Did Virginia decide whether a former CEO met the responsible-officer test for a company's unpaid meal tax?

Plain-English summary

Virginia discharged the former CEO's converted sales-tax assessment because the bankruptcy settlement had been fully paid. The company had ceased business, entered Chapter 7 bankruptcy, and left an assessment for untaxed meal sales. Virginia had converted that liability to the former CEO under the responsible-officer statute.

The CEO argued that he had no duty to collect or pay the tax and lacked actual knowledge of any failure. But the Department never had to decide those facts. The bankruptcy trustee, the taxpayer, Virginia, and others entered a settlement that released claims arising before the agreement once the Department received the agreed payment. The bankruptcy court approved the agreement, and the payment was made.

Because the settlement resolved the liability, Virginia discharged the converted assessment in full and expressly declined to decide whether the taxpayer met the statutory corporate-officer criteria.

What this means for you

• A settlement can resolve a converted responsible-officer assessment without producing a ruling on the officer test.
• Read release language carefully to identify covered parties, claims, dates, conditions, and required payment.
• Court approval and full performance of the settlement were decisive here.
• This decision does not establish that the former CEO lacked responsible-officer status.

Common questions

Q: Did Virginia find that the CEO was not responsible for collecting the tax?
A: No. It did not reach that issue.

Q: Why was the converted assessment discharged?
A: The court-approved settlement released the claims after the agreed payment was remitted to Virginia.

Q: Was the discharge partial?
A: No. The determination states that the converted assessment was discharged in its entirety.

Citations and references

• Va. Code §§ 58.1-1821 and 58.1-1813.
• The court-approved settlement agreement described in the determination.

Subject

Criteria for corporate officer under Va. Code § 58.1-1813

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-201

Original ruling text

November 1, 2013

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

Dear *:

This is in response to your letter in which you request correction of the converted retail sales and use tax assessment on behalf of * (the "Taxpayer") for the period February 2004 through July 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer served as chief executive officer of * (the "Company") from March 2006 to July 2009. The Company ceased business in 2009. In 2010, the Department audited the Company and issued a retail sales and use tax assessment (the "original assessment") to the Company for untaxed sales of meals. Upon failure of the Company to pay the assessment, the Department converted the liabilities to the Taxpayer as a penalty assessment (the "converted assessment") in accordance with Va. Code § 58.1-1813.

The Taxpayer maintains that he was not under any duty to collect, report, and pay over sales tax to the Department. Furthermore, the Taxpayer maintains that he had no actual knowledge of any failure or attempt to evade the payment of such tax. Accordingly, the Taxpayer contends that he does not meet the minimum criteria for treatment as a corporate officer, as defined in Va. Code § 58.1-1813, and thus should not be held liable for the converted assessment.

Notwithstanding the foregoing, the Taxpayer has presented evidence that the Company's estate has been in Chapter 7 bankruptcy since 2010. In February 2013, the Taxpayer entered into a settlement agreement with the Company's trustee, the Department and others that would provide a settlement payment to the Department for the original assessment. Upon payment in full of the agreed to settlement payment, the Department agreed to waive and discharge the Company and Taxpayer from any and all claims, debts, and liabilities that the Department may have existing prior to the date of such agreement. The parties to such agreement also agreed not to commence any action against another party to the agreement with respect to any of the claims released by such agreement. In addition, this agreement prohibits the Department from taking any further action based upon, arising out of or related to such matter. The bankruptcy court has subsequently approved the settlement agreement.

DETERMINATION

Based on the settlement reached in this case, and the fact that the settlement amount has now been remitted to the Department, the converted liabilities assessed in this case are no longer applicable. Accordingly, there is no need to address the issue of whether the Taxpayer meets the criteria for corporate officer under Va. Code § 58.1-1813. Based on this determination, the converted assessment has been discharged in its entirety.

If you have any questions about this determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5370155963.R