in an Oklahoma public 
school. No school or school district shall be liable for payment of bonuses 
pursuant to this section. Upon implementation, the bonus provided for in this 
subsection shall replace the bonus provided for in subsection J of this 
section.
O. Implementation of subsection N of this section shall be contingent upon 
the appropriation by the Legislature of state funds for the specific purpose of 
implementing subsection N of this section. Nothing in this section shall prevent 
the State Board of Education or a school district board of education from 
utilizing private, local, or federal funds to implement subsection N of this 
section.
The current version of the statute is not referenced because it was not in 
effect at the time the bonuses were distributed.

2 Although the IRS rulings are not a part of the record, 
the following information regarding the IRS determination is helpful. It was 
sent in a December 6, 2007, letter to Sandy Garrett, State Superintendent of 
Public Instruction of the Oklahoma State Department of Education from Brenda 
Bolander, State Comptroller of the Oklahoma Office of State Finance:

Dear Superintendent Garrett;
We have recently settled an appeal with the Internal Revenue Service (IRS) 
for the limited scope examination of the State of Oklahoma Employment Tax 
Returns (Forms 941) for calendar years 2001, 2002, and 2003. At issue was 
whether the annual bonus paid to teachers for National Certification by the 
Oklahoma State Department of Education is wages for purposes of Internal Revenue 
Code (IRC) 3121(b)(7)(E) and/or IRC 3121(b)(7)(F).
The IRS has found for the purposes of the bonus payment that the teachers are 
subject to the will and control of the School District, State, and Statutes in 
performing their duties as public school teachers. The source of compensation 
for these services is irrelevant in determining worker classification. The fact 
that the bonus was paid by the State, rather than the school district, does not 
change the teachers' classification from employee to independent contractor. The 
amounts were paid in connection with the employee's services as a public school 
teacher. IRC 3401(d) provides that an employer (for purposes of withholding) can 
be someone other than the common law employer, if that person has control of the 
payment of wages.
Based on the IRS worker classification determination, the bonus is wages and 
the teachers would be considered employees of the State, per IRC 3121(a) and 
3121(b). These wages are subject to Social Security, Medicare, and income tax 
withholding per IRC 3402(d).
Effective immediately, as part of the settlement agreement, the State has 
agreed to no longer process these payments as 1099-MISC reportable and the State 
is not required to issue corrected 1099-MISC or W-2 forms to the teachers. 
Accordingly, OSF will reject any miscellaneous claims from this point forward 
which include these bonus payments.
At this point, the State Department of Education will need to determine which 
method of payment it chooses to use, either add the teachers to the state 
PeopleSoft payroll system and pay them directly as state employees, or forward 
the funds to the school districts for payment to the teachers through the 
districts' payroll systems. There are issues to consider in making that decision 
and our staff is available to provide additional information as needed.
Please let me know if you require any assistance during this transition.
Sincerely,Brenda BolanderState Comptroller

3 Letter from Garrett, State Superintendent, Defendant's 
Motion to Dismiss, Exhibit "C."

4 There was no "Revised Allocation Notice" attached to 
the January 25, 2010 letter in the record provided. 

5 January 26, 2010 e-mail from Sandy Garrett, Plaintiffs' 
Response and Brief in Opposition to Defendant's Motion to Dismiss, Exhibit "B," 
page 1 of 2. 

6 January 26, 2010 letter from Brenda Burkett, CFO of 
Norman Public Schools, Plaintiffs' Response and Brief in Opposition to 
Defendant's Motion to Dismiss, Exhibit "C." 

7 Jones v. Goodson, 121 F.2d 176, 179 (10th 
Cir. 1941).

8Title 26 U.S.C. § 3111(a) and (b) provide:

(a) Old-age, survivors, and disability insurance.--In addition to other 
taxes, there is hereby imposed on every employer an excise tax, with respect to 
having individuals in his employ, equal to the following percentages of the 
wages (as defined in section 3121(a)) paid by him with respect to employment (as 
defined in section 3121(b))--
In cases of wages paid during 1984, 1985, 1986, or 1987, the rate shall be 
5.7 percent.In cases of wages paid during 1988 or 1989, the rate shall be 
6.06 percent. In cases of wages paid during 1990 or thereafter, the rate 
shall be 6.2 percent.
(b) Hospital insurance --In addition to the tax imposed by the preceding 
subsection, there is hereby imposed on every employer an excise tax, with 
respect to having individuals in his employ, equal to the following percentages 
of the wages (as defined in section 3121(a)) paid by him with respect to 
employment (as defined in section 3121(b))--
(1) with respect to wages paid during the calendar years 1974 through 1977, 
the rate shall be 0.90 percent; (2) with respect to wages paid during the 
calendar year 1978, the rate shall be 1.00 percent; (3) with respect to 
wages paid during the calendar years 1979 and 1980, the rate shall be 1.05 
percent; (4) with respect to wages paid during the calendar years 1981 
through 1984, the rate shall be 1.30 percent; (5) with respect to wages paid 
during the calendar year 1985, the rate shall be 1.35 percent; and (6) with 
respect to wages paid after December 31, 1985, the rate shall be 1.45 percent. 

