Was a 10% shareholder who served as secretary and treasurer personally liable for the corporation's unpaid Virginia withholding tax?

Subject

Corporation's failure to pay the tax liability; Converted assessment

Plain-English summary

Virginia removed the personal assessments and ordered a refund. The taxpayer owned 10% of the corporation and was its secretary and treasurer, while his son was president and owned 60%. After the corporation failed to pay withholding tax for October 2008 through March 2009, the Department converted the assessments to corporate officers. The taxpayer paid and appealed.

Va. Code § 58.1-1813 requires more than an officer title. The person must have a duty concerning the unpaid tax, knowledge of the failure, authority to prevent it, and a willful failure or attempt to evade payment.

The taxpayer said he could not review the books, did not sign checks or tax returns, and learned of the unpaid withholding only after he resigned in January 2009 and received the converted assessments. The available records showed the president signed the corporation's withholding returns and did not establish that the taxpayer could file returns or prevent nonpayment. The Commissioner therefore found he was not a responsible corporate officer for these periods.

What this means for you

• A corporate title or minority ownership does not by itself establish responsible-officer liability.
• Virginia examines actual tax duties, knowledge of the delinquency, and authority to prevent it.
• Paying a converted assessment does not eliminate the right to appeal and seek a refund.

Common questions

Did the ruling find that no corporate officer could be liable?

No. It decided only that this taxpayer was not a responsible officer on the evidence presented.

Why did the taxpayer receive a refund?

He had paid the converted assessments, and the Commissioner later concluded that § 58.1-1813 did not make him personally liable.

Citations and references

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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-73

Original ruling text

May 17, 2011

Re: § 58.1-1821 Application: Converted Assessments

Dear *:

This is in response to your letter requesting correction of the converted assessments issued to * (the "Taxpayer") for unpaid withholding taxes assessed to *** (the "Corporation").

FACTS

The Taxpayer owned 10% of the stock of the Corporation and was its secretary and treasurer. The Taxpayer's son (the "President") was president and owned a 60% share of the Corporation.

The Department issued assessments to the Corporation for withholding tax liabilities owed for the taxable periods October 2008 through March 2009. When the Corporation failed to pay the deficiencies, the Department timely converted the assessments to the Taxpayer and the other officers of the Corporation as permitted under Va. Code § 58.1-1813.

The Taxpayer paid the assessments and filed an appeal, contending he should not be held personally liable for the unpaid withholding taxes of the Corporation because his sole responsibilities were as the Corporation's registered agent responsible for filing the annual report with the Virginia State Corporation Commission (SCC).

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.

Although the Taxpayer was an officer of the Corporation, he asserts that he was not permitted to see the Corporation's books and records and did not sign any checks or tax returns. The Corporation's 2007 and 2008 Virginia income tax withholding returns were signed by the President. The available evidence does not indicate whether the Taxpayer had the authority to sign the Corporation's tax returns or to prevent the Corporation's failure to pay the tax liability. The evidence does show that the Taxpayer resigned as an officer in the Corporation in January 2009.

The Taxpayer asserts that he did not learn of the Corporation's failure to remit its withholding taxes until after he resigned from the Corporation and received the converted assessments from the Department. Based on the evidence, it appears the Taxpayer did not have a duty to perform or oversee the performance of the filing and payment of the Virginia withholding taxes for the periods assessed. As such, I conclude that the Taxpayer was not a responsible corporate officer under Va. Code § 58.1-1813 for the Corporation's withholding tax assessments for the taxable periods October 2008 through March 2009.

Based on this determination, the Department will issue a refund to the Taxpayer in accordance with the enclosed schedule. 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,

Craig M. Burns

Tax Commissioner

AR/1-4512401704.B