Tax Type
Corporation Income Tax
Description
Liability of corporate officers; Officer liable for bankrupt corporation's taxes
Topic
Collection of Tax
Date Issued
03-20-1996
March 20, 1996
Re: § 58.1-1821 Application
Dear****
This will reply to your letter in which you seek correction of retail sales and use tax, withholding tax, litter tax, and corporate income tax assessments on behalf of your client,******* (the "Taxpayer").
FACTS
The department assessed sales, withholding, litter, and corporate income taxes against (the "corporation") for periods from January 1991 through March 1994. The corporation filed a Chapter 11 bankruptcy petition on October 5, 1992. Subsequently, the corporation converted the case to a Chapter 7 bankruptcy on February 11, 1994. Upon failure to collect the deficiencies from the corporation, the department converted the assessments to the Taxpayer, pursuant to Code of Virginia § 58.1-1813.
You contest the converted assessments, claiming the department has offered no evidence to support its assertion that the Taxpayer is a "responsible officer" liable for the penalty provided under Code of Virginia § 58.1-1813. You believe the department's sole remedy is to file a Proof of Claim to receive payment from the assets of the Chapter 7 estate of the corporation.
DETERMINATION
Code of Virginia § 58.1-1813 states that "[a]ny corporate or partnership 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...be liable to a penalty of the amount of the tax evaded, or not paid, collected or accounted for and paid over...."
The statute defines the term "corporate officer" as an officer or employee of a corporation who is under a duty to perform on behalf of the corporation the act in question. Further, the corporate officer must possess knowledge of the failure or attempt and the authority to prevent it.
Based on the information provided, the Taxpayer was a "corporate officer" under Code of Virginia § 58.1-1813. As you concede in your letter, the Taxpayer had authority and responsibility for accounting for and paying over all corporate taxes. No other employee, officer, or director had authority to account for or pay over taxes to any taxing authority.
You contend that, while the Taxpayer may be a corporate officer, he is not liable for the penalty provided under Code of Virginia § 58.1-1813 because the failure to pay the taxes at issue was not willful.
In order for the failure to pay over taxes to be considered "willful," 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.) There is no requirement of bad motive or specific intent to defraud the government or deprive it of revenue. In this case, when the corporation filed for bankruptcy, the Taxpayer knew that funds for payment of the withholding and sales tax liabilities had been collected and were held in trust. He owed a fiduciary duty to care for the funds properly. The Taxpayer had authority to expend the funds but failed to ensure the taxes were properly paid. For example, sales tax returns and withholding tax returns were filed without full payment remitted. In other instances, the amount of Virginia income tax reported as withheld did not agree with actual withholding deposits. By filing returns and failing to remit in full the taxes due, the Taxpayer made a voluntary and conscious decision to prevent those taxes held in trust for the Commonwealth from being remitted to the department. Therefore, the Taxpayer's failure to remit the taxes due was willful, and he is liable for the penalty under Code of Virginia § 58.1-1813.
In your letter, you assert that the assessment amounts are many times greater than the tax indicated on the returns. However, you offer no documentation to indicate why you believe the department's assessments are erroneous. An assessment of tax by the department is presumed correct. Code of Virginia § 58.1-205. The burden is on the taxpayer to prove what the correct amount should be. A taxpayer cannot allege inaccuracies in an assessment and fail to supply the information necessary to compute it correctly. The filing of a Chapter 7 bankruptcy does not alter the burden of proof.
Finally, you suggest the department's sole remedy is to file a Proof of Claim in bankruptcy court against the debtor corporation's estate.
The purpose of Code of Virginia § 58.1-1813 is to encourage the prompt payment of taxes and to provide an additional tool for the department to use in collecting delinquent taxes owed by a corporation. There is no provision in the statute that requires the department to seek payment of the assessed amounts from officers of a corporation only after efforts by the department to obtain the assessed amounts from the corporation are exhausted. Rather, the statute insures the ultimate collection of such taxes from a secondary source. The fact that a corporation has filed for bankruptcy does not relieve the corporate officers of their responsibility. The personal liability of a corporate officer under Code of Virginia § 58.1-1813 is separate and distinct from that imposed on the corporation.
Accordingly, there is no basis to abate the assessments. However if the Taxpayer can provide documentation (cancelled checks showing full payment with the returns, proof of deposits equalling tax reported as withheld, etc.) proving the department's assessments are erroneous, the assessments will be adjusted accordingly. To assist your client in gathering the necessary documentation, I have enclosed a table listing the assessments and the reason for each assessment. Please send any documentation to the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. If the necessary information is not supplied within 60 days, the information on which the assessments were originally based will be presumed to be correct, and collection action will resume.
If you have any questions concerning the computation of the amount of the assessments on the enclosed list, you may contact the department's Office of Customer Services at******
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9560F
Rulings of the Tax Commissioner