Was a former president personally liable for company use tax when tax and finance duties belonged to the CFO?

Plain-English summary

Virginia abated the former president's converted use-tax assessment in full. Although he had been a director and president, his responsibilities were operational matters and sales. The CFO handled taxes, financial reporting, and bank accounts.

Responsible-officer liability required more than a title. The person had to owe the relevant corporate duty, know of the failure, have authority to prevent it, and willfully fail to pay.

The president had left active involvement in October 2006, well before the company received the later audit assessment. On the facts presented, Virginia found no tax-reporting duty, actual knowledge, payment authority, or voluntary and intentional nonpayment.

What this means for you

• Corporate title alone does not establish responsible-officer liability.
• Document who controls tax filings, bank accounts, and payment decisions.
• Departure dates matter when an assessment arises later.
• Actual knowledge and authority are central to a converted assessment.

Common questions

Q: Was being president enough for personal liability?
A: No.

Q: Who handled the company's tax and financial duties?
A: The CFO, who was also secretary, treasurer, and a bank signatory.

Q: What happened to the converted assessment?
A: Virginia abated it in full.

Citations and references

• Va. Code § 58.1-1813.
• Hewitt v. United States, 377 F.2d 921, 924 (5th Cir. 1967).

Subject

Taxpayer responsibilities were limited to operational matters and sales.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-163

Original ruling text

September 26, 2011

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter of May 5, 2011, submitted on behalf of * (the "Taxpayer"), in which you request correction of a converted use tax assessment issued for the period January 2005 through April 2008.

FACTS

The Taxpayer served as a director and president of * (the "Corporation") from October 2004 through October 2006. The Taxpayer claims that his responsibilities were limited to operational matters and sales and had no responsibilities for the Corporation's federal, state, or local tax filings. The Taxpayer ceased active involvement in the Corporation in October 2006 and pursued other business activities. The Taxpayer further claims to have had no responsibility for financial reporting matters, such as tax and financial matters that were entrusted to another individual who was the Chief Financial Officer ("CFO"), the Secretary and Treasurer of the Corporation, and signatory on the Corporation's bank accounts. The CFO's duties included the responsibility in all financial matters, including tax return filings and financial reporting.

Pursuant to an audit for the period January 2005 through April 2008, the Corporation was assessed use tax on untaxed purchases of tangible personal property used in the Corporation's business. Because the Corporation's assessment was not paid before or after the Corporation ceased operations and the Taxpayer was 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.

DETERMINATION

When a corporation fails or is unable to pay its tax deficiencies, the Department may convert the assessments to the corporate officers pursuant to 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 presented, the Taxpayer was not under a duty to perform the tax reporting or payment duties. Rather, the responsibility to perform such duties appears to have rested with the CFO. Absent evidence that the Taxpayer was aware of the Corporation's purported use tax liability, I must conclude that the Taxpayer lacked actual knowledge of the failure of the Corporation to pay and report use taxes. Furthermore, it is reasonable to conclude that the Taxpayer had no actual knowledge of the audit assessment issued to the Corporation (or the authority to prevent its payment) because such assessment was issued well after the Taxpayer ceased his active involvement in the Corporation. Accordingly, I find no basis to conclude that the Taxpayer acted willfully to avoid the payment of the taxes owed by the Corporation. Based on these facts, I find no basis to uphold the converted assessment.

CONCLUSION

Based on this determination, the converted assessment issued to the Taxpayer will be abated in full.

The Code of Virginia sections cited 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,

Craig M. Burns

Tax Commissioner

AR/1-4770197330.R