Can Virginia personally assess a minority shareholder and senior manager for unpaid withholding tax when his work covered engineering and legal matters, not payroll or finance?

Plain-English summary

Virginia abated personal withholding-tax assessments against a senior manager and minority shareholder. His work covered test facilities, engineering products, internal programs, legal matters, and business development. Other executives controlled accounting, payroll, and finance.

Although he helped secure loans during financial difficulty, the records showed no direct or indirect responsibility for payroll or withholding. Without a duty to withhold tax from employee wages, he did not meet Va. Code § 58.1-1813's corporate-officer definition for this violation.

Common questions

Did senior-management status create liability? No. The statute required an actual duty concerning the unpaid tax.

Did arranging loans make him responsible for payroll tax? No. That limited activity did not establish payroll authority.

Did Virginia decide who else was liable? No. The ruling left open whether another individual should bear the liability.

Citations and references

• Va. Code § 58.1-1813 A and B
• Hewitt v. United States, 377 F.2d 921, 924

Subject

Taxpayer was not a “corporate officer” for purposes of converting the withholding tax assessments

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-85

Original ruling text

June 2, 2017

Re: § 58.1-1821 Application: Converted Assessments

Dear *:

This will reply to your letter in which you seek correction of the converted assessments issued to your client, * (the “Taxpayer”), for unpaid withholding taxes assessed to *** (the “Company”).

FACTS

The Taxpayer was a member of senior management of the Company and a minority shareholder. The Department issued assessments to the Company for withholding tax liabilities owed for the taxable periods January 2013 through August 2013. When the Company failed to pay the deficiencies, the Department timely converted the assessments to the Taxpayer as permitted under Va. Code § 58.1-1813.

The Taxpayer filed an appeal, contending he should not be held personally liable for the unpaid withholding taxes because he was not a responsible corporate officer as defined under Va. Code § 58.1-1813. The Taxpayer also asserts that the assessments violate the United States and Virginia Constitutions.

DETERMINATION

Virginia Code § 58.1-1813 A states, “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.”

Under Va. Code § 58.1-1813 B, the term “corporate officer” is defined as “an officer or employee of a corporation . . . who as such officer [or] employee . . . 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 the authority to prevent such failure or attempt.” [Insert added.]

Virginia Code § 58.1-1813 requires that the failure to pay over the taxes be willful, and that the corporate officer had: (i) knowledge of the failure, and (ii) authority to prevent it. 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 corporation.

The information provided indicates that the Taxpayer's responsibilities included design and advancement of test facilities, development of engineering products and internally funded programs. The Taxpayer was also in charge of legal matters. Another position oversaw the Company's financial matters, including corporate income tax and payroll. Although part of the Taxpayer's duties involved oversight of legal matters, he did not have authority over those involved with the Company's financial matters. Such individuals reported to a chief operations officer, who in turn reported to a chief executive officer.

The Taxpayer explains that during the taxable periods in question, he was involved in development and testing activities. He also became involved in business development activities. He admits, however, that he became involved in some of the Company's financial matters during periods of financial difficulty, but such activities were limited to securing loans on the Company's behalf. He states that he never had any direct or indirect responsibility for accounting, finances or payroll. The documentation provided supports the Taxpayer's assertions.

Based on the information provided, the Department finds that the Taxpayer was not under a duty to properly withhold Virginia income tax from the Company's employees' wages. Therefore, he was not a “corporate officer” for purposes of converting the withholding tax assessments under Va. Code § 58.1-1813. Because the Department finds that the Taxpayer did not satisfy the statutory definition of “corporate officer,” it is not necessary to address the Taxpayer's constitutional arguments.

Accordingly, the assessments will be abated. Nothing in this determination should be construed as a final determination as to the individual or individuals, if any, to whom the liabilities should be attributed.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/868.M