Tax Type
Corporation Income Tax
Description
Converted assessment; Collection of Tax
Topic
Persons Subject to Tax
Responsible Officer
Taxable Transactions
Date Issued
04-12-2013
April 12, 2013
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter submitted on behalf of your client, ***** (the "Taxpayer"), in which you seek correction of the converted assessment issued for the taxable year ended June 30, 2009. I apologize for the delay in responding to your request.
FACTS
The Taxpayer was president of ***** (ACP). ACP sold substantially all of its assets to ***** (BCP) in June 2009. As a result of the transaction, ACP recognized deferred revenues and a gain on the sale of intangible property for the taxable year at issue.
ACP filed a 2008 Virginia corporate income tax return but failed to pay the resulting liability. When the Department was unable to collect the corporate income tax assessment from ACP, it converted the assessment to the Taxpayer as a responsible officer.
The Taxpayer appeals the assessment, contending he was not a responsible officer of ACP at the time of the sale or when the liability was recognized. The Taxpayer maintains that proceeds from the sale of ACP's assets were not sufficient to pay the corporate tax due.
DETERMINATION
Virginia Code § 58.1-1813 A states, "Any corporate . . . 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." The statute requires that the failure to pay over the taxes be willful, and that the corporate officer had: (i) knowledge of the failure, and (ii) authority to prevent it. Under the standard of willfulness applied by the courts, all that needs to be shown is that the act was "voluntary, conscious, and intentional." See 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.
Under Va. Code § 58.1-1813 B, the term "corporate officer" is defined as "an officer or employee of a corporation . . . who as such officer [or] employee is under a duty to perform on behalf of the corporation . . . 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." The Department has previously ruled that a responsible officer assumes the authority of ensuring that the final corporation income tax return is correct when it is filed. In such cases, the Department may assess the penalty so long as the officer had knowledge of the deficiency within the period of limitations for making an assessment against the corporation or partnership. See Public Document (P.D.) 97-434 (10/29/1997). In this case, the Taxpayer had knowledge that a corporate income tax return was required to be filed after the transaction took place. See also, P.D. 97-230 (5/19/1997) and P.D. 10-184 (8/16/2010).
The Taxpayer asserts that ACP had previously fully complied with Virginia income tax statutes and had not been delinquent. Thus, ACP would have paid the assessment if it had the funds to do so. However, because the asset sale did not occur in ACP's normal course of business, the Taxpayer had a fiduciary responsibility to determine how the transaction could affect ACP's corporate income tax liability and make provision to comply with Virginia tax statutes.
The Taxpayer cites P.D. 94-361 (11/29/1994) and P.D. 10-133 (7/12/2010) to support its position that the failure of the responsible officer to pay the tax was not willful. In P.D. 94-361, the information presented to the Department indicated that the Taxpayer lacked sufficient funds to pay the tax and the failure to pay was not willful because the facts at hand did not evidence an intent of the officer to siphon off funds. In P.D. 10-133, the conversion was upheld, in part because the taxpayer, the sole owner of the firm who wrote checks, signed and filed tax returns and payments, presented no evidence of insufficient funds to pay the tax. In addition, she paid other creditors rather than the Department.
In this case, the evidence does not show that ACP was insolvent or in bankruptcy when the transaction took place. In fact, the Taxpayer indicates that funds were available to pay employees' salaries through the date of the transaction. In addition, the Taxpayer, as President, negotiated a non-cash sale of specified assets and liabilities of ACP to BCP. The negotiations were conducted with a former officer familiar with ACP's financial situation who had formed BCP for the specific purpose of acquiring ACP. The Taxpayer was aware that the sale of ACP would result in a substantial taxable gain, but failed to make a provision for any possible tax liability out of funds remaining in ACP.
Accordingly, the Taxpayer's request for the abatement of the converted assessment cannot be granted. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the bill statement.
The Code of Virginia sections and public documents cited are available on-line in the Laws, Rules and Decisions section of the Department's web site, located at www.tax.virginia.gov. If you have any questions regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-4999418485.o
Rulings of the Tax Commissioner