Was a restaurant's shareholder-president personally liable for converted sales, withholding, and litter-tax assessments despite blaming the general manager?

Plain-English summary

Virginia held the restaurant corporation's shareholder-president personally liable for converted sales, withholding, and litter-tax assessments. He argued that he was only an investor and that the general manager handled day-to-day operations, books, hiring, and tax payments.

The record showed greater involvement. The president attended collection or padlock hearings, took responsibility for existing liabilities, entered a payment arrangement, signed multiple state-tax checks, paid current taxes from personal funds, and hired a replacement manager after learning of the restaurant's financial distress.

Virginia's responsible-officer statute required willful nonpayment, a duty relating to the tax, actual knowledge, and authority to prevent the failure. Knowledge and responsibility were not limited to the original due date. Once the president learned of the debts while the restaurant still operated, his assumption of payment duties, failure to complete the plan, corporate authority, and absence of proof that funds were unavailable supported all four elements.

The possibility that the general manager was also responsible did not protect the president. The statute allowed the Department to convert a liability to more than one responsible person. The assessments were upheld with accrued interest.

What this means for you

• A nominally passive officer can assume responsibility through tax payments, collection meetings, and payment agreements.
• Responsible-officer liability can arise after a tax first becomes delinquent once an officer learns of it and has authority to act.
• Delegating bookkeeping to a manager does not necessarily eliminate another officer's duty or authority.
• Multiple individuals can be personally assessed for the same unpaid corporate taxes.

Common questions

Q: Did Virginia accept the claim that the general manager alone was responsible?
A: No. The manager might also have been liable, but the statute did not limit conversion to one person.

Q: What showed the president's financial role?
A: He signed tax checks, attended collection hearings, entered a payment plan, and paid current taxes from personal funds.

Q: Did he need to know about the debt on its original due date?
A: No. The ruling said the required knowledge, authority, and willfulness can arise after delinquency.

Q: What was the result?
A: The converted assessments remained correct and personally collectible from him.

Citations and references

• Va. Code §§ 58.1-622, 58.1-625, and 58.1-1813.
• Angelson v. Commonwealth, 25 Va. Cir. 319 (1991).
• Hewitt v. United States, 377 F.2d 921 (5th Cir.).
• Virginia Public Document 96-234.

Subject

Converted tax assessments

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-128

Original ruling text

July 3, 2013

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use, withholding and litter tax assessments converted to * (the "Taxpayer") for various periods from July 2010 to November 2011. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is shareholder and president of * (the "Restaurant"). The Taxpayer contends that he is not liable for the converted assessments on the basis that all of the corporate officer liability criteria set out in Va. Code § 58.1-1813, and the related tests set out in Angelson v. Commonwealth , 25 Va. Cir. 319 (1991), cannot be satisfied. According to the Taxpayer, he did not serve in an operational or day-to-day role of the Restaurant and only served as an investor for the Restaurant. The Taxpayer also maintains to have no managerial role in the accounting or bookkeeping of the Restaurant and no role in hiring employees or the payment of taxes. Rather, the Taxpayer maintains that such responsibilities were the duties of the general manager who was employed during the period in which these contested liabilities occurred and whose employment with the Restaurant ended in January 2012.

In the latter part of 2010, the Taxpayer discovered that the Restaurant's state taxes were delinquent and subsequently learned from the general manager that the Restaurant was in dire financial distress. At that time, the Taxpayer took a more active role in the business by paying the current taxes out of his personal funds and hiring a new general manager. The Taxpayer further notes that state taxes accruing under his watch have been paid. According to the Department's records, the Taxpayer closed its sales tax registration effective September 2012.

DETERMINATION

Based on a review of the Restaurant's sales tax account, I note on-going issues with the non-remittance of the sales tax collected from customers to the Department. In August 2009, I understand that the Taxpayer met with a representative of the Department's Collection Section for a padlock hearing. Such representative indicates that the Taxpayer took responsibility for the tax liabilities owed at that time. In August 2011, I understand that the Taxpayer met with the Department in another padlock hearing for unpaid tax liabilities and the Taxpayer agreed to a payment arrangement which was not kept. The Taxpayer maintains that the Restaurant has not been profitable and has received notices from several creditors for delinquent accounts. For this reason, the Taxpayer asserts that the payment plan could not be kept. I also understand the Taxpayer subsequently claimed no responsibility for such liabilities and refused to provide the name of the responsible person when asked by the representative.

