Was a corporation's president and sole owner personally liable as a responsible officer for unpaid Virginia corporate income tax?

Subject

President and sole owner was liable for the corporation's unpaid income tax

Plain-English summary

Virginia upheld personal responsible-officer liability against a corporation's president and 100% owner for unpaid 2006 corporate income tax. She signed the final return showing tax due, but the corporation filed it without payment after selling its operating assets and ceasing business.

The Department found authority and knowledge from her ownership, office, and established pattern of signing corporate returns, estimated-tax vouchers, withholding-tax checks, and other tax payments. She did not show that tax authority had been delegated exclusively to someone else.

Virginia treated willfulness as a voluntary, conscious, and intentional failure. It concluded that the officer knowingly preferred other creditors over the Department and did not provide evidence supporting her claim that corporate funds were unavailable when the relevant tax payments were due.

The converted assessment was upheld. An updated bill with interest was to be issued, with a 30-day payment period stated in the ruling.

What this means for you

• Title and ownership are important, but Virginia also examined actual tax-signing and payment activity.
• A responsible-officer assessment requires duty, knowledge, authority, and willful failure.
• Paying other creditors while knowing tax is unpaid can support a finding of willfulness.
• Claims that funds or authority were unavailable need documentary support.
• The officer challenging an assessment bears the burden of showing it is incorrect.

Common questions

Did Virginia require an intent to defraud?

The ruling applied a willfulness standard of voluntary, conscious, and intentional conduct and focused on knowing payment of other debts while tax remained unpaid.

Why did prior tax documents matter?

The officer's repeated signatures on returns, vouchers, and checks showed experience, knowledge, and authority over the corporation's Virginia tax obligations.

Did the claim of insufficient sale proceeds defeat liability?

No. The officer supplied no supporting evidence and did not address the availability of funds on the estimated-tax due dates identified in the ruling.

Citations and references

• Va. Code §§ 58.1-1813, 58.1-205(1), and 58.1-1825(D).
• Hewitt v. U.S., 377 F.2d 921, 924 (C.A. Tex.).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-133

Original ruling text

July 12, 2010

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This is in response to your letter requesting correction of the converted assessment issued to * (the Taxpayer) for unpaid corporate income taxes assessed to *** (the Corporation). I apologize for the delay in responding to your letter.

FACTS

The Taxpayer was president and 100% owner of the Corporation. In October 2006, the Corporation sold off all of its operating assets and ceased operations. In September 2007, the Taxpayer signed the Corporation's final income tax return (2006), which indicated a tax amount due. The return was filed with the Department in October 2007 without any payment of the tax amount due. In November 2007, the Department assessed the Corporation for the unpaid 2006 corporate income tax. Because such assessment was not paid, the bill was converted to the Taxpayer in March 2009 as the sole corporate officer on record.

The Taxpayer contends that she should not be held personally liable for the unpaid taxes of the Corporation. According to the Taxpayer, she did not have a specific duty to prepare or file tax returns or pay the taxes due in connection with such returns. The Taxpayer also maintains that she did not have the authority to prevent the failure to pay the taxes by paying the Commonwealth prior to paying secured creditors or the Internal Revenue Service. Moreover, the Taxpayer maintains that sales proceeds were insufficient to pay in full the secured creditors having liens against the assets and the Corporation had no funds available to pay the corporate taxes at issue.

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."

Virginia Code § 58.1-1813 B defines the term "corporate . . . officer" as "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 the authority to prevent such failure or attempt."

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 Corporation's 2006 federal income tax return indicates that the Taxpayer owned 100% of the voting stock and was the President of the Corporation. As such, the Taxpayer clearly had the authority to prevent the Corporation's failure to pay the tax liability. The Taxpayer has not indicated that such authority was delegated to another person. No evidence has been presented to establish that someone other than the Taxpayer had the sole authority to file and pay the taxes in question.

The Department has evidence that the Taxpayer exercised her authority to sign and approve income tax returns and tax payments. For instance, the Taxpayer signed Virginia Forms 500E (Virginia Corporate Income Tax Extension Payment Voucher and Tentative Tax Return) for the years ended December 2002 and December 2003, and the Virginia Forms 500ES - Vouchers 1, 2 and 3 (Virginia Estimated Tax Declaration for Corporations) for the year ended December 2004. The Department also has evidence that the Taxpayer signed check payments related to the Corporation's Virginia corporate income taxes. For instance, the Taxpayer signed checks in 2003 and 2004 to remit taxes owed in connection with the above Virginia Forms 500E and 500ES, except for the payment made for Voucher 3 of Form 500ES, but including the payment made for Voucher 4 of Form 500ES for the year ended December 2004. The Department also has evidence that the Taxpayer signed the 2005 Virginia Corporation Income Tax Return on September 6, 2006, which is one month before the sale of the Corporation on October 6, 2006. In addition, I would note that the Taxpayer signed Corporation checks in October and November 2006 to pay for Virginia withholding income taxes.

These actions demonstrate a regular and consistent pattern of signing income tax returns and income tax payments (with the only, exception being the 2006 corporate income taxes). This pattern establishes that the Taxpayer has experience with and awareness of income tax reporting and payment responsibilities, including the taxes in question. Thus, it is my conclusion that the Taxpayer had the requisite knowledge that the 2006 corporate income taxes were due before the Corporation closed its business.

Pursuant to Va. Code § 58.1-205 1, any assessment of tax by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to establish that the assessment is incorrect. Virginia Code § 58.1-1825 D also places the burden of proof upon the Taxpayer. Although the Taxpayer claims that no funds were available from the Corporation to pay off the taxes in question when the final return was filed in 2007, no evidence has been presented in support of such claim. There is also no evidence of insufficient funds to pay the estimated corporate income taxes owed on April 17, 2006, June 15, 2006, September 15, 2006 and December 15, 2006. Accordingly, I find that the Taxpayer has not met the burden of proof.

Based on the foregoing, the evidence is convincing that the Taxpayer was under a duty to perform or oversee the performance of the filing and payment of the Virginia corporation income taxes. Under these circumstances and absent proof to the contrary, it would appear that the Taxpayer willfully failed to pay the taxes in question by intentionally paying creditors in preference to the Department. As such, I must conclude that the Taxpayer is a responsible corporate officer under Va. Code § 58.1-­1813.

You ask for a copy of the notice of assessment if one has been issued to the Taxpayer. A copy of the Notice of Personal Liability Converted Assessment issued to the Taxpayer on March 8, 2009 is enclosed.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, 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, Attention: *, 600 East Main Street, 15th Floor, Richmond, Virginia 23219. If you have any questions concerning payment of the assessment, you may contact at **.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library 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,

Linda Foster

Deputy Tax Commissioner

AR/1-3447032748.R