Tax Type
Corporation Income Tax
Description
Liability of corporate officers; Responsible officers
Topic
Collection of Tax
Date Issued
05-19-1997
May 19, 1997
Re: § 58.1-1821 Application: Corporation Income Tax
Dear**************
This will respond to your letter in which you contest the assessment of corporation income tax on behalf of your client, ****** (the "Taxpayer"), for the taxable year ended March 31, 1991.
FACTS
The Taxpayer was liquidated effective March 31, 1991. The department received information from the Internal Revenue Service (I.R.S.) regarding an audit of the Taxpayer's final federal filing for the tax year ended March 31, 1991. From this information, the department increased the Taxpayer's federal taxable income reported on its Virginia return and issued an assessment dated January 2, 1997, pursuant to Code of Virginia § 58.1-312 (A)(3).
You contend that the department should abate the assessment because the Taxpayer has been liquidated. As such, it lacks the resources to pay the assessment and the department lacks the authority to act against the officers and shareholders of the Taxpayer.
DETERMINATION
In a case where a corporation assessed with a tax has liquidated and distributed its assets to its shareholders, the department may hold those individuals receiving distributions personally liable for any unpaid taxes owed by the corporation pursuant to Code of Virginia § 58.1-7. The statute limits the department's authority to those shareholders notified of the assessment before receiving an asset distribution. Since the tax was not assessed before liquidation, the Taxpayer could not have paid the assessment before distributing the assets. In addition, none of the shareholders were notified until well after the distribution transactions were concluded. As such, the department cannot hold the shareholders personally liable for the tax owed by the Taxpayer.
When a corporation fails or is unable to pay its tax deficiencies, the department can convert the assessments to the corporate officers under Code of Virginia § 58.1-1813. This statute defines the term "corporate officer" as an officer of the corporation who 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 and (2) had the 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 (C.A. Tex.)
You maintain that the department cannot hold the officers of the corporation liable because they did not willfully fail to pay the tax and did not have knowledge of the deficiency. Code of Virginia § 58.1-311 requires any taxpayer to report a change or correction in federal taxable income within ninety days of the final determination of the change or correction by filing an amended return with the department. Since, Virginia uses federal taxable income as the starting point for computing Virginia corporation income tax, any change to federal taxable income by the l.R.S. will likely result in a change to income tax due to Virginia. As this is clearly defined by statute and corporate officers have a duty to comply with the laws of the Commonwealth on behalf of the corporation, the responsible officer(s) knew or should have known that the changes made by the l.R.S. would result in additional state liability.
Information obtained by the department shows that the officers were able to resolve the federal audit with the l.R.S. and made payments of additional tax. Thus, the officers continued to act on behalf of the Taxpayer, even after the Taxpayer no longer existed. The department, therefore, concludes that the Taxpayer's officers had knowledge or should have known of the potential state liability, and had the authority and the ability to pay the additional tax, but voluntarily failed to do so.
Based on the facts of this case, the department does have the authority to hold the responsible officer(s) liable for a penalty equal to tax assessed against the Taxpayer. However, the department will provide the responsible officers an opportunity to resolve the Taxpayer's assessment before assessing individual penalties pursuant to Code of Virginia § 58.1-1813 . The responsible officers, on behalf of the Taxpayer, may pay the assessment of ******* in tax and **** in interest) within 30 days and send it to *****c/o Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880. The department will convert the assessments if this matter is not resolved within the time allotted. If you should have any further questions, please feel free to contact***** at *******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12271O
Rulings of the Tax Commissioner