Document Number
13-181
Tax Type
Income Tax
Description
filings by the IRS does not prevent the Department from pursuing collection activity against the Taxpayer.
Topic
Persons Subject to Tax
Records/Returns/Payments
Responsible Officer
Date Issued
10-18-2013


October 18, 2013



Re: § 58.1-1821 Application: Converted Assessment

Dear *****:

This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek reversal of the converted assessment issued to the Taxpayer for the periods January 2008 through December 2011. I apologize for the delay in responding to your appeal.

FACTS

The outstanding sales and use tax and withholding tax liabilities issued to (the "business") were converted to the Taxpayer in accordance with Va. Code § 58.1-1813. Citing Paul Angelson v. Commonwealth of Virginia, 25 Va. Cir. 319 (1991), the Taxpayer contests the assessment, stating he is not liable for the business' outstanding tax liabilities because the failure to pay was not willful as required by Va. Code § 58.1-1813. The Taxpayer maintains that the liability was not paid by the business because the business lacked the funds to do so. The Taxpayer further states that he is unable to pay the outstanding liability because he owes other secured debts to the Internal Revenue Service (the "IRS") that have priority over the liability owed to Virginia. The Taxpayer filed for bankruptcy in April 2011. The business filed for bankruptcy in July 2011.

DETERMINATION

Corporate Officer

Virginia Code § 58.1-1813 B states:
    • The term "corporate, partnership or limited liability officer" as used in this section means 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 this instance, the Taxpayer states that he had knowledge of the business' Virginia tax liability. The Taxpayer also states that he had the authority to cause the business to pay its taxes to the Department. Based upon these factors, the Taxpayer is a corporate officer as defined in Va. Code § 58.1-1813.

Sales and Use Tax

Virginia Code § 58.1-625 states, in pertinent part, that "The tax levied by this chapter shall be paid by the dealer, but the dealer shall separately state the amount of the tax and add such tax to the sales price or charge. All sums collected by a dealer as required by this chapter shall be deemed to be held in trust for the Commonwealth."

In Hewitt v. U.S., 377 F.2d 921, 924 (1967), penalty was assessed against the taxpayer for his willful failure to collect and pay over the federal income and Social Security taxes withheld from employees. The court defined willfulness as "a voluntary, conscious and intentional decision not to have the corporation pay over the taxes to the government."

In Public Document (P.D.) 95-74 (4/7/95), the taxpayer was Chairman of the Board and CEO of a corporation, which filed for bankruptcy on February 15, 1991. The corporation filed its January 1991 sales tax return on February 20, 1991, but failed to remit the tax due. An assessment was issued to the corporation in March 1991. Upon failure to collect the deficiency from the corporation, the Department converted the assessment to the taxpayer pursuant to Va. Code § 58.1-1813. Relying on the fact that the assessment was not issued by the Department until March 1991, the taxpayer claimed that he had no knowledge of the sales tax liability prior to filing the bankruptcy petition. The Tax Commissioner found that the liability for the taxes attached when they were collected at the time of sale and not upon the date set for filing the return. Furthermore, an assessment of the tax is not a prerequisite to tax liability. The taxpayer knew the corporation incurred sales tax liability at the time of the January 1991 sales. Pursuant to Va. Code § 58.1-625, the taxes collected were held in trust for the Commonwealth. When the petition for bankruptcy was filed, the taxpayer was aware that the sales taxes collected from the corporation's January 1991 sales, and held in trust for the Commonwealth, had not yet been remitted to the Department, as he had not approved a check for payment of those taxes. Therefore, the taxpayer had knowledge of the failure to pay over the tax collected. The taxpayer's failure to remit the taxes was considered willful in accordance with Hewitt v. U.S. The taxpayer filed for bankruptcy knowing that funds for payment of the sales tax liability had been collected and were held in trust. The Tax Commissioner found that by filing for bankruptcy, the taxpayer made a voluntary and conscious decision to prevent those funds from being remitted to the Department, and the funds were ultimately distributed to other creditors and not to the Department.

