A nonprofit I used to help run years ago still lists me as a contact on its Department tax account, and the Department is trying to hold me personally liable for taxes it never paid -- can they do that just because I never got removed from the paperwork, especially since a nonstock nonprofit doesn't even have 'owners' to transfer things to?

Plain-English summary

A Virginia nonprofit organization was assessed unpaid withholding tax for July 2019 through March 2021. When the organization failed to pay, the Department converted the assessments to an individual who was listed as the contact on the organization's withholding tax account. She appealed, contending she shouldn't be held personally liable because she wasn't a "responsible officer" of the organization during the periods at issue.

The four-part test for personal liability. Va. Code § 58.1-1813 A imposes a personal penalty on any corporate, partnership, or LLC officer who willfully fails to pay, collect, or account for a tax the entity owes, or willfully tries to evade it. Applying this statute, Angelson v. Commonwealth, 25 Va. Cir. 319 (Richmond 1991), identifies four conditions that must ALL be met before an individual can be held personally liable: (1) willful failure to pay/collect/account for the tax, or willful attempt to evade it; (2) the person is an officer or employee with a duty to perform the relevant act; (3) the person knew about the failure; and (4) the person had authority to prevent it. Missing any single element blocks conversion of the assessment to that individual. "Willfully" here just means the act was voluntary, conscious, and intentional (Hewitt v. U.S., 5th Cir. 1967).

The facts, and why they fell short. The taxpayer was listed as a director and treasurer on the organization's 2019 annual report filed with the State Corporation Commission, and was the Department's listed contact for its withholding tax account. But she said she'd begun phasing out her involvement in 2008 and had none at all by 2016, when another individual took over payroll, accounting, and tax responsibilities -- and that this person simply never got around to removing her name from official filings. She was no longer listed as an officer as of the ruling. The audit staff converted the assessment largely because she remained the listed Department contact and hadn't provided "legal documentation" showing ownership had transferred to someone else.

Why the "no ownership documentation" reasoning couldn't work. The Department found that simply being listed as a contact isn't, by itself, sufficient evidence of the four Angelson elements. It also flagged a deeper problem with the audit's reasoning: the organization was a Virginia NONSTOCK corporation under the Virginia Nonstock Corporation Act (Va. Code § 13.1-801 et seq.), which expressly bars issuing stock or distributing income to members, directors, or officers (§ 13.1-814). A nonstock nonprofit simply has no "owners" in the way a for-profit stock corporation does -- so there could never have been the kind of ownership-transfer documentation the audit staff was asking for. While better recordkeeping about changes in officers and their responsibilities would have been good governance practice, its absence here didn't supply the missing proof needed to convert the assessment.

Outcome. Without a more complete investigation establishing the required elements, the Department abated the converted assessment against the individual -- but the underlying withholding tax assessment against the organization itself remains due and payable.

What this means for you

Anyone listed as a contact, officer, or director on a nonprofit's Department tax account after stepping back from involvement

Being the listed contact alone is not sufficient evidence to hold you personally liable for the organization's unpaid tax -- the Department (or a reviewing court) still has to establish all four Angelson elements: willful failure, an officer's duty, actual knowledge, and authority to prevent it.

Nonprofit board members and treasurers stepping down from active involvement

Even though a nonstock nonprofit has no "ownership" to formally transfer, get your resignation and departure from any active role documented and filed with the Department and the State Corporation Commission promptly -- stale filings listing you as a contact or officer can trigger a converted assessment years later, even if the underlying liability is ultimately not sustained.

Auditors and preparers assessing responsible-officer liability against nonprofit officers

Requesting "ownership transfer" documentation doesn't fit a nonstock corporation, which by statute has no shareholders and can't distribute income to its officers or directors -- the four Angelson elements need to be independently established rather than inferred from missing paperwork that couldn't exist in the first place.

Common questions

Q: I'm still listed as a contact on an organization's tax account even though I stopped being involved years ago -- can the Department hold me personally liable for its unpaid tax just based on that listing?
A: Not by itself, based on this ruling. Being the listed contact doesn't establish the four required elements (willful failure, officer duty, knowledge, and authority to prevent it) -- the Department needs more complete evidence.

