Document Number
12-106
Tax Type
Retail Sales and Use Tax
Description
Converted Assessments; Responsible Officer
Topic
Assessment
Collection of Delinquent Tax
Penalties
Records/Returns/Payments
Responsible Officer
Date Issued
06-20-2012

June 20, 2012


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

Dear *****:

This is in response to your appeal submitted on behalf of ***** (Taxpayer 1) and ***** (Taxpayer 2), (collectively, the Taxpayers), for correction of the converted consumer use tax assessments issued for the period January 2005 through April 2008. I apologize for the delay in responding to your letter.

FACTS


Taxpayer 1's primary affiliation with ***** (the Corporation) was as a commissioned salesman. Because of the departure of ***** (former president), Taxpayer 1 became president of the Corporation starting in October 2007 and claims that such position ended in April 2008.

In December 2008, the Corporation went dormant and closed its offices, ceased any new projects, and laid off employees. However, the Corporation remained open until June 2009 to pay suppliers, subcontractors and other accounts payable. The sales and use tax audit was concluded in April 2009, and an assessment was issued on April 24, 2009. Taxpayer 1 claims that the Corporation had no funds to pay such assessment.

Upon failure to collect the deficiencies from the Corporation, the Department assessed the Taxpayers penalties in the amount of the taxes and interest owed by the Corporation pursuant to Va. Code § 58.1-1813. The Taxpayers contend they do not satisfy all of the conditions to be held as responsible officers and request the full abatement of the converted assessments issued to them.

In regard to the former president, Taxpayer 1 claims that the responsibility for paying the tax rested with the former president who served as secretary and treasurer of the Corporation from October 2004 through October 2007, vice president of the Corporation from March 2006 through March 2007, and president of the Corporation from March 2007 through October 2007. According to Taxpayer 1, the former president was responsible for filing all tax returns and paying all bills. When the former president also served as the chief financial officer in October 2004, he was given the authority to sign corporate checks. In December 2007, such signatory authority was removed.1 In its place, Taxpayer 1 and another person were given such authority.

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, 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 assessed 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 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.

Taxpayer 1

Taxpayer 1 served as chairman of the Corporation's board of directors from 2004 through 2009. Pursuant to section 4 of the Corporation's Bylaws, the Board of Directors "shall have the control and general management of the affairs and business of the Corporation." According to the minutes of the annual meetings of the Board of Directors and shareholders held on March 2, 2009, it was agreed by the directors (which included Taxpayer 1 and the former president) that the Corporation would cease all operations by June 30, 2009 because of the current economic climate, the lack of work and the negative cash position of the Corporation. Moreover, a vote was held by the directors, and Taxpayer 1 was elected the president of the Corporation until the Corporation closed. Thus, Taxpayer 1 was still running the Corporation until its closure. As also shown by these minutes, the former president was elected to serve as secretary and treasurer of the Corporation until all operations ceased. However, none of the evidence submitted indicates that the signatory authority of the former president was restored.

In April 2008, Taxpayer 1 entered into an agreement with an escrow agent for the disbursement of client funds to subcontractors and suppliers. For progress payments, Clause I A 5 of the agreement makes the escrow agent specifically responsible for sending copies of checks received by the agent to Taxpayer 1. For the disbursement of remaining funds, Clause II A 2 of the agreement requires that the president of the Corporation, i.e., Taxpayer 1, sign each weekly request for the transfer of funds to the Corporation's operating account. Further, Clause II A 5 provides that, "[i]n its weekly request for funds, [the Corporation] may stipulate that a portion of the disbursements be made to [the Corporation] and portions made directly to certain of [the Corporation's] creditors." [Inserts added.] The escrow agreement is addressed to Taxpayer 1 as president of the Corporation and signed by Taxpayer 1. Thus, these contract clauses indicate that the Corporation did not lose total control over the funds that became available to it and could have used the funds to pay the taxes at issue.

In August 2008, Taxpayer 1 signed a power of attorney to permit a consultant to represent the Corporation in an upcoming consumer use tax audit. Also in August 2008, Taxpayer 1 signed a Waiver of Time Limitations on Assessment of Taxes to extend the time for assessing omitted consumer use taxes until April 30, 2009.2. Such waiver is applicable for the assessment of any omitted consumer use tax liability for the period July 2005 through August 2008. On both the power of attorney and waiver, the title of Taxpayer 1 is shown as President of the Corporation.

