Tax Type
Retail Sales and Use Tax
Description
Taxpayer was properly treated as a responsible officer of an LLC
Topic
Persons Subject to Tax
Records/Returns/Payments
Responsible Officer
Statute of Limitations
Date Issued
11-01-2013
November 1, 2013
Re: § 58.1-1821 Application: Retail Sales and Use Tax and Withholding Tax
Dear *****:
This is in response to your letters in which you seek the correction of retail sales and use tax and withholding tax assessments converted to you, ***** (the "Taxpayer"), as a responsible officer under Va. Code § 58.1-1813. You also contest the recording by the Department of two liens to collect various delinquent tax assessments owed by businesses associated with you. I apologize for the delay in this response.
FACTS
The Taxpayer is or was a member of limited liability companies that operate or have operated *****. These business entities are ***** ("LLC 1") and ***** ("LLC 2"). Both LLC 1 and LLC 2 have numerous delinquent withholding and retail sales and use tax liabilities with the Department. As a result, the Department has taken various actions against the business entities and the Taxpayer to collect these liabilities. Liens have been filed for the outstanding assessments and the business assessments have been converted to the Taxpayer as a responsible officer of the businesses.
DETERMINATION
The Taxpayer submitted an appeal letter dated October 29, 2012 to protest a notice of intent to lien issued by the Department. The Taxpayer's letter presents three reasons that the lien is incorrect. The Taxpayer subsequently submitted letters to the Department dated November 2, 2012 and December 31, 2012 that raise additional issues that are addressed in this determination. With the exception of the responsible officer issue related to LLC 1, the issues raised in these letters will be addressed in the date order that the letters were received by the Department.
Memorandum of Lien: Statute of Limitations
The Taxpayer states that the lien notice issued by the Department was for assessments made from 1998 through 2004, and the statute of limitations for issuing the lien has expired. The lien was recorded on November 6, 2012. Effective July 1, 2012, Va. Code § 58.1-1802.1 A provides that:
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- Where the assessment of any tax imposed by this subtitle has been made within the period of limitation properly applicable thereto, such tax may be collected by levy, by a proceeding in court, or by any other means available to the Tax Commissioner under the laws of the Commonwealth, but only if such collection effort is made or instituted within seven years from the date of the assessment of such tax.
The Taxpayer should note that the statute of limitations has changed two times due to legislative action in recent years. Between July 1, 2010 and July 1, 2012 the statute of limitations was ten years. Prior to July 1, 2010, the statute of limitations was twenty years.
The facts presented in the Taxpayer's October 29, 2012 appeal letter are not related to the lien at issue. Based on a review of the November 6, 2012 lien document, the assessments listed were assessed from November 2011 through October 2012. These are the outstanding assessments of LLC 2 that were converted to the Taxpayer as a responsible officer. The Department's records indicate that the oldest business assessments issued to LLC 2 were made in October 2010. The taxable periods for the assessments issued to LLC 2 and the conversion of those business assessments to the Taxpayer are within the three-year statute of limitations for making assessments. The lien at issue is not for any assessments made from 1998 through 2004. This time period was well before the formation of LLC 2. Based on the dates of the assessments, the November 6, 2012 lien was properly issued within the applicable statute of limitations as set out in Va. Code § 58.1-1802.1.
Personal Lien
The Taxpayer states that a personal lien is already in place for tax years 2008 and 2009. There is no statutory provision in the Code of Virginia that prohibits the Department from issuing additional liens to collect outstanding liabilities owed by a taxpayer. Clearly, a taxpayer may incur additional, new liabilities after a lien is issued to collect existing liabilities. Such a provision ensures that the Department can use liens to collect all liabilities owed by taxpayers. This is true whether the lien is issued to the Taxpayer personally or to businesses associated with the Taxpayer. The fact that the Taxpayer had a personal lien in place at the time the November 6, 2012 lien was issued does not provide a basis for relief.
Responsible Officer Assessments: LLC 2
On November 6, 2012, the Department recorded the personal memorandum of lien for delinquent business assessments that were converted to the Taxpayer as the responsible officer of LLC 2. The Taxpayer claims that another member of LLC 1 was responsible for running the restaurant business and for filing and paying the taxes owed by the business. The Taxpayer states that this member of LLC 1 died in September 2009. The Taxpayer then began operating the business.
The facts clearly provide that the responsible officer issue raised in the Taxpayer's October 29, 2012 appeal is not related to LLC 2 or the conversion to the Taxpayer of the assessments issued to LLC 2. This issue relates to LLC 1 only. LLC 2 was formed as a business entity after the death of the LLC 1 member in September 2009. The deceased member of LLC 1 was never a member of LLC 2 and cannot be considered a responsible officer of LLC 2. The November 6, 2012 lien was issued solely for the assessments of LLC 2 that were converted to the Taxpayer. As the responsible officer issue raised in the Taxpayer's letter is not relevant to this lien, the lien is valid and was properly filed by the Department.
Memorandum of Lien: Bankruptcy
In a letter dated November 2, 2012, the Taxpayer contests a memorandum of lien recorded by the Department while the Taxpayer was in personal bankruptcy. The lien was issued on August 6, 2010 as the result of delinquent business assessments that were outstanding for LLC 1. The Taxpayer was in personal bankruptcy from February 2009 until January 5, 2011, when the bankruptcy was dismissed without judgment. The Taxpayer asserts that the automatic stay provisions of the federal bankruptcy law prohibited the Department from filing the lien.
