Could Virginia convert a bankrupt corporation's unpaid use and withholding taxes to its president and majority shareholder?

Subject

Corporate tax conversion failed for lack of duty, knowledge, and willfulness

Plain-English summary

Virginia abated converted use-tax and withholding-tax assessments against a bankrupt corporation's president and majority shareholder. Corporate titles and authority were not enough by themselves. Va. Code § 58.1-1813 required an officer who had a duty to perform the violated act, knowledge of the failure, authority to prevent it, and willful nonpayment.

The taxpayer was a signatory for tax payments, but checks used an automatic signature machine and the corporation's other CEO directed which creditors were paid. The taxpayer was not involved in day-to-day management and learned of the tax issue only after other debts had been paid. By then, the corporation lacked sufficient funds.

Virginia found that the taxpayer was not under the relevant payment duty, lacked actual knowledge at the necessary time, and did not willfully evade the taxes. The converted assessments were therefore abated.

What this means for you

• Officer status, stock ownership, and theoretical authority do not automatically establish personal liability under the provision applied here.
• Virginia examined the actual payment duty, operational control, knowledge timing, and willfulness.
• A mechanically applied signature did not prove that the taxpayer selected or authorized the payments.
• Learning of unpaid taxes only after funds are exhausted can affect the knowledge and willfulness analysis.

Common questions

Was the taxpayer a corporate officer?

Yes by title, but he did not satisfy all statutory conditions for converted personal liability.

Did he have authority to prevent nonpayment?

His position appeared to provide authority, but Virginia found the other required elements missing.

What was the final result?

The converted retail sales and use tax and withholding tax assessments were abated.

Citations and references

• Va. Code § 58.1-1813.
• Hewitt v. U.S., 377 F.2d 921 (5th Cir. 1967).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-90

Original ruling text

June 4, 2010

Re: § 58.1-1821 Application: Converted Assessments

Dear *:

This is in response to your letter in which you request correction of the converted retail sales and use tax and withholding tax assessments issued to * (the "Taxpayer") for the period May 2005 through February 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer was president, CEO, board chairman and majority stockholder of * (the "Corporation"), which closed in December 2007 because of bankruptcy. Pursuant to an audit for the above period, the Corporation was assessed use tax on untaxed purchases of tangible personal property used or consumed in the Corporation's business. The Department also issued an assessment to the Corporation for the unreported and unpaid employer withholding tax due for the fourth quarter of 2007.

Because the Corporation's assessments were not paid and the Taxpayer is listed as a corporate officer on the Department's registration records, the Department subsequently converted the assessments from the Corporation to the Taxpayer pursuant to Va. Code § 58.1-1813. The Taxpayer contests the conversion and claims to have no knowledge of any failure to pay any taxes until October 11, 2007, when the Taxpayer received an e-mail from the vice president and chief executive officer (hereinafter, the "CEO") of the Corporation that informed the Taxpayer that there was a tax issue.

While the Taxpayer was the sole signatory for paying the consumer use tax and was also one of the signatories for paying the withholding tax, the Taxpayer indicates that checks were run through an automatic signature machine that mechanically printed the Taxpayer's name on them. The Taxpayer asserts that the CEO determined what payments were made and to whom and instructed his staff to run checks.

According to the Taxpayer, he was not involved in the day-to-day management and activity of the Corporation during the audit period. As a result, the Taxpayer asserts that he was not involved in the decisions regarding payments, checks, employees or any type of review of such. Additionally, the Taxpayer maintains that he was not present at the Corporation facilities during the audit period except on the occasion of board meetings.

DETERMINATION

When a corporation fails or is unable to pay its tax deficiencies, the Department may convert the assessments to the corporate officers under Va. Code § 58.1-1813. This statute defines the term "corporate officer" as an officer of the corporation who 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 and (2) had the authority to prevent it. Virginia Code § 58.1-1813 requires that the failure to pay over the taxes be willful. 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 (5th Cir. 1967).

Based on the facts and documentation presented, the Taxpayer was not under a duty to pay the taxes at issue. Furthermore, it does not appear that the Taxpayer had any actual knowledge of the failure to pay such taxes prior to the payment of other debts or acted in a manner to willfully evade payment of the taxes. Although the Taxpayer's position in the Corporation should have provided sufficient authority to prevent the failure to pay, it appears that the Corporation had insufficient funds to pay the tax liabilities after the Taxpayer learned of the debt. For these reasons, the Taxpayer does not satisfy all of the conditions required to be considered a corporate officer pursuant to Va. Code § 58.1-1813. Accordingly, the converted assessments at issue will be abated.

The Code of Virginia section cited is 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,

Janie E. Bowen

Tax Commissioner

AR/1-3217179875.R