Was the corporation's former president personally liable for its unpaid Virginia withholding tax?

Subject

Taxpayer taxes, penalties and interest owed by the Corporation will be discharged

Plain-English summary

Virginia discharged the personal penalties assessed against the corporation's former president for the company's unpaid withholding tax. Although he remained a director, his son had succeeded him as president years earlier, and declining health had reduced his work to occasional consultation on technical issues.

Va. Code § 58.1-1813 applies to an officer or employee who had a duty concerning the unpaid tax, knew of the failure or attempted evasion, and had authority to prevent it. The evidence—including an employee affidavit and returns signed by the son—supported the appeal's position that the former president did not control the corporation's finances, did not know of its tax problems, and was prevented from obtaining financial information.

Because the required knowledge and authority were missing, the Commissioner discharged the penalties assessed against him in the amount of the corporation's taxes, penalties, and interest.

What this means for you

• A title such as director or former president does not by itself establish personal liability under Va. Code § 58.1-1813.
• The Department looks for both knowledge of the tax failure and authority to prevent it, along with the officer's actual duty concerning the tax.
• Evidence about who made financial decisions, signed returns, had access to records, and controlled payments can be decisive.
• This ruling addressed the individual's converted penalties; it did not erase the corporation's underlying withholding-tax failure.

Common questions

Q: Why was the former president not treated as a responsible officer?
A: The evidence showed that he lacked authority over financial affairs and lacked sufficient knowledge of the withholding failure during the periods assessed.

Q: Was he still connected to the corporation?
A: Yes. He remained a director and occasionally consulted on technical issues, but his son made the executive and financial decisions.

Q: What evidence supported the discharge?
A: The ruling cites an affidavit describing his diminished role and other corporate returns bearing his son's signature.

Q: Does this mean all inactive directors avoid withholding liability?
A: No. The determination turned on this individual's duties, knowledge, authority, health-related reduction in activity, and the evidence submitted.

Citations and references

• Va. Code § 58.1-1813.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-172

Original ruling text

September 11, 2008

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter in which you seek correction of the penalty assessments issued to * (the "Taxpayer"), resulting from withholding assessments issued against *** (the "Corporation") for the periods January 2003 through December 2004.

FACTS

The Department issued assessments against the Corporation for failure to remit withholding tax for the periods January 2003 through December 2004. Upon failure to collect the deficiencies from the Corporation, the Department assessed the Taxpayer penalties in the amount of the taxes, as well as penalties and interest owed by the Corporation, pursuant to Va. Code § 58.1-1813.

On behalf of the Taxpayer, who is now deceased, you contest conversion of the assessments. You admit that the Taxpayer was the president and CEO of the Corporation until 1987, at which time his son succeeded him as president. Although he remained as a director, declining health forced the Taxpayer to reduce the amount of time that he worked for the Corporation. By 2003, all executive decisions, including financial ones, were made by the Taxpayer's son in his capacity as president and treasurer of the Corporation. As such, you contend that the Taxpayer is not a corporate officer as defined in Va. Code § 58.1-1813 and cannot be held liable for the taxes, penalties and interest assessed to the Corporation.

DETERMINATION

Virginia Code § 58.1-1813 addresses the liability of corporate officers and provides, in pertinent part, the following:

Any corporate, partnership or limited liability officer who willfully fails to pay, collect or truthfully account for and pay over any tax administered by the Department of Taxation, 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 of the amount of tax evaded, or not paid ....

The term "corporate or partnership officer" as used in this statute means an officer or employee of a corporation, who as such officer is under a duty to perform on behalf of the corporation, the act in respect of which the violation occurs and who (1) had knowledge of the failure or attempt to evade taxes and (2) had authority to prevent such failure or attempt.

You assert that the Taxpayer's poor health necessitated a progressive reduction of his authority over the financial administration of the Corporation. During the taxable periods at issue, he came into the office at most two days a week, and his only job responsibility was to consult on technical issues. You state that the corporation's tax problems were not disclosed to him. An affidavit from a long-time employee has been submitted supporting the assertion that the Taxpayer had a diminishing role in the Corporation due to health issues.

During the taxable years at issue no withholding returns were filed. However, other returns that were filed both prior and subsequent to the taxable years at issue bear the signature of the Taxpayer's son.

The available evidence appears consistent with statements made in your appeal that the Taxpayer did not have authority over the financial affairs of the Corporation, and was even prevented from gaining information about the Corporation's financial condition. Accordingly, I find that the Taxpayer did not have sufficient knowledge of the failure or attempt to evade taxes, or the authority to prevent synch failure or attempt pursuant to Va. Code § 58.1-1813. The penalties assessed against the Taxpayer in the amount of the taxes, penalties and interest owed by the Corporation will be discharged.

If you have any questions regarding this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***,

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2342935324.B