I was president and a minority shareholder of a restaurant company that fell behind on sales tax -- can the Department make me personally liable for the company's unpaid tax as a 'responsible officer' even though I didn't handle the company's finances or tax filings?

Plain-English summary

A restaurant company fell behind on its retail sales and use tax obligations for various periods between May 2015 and May 2016, and the Department assessed the company for the unpaid tax. Because corporate tax liabilities can be personally converted to a "responsible officer" under Virginia law, the Department also assessed the company's president -- who was also a minority shareholder -- personally for the unpaid tax. He appealed, arguing he didn't meet the legal requirements to be held personally responsible.

Virginia's responsible-officer statute (Va. Code § 58.1-1813) has real teeth, but real limits too. It applies to a "corporate, partnership or limited liability officer" who WILLFULLY fails to pay, collect, or account for and pay over a tax the company owes. But being an officer isn't enough by itself -- the statute (and a 1991 Virginia circuit court decision, Angelson v. Commonwealth, interpreting it) requires ALL FOUR of the following:

1. The person willfully failed to pay, collect, or account for and pay over the tax (or willfully tried to evade it).
2. The person was an officer/employee of the company with an actual DUTY to perform the act in question (i.e., paying or reporting the tax).
3. The person had ACTUAL KNOWLEDGE of the failure.
4. The person had the AUTHORITY to prevent the failure.

The absence of even ONE of these conditions blocks personal liability -- and "willfulness" under this framework just means the failure was voluntary, conscious, and intentional (not necessarily malicious).

Applying that test here, the Tax Commissioner found the president didn't have the specific corporate duty to timely report and pay the company's taxes, and wasn't responsible for budgeting or paying the company's bills -- those jobs belonged to the OTHER shareholders, who actually signed the checks and filed the tax returns. Even if he may have known the company was behind on taxes, he lacked the actual authority to prevent that failure, and there wasn't evidence he personally, willfully failed to pay taxes he was responsible for. Because the duty and authority elements weren't met, the personal assessment against him was abated entirely, with any amounts he'd already paid (plus interest) to be refunded.

What this means for you

Corporate officers and minority shareholders facing a "responsible officer" assessment

Your title alone (president, officer, even shareholder) doesn't make you personally liable for unpaid corporate sales tax -- the Department has to show you actually had the specific DUTY to handle tax payments/filings, had actual KNOWLEDGE the company was behind, AND had the real-world AUTHORITY to fix it. If someone else in the company actually controlled the finances and signed the returns, that's a strong defense even if you held a senior title.

Businesses with multiple officers/shareholders and unclear financial roles

Document who actually has check-signing authority, who prepares and files tax returns, and who has practical control over the company's finances -- this ruling shows that real, functional control (not job title) is what the Department and courts look at when deciding whom to hold personally liable.

Taxpayers appealing a converted responsible-officer assessment

Focus your appeal on the specific "duty" and "authority" elements, not just willfulness -- this ruling shows that even acknowledging some awareness of the company's tax troubles isn't enough to establish personal liability if you lacked the authority to actually prevent the failure.

Common questions

Q: If I was aware the company wasn't paying its sales tax, does that alone make me personally liable as a responsible officer?
A: No -- knowledge of the failure is only one of four required elements. You also need to have had the specific duty to pay/report the tax and the actual authority to prevent the failure; missing either of those defeats personal liability even with knowledge.

Q: Does being president of the company automatically make me a "responsible officer" for unpaid sales tax?
A: No -- job title isn't the test. The Department (and the Angelson case) look at who actually had the duty to handle tax obligations, who had authority over the company's finances, and who signed the checks and returns.

Q: What happens if the Department already collected money from me personally before I won this appeal?
A: Under this ruling, once the assessment is abated, any amounts already paid or otherwise collected from the individual are refunded, including any accrued interest.

Citations and references

• Angelson v. Commonwealth of Virginia, 25 Va. Cir. 319 (City of Richmond, 1991) -- established the four-part test (willfulness, duty, knowledge, authority to prevent) for responsible-officer liability under Va. Code § 58.1-1813
• Hewitt v. U.S., 377 F.2d 921, 924 (5th Cir.) -- cited for the standard that "willfulness" means an act that is voluntary, conscious, and intentional

Subject

Administration: Collection/Remittance of Tax - Responsible Officer

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-77

Original ruling text

May 25, 2021

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you seek correction of the retail sale and use tax assessment converted to * (the “Taxpayer”) as a result of liabilities incurred by *** (the “Company”) for various periods between May 2015 and May 2016. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer was president and minority shareholder of the Company, which was engaged in the operation of a restaurant in Virginia. During the periods at issue, the Company incurred unpaid sales and use tax liabilities, which resulted in assessments against the Company. Thereafter, the unpaid tax liabilities of the Company were converted to the Taxpayer as a responsible officer pursuant to Virginia Code § 58.1-1813. The Taxpayer appeals, contending that he does not meet the requirements of a responsible officer under Virginia Code § 58.1-1813 and requests an abatement of the converted assessments.

DETERMINATION

Virginia Code § 58.1-1813 A provides that:

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 assesses and collected.

Virginia Code § 58.1-1813 B defines the term “corporate, partnership or limited liability officer” as

an officer or employee of a corporation, or a member, manager or employee of a partnership or limited liability company, who as such officer, employee, member or manager is under a duty to perform on behalf of the corporation, partnership or limited liability company 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 set out a four prong test for interpreting the provisions in Virginia Code § 58.1-1813. The Court stated:

First, 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. Second, 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. Third, the person must have actual knowledge of the failure or attempt as set out in the statute. And fourth, the person must have authority to prevent such failure or attempt.

The court 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.” Hewitt v. U.S. , 377 F.2d 921, 924 (C.A. Tex.).

Although an officer of the Company, it appears the Taxpayer did not have the specific corporate duty of timely reporting and paying the Company’s tax obligations. The Taxpayer was also not responsible for budgeting or paying the Company’s bills. These responsibilities belonged to the other shareholders, who signed checks and tax returns filed by the Company. While the Taxpayer may have had knowledge that the Company was not current on its tax obligations during the periods at issue, the Taxpayer lacked authority to prevent the failure of the Company to pay the taxes. Additionally, the evidence fails to show the Taxpayer willfully failed to pay the taxes owed by the Company to the Department.

CONCLUSION

Based on all of the foregoing, and absent evidence to the contrary, I find that the Taxpayer was not a responsible officer within the meaning of Virginia Code § 58.1-1813 A and B, and the interpretation thereof in Angelson v Commonwealth of Virginia . Accordingly, the converted assessments issued to the Taxpayer will be abated and any amounts paid or otherwise collected by the Taxpayer in payment of the assessments at issue shall be refunded, including any accrued interest.

The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions regarding this determination, please contact * in the Office of Tax Policy, Appeals, and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1165.A