Pursuant to Va. Code § 58.1-625, the Virginia sales tax that was collected on sales made by the business to its customers during the periods at issue should have been remitted by the business to the Department when collected. The business became liable for the tax at the moment the sales tax was collected, not when the business received notification of an assessment from the Department or when the assessments were converted to the Taxpayer. The Taxpayer and the business filed for bankruptcy knowing that funds for payment of the sales tax liability had been collected and were held in trust for the Commonwealth. The bankruptcy filing by the Taxpayer represented a voluntary and conscious decision by the Taxpayer to prevent those funds from being remitted to the Department, in accordance with Hewitt v. U.S. and P.D. 95-74. The Taxpayer's argument that the business lacked sufficient funds to make the payments is without merit.

Withholding Tax

Virginia Code § 58.1-461 provides, in pertinent part, that "Every employer making payment of wages shall deduct and withhold with respect to the wages of each employee for each payroll period an amount as determined" by this statute.

Virginia Code § 58.1-472 provides, in pertinent part, that "Every employer
required to deduct and withhold from an employee's wages under this article shall make return and pay over to the Tax Commissioner the amount required to be withheld" as provided by this statute.

Pursuant to Va. Code §§ 58.1-461 and 58.1-472, the business should have withheld and remitted tax with respect to wages to the Department for the periods at issue. The business became liable for the tax at the moment the tax was withheld, not when the business received notification of an assessment from the Department or when the assessments were converted to the Taxpayer. The Taxpayer states that he had authority to cause the business to pay its taxes during the periods at issue. The Taxpayer and the business filed for bankruptcy knowing that funds for payment of the withholding tax liability had been collected and were held in trust for the
Commonwealth. The bankruptcy filing by the Taxpayer represented a voluntary and conscious decision by the Taxpayer to prevent those funds from being remitted to the Department, in accordance with Hewitt v. U.S. The Taxpayer's argument that the business lacked sufficient funds to make the payments is without merit.

Converted Assessment

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.

In Angelson, the court set out the "four conditions that must be met before a person can be held individually liable for taxes assessed against a corporation." The person must willfully fail to pay over the state tax. The person must be an officer of the corporation. The person must have knowledge of the failure or attempt. Finally, the person must have authority to prevent the failure or attempt. The Angelson court held that the taxpayer was not liable for sales taxes and employee withholding taxes assessed against the corporation. The court found that for the period at issue, the taxpayer was not under a duty to report or pay taxes, the taxpayer had no knowledge of the corporation's failure to report or pay those taxes, and the taxpayer did not willfully fail to pay the taxes at issue.

That is not the case here. In this instance, the Taxpayer admits that he had authority to cause the business to pay its sales and withholding taxes. During the periods at issue, these taxes were collected by the business and held in trust for the Commonwealth, but were not remitted to the Department as required by law. Also, in this instance, the Taxpayer is a corporate officer under a duty to report and pay the taxes at issue. Furthermore, in his position of authority in the business, the Taxpayer had knowledge (and has admitted such) of the business' failure to report and remit the taxes that had been collected during the periods at issue. Lastly, by filing for bankruptcy, the Taxpayer made a willful decision to prevent the taxes at issue from being remitted to the Department. Based on the factors considered by the court in the Angelson case, the converted assessment is proper as issued.

Taxpayer's Ability to Pay the Assessment

The Taxpayer states that the IRS has filed a lien against the Taxpayer. As a result of this filing, the Taxpayer maintains that the Department should not attempt to collect from the Taxpayer because the IRS lien has priority over any lien or attempt to collect filed by the Department.

The Department has no actual knowledge of a lien being filed by the IRS against the Taxpayer. Nonetheless, any filing by the IRS does not prevent the Department from pursuing collection activity against the Taxpayer. Accordingly, the Taxpayer's argument with respect to the IRS lien is without merit.

CONCLUSION

In accordance with the aforementioned authorities, the converted assessment is correct as issued. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding balance is paid within 30 days from the date of the bill. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections and public document 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 about this response, you may contact ***** in the
Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Craig M. Burns
                  Tax Commissioner



AR/1-5269843541.P

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46