Could a corporate officer avoid personal tax liability because an accountant incorrectly advised that the dissolving corporation owed no tax?

Subject

Inaccurate or erroneous advice given to taxpayer by persons he employes/ only recourse is against the accountant, lawyer, or tax preparer for the error

Plain-English summary

A corporation's president and sole shareholder remained personally liable for unpaid corporate tax despite an accountant's advice that no 2007 Virginia tax would be due. The corporation sold its commercial property, paid creditors, distributed the remaining assets to the shareholder, reserved no cash for taxes, and wound up operations.

The final corporate return reported a liability but no payment. After collection from the corporation failed, Virginia converted the unpaid tax, penalty, and interest into a responsible-officer assessment against the shareholder.

Virginia found willfulness because the officer knew a final return was required and deliberately preferred other creditors and himself over the Department. The standard required a voluntary, conscious, and intentional decision, not a specific intent to defraud.

Erroneous professional advice did not establish reasonable cause to waive the converted assessment. The ruling said a taxpayer's recourse for such an error was against the accountant, lawyer, or preparer, not abatement by the Department.

What this means for you

• Reserve for potential tax before dissolving a corporation or distributing its assets.
• Paying creditors or owners while tax remains unpaid can establish willfulness.
• A responsible officer may be personally assessed for the entity's tax, penalty, and interest.
• Reliance on a paid adviser does not necessarily provide reasonable cause under Virginia's policy.

Common questions

Why was the shareholder considered a responsible officer?

He was president and sole shareholder, knew a final return was required, and had authority to preserve funds for payment.

What made the failure willful?

He consciously paid other creditors and himself without reserving money for Virginia tax.

Did the accountant's advice eliminate the assessment?

No. Virginia denied abatement and pointed to recourse against the adviser.

Citations and references

• Va. Code §§ 58.1-105 and 58.1-1813(A) and (B).
• Hewitt v. U.S., 377 F.2d 921, 924 (C.A. Tex.), as cited in the ruling.
• Virginia Public Documents 97-434 and 08-69.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-184

Original ruling text

August 16, 2010

Re: § 58.1-1821 Application: Corporate Officer Liability

Dear *:

This will reply to your letter in which you seek correction of the converted assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2007. I apologize for the delay in the Department's response.

FACTS

The Taxpayer was president and sole shareholder of * (the "Corporation"), a single asset entity that held a parcel of commercial real estate during the taxable year at issue. The commercial property was sold in late 2007. Soon thereafter, the Corporation paid off its creditors and distributed the remaining assets to its shareholder, the Taxpayer. The Corporation reserved no cash for potential tax liabilities and wound up operations in early 2008.

The Corporation filed a 2007 income tax return reporting a tax liability but failed to remit the balance due. Upon failure to collect the deficiency from the Corporation, the Department assessed the Taxpayer a penalty in the amount of the tax, penalty and interest owed by the Corporation pursuant to Va. Code § 58.1-1813.

The Taxpayer appeals the assessment, contending he did not willfully fail to pay the Corporation's income tax liability. He asserts that he conferred with his accountant prior to the dissolution of the Corporation and was advised there would be no Virginia corporate income tax liability for the 2007 taxable year. Accordingly, the Taxpayer believes that because he made a good faith effort to determine the Corporation's potential liability, his failure to ensure that the Corporation paid its liability was not voluntary, conscious, and intentional.

DETERMINATION

Virginia Code § 58.1-1813 A states, "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 the tax evaded, or not paid, collected or accounted for and paid over, to be assessed and collected in the same manner as such taxes are assessed and collected."

Virginia Code § 58.1-1813 B defines the term "corporate, partnership or limited liability officer" as "an officer or employee of a corporation, or a member, manager or employee of a partnership or limited liability company, who as such officer, employee, member or manager is under a duty to perform on behalf of the corporation, partnership or limited liability company the act in respect of which the violation occurs and who (1) had knowledge of the failure or attempt as set forth herein and (2) had the authority to prevent such failure or attempt."

Under the standard of willfulness applied by the courts, all that needs to be shown is that the act was "voluntary, conscious, and intentional." Hewitt v. U.S. , 377 F.2d 921, 924 (C.A. Tex.). In other words, it need only be shown that the corporate officer was aware of the outstanding liability and knowingly and intentionally paid operating expenses or other debts of the company.

The Department has previously ruled that a responsible officer assumes the authority of ensuring that the final corporation income tax return is correct when it was filed. The Department may assess the penalty so long as the officer had knowledge of the deficiency within the period of limitations for making an assessment against the corporation or partnership. See (Public Document (P.D.) 97-434 (10/29/1997). In this case, the Taxpayer had knowledge that a final corporate income tax return was required and even discussed the potential liability with his accountant.

Further, by paying other creditors and himself, in preference to the Department, the Taxpayer made a voluntary and conscious decision to prevent those funds from being remitted to the Department. As such, I find that the Taxpayer's failure to pay the Corporation's tax liability was willful.

The Taxpayer requests that the penalty be abated because he relied on his accountant's advice that the Corporation would have no tax liability in 2007. Virginia Code § 58.1-105 grants the Tax Commissioner authority to waive penalty for reasonable cause. In a situation where a taxpayer relies on his accountant, lawyer, or tax preparer, and the accountant, lawyer, or tax preparer provides inaccurate or erroneous advice that results in a, penalty, the taxpayer has recourse against the accountant, lawyer, or tax preparer for the error. See P.D. 08-69 (5/22/2008). The Department will not consider such circumstances as reasonable cause to waive a penalty. Accordingly, the Taxpayer's request for the abatement of the conversion assessment is denied.

A revised bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the revised bill.

The Code of Virginia sections and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3431687139.B