In October 2008, the Department began its audit of the Corporation to determine whether it incurred any Virginia consumer use tax deficiencies. In January 2009, the consultant's contract with the Corporation ended. On April 9, 2009, the Department's auditor mailed a certified letter with an audit schedule (a list of untaxed purchases and the taxable cost prices representing the audit liability) to Taxpayer 1 informing him that an assessment for such liability would be sent soon. This certified mailing was delivered on April 14, 2009. As such, Taxpayer 1 was put on notice that a tax assessment was forthcoming. On April 22, 2009, a closing letter and the audit report were sent to Taxpayer 1 by the auditor's supervisor. Both of these documents indicated the balance due. On April 24, 2009, the notice of assessment for the audit liability was sent to the Corporation by regular mail. Thus, I must conclude based on these facts that Taxpayer 1 had actual knowledge of the consumer use tax liability owed in this case by or before the end of April 2009.

According to the escrow account maintained on behalf of the Corporation,
available funds of ***** existed as of April 8, 2009. Funds in the amount of ***** were transferred into the escrow account on May 14, 2009. After April 8, 2009, the only reductions to these funds were for payments made to the escrow agent on May 8, 2009 (*****) and June 8 (***** and *****). Thus, excluding such escrow expenses, there were funds available in the amount of ***** that could have been used to pay, in part, the consumer use tax liabilities owed by the Corporation. Instead, these funds were used to pay escrow expenses of the Corporation. It is my understanding that the remainder of the escrow balance ***** was divided among the shareholders. 3. These facts indicate that Taxpayer 1 used funds available to the Corporation to willfully pay other debts.

Based on these facts, the Corporation had funds available to pay the Virginia consumer use tax liability at least in part. However, no amounts of the available funds were used to pay such tax liability. Rather, the available funds after the tax liability was made known to the Corporation and Taxpayer 1 were used to pay operating expenses of the Corporation or disbursed to shareholders.

Based on all of the foregoing facts, Taxpayer 1 does meet all of the criteria set out in Va. Code § 58.1-1813 and in Angelson v. Commonwealth of Virginia. The Department made known to Taxpayer 1 the Corporation's use tax liabilities prior to the close of the Corporation's business operations. As such, I must conclude that Taxpayer 1 had actual knowledge of the Corporation's use tax liabilities prior to the dissolution of the Corporation's business. Furthermore, because the Corporation had funds available to pay some of the assessment, it appears that Taxpayer 1 could have used the power of his position as a director and president of the Corporation to direct the escrow agent to apply the available funds to pay part of the tax assessment. The fact that none of the available funds were used to pay the assessment indicates that Taxpayer 1 willfully disregarded the tax liability. Thus, Taxpayer 1 had the authority to prevent the nonpayment of the tax.

I realize that none of the assessed liability included purchases during the period in which Taxpayer 1 was in charge of the Corporation. However, the audit of the Corporation's use tax liability was conducted at the time that Taxpayer 1 was in charge of the Corporation. Thus, while there was a failure on the part of the Corporation to report and remit the consumer use tax on untaxed purchases of tangible personal property used in Virginia, there was also a failure on the part of the Corporation to pay the assessed consumer use tax liability resulting from the audit of the Corporation. In regard to the latter, Taxpayer 1 failed to direct that the remaining funds of the Corporation be applied to the tax assessment at issue.

Taxpayer 2

In regard to Taxpayer 2, the Corporation's business registration application filed in April 2001 lists Taxpayer 2 as a responsible officer and the president of the Corporation. For the audit period in question, however, Taxpayer 2 was not an officer, employee, or director of the Corporation but was a minority shareholder of the Corporation. Thus, Taxpayer 2's role in the Corporation during the audit period appears to have been limited to investment only. Based on these facts, Taxpayer 2 is not a responsible officer and is thus not liable for the converted assessment in accordance with Va. Code § 58.1-1813.

CONCLUSION


Based on this determination, Taxpayer 1 is liable for the converted assessment. An updated bill, with interest accrued to present, will be sent to Taxpayer 1. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. Taxpayer 1 should remit payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

Based on this determination, the converted assessment for Taxpayer 2 will be abated in full.

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/1-4620527037.R
1. No documentation was presented to confirm that the former president's signatory authority was ever restored, even while acting as one of the directors of the Corporation in 2009.
2. In September 2008, the Corporation filed its final Virginia income tax return for the fiscal year ending June 2008 and its final withholding income tax returns for 2008. Notwithstanding the claimed cessation of his presidency in April 2008, Taxpayer 1 signed the income tax return as president of the Corporation. I understand that Taxpayer 1 also signed the 2007 and 2008 federal income tax returns as president.
3. Most all of the office furniture and equipment of the Corporation were sold prior to the final eight months of its existence. The rest of it was given away as compensation for expenses during the wind down period and thus was not sold to create additional funds available for payment of the taxes at issue.

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46