Title: Bailey v. Independent School Dist. No. I-29
Citation: 2011 OK 37, 256 P.3d 57
Docket Number: 
State: Oklahoma
Issuer: Oklahoma Supreme Court
Date: May 3, 2011

Bailey v. Independent School Dist. No. I-29 Annotate this Case Justia Opinion Summary If funds are available, the Educational Leadership Oklahoma Act (Act) provides for bonuses to eligible teachers who attain national certification. In the past, the State Board of Education provided the full amount of bonuses and any additional amounts necessary to cover the payroll withholding taxes on the bonuses. In 2010, the Board didn’t pay the withholding taxes. Teachers filed suit seeking a declaratory judgment that the Board should have paid the withholding taxes on their bonuses. The trial court found that because the School District was not liable for the bonus payments under the Act, the State Department of Education was, and payment of the bonuses was conditioned on the availability of funds to pay them from State. The court determined that the School District was required to use some of the allocated bonus money from the State to fund the District’s tax obligations. Furthermore, the court concluded that the Teachers sued the wrong party by suing the School District, so that it could not enter a judgment in their favor. Accordingly, district court dismissed the action for lack of jurisdiction. On appeal, the Supreme Court held that because the Teachers were State employees, and State was responsible for paying employer withholding taxes for the bonuses, the School District had to pay them. However, the Court found that the State did not have enough money to pay both the bonuses and the withholding tax—it only had enough to pay the bonuses. The Court affirmed the lower court’s decision to dismiss the case. Read more Want to stay in the know about new opinions from the Oklahoma Supreme Court? Sign up for free summaries delivered directly to your inbox. Learn More › You already receive new opinion summaries from Oklahoma Supreme Court. Did you know we offer summary newsletters for even more practice areas and jurisdictions? Explore them here . BAILEY v. INDEPENDENT SCHOOL DIST. NO. I-29 2011 OK 37 Case Number: 109031 Decided: 05/03/2011 THE 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. FOOT