Tax Type
Retail Sales and Use Tax
Description
Corporate officer's personal liability; Willful failure to remit tax to state
Topic
Collection of Delinquent Tax
Date Issued
04-07-1995
April 7, 1995
Re: §58.1-18:21 Application: Retail Sales and Use Tax
Dear **************
This will reply to your letter of September 15, 1994 in which you seek correction of a sales and use tax assessment on behalf of your client, ***************(the "Taxpayer" ) .
FACTS
The Taxpayer was Chairman of the Board and CEO of a corporation, which filed Chapter 11 bankruptcy on February 15, 1991. The corporation filed its sales tax return for January 1991 on February 20, 1991 but failed to remit the tax due. An assessment was issued to the corporation in March 1991. Upon failure to collect the deficiency from the corporation, the department converted the assessment to the Taxpayer, pursuant to Code of Virginia §58.1-1813.
You contest the converted assessment, claiming the Taxpayer was not a "responsible officer" under Code of Virginia §58.1-1813. You maintain the Taxpayer had no knowledge of the sales tax liability prior to the filing of the bankruptcy petition and, once the petition was filed, there were no unencumbered funds available to pay the tax.
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 i!; 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 and (2) had the authority to prevent it.
Based on the information provided, the Taxpayer was a responsible officer under Code of Virginia §58.1-1813 prior to the filing of the bankruptcy petition. Other officers of the corporation furnished statements that the Taxpayer had the authority to sign checks, and the approval of the Taxpayer was required to present checks for payment. Furthermore, the statements indicate the Taxpayer, as sole owner of the business, had final approval in making the day to day decisions for the corporation.
You claim that the Taxpayer had no knowledge of the sales tax liability prior to the filing of the bankruptcy petition and rely on the fact that an assessment was not issued by the department until March 11, 1991, over three weeks after the filing of the petition. However, liability for the taxes attached when they were collected at the time of sale (January 1991) and not upon the date set for filing the return (February 20, 1991). Furthermore, an assessment of the tax is not a prerequisite to tax liability. The Taxpayer knew the corporation incurred sales tax liability at the time of the January 1991 sales.
Pursuant to Code of Virginia §58.1-625, the taxes collected were held in trust for the Commonwealth. When the petition for bankruptcy was filed (February 15, 1991), the Taxpayer was aware that the sales taxes collected from the corporation's January 1991 sales and held in trust had not yet been remitted to the department, as he had not approved a check for payment of those taxes. Therefore, the Taxpayer had knowledge of the failure to pay over the tax collected.
You also argue that the Taxpayer cannot be a responsible officer because the failure to pay the tax was not willful, as the Taxpayer did not direct which creditors would be paid.
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.) In this case, the Taxpayer filed for bankruptcy knowing that funds for payment of the sales tax liability 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. By filing for bankruptcy, the Taxpayer made a voluntary and conscious decision to prevent those funds from being remitted to the department, and the funds were ultimately distributed to other creditors and not to the department.
You cite the case Slodov v. U.S., 436 U.S. 238 (1978) to support your position that the Taxpayer's liability is equal to the amount of unencumbered funds of the corporation which were available for payment to the department, and his liability cannot increase due to subsequent events. You contend that there were no unencumbered funds when the Taxpayer became a responsible officer (after the filing of the bankruptcy petition); therefore, the Taxpayer has no liability for the unpaid sales taxes.
The Slodov case is distinguishable from the Taxpayer's situation. In Slodov, the corporations were indebted for federal wage and social security taxes prior to the date on which the taxpayer assumed control of the corporations. The court found that the taxpayer was not personally liable for taxes that the corporations had withheld from wages prior to his assumption of control where the tax funds had been dissipated by predecessor officers; there was not a trust on after-acquired funds for which the taxpayer was responsible officer. In the present case, the Taxpayer was a responsible officer prior to and at the time the failure to pay over the sales taxes occurred. The funds had not been dissipated by predecessor officers, but instead, were intentionally held by the corporation and not paid over to the department.
Accordingly, there is no basis to abate the converted assessment for January 1991. Please have your client submit a check for*********to the department's Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23282-1880.
-
-
-
-
-
-
-
-
-
-
-
- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
-
-
-
-
-
-
-
-
-
-
Rulings of the Tax Commissioner