The memorandum of lien at issue was recorded to seek the satisfaction of the outstanding business assessments of LLC 1. The bills listed on the lien were not assessments made against the Taxpayer. Thus, the Taxpayer's name and Social Security number were improperly listed on the lien because the delinquent assessments were for LLC 1 and not the Taxpayer. This error has been corrected and the Taxpayer's name and Social Security number have been vacated from the lien. However, the lien remains valid with respect to the outstanding liabilities of LLC 1. No evidence has been presented that the assessments issued to LLC 1 are erroneous or that LLC 1 was in bankruptcy on the date the lien was filed by the Department.
Memorandum of Lien: § 58.1-1821 Appeal
The personal memorandum of lien recorded on November 6, 2012 was for delinquent business assessments converted to the Taxpayer as the responsible officer of LLC 2. The Taxpayer contends in a December 31, 2012 letter that the Department was prohibited from issuing the lien while this administrative appeal was pending. Virginia Code § 58.1-1821 states, in part, that "[o]n receipt of a notice of intent to file under this section, the Tax Commissioner shall refrain from collecting the tax until the time for filing hereunder has expired ...."
A review of the appeal letter filed by the Taxpayer on October 29, 2012 indicates that three issues were raised. One issue was the conversion of business assessments to the Taxpayer as a responsible officer. As previously stated in this determination, the facts presented in the appeal relate to the filing of the lien for assessments converted from LLC 2 to the Taxpayer. The LLC 1 member that died in September 2009 could not have been a responsible officer of LLC 2. The collection provisions of Va. Code § 58.1-1821 do not apply to the filing of the November 6, 2012 lien because the issues raised in the Taxpayer's appeal are not related to the assessments for which the lien was issued. There is no basis for relief on this issue.
Memorandum of Lien: Proper Notice
The Taxpayer also states in the December 31, 2012 letter that proper notice was not given before another lien was filed by the Department on December 12, 2012. There is no record that the Department issued a lien to the Taxpayer dated December 12, 2012. The Taxpayer appears to be referencing to the November 6, 2012 personal lien that was filed by the Department. Proper notice was given to the Taxpayer before this lien was issued. The lien is the same lien referenced in the Taxpayer's October 29, 2012 letter. In this letter, the Taxpayer states that he received a "Notice of Intent to File Memorandum of Lien" for which a response was due by October 31, 2012. The lien was issued on November 6, 2012, not on December 12, 2012 as claimed in the Taxpayer's letter.
Responsible Officer Assessments: LLC 1
The Department converted outstanding assessments from LLC 1 to the Taxpayer in accordance with Va. Code § 58.1-1813. Notices of the conversions dated August 1, 2010 and November 17, 2011 were issued to the Taxpayer. The Taxpayer maintains that there were two other members of LLC 1, and one of these members ran the restaurant until his death in September 2009. The Taxpayer admits that he ran the business after the member's death. The Taxpayer also states that the other two members of LLC 1 owed the Taxpayer a substantial amount of money at the time of the member's death.
Virginia Code § 58.1-1813 A states that:
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- 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:
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- 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 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:
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- 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 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.) 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 corporation.
While another member of LLC 1 may have run the day-to-day operations of the restaurant, the Taxpayer can still be considered a responsible officer of the business if the criteria set out in Angelson v. Commonwealth of Virginia are met. The Department's records indicate that the Taxpayer signed checks, sales and use tax returns and withholding tax returns filed for periods prior to the member's death. Only one sales tax return signed by the deceased member of LLC 1 could be located in the Department's records. Many of the returns filed on behalf of LLC 1 were not signed. Moreover, the Taxpayer has indicated on signed income tax returns that he was President and managing owner of LLC 1. The Department's records also list the Taxpayer as the only corporate officer of LLC 1. Further, the Department's records contain no information that suggests the deceased member of LLC 1 was a responsible officer.
Pursuant to Va. Code § 58.1-205 1, an assessment of tax by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to establish that the assessment is incorrect. Based on the returns and other documents filed with the Department and signed by the Taxpayer, it is clear that the Taxpayer was under a duty to perform or oversee the performance of the filing of returns and the payment of Virginia business taxes for LLC 1. As an officer and managing owner of LLC 1, the Taxpayer had the authority to prevent the failure of LLC 1 to pay its tax liabilities. Further, the Taxpayer has presented no evidence that any other party possessed the authority to prevent payment of the tax liabilities owed by LLC 1. It is also important to note that 14 of the 23 converted assessments from LLC 1 are for taxable periods subsequent to the member's death. The Taxpayer admits that he operated the business after the member's death.
Based on the available information, the Taxpayer meets the criteria in Angelson v. Commonwealth of Virginia and has not met its burden of proving that the converted assessments are incorrect. As such, I must conclude that the Taxpayer is a responsible corporate officer under Va. Code § 58.1-1813, and the delinquent tax liabilities of LLC 1 were properly converted to the Taxpayer.
SUMMARY
The August 6, 2010 memorandum of lien has been corrected by removing the Taxpayer's personal information from the lien. Based on this determination, the November 6, 2012 lien is valid. Further, the Taxpayer was properly treated as a responsible officer of LLC 1, and there is no basis to dispute the responsible officer conversion to the Taxpayer of the liabilities owed by LLC 2. The Department's records also indicate that LLC 1 filed for bankruptcy on February 26, 2013. The bankruptcy was discharged August 30, 2013. Therefore, the outstanding assessments issued to LLC 1, LLC 2 and the Taxpayer are due and payable.
The Code of Virginia sections cited, along with other reference documents, 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 concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5236320929.S
Rulings of the Tax Commissioner