March 27, 2024
Re: § 58.1-1821 Application: Converted Assessments
Dear *****:
This will reply to your letter in which you seek correction of the converted assessments issued to your client, ***** (the “Taxpayer”), for unpaid withholding taxes assessed to a nonprofit organization (the “Organization”) for the taxable periods July 2019 through March 2021. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer was a listed as the contact on the Organization’s withholding tax account with the Department. The Department issued assessments to the Organization for withholding tax due for the taxable periods at issue. When the Organization failed to pay the assessments, the Department converted them to the Taxpayer. The Taxpayer filed an appeal, contending that she should not be held personally liable for the unpaid withholding taxes because she was not a responsible corporate officer.
DETERMINATION
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.”
Under Virginia 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.”
In Angelson v. Commonwealth of Virginia, 25 Va. Cir. 319 (City of Richmond, 1991), the court pointed out four conditions of Virginia Code § 58.1-1813 that must be met before a person can be held individually liable for taxes assessed against a corporation:
1. 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.
2. 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.
3. The person must have knowledge of the failure or attempt as set out in the statute.
4. The person must have authority to prevent such failure or attempt.
The court further 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.” See Hewitt v U.S., 377 F.2d 921, 924 (5th Cir. 1967).
The Taxpayer was listed as a director and the treasurer of the Organization’s Annual Report filed with the Virginia State Corporation Commission as of September 2019. Although the Taxpayer was named as an officer, she claims that she began phasing out her involvement with the Organization in 2008 and that, by 2016, she had no further involvement. The Taxpayer asserts that another individual had assumed the operation of the Organization and that he was responsible for all payroll, accounting, and tax matters. She further asserts that this individual failed to remove her from any documents filed with the Department or SCC as of 2016 when she ceased her affiliation with the Organization. The Taxpayer is no longer listed as an officer or director as of the date of this letter.
According to the audit staff, the assessments were converted to the Taxpayer because she was the listed contact on the Organization’s withholding tax account with the Department. In addition, the taxpayer had not provided “legal documentation” showing that ownership had been transferred to any other individual.
The mere fact that an individual is listed as a contact for a business’s tax account with the Department is not by itself sufficient evidence to prove the elements necessary to convert an assessment to that individual under Virginia Code § 58.1-1813. Further, the Organization was a Virginia nonstock corporation subject to the provisions of the Virginia Nonstock Corporation Act (the “Act”), currently codified at Virginia Code § 13.1-801 et seq. As such, it would not have owners, i.e., shareholders, like a stock corporation. In fact, the Act expressly states that “[a] corporation shall not issue shares of stock. No dividend shall be paid and no part of the income of a corporation shall be distributed to its members, directors or officers.” See Virginia Code § 13.1-814. Although as a corporate governance best practice, the Organization should have kept sufficient records to indicate changes to its officers and directors and their responsibilities, there would not have been any documentation showing a change in ownership as requested by the audit staff.
Without a more complete investigation, the Department is unable to determine with a sufficient degree of certainty that the elements required in order to convert the assessments to the Taxpayer have been met. As such, the converted assessments will be abated. The underlying assessments against the Organization, however, remain due and payable.
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 (804) *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3889.B