Tax Type
Fiduciary Income Tax
Description
Penalties; Trust fiduciary liability for delinquent tax
Topic
Collection of Tax
Date Issued
03-13-1997
March 13, 1997
Re: Ruling Request: Fiduciary Income Tax
Dear********************
This will reply to your letter of December 4, 1996, requesting a ruling on the liability of a trustee for unpaid income taxes of the Trust.
FACTS
In 1990, an inter vivos irrevocable trust was established by a settlor, who had substantial income tax liabilities with the Internal Revenue Service (IRS). The IRS has taken the position that the trust is a nominee of the settlor and has filed a federal tax lien against the trust. The settlor's tax liability exceeds the value of the trust's assets.
The trustee of the trust was one of three beneficiaries. An arrangement was made with the IRS for the trustee to be compensated for liquidating the assets of the trust. The federal tax lien, which exceeded the value of the trust assets, attached to all real and personal property of the trust. The IRS, therefore, would be entitled to the funds generated by the liquidation, with the exception of compensation paid to the Trustee. As a result, there would be no funds available to pay the Virginia fiduciary income tax liability. You request a ruling on whether the department can assess any unpaid income taxes against the trustee similar to an assessment against a responsible officer of a corporation pursuant to Code of Virginia § 58.1-1813.
RULING
Code of Virginia § 58.1-381 provides a trust that is required to file a federal income tax return or that has Virginia taxable income to file a fiduciary income tax return. The Virginia tax is imposed in accordance with Code of Virginia § 58.1-360.
Where taxes are owed to the Commonwealth, the trustee is responsible for payment of such taxes pursuant to Code of Virginia §§ 58.1-21 and 22.
Code of Virginia § 58.1-1813 provides the department may assess a penalty of the amount of the tax evaded, or not paid, collected or accounted for and paid over by a corporate or partnership officer who willfully fails to pay, collect or truthfully account for and pay over Virginia taxes. That code section defines the term, "corporate or partnership officer" to mean:
-
- [A]n officer or employee of a corporation, or a member or employee of a Partnership, who as such officer, employee, member is under a duty to perform on behalf of the corporation, partnership 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 authority to prevent such failure or attempt. (Emphasis added.)
As a result, when the trustee is the fiduciary of a trust and not an officer of a corporation or a partnership, the department may not assess the unpaid tax of the trust to the trustee in the form of a penalty, as provided in Code of Virginia § 58.1-1813. If, however, the trustee does not exercise reasonable care and skill in administering the trust that contributes to a delinquent Virginia fiduciary income tax liability, the department may collect the tax from the trustee, pursuant to Code of Virginia § 26-5.
If you need further assistance, please contact *****at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11924N
Rulings of the Tax Commissioner