Was a corporate vice president personally liable when the company failed to remit employee withholding taxes?

Plain-English summary

Virginia held the company's vice president and secretary personally responsible for the unpaid 2009 withholding taxes. The company had failed to remit withholding, and collection from the company was unsuccessful.

Responsible-officer liability required a willful failure plus knowledge and authority to prevent it. The officer said he only supervised field operations and that his spouse, the president and treasurer, handled payroll and finances. But the evidence showed he learned of the underpayment while still an officer and knew of a partial-payment agreement.

His spouse also stated that he knew of the assessments and transferred the company's assets and customer base to another entity when it closed instead of using them to pay company debts. The officer provided no objective evidence that he lacked authority.

An IRS document finding insufficient federal evidence did not control Virginia's separate statutory determination. Virginia may assess all responsible officers, not only one. The requested abatement was denied.

What this means for you

• Withheld employee tax is a trust-type obligation that can become personal officer liability.
• Knowledge plus authority to prevent nonpayment can satisfy Virginia's responsible-officer test.
• Job titles do not decide the case; actual duties, decisions, access, and conduct matter.
• A federal responsible-person decision is relevant evidence but does not bind Virginia.

Common questions

Q: Did the officer know about the unpaid tax?
A: Yes, while the company was still operating.

Q: Did he prove he lacked authority?
A: No. The Department found no objective evidence supporting that claim.

Q: Could Virginia assess both spouses or multiple officers?
A: Yes. The statute was not limited to a single responsible officer.

Citations and references

• Va. Code §§ 58.1-205, 58.1-301, and 58.1-1813 A.
• IRC § 6672.
• Hewitt v. United States, 377 F.2d 921 (5th Cir. 1967).

Subject

Failure to remit withholding tax; Responsible Officer

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-60

Original ruling text

May 3, 2013

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter in which you seek correction of the penalty assessments issued to * (the "Taxpayer"), resulting from a withholding assessment issued against *** (VSC) for the periods January 2009 through December 2009. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer was vice president and secretary of VSC. The Taxpayer's spouse was president and treasurer.

The Department issued an assessment to VSC for failure to remit withholding tax for the periods January 2009 through December 2009. Upon failure to collect the deficiency from VSC, the Department assessed penalties against VSC officers equal to the amount of the withholding taxes, penalties and interest owed by VSC.

The Taxpayer appeals the conversion of the assessment, contending his functions for VSC were limited to overseeing field operations and he was not personally responsible for the liabilities of VSC, pursuant to Va. Code § 58.1-1813.

DETERMINATION

When a corporation fails or is unable to pay its tax liabilities, the Department may assess the corporate officers personally for a penalty equal to the amount of the liabilities. 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 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." See Hewitt v. U.S. , 377 F.2d 921, 924 (1967). In other words, it need only be shown that the officer was aware of the outstanding liability and knowingly and intentionally paid operating expenses or other debts of the corporation.

The Taxpayer has provided a document in which the Internal Revenue Service (IRS) found insufficient evidence to hold the Taxpayer as a responsible party for federal purposes. The Taxpayer asserts this document proves he was not responsible for VSC's failure to remit withholding tax.

The Commonwealth's conformity to federal law is set forth in Va. Code § 58.1­301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (IRC). As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Conformity does not extend to terms, concepts, or laws not specifically provided in the Title 58.1 of the Code of Virginia .

Virginia Code § 58.1-1813 establishes the Commonwealth's policy with regard to converting assessments against responsible officers and employees. Although this statute includes some of the same concepts and terms used in IRC § 6672, the Department is not bound to a determination by the IRS concerning the conversion of an assessment against a responsible party. The Department will consider such a determination in light of all the attendant facts and circumstances related to the responsibilities of an officer or employee in determining whether a conversion is appropriate.

The Taxpayer asserts that he had no knowledge that taxes were not being paid until he was contacted by the IRS in 2010. VSC continued to operate until late 2011. As such, the Taxpayer had knowledge of the underpayment while acting as an officer of VSC.

The Taxpayer further asserts that the treasurer was the responsible officer. He indicates that she was responsible for keeping the financial records of VSC, paying vendors, and administering payroll. The Department's records indicate that the withholding returns were filed by the treasurer.

The treasurer has admitted responsibility but has attested that the Taxpayer was aware of the assessments, including a partial payment agreement with the Department with regard to VSC's liability. The treasurer also asserts the Taxpayer took all of VSC's assets and client base to another entity when VSC closed in December 2011 instead of using them to raise funds to pay VSC's debts. VSC filed for bankruptcy in May 2012.

In this instance, all attributes of the VSC's income, gain, loss, deduction, or credit pass through to the Taxpayer and his wife; therefore, the Taxpayer and his wife were not only responsible for the decisions made on behalf of the VSC, they retained all benefits from such decisions.

Under the provisions of Va. Code § 58.1-205 any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the Taxpayer to show he had no knowledge of the failure of VSC to remit income taxes withheld from its employees' salaries, and lacked the authority to prevent it.

The evidence indicates the Taxpayer had knowledge of the failure. In addition, the Taxpayer has provided no objective evidence to show that he lacked the authority to prevent the failure. Accordingly, the Taxpayer is considered a responsible officer of VSC with regard to the withholding liability for the period January 2009 through December 2009.

Further, the Department is not limited to assessing the penalty against one officer, but may assess any and all responsible officers as defined in Va. Code § 58.1­ - 1813. Accordingly, the Taxpayer's request for the abatement of the penalty assessed as a responsible officer is denied.

The Code of Virginia sections 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 regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5089118054.D