All sums collected by the Restaurant are deemed to be held in trust for the Commonwealth, except for the amount taken as a dealer's discount when the tax is timely reported and paid to the Commonwealth. See Va. Code §§ 58.1-625 and 58.1-622. As a result of the Restaurant's failure to pay the sales tax collected, the Department issued several notices of assessment to the Restaurant for the tax liabilities. When the Restaurant failed to pay such assessments, the tax liabilities were converted to the Taxpayer as a penalty pursuant to the provisions set out in Va. Code § 58.1-1813, which provides the following:

A. Any corporate . . . 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.

B. The term "corporate . . . officer" as used in this section means an officer or employee of a corporation . . . who as such officer, employee, member or manager 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 as set forth herein and (2) had authority to prevent such failure or attempt.

The Taxpayer cites the four prong test set out by the Circuit Court of the City of Richmond, Virginia in Angelson v. Commonwealth , 25 Va. Cir.319 (1991) for interpreting the above cited statutory provisions. In such case, the Court stated:

First, the person must willfully fail to pay, collect, or truthfully account for and pay over a state tax, or willfully attempt in any manner to evade or defeat such tax or its payment. Second, the person must be an officer or employee of the corporation and have a duty to perform the act in respect to which the violation occurs. Third, the person must have (actual) knowledge of the failure or attempt as set out in the statute. And fourth, the person must have the authority to prevent such failure or attempt.

As further authority cited by the Taxpayer, the Court stated that the absence of any one of these conditions prohibits the Department from collecting corporate taxes from an individual. Under the standard of willfulness applied by the courts, what needs to be shown is that the act was "voluntary, conscious, and intentional." Hewitt v. U.S. , 377 F.2 nd 921, 924 (C.A. Tex.). In other words, it needs to be proven that the corporate officer was aware of the outstanding liability and knowingly and intentionally paid operating expenses or other debts of the company.

Based on the facts presented, it appears that the general manager could potentially be held liable under the provisions of Va. Code § 58.1-1813 for some of the Restaurant's tax liabilities. However, the statute does not prohibit the Department from converting a state tax assessment to more than one responsible person.

The sales tax liabilities at issue involve the periods October 2010 through January 2011, April 2011 through June 2011, September 2011 and November 2011. In these periods, either insufficient or no tax payments were made by the Restaurant. During the periods in question, the Department's records indicate that the Taxpayer signed the following checks:

On September 23, 2011 for sales tax assessed for the period October 2010,

On October 24, 2011 for sales tax assessed for the period October 2010,

On December 19, 2011 for sales tax assessed for the period November 2010,

On January 20, 2012 for sales tax assessed for the period December 2010, and

On January 20, 2012 for sales tax owed for the return period December 2011.

Prior to the periods in question, the Department's records also indicate that the Taxpayer signed a check on June 30, 2010, to pay unpaid state assessments issued with respect to the 2009 employer withholding income tax. These actions demonstrate a pattern of financial oversight or duty on the part of the Taxpayer to ensure that state liabilities were paid, i.e. , the Taxpayer stepped in and apparently took responsibility for these matters.

Although it is not clear whether the Taxpayer was under a duty to report and pay the sales tax collected, the Taxpayer nevertheless placed a duty upon himself to pay the liabilities when he signed the above checks and entered into a payment plan with the Department. While the Taxpayer may not have actually known about the tax liabilities in question when they became delinquent, the facts establish that the Taxpayer became aware of such liabilities while the Restaurant was still operating and initially acted to satisfy the tax liabilities. 1 By not carrying through with the payment plan, the Taxpayer acted willfully to avoid paying such liabilities. As president of the corporation that owns the Restaurant, and with actual knowledge of the tax liabilities, the Taxpayer had the authority to prevent a failure to pay the tax liabilities owed the Commonwealth. Instead, after the general manager left his employment, the Restaurant continued to operate in 2012 and appears to have income from gross sales 2 . of meals and drinks of a sufficient amount to pay the tax liabilities in question. While the Taxpayer claims no willful failure to pay the debts on the contention that the Restaurant had insufficient funds, no evidence of the financial status of the Restaurant has been presented for the periods after the general manager left his employment. In the absence of such evidence, I must hold that the Taxpayer satisfies all of the criteria for a corporate officer liability as set out in Va. Code § 58.1-1813.

CONCLUSION

Based on this determination, the assessments are correct. Updated bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessments, you may contact at **.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this matter, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5265382839.R

1. The elements of knowledge, authority and willfulness required to impose a personal liability pursuant to Va. Code § 58.1-1813 are not limited to only the time when the taxes become due. They are applicable to any time a corporate officer becomes aware of an outstanding tax liability. See Public Document 96-234 (9/9/96).

2. The Department's records indicate that the Restaurant reported gross sales of over $653,000.00 during the January 2012 through September 2012, periods after the general manager's employment