Q: The organization I was involved with is a nonprofit with no shareholders -- can the Department require "ownership transfer" documentation from me to prove I'm no longer responsible?
A: This ruling found that reasoning doesn't fit a nonstock corporation, which by law has no owners and can't distribute income to officers or directors -- there's no ownership-transfer paperwork that could exist to provide.

Q: If my personal assessment gets abated, does that mean the organization no longer owes the tax either?
A: No. The underlying assessment against the organization itself remains due and payable; only the personal, converted assessment against the individual is abated.

Citations and references

Statutes:

• Va. Code § 58.1-1813 A -- personal penalty on a corporate officer who willfully fails to pay, collect, or account for tax
• Va. Code § 58.1-1813 B -- definition of "corporate officer" for responsible-officer liability
• Va. Code § 13.1-814 -- Virginia nonstock corporations may not issue stock or distribute income to members, directors, or officers

Case law: Angelson v. Commonwealth, 25 Va. Cir. 319 (City of Richmond, 1991) -- the four conditions that must all be met before an individual is personally liable for a corporation's unpaid tax; Hewitt v. U.S., 377 F.2d 921 (5th Cir. 1967) -- "willfully" means voluntary, conscious, and intentional conduct.

Related rulings in this corpus applying the same responsible-officer doctrine (described here, not linked): P.D. 24-124 and P.D. 24-145, involving stock corporations where ownership-transfer facts were more directly relevant.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-41

Original ruling text

March 27, 2024

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 a nonprofit organization (the “Organization”) for the taxable periods July 2019 through March 2021. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer was a listed as the contact on the Organization’s withholding tax account with the Department. The Department issued assessments to the Organization for withholding tax due for the taxable periods at issue. When the Organization failed to pay the assessments, the Department converted them to the Taxpayer. The Taxpayer filed an appeal, contending that she should not be held personally liable for the unpaid withholding taxes because she was not a responsible corporate officer.

DETERMINATION

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

Under Virginia 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.”

In Angelson v. Commonwealth of Virginia , 25 Va. Cir. 319 (City of Richmond, 1991), the court pointed out four conditions of Virginia Code § 58.1-1813 that must be met before a person can be held individually liable for taxes assessed against a corporation:

1. 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.

2. The 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.

3. The person must have knowledge of the failure or attempt as set out in the statute.

4. The person must have authority to prevent such failure or attempt.

The court further 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.” See Hewitt v U.S ., 377 F.2d 921, 924 (5th Cir. 1967).

The Taxpayer was listed as a director and the treasurer of the Organization’s Annual Report filed with the Virginia State Corporation Commission as of September 2019. Although the Taxpayer was named as an officer, she claims that she began phasing out her involvement with the Organization in 2008 and that, by 2016, she had no further involvement. The Taxpayer asserts that another individual had assumed the operation of the Organization and that he was responsible for all payroll, accounting, and tax matters. She further asserts that this individual failed to remove her from any documents filed with the Department or SCC as of 2016 when she ceased her affiliation with the Organization. The Taxpayer is no longer listed as an officer or director as of the date of this letter.

According to the audit staff, the assessments were converted to the Taxpayer because she was the listed contact on the Organization’s withholding tax account with the Department. In addition, the taxpayer had not provided “legal documentation” showing that ownership had been transferred to any other individual.

The mere fact that an individual is listed as a contact for a business’s tax account with the Department is not by itself sufficient evidence to prove the elements necessary to convert an assessment to that individual under Virginia Code § 58.1-1813. Further, the Organization was a Virginia nonstock corporation subject to the provisions of the Virginia Nonstock Corporation Act (the “Act”), currently codified at Virginia Code § 13.1-801 et seq. As such, it would not have owners, i.e., shareholders, like a stock corporation. In fact, the Act expressly states that “[a] corporation shall not issue shares of stock. No dividend shall be paid and no part of the income of a corporation shall be distributed to its members, directors or officers.” See Virginia Code § 13.1-814. Although as a corporate governance best practice, the Organization should have kept sufficient records to indicate changes to its officers and directors and their responsibilities, there would not have been any documentation showing a change in ownership as requested by the audit staff.

Without a more complete investigation, the Department is unable to determine with a sufficient degree of certainty that the elements required in order to convert the assessments to the Taxpayer have been met. As such, the converted assessments will be abated. The underlying assessments against the Organization, however, remain due and payable.

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 (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3889.B