Document Number
12-100
Tax Type
Retail Sales and Use Tax
Description
Taxpayer does not satisfy all of the criteria required to be considered a corporate officer as defined by Va. Code § 58.1-1813.
Topic
Persons Subject to Tax
Records/Returns/Payments
Responsible Officer
Date Issued
06-15-2012

June 15, 2012



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

Dear *****:

This is in response to your correspondence requesting correction of the retail sales and use tax, withholding tax and tire tax assessments converted to ***** (the "Taxpayer") as a result of liabilities incurred by ***** (the "Corporation") for various nonconsecutive periods between July 2006 and August 2010. I apologize for the delay in responding to your letter.

FACTS


The Corporation was engaged in the business of selling automobile tires and tire equipment and related automotive servicing. Prior to the Corporation closing on August 30, 2010, it had failed to report and pay certain retail sales and use, withholding, and tire taxes. Based on information on file that the Taxpayer was listed as a corporate officer of the Corporation, the Department converted the unpaid tax liabilities of the Corporation to the Taxpayer pursuant to Va. Code § 58.1-1813.

During the period in question, the Taxpayer owned a 20% share in the Corporation. The Taxpayer's election as president of the Corporation was titular in nature because he continued to perform duties as the Corporation's shop foreman, overseeing and performing tire sales, installation, repair, and servicing. The Taxpayer was never provided a copy of the bylaws of the Corporation and has been unable to obtain a copy of such. The Taxpayer indicates that ***** (Secretary-Treasurer) owned a 20% share in the Corporation and handled and oversaw all of the financial, payroll, accounting, tax, monetary and business office functions and duties for the Corporation. As owner of a 60% share of the Corporation ***** (Vice President) served as the vice president of the Corporation. The Vice President answered phone calls and assisted the Secretary­ Treasurer in overseeing and performing the financial and office operations. The Taxpayer, Vice President, and Secretary-Treasurer had signature authority over the Corporation's bank accounts. However, the Taxpayer only used such authority in limited instances.

In July 2010, the Secretary-Treasurer verbally resigned from the Corporation. Prior to this time, the Corporation defaulted on a bank loan for which the Taxpayer and the Secretary-Treasurer were guarantors. The Secretary-Treasurer subsequently informed the Taxpayer that the Corporation owed taxes and that arrangements were made with the Department to pay those taxes. The Secretary-Treasurer also borrowed money from a bank (guaranteed by both the Secretary-Treasurer and the Taxpayer) to pay those taxes. The Secretary-Treasurer assured the Taxpayer that all of the taxes had been paid. Another default of the loan was made by the Corporation and the loan was modified. To the Taxpayer's knowledge, no further default notices were received until the time of the Secretary-Treasurer's resignation, when a foreclosure notice was received. Immediately, the Taxpayer began reviewing the financial records and discovered unpaid bills, unauthorized and suspicious cash withdrawals, unpaid taxes, and a default on a promissory note.

According to the Taxpayer, the Secretary-Treasurer had exclusive and sole discretion over the Corporation's funds and its bills and expenses, including the preparation, reporting, and filing of all tax returns and deposits. The Vice President signed or authorized substantially all of the drafts from the Corporation's cash accounts. The Taxpayer only signed a nominal number of checks prior to the resignation of the Secretary-Treasurer for emergencies in which neither the Vice President nor the Secretary-Treasurer was available. Such checks were prepared by or at the direction of the Secretary-Treasurer. The Taxpayer did not control or direct the Secretary-Treasurer or any of the office, financial, or business functions of the Corporation. The Taxpayer was not aware of unpaid state taxes until after the Corporation ceased business. At such time, neither the Taxpayer nor the Vice President was in a position to continue operating the business operations. Moreover, at that time, the Corporation lacked funds to pay the taxes in question.

Based on all of these facts, the Taxpayer claims that he is not liable for the converted bills assessed under Va. Code § 58.1-1813.

DETERMINATION


Subsection A of Va. Code § 58.1-1813 addresses the tax liability of corporate officers and states, in part, the following:
    • Any corporate . . . officer who willfully fails to pay, collect or truthfully account for and pay over any tax administered by the Department . . . shall . . . be liable to a penalty of the amount of the tax evaded . . . .

Subsection B of Va. Code § 58.1-1813 defines corporate officer as:
    • An officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee or member is under a duty to perform on behalf of the corporation or partnership 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 authority to prevent such failure or attempt.

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

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.). 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 company.

In Public Document (P.D.) 09-116 (7/31/09), a president was not liable as a corporate officer as defined in Va. Code § 58.1-1813 because he did not have the duty of reporting the tax when it was due although he subsequently became aware of the sales tax liability. Rather, the store manager who had the specific duty to report and pay the sales tax but failed to do so was held liable for the tax.

In P.D. 10-90 (6/4/10), a president who was also CEO, board chairman and majority stockholder was not liable under Va. Code § 58.1-1813. The president was not involved in the day-to-day management and accounting or financial aspects of the business during the period in which the taxes became due. Rather, another officer determined what payments were made and to whom. As such, the president had no direct or close association with the tax reporting and payment aspects of the business as to have acted willfully to evade payment of the taxes. Further, the Corporation lacked sufficient funds to pay the tax liabilities after the president learned of the debt.

Although an officer of the Corporation, the Taxpayer did not have the specific corporate duty of timely reporting and paying the tax on behalf of the Corporation. The Taxpayer also lacked actual knowledge of the Corporation's failure to file and pay its taxes until after the resignation of the Secretary-Treasurer. In addition, there is no evidence that the Taxpayer willfully failed to pay the state taxes owed by the Corporation. While the Taxpayer may have had apparent authority to prevent the Corporation's failure to pay the taxes, he had no actual authority or ultimate control over the business affairs. Rather, the Vice President as majority shareholder had such ultimate authority. For these reasons, the Taxpayer does not satisfy all of the criteria required to be considered a corporate officer as defined by Va. Code § 58.1-1813.
CONCLUSION

The converted assessments issued to the Taxpayer will be abated in accordance with this determination.

The Code of Virginia sections and public documents 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



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    Rulings of the Tax Commissioner

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