Tax Type
Retail Sales and Use Tax
Description
Corporate officer's personal liability
Topic
Collection of Delinquent Tax
Date Issued
05-15-1997
May 15, 1997
Re: § 58.1-1821 Application: Sales, Withholding, Corporate Income and Litter Taxes
Dear******************
This is in response to your letter seeking correction of the converted assessments issued to your client, ****** (the Taxpayer).
FACTS
The Taxpayer was President and principal director of ******** (the Restaurant) from its inception in November 1992 until its sale in July 1995. In March and November 1995, the department issued assessments to the Restaurant for failure to file and for late filing of certain sales and use, withholding, litter, and corporate income taxes.
Unable to collect these taxes from the Restaurant, the department converted these assessments to the Taxpayer in June 1996 under the authority of Code of Virginia § 58.1-1813. The Taxpayer maintains that he was not a responsible corporate officer as defined by Code of Virginia § 58.1-1813 and therefore should not be held liable for these assessments. The Taxpayer claims that the Restaurant's manager was responsible for all operating and financial decisions and wrote all of the checks during the period in which taxes were paid. The Taxpayer further claims that he had no knowledge of the manager's failure to pay the taxes owed and was not consulted concerning the payment of taxes and assumed they were being paid.
The Taxpayer also maintains that he had no control over the day-to-day finances of the business and had little involvement with the daily operation of the business, including the payment of operating expenses and taxes. According to the Taxpayer, his only ongoing involvement was to fund cash shortfalls that were reported to him by the Restaurant's manager.
The Taxpayer states that he became aware of the tax deficiency in December 1994. After learning of it, the Taxpayer immediately instituted efforts to sell the business to prevent further unpaid taxes. When the Restaurant was sold, the sales proceeds were used to pay the costs of closing the sale, the landlord and the IRS.
DETERMINATION
In order to convert an assessment to a corporate officer, Code of Virginia § 58.1-1813 requires that the failure to pay over the corporation's taxes must be willful, and that the corporate officer must have had (1) knowledge of the failure and (2) authority to prevent it. Under the standards 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, 924 (C.A. Tex.). In other words, it need only be shown that the Taxpayer was aware of the outstanding liability and knowingly and intentionally paid operating expenses or other debts of the corporation. In this case, the Taxpayer sold its business knowing that the Restaurant had not paid all of its state tax liabilities. By paying other creditors in preference to the department, the Taxpayer made a voluntary and conscious decision to prevent those funds from being remitted to the department.
Furthermore, no proof has been submitted that the manager of the Restaurant had complete and exclusive authority to operate the business without any involvement from the Taxpayer. On the contrary, it appears from the facts presented that the Taxpayer was in a position to exercise significant control over the operation of the Restaurant and would thus have the authority during the life of the Restaurant to prevent its failure to report and pay the state tax liabilities at issue.
Based on all of the foregoing, I find that the assessments were properly converted to the Taxpayer. Accordingly, the assessments are correct as issued. The Taxpayer will shortly receive updated bills with interest accrued to date. These bills should be paid within 30 days to avoid further interest charges.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11658R
Rulings of the Tax Commissioner