Can Virginia hold a minority shareholder and corporate officer personally liable for unpaid company sales and withholding taxes when he knew of the delinquency but lacked responsibility and authority over tax payments?

Plain-English summary

Virginia abated personal assessments for a corporation's unpaid retail sales and use tax and withholding tax. The taxpayer held several formal positions -- 15% shareholder, vice president, secretary, and director -- and knew the corporation was not current on its taxes. Those facts were not enough.

His father owned the other 85%, controlled the budget, decided which creditors to pay, signed checks and returns, and had responsibility for the company's bills and taxes. The taxpayer worked primarily in outside sales and wrote only occasional checks at his father's direction. He therefore lacked the required duty and authority under Va. Code § 58.1-1813.

Virginia's responsible-officer test

P.D. 17-105 applied the four-part test from Angelson v. Commonwealth:

1. A willful failure to pay, collect, account for, or pay over the tax, or a willful attempt to evade it;
2. Officer or employee status plus a duty to perform the act involved;
3. Knowledge of the failure; and
4. Authority to prevent the failure.

The absence of any one condition prevents Virginia from collecting the corporate tax from the individual. Willfulness means conduct that is voluntary, conscious, and intentional.

Why the assessment was abated

The taxpayer acknowledged knowing about the delinquency, but the Department found he did not have the corporate duty to report and pay the taxes, did not control budgeting or bill payment, and could not prevent the corporation's nonpayment. It also found no evidence that he willfully failed to pay the corporation's taxes.

The converted sales and withholding tax assessments were therefore abated.

What this means for corporate officers

• A title or minority ownership interest alone does not establish responsible-officer liability.
• Knowledge of unpaid taxes is important but does not replace the separate duty and authority requirements.
• Actual financial control -- who decides what gets paid, signs returns, and controls checks -- is central.
• Corporate records and evidence of assigned responsibilities can be decisive in an appeal.

Common questions

Did knowledge of the delinquency make the taxpayer liable?

No. He knew the taxes were unpaid, but he lacked the duty and authority required by the statute.

Did his officer titles make him a responsible officer?

No. Virginia examined his real responsibilities and control, not titles alone.

What happened to the personal assessments?

The Tax Commissioner ordered the converted retail sales and use tax and withholding tax assessments abated.

Citations and references

• Va. Code § 58.1-1813 A and B — responsible-officer liability and definition
• Angelson v. Commonwealth, 25 Va. Cir. 319 (1991) — four-part responsible-officer test
• Hewitt v. United States, 377 F.2d 921, 924 — willfulness standard
• Related Virginia rulings cited: P.D. 12-100, P.D. 09-116, and P.D. 10-90

Subject

Taxpayer is not a responsible officer as defined in Va. Code § 58.1-1813.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-105

Original ruling text

June 21, 2017

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

Dear *:

This is in response to your correspondence requesting correction of the retail sales and use tax and withholding tax assessments converted to * (the “Taxpayer”) as a result of liabilities incurred by *** (the “Corporation”) for various periods between June 2013 and December 2015. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is one of two stockholders of the Corporation and owns 15% of the issued and outstanding stock of the Corporation. The Taxpayer's father, * (the “Majority Stockholder”) owns the remaining 85% of the issued and outstanding shares of stock. The Majority Stockholder is the president of the Corporation and the Taxpayer is the vice president and secretary. Both stockholders are on the Corporation's board of directors.

The Taxpayer contends that the Majority Stockholder was solely responsible for the budgeting, as well as for paying the Corporation's bills and taxes during the periods in question. The Majority Stockholder decided which creditors to pay and when payment would be made. The Taxpayer asserts that he was primarily responsible for outside sales. The Taxpayer further provides that during the periods in question, he did write an occasional check in payment of a bill. However, he states that such payment was always at the direction and authority of the Majority Stockholder and generally done because the Majority Stockholder was not available. The Taxpayer admits that while he had knowledge that the Corporation was not current with regard to its tax obligations, he had no authority to prevent the Corporation from failing to meet such obligations. Based upon these facts and relying on Va. Code § 58.1-1813, the Taxpayer claims that he is not liable for the converted assessments at issue.

DETERMINATION

Virginia Code § 58.1-1813 A provides that:

Any corporate, partnership or limited liability 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.

Virginia Code § 58.1-1813 B defines the term “corporate, partnership or limited liability officer” as:

an officer or employee of a corporation, or a member, manager or employee of a partnership or limited liability company, who as such officer, employee, member or manager is under a duty to perform on behalf of the corporation, partnership or limited liability company 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.

In Angelson v. Commonwealth , 25 Va. Cir. 319 (1991), the court set out a four prong test for interpreting the provisions in Va. Code § 58.1-1813. The court stated that:

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 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.

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, all that needs to be shown is that the act was “voluntary, conscious, and intentional.” Hewitt v. U.S. , 377 F.2d 921, 924 (C.A. Tex.). In other words, it need only be shown that the corporate officer was aware of the outstanding liability and knowingly and intentionally paid operating expenses or other debts of the company.

Although an officer of the Corporation, the Taxpayer did not have the specific corporate duty of timely reporting and paying the taxes on behalf of the Corporation during the periods at issue. The Taxpayer was also not responsible for budgeting or for paying the Corporation's bills. These responsibilities belonged to the Majority Stockholder, who also signed checks and the tax returns filed by the Corporation. While the Taxpayer had knowledge that the Corporation was not current on its tax obligations during the periods at issue, the Taxpayer did not have the authority to prevent the failure of the Corporation to the pay the taxes, nor did the Taxpayer have a duty to file and pay the taxes for the Corporation. Additionally, there is no evidence that the Taxpayer willfully failed to pay the taxes owed by the Corporation to the Department. Accordingly, I find that the Taxpayer is not a corporate officer as considered in the aforementioned authorities.

This determination is supported by Public Document (P.D.) 12-100 (6/15/12). In that instance, the corporation's assessment was converted to the taxpayer, who owned a 20% share in the corporation. During the period at issue, the taxpayer was elected president of the corporation, but continued to perform duties as the corporation's shop foreman, overseeing and performing tire sales, installation, repair and servicing. The taxpayer maintained that he was not liable for the converted assessments. The Tax Commissioner determined the taxpayer was not a corporate officer as defined in the authorities referenced above, and the taxpayer was not liable for the tax because the taxpayer did not have the specific corporate duty of timely reporting and paying the tax on behalf of the corporation. The taxpayer also lacked actual knowledge of the corporation's failure to file and pay the taxes. The Tax Commissioner also determined that there was no evidence the taxpayer willfully failed to the pay the corporation's taxes or the taxpayer had actual authority or ultimate control over the business affairs of the corporation. See also, P.D. 09-116 (7/13/09) and P.D. 10-90 (6/4/10).

CONCLUSION

Based on the evidence provided and the cited authorities, the Taxpayer is not a responsible officer as defined in Va. Code § 58.1-1813. Accordingly, the converted assessments issued to the Taxpayer will be abated

The Code of Virginia section and public documents 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 determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/709.P