School Board Chair Is Personally Liable for School's Unpaid Payroll Taxes and Penalties

(Parker Tax Publishing April 2025)

The Ninth Circuit affirmed a district court and held that the chairperson of a private school was a responsible person and thus personally liable for $187,900 in unpaid trust fund taxes and related penalties. The court agreed with the district court that the IRS's arguments for imposing the taxes and penalties were well-supported by the record and that the chairperson's reasons for believing that the taxes had been paid were not credible. Dreyer v. U.S., 2025 PTC 114 (9th Cir. 2025).

Background

Kristopher Dreyer was a board member of Riverside Christian Schools (RCS) from October of 2015 through February of 2019, and the Chairperson of RCS from October 28, 2015, to July 5, 2018. Dreyer was also the sole member of KLD LLC, a California LLC, when KLD LLC entered into a management services agreement with RCS. Under that agreement, RCS appointed KLD LLC to act as its sole and exclusive manager and representative advisor in all matters including but not limited to entering into advice, guidance, counsel, directions and other services, including the provision of overall executive management and financial and operational management and oversight.

During the last quarter of 2017 and the first two quarters of 2018, RCS failed to pay its trust fund taxes (i.e., income, social security, and Medicare taxes on employee wages). One of RCS's federal payroll tax deposits in the amount of $26,474 was dishonored on January 4, 2018, and RCS's bank statements for its payroll account showed that a wire transfer from RCS in the amount of $26,274 to the IRS was returned for insufficient funds on January 5, 2018.

In February of 2018, Dreyer received three emails from Gary Carroll, who was the business manager at RCS until the end of February 2018, informing him that (1) the IRS was requesting the taxes, (2) checks to pay the taxes had been rejected, and (3) the school's bank account with Citizens Bank was repeatedly overdrawn and unable to provide the necessary money for the tax payments. Dreyer replied that the taxes would need to be paid "directly," and not from the Citizens Bank account. The only other bank account available was Union Bank, which was controlled exclusively by Dreyer.

In December 2021, the IRS determined Dreyer was a "responsible person" under Code Sec. 6672 and thus was personally liable for RCS's outstanding trust fund taxes, plus interest and penalties. Under Code Sec. 6672, a responsible person is any person who has the duty to account for, collect, and pay over trust fund taxes to the government. If an employer fails to pay the government the collected trust fund taxes, the employer's officers or employees responsible for effectuating the collection and payment of trust fund taxes can be held personally liable for the delinquent taxes and penalties.

To impose personal liability, Code Sec. 6672 requires that an individual was required to collect, truthfully account for, and pay over the taxes, and willfully failed to meet one or more of these obligations. For a responsible person to be deemed to have acted willfully, the person must have either had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the IRS, or deliberately or recklessly disregarded facts and known risks that the taxes were not being paid. Individuals must prove by a preponderance of the evidence that they are not a "responsible person" or that they did not act "willfully" under Code Sec. 6672.

Dreyer paid a portion of the assessment for each quarter and filed for a refund which the IRS rejected. He then filed suit in a district court seeking a refund of what he had paid. The government filed a counterclaim seeking the unpaid portion of the employment taxes, including interest and penalties. In Dreyer v. U.S., 2023 PTC 336 (C.D. Calif. 2023), the district court found Dreyer's reasons for believing the taxes had been paid were uncredible and held in favor of the government, awarding it $187,900, plus interest and statutory additions as provided by law.

Dreyer appealed to the Ninth Circuit, arguing that (1) he had instructed Carroll and Michael Nolan, RCS's chief financial officer, to pay the taxes; (2) Carroll had told him that all RCS's taxes and bills were paid or being paid on time; (3) he believed the taxes were paid after RCS received a large donation in March 2018; and (4) it was reasonable for him to believe the taxes had been paid because he relied on financial statements that did not show the tax debt.

Analysis

The Ninth Circuit affirmed the district court after concluding that the court's rejection of Dreyer's narrative was well-supported by the record. The court found Dreyer's reasons for believing that the taxes were paid uncredible.

First, with respect to Dreyer's claim that he instructed Carroll and Nolan to pay the taxes, the court noted that Dreyer never mentioned Carroll or Nolan in his initial accounting of events when he filed for a refund with the IRS and both Carroll and Nolan provided testimony that contradicted Dreyer's narrative. Carroll, the court observed, repeatedly testified that he could not have paid the taxes, because there were not enough funds in the Citizens Bank account, and he did not have access to the Union Bank account.

Second, while several emails sent in February 2018 between Dreyer, Nolan, and Carroll concerning the taxes were admitted into evidence, Dreyer did not provide any corroborating emails or evidence to support his declaration that he had instructed Carroll and Nolan to pay the taxes that same month.

Third, since Carroll was no longer the business manager at RCS after February, the court found that he could not have known or reported that the taxes had been paid with the large donation received in March.

Finally, the court noted that Dreyer had admitted at trial that he knew the financial statements he claimed to rely on did not show all of the other debts he knew RCS had.

For a discussion of an employer's liability for unpaid trust fund taxes and related penalties, see Parker Tax ¶210,108.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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