9 Title 26 U.S.C. §3111(a) and (b), see note 8, 
supra.

10 Letter to Garrett, see note 2, supra.

11 Letter to Garrett, see note 2, supra.

12 Title 26 U.S.C. §6672(a) provides: 

General rule.-- Any person required to collect, truthfully account for, and 
pay over any tax imposed by this title who willfully fails to collect such tax, 
or truthfully account for and pay over such tax, or willfully attempts in any 
manner to evade or defeat any such tax or the payment thereof, shall, in 
addition to other penalties provided by law, be liable to a penalty equal to the 
total amount of the tax evaded, or not collected, or not accounted for and paid 
over. No penalty shall be imposed under section 6653 or part II of subchapter A 
of chapter 68 for any offense to which this section is applicable.

13 Kadah v. United States, 600 F. Supp. 1302, 1308 (N.D.N.Y. 1985).

14 Kadah v. United States, 600 F.Supp 
1308, see note 13, supra.

15 Slodov v. United States, 
436 U.S. 238, 259, 98 S. Ct. 1778, 56 L. Ed. 2d 251 (1978). 

16Title 26 U.S.C. §6672(a), see note 12, supra.

17 In Commonwealth National Bank 
of Dallas v. U.S., 665 F.2d 743 (5th Cir. 1982) the court 
noted one of the jury instructions provided at trial which stated, in pertinent 
part:

The term "responsible person" includes any person or entity who is connected 
or associated with the corporation-employer in such a manner that such person or 
entity has the power to see that the taxes are paid, has the power to make final 
decisions concerning disbursement of funds of the corporation, or has the power 
to determine which creditors are to be paid and when they are to be paid. 
"Final" means significant rather than exclusive control over the disbursal of 
corporate funds. The meaning of the term "responsible" is very broad and is not 
limited to the person who actually prepares the payroll checks or the tax 
returns, although it may include such person. A "responsible person," within the 
meaning of the law, is not limited to a person in the sense of a human being as 
we customarily understand the word, but may include an individual, a bank, a 
creditor, or a corporation. 
A responsible person need not even be authorized to draw checks for the 
corporation so long as he has the power to decide who will get such checks. In 
other words, the "responsible person" is any person or other entity who can 
effectively determine how corporate funds are to be spent and which bills should 
or should not be paid or when they should be paid. A person who is not an 
official of the employer, or a corporation unrelated to the employer, may also 
be a "responsible person" if, because of a peculiar relationship with the 
employer, such person or corporation controls the finances of the employer. 
The Commonwealth Court also noted that:
In approaching the issue of personal responsibility for non-payment of 
withheld taxes, the courts have tended to disregard the mechanical functions of 
the various corporate officers, and, instead, have searched for the person or 
persons who could have seen to it that the taxes were paid, a person with 
ultimate authority over expenditures of corporate funds who can fairly be said 
to be responsible for the corporation's failure to pay over its taxes. 

18 Harrington v. United States, 504 F.2d 1306, 1312 (1st Cir. 1974); Adams v. United States, 
504 F.2d 73, 75 (7th Cir. 1974), cert. den. 421 U.S. 991, 
95 S. Ct. 1998, 44 L. Ed. 2d 482; Pacific National 
Insurance Co. v. United States, 422 F.2d 26, 30 (9th 
Cir. 1970), cert. den. 398 U.S. 937, 90 S. Ct. 1838, 26 L. Ed. 2d 269; 
Werner v. United States, 374 F.Supp 558, 562 (1974), 
aff'd without discussion 512 F.2d 1381 (2nd Cir. 1975); United 
States v. North Side Deposit Bank, 569 F. Supp. 948, 960 (W.D. Pa. 1983); United States v. Hill, 
368 F.2d 617, 621 (5th Cir. 1966); Mueller v. Nixon, 470 F.2d 1348, 1360 (6th Cir. 1972), cert. den. 412 U.S. 949, 
93 S. Ct. 3011, 37 L. Ed. 2d. 1001.

19 Title 70 O.S. Supp. 
2007 §6-204.2, 
supra, note 1. 

20 Amended by Laws 2010, House Bill 3029, c. 457, §4.