April 15, 2015
Re: § 58.1-1821 Application: Converted Assessments
Dear *****:
This will reply to your letter in which you seek correction of the converted assessment issued to ***** (the "Taxpayer") for unpaid withholding taxes assessed to ***** (the "Corporation").
FACTS
The Taxpayer was employed by the Corporation as an operations manager until he was elected its president in June 2012. At the time of his election, the Department was conducting a withholding tax audit for the taxable periods January 2011 through June 2012, and assessments were issued in December 2012. The Taxpayer resigned as president in February 2013.
The assessment for the taxable periods from January 2012 through June 2012 has been satisfied. When the Corporation failed to pay the assessment for the taxable period January 2011 through December 2011, however, the Department timely converted the assessments to the Taxpayer as permitted under Va. Code § 58.1-1813.
The Taxpayer filed an appeal, contending that he should not be held personally liable for the assessment because he was not responsible for filing returns or remitting withholding taxes during the taxable periods at issue. The Taxpayer also contends that the Corporation's failure to pay the assessment was not caused by any willfulness on his part.
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."
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."
Virginia Code § 58.1-1813 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." Hewitt v. U.S., 377 F.2d 921, 924 (5th Cir. 1967). 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.
The Taxpayer contends that he was not a responsible corporate officer under Va. Code § 58.1-1813 because he was employed as an operations manager during the taxable periods at issue and his duties did not include filing withholding tax returns or remitting withholding taxes. Virginia Code § 58.1-1813, however, does not specify that the corporate officer or employee must have had such responsibility at the time the returns and payments were due. A failure to pay, collect, or truthfully account for and pay over the tax continues until the business corrects such failure. In this case, the Taxpayer learned of the Corporation's failure to pay withholding tax after he became president and assumed authority for ensuring the Corporation's compliance with federal and state tax laws. The remaining question, therefore, becomes whether the Taxpayer's failure to pay over the withholding taxes was willful.
After he became president, the Taxpayer directed the Corporation to hire an accounting firm to conduct a comprehensive review of the Corporation's accounting. At that time, the Department was already conducting withholding and sales tax audits. Before the accounting firm was hired, the Department had difficulty obtaining the information it needed to complete the audits. This difficulty, however, was not caused by the Taxpayer's refusal to cooperate. Rather, according to the auditor, the accounting firm assisted him in obtaining all of the information he needed to conclude the audits and issue accurate assessments. As such, it appears that the Taxpayer's direction to hire the firm helped produce a truthful accounting of the Corporation's withholding tax liabilities.
In addition, the Taxpayer was president when the Corporation and the Department agreed to a payment plan in February 2013 covering the Corporation's remaining withholding and sales tax liabilities. At his direction, the Corporation had begun making payments on the plan.
Although the Taxpayer satisfied the definition of "corporate officer" under Va. Code § 58.1-1813 B, the Department finds that the Corporation's failure to pay the remaining withholding taxes due was not caused by any willful acts or omissions of the Taxpayer. As such, he was not a responsible corporate officer to whom the assessment could be converted pursuant to Va. Code § 58.1-1813. Accordingly, the converted assessment will be abated.
The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5843879603.M