Were an owner and a retired corporate secretary personally liable for a closed business's unpaid Virginia taxes?

Plain-English summary

Virginia found no personal converted-tax liability for the two people addressed in this determination. Responsible-officer conversion required an officer or employee who had a duty to perform the failed tax act, knew of the failure, had authority to prevent it, and acted willfully.

Taxpayer A was the principal owner and later participated in efforts to separate sales-tax funds and compromise the business debt, but did not serve as an officer or employee with specified corporate duties. The ruling understood that assessments against Taxpayer A had already been canceled.

Taxpayer B remained corporate secretary after retiring but had no employment, check-signing, financial decisions, or material information about the business. Virginia treated Taxpayer B as a passive investor, abated the converted assessments, and ordered refunds of funds taken through the bank lien and income-tax offset, with interest. It could not repay the bank's lien fee because that fee never entered the state treasury.

Common questions

Q: Is ownership alone enough for converted corporate tax liability?
A: No. The ruling required officer or employee status plus a specific duty, knowledge, authority, and willfulness.

Q: Did Virginia refund the bank's lien fee?
A: No. It refunded state-held tax funds but said the taxpayer would have to ask the bank to forgive its own fee.

Citations and references

• Va. Code §§ 58.1-1813, 58.1-1822, and 58.1-1833.
• Va. Code § 13.1-872(C).
• Angelson v. Commonwealth, 1991 WL 835240 (Va. Cir. Ct. 1991); Hewitt v. United States, 377 F.2d 921 (5th Cir. 1967).

Subject

Failure to report and remit all of its tax liabilities; Converted assessments

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-49

Original ruling text

April 23, 2012

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

Dear *:

This is in response to your letter in which you request correction of a number of converted assessments issued to * (Taxpayer A and Taxpayer B, respectively) for the periods February 2008 through January 2010. In this instance Taxpayer A is the acting Power of Attorney for Taxpayer B. I apologize for the delay in responding to your letter.

FACTS

During the period in question, * (the "Business") failed to report and remit all of its tax liabilities. Officers of the Business consisted of (President), ** (Vice President and 25% owner), and Taxpayer B (Secretary and 25% owner). Taxpayer A was 50% owner. I understand that the President and Taxpayer A operated the Business from 2004 until it closed on June 30, 2010.

After the Business closed, the Department converted the unpaid tax liabilities to Taxpayer B and subsequently liened Taxpayer B's bank account to pay some of the converted liabilities. The Department also issued converted assessments to Taxpayer A.

This appeal involves several persons. Therefore, separate responses have been issued to the other persons pursuant to the confidential tax information restrictions imposed by Va. Code § 58.1-3.

DETERMINATION

When a corporation fails or is unable to pay its tax deficiencies, the Department may convert such deficiencies 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).

Taxpayer A

I understand that Taxpayer A became actively involved in the Business in December 2009 and subsequent periods by instructing the store manager to create a separate sales tax account to deposit the sales tax for remitting to the Department. I also understand that Taxpayer A was involved jointly with the President to seek an offer in compromise of the unpaid tax liabilities of the Business. Despite this and being the principal owner of the Business, Taxpayer A did not serve in any role as a corporate officer of the Business with specific corporate duties.

In Angelson v. Commonwealth , 1991 WL 835240 (1991), the Circuit Court of Virginia reviewed the criteria of the above statute and determined that a person cannot be held individually liable for the unpaid debts of a business unless four conditions are satisfied. One of those conditions is that a person must be an officer or employee of the corporation and have a duty to perform the act in respect of which the violation occurs. Because Taxpayer A was neither an officer nor an employee of the Business with specific corporate duties, Taxpayer A cannot be deemed a corporate officer for the tax conversion purposes of Va. Code § 58.1-1813.

It is my understanding that the, converted assessments issued to Taxpayer A were previously reversed, i.e. , cancelled.

Taxpayer B

Based on a signed statement, Taxpayer B retired from the Business approximately seven years ago and was not an employee of the Business since such retirement. A corporate officer who is assigned secretary duties is statutorily responsible "for preparing and maintaining custody of minutes of the directors' and members' meetings and for authenticating records of the corporation." See Va. Code § 13.1-872 C. Taxpayer B indicates, however, that substantially all corporate business was carried on with consents in lieu of meetings. Taxpayer B also claims to have had limited involvement in the Business during retirement and received no material information about the financial condition of the Business. Taxpayer B did not sign any checks or make any decisions regarding financial or other matters of the Business. Accordingly, it appears that Taxpayer B's role during retirement was limited to that of a passive investor.

Based on these facts, I find that the converted assessments were erroneously issued to Taxpayer B and will be abated in full. Taxpayer B has paid some of the converted assessments via an erroneous bank account lien. Accordingly, the entire amount of funds paid by Taxpayer B and applied to the converted tax liabilities at issue will be refunded as soon as practical. The *** state income tax refund withheld from Taxpayer B's 2010 individual income tax return and applied to a converted assessment will also be refunded. Interest owed to Taxpayer B will be provided in accordance with Va. Code § 58.1-1833.

As for the * bank lien fee collected by the bank, Va. Code § 58.1-1822 does not allow the Commonwealth to pay for any costs incurred as a result of the Department's collection actions, even if such actions are done in error. Because such funds were not paid into the state treasury, Taxpayer B may ask the bank for forgiveness of such fees. Accordingly, the Department cannot reimburse Taxpayer B for the bank lien fee.

CONCLUSION

The converted assessments issued to Taxpayer B will be adjusted in accordance with this determination and a refund will be issued for the overpayment.

You request a hearing by conference call. A member of the Department's Appeals and Rulings staff called the only number provided and left a message. However, you did not return the call.

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/1-4774357521.1R