Tax Type
Individual Income Tax
Description
Embezzlement of Income
Topic
Collection of Tax
Date Issued
06-23-1999
June 23, 1999
Re: Sec. 58.1-1821 Application: Corporate and Individual Income Taxation
Dear***
This will reply to your letter in which you contest income tax assessments on behalf of your client, ***** (the "Taxpayer'), for the 1993 through 1995 taxable years as the result of an Internal Revenue Service ("IRS') audit. I apologize for the delay in responding.
FACTS
The Taxpayer owned a majority interest in ***** (the "Corporation') during the taxable years in question. An employee embezzled income from the Corporation. The Taxpayer did not discover the embezzlement.
The IRS audited the Corporation and increased its gross receipts for the 1994, 1995 and 1996 taxable years to estimate the embezzled receipts. One-half of these unreported gross receipts were charged to the Taxpayer as a dividend.
Pursuant to the IRS audit, the department has assessed additional corporate income tax against the Corporation and additional income tax on the Taxpayer based on the corporate dividend. You contend that the Taxpayer and the Corporation should not be held liable for any additional Virginia income tax because the Taxpayer had no knowledge of the employee's embezzlement.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia Sec. 58.1-301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (IRC). Therefore, federal adjusted gross income (FAGI) and federal taxable income (FTI), which are the starting points for determining Virginia taxable income for individuals and corporations, respectively, is identical to that as defined by the IRC.
A taxpayer's Virginia taxable income of a resident individual equals FAGI along with the modifications enumerated in Code of Virginia Sec. 58.1-322. A dividend treated as additional gross income by the IRS would increase a taxpayer's FAGI which in turn would increase the taxpayer's Virginia taxable income. Therefore, the Taxpayer's Virginia taxable income would increase for the 1993, 1994 and 1995 taxable years.
Code of Virginia Sec. 58.1-311 requires corporations and individuals to file an amended Virginia income tax return if the amount of the federal taxable income is changed by the IRS. A taxpayer is required to file the returns within 90 days after the final determination and either concede the accuracy of the IRS determination or state why it is erroneous. As of this date, the Taxpayer has not filed amended returns as required by Code of Virginia Sec. 58.1-311, nor has it provided any evidence that the IRS' attribution of the additional receipts to the corporation or dividend to the Taxpayer were erroneous. Consequently, the department correctly assessed additional corporate and individual income tax.
You contend that under Code of Virginia Sec. 58.1-1813, the Taxpayer would not be liable for the Corporation's income tax liability because he had no knowledge of his employee's embezzlement. Code of Virginia Sec. 58.1-1813 is not relevant to this case. This code section provides that corporate tax liability may be converted to a responsible corporate officer if the responsible corporate officer is unwilling to pay the corporation's state taxes. In the instant case, the Corporation's additional income tax liability resulting from the IRS audit has not been converted to the Taxpayer.
However, 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 Sec. 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.)
Accordingly, the assessments of corporate and individual income tax for the 1993 through 1995 taxable years have been upheld and the interest updated pursuant to the enclosed schedule. Please send your payment in full to *****, Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 232181880 within 30 days to avoid the accrual of additional interest.
If however, the Taxpayer can show that the IRS changed its audit findings in favor of the Taxpayer and the Corporation, the Taxpayer would have two years from the date of payment of the assessments to recover any overpayment. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/15731B
Re: Sec. 58.1-1821 Application: Corporate and Individual Income Taxation
Dear***
This will reply to your letter in which you contest income tax assessments on behalf of your client, ***** (the "Taxpayer'), for the 1993 through 1995 taxable years as the result of an Internal Revenue Service ("IRS') audit. I apologize for the delay in responding.
FACTS
The Taxpayer owned a majority interest in ***** (the "Corporation') during the taxable years in question. An employee embezzled income from the Corporation. The Taxpayer did not discover the embezzlement.
The IRS audited the Corporation and increased its gross receipts for the 1994, 1995 and 1996 taxable years to estimate the embezzled receipts. One-half of these unreported gross receipts were charged to the Taxpayer as a dividend.
Pursuant to the IRS audit, the department has assessed additional corporate income tax against the Corporation and additional income tax on the Taxpayer based on the corporate dividend. You contend that the Taxpayer and the Corporation should not be held liable for any additional Virginia income tax because the Taxpayer had no knowledge of the employee's embezzlement.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia Sec. 58.1-301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (IRC). Therefore, federal adjusted gross income (FAGI) and federal taxable income (FTI), which are the starting points for determining Virginia taxable income for individuals and corporations, respectively, is identical to that as defined by the IRC.
A taxpayer's Virginia taxable income of a resident individual equals FAGI along with the modifications enumerated in Code of Virginia Sec. 58.1-322. A dividend treated as additional gross income by the IRS would increase a taxpayer's FAGI which in turn would increase the taxpayer's Virginia taxable income. Therefore, the Taxpayer's Virginia taxable income would increase for the 1993, 1994 and 1995 taxable years.
Code of Virginia Sec. 58.1-311 requires corporations and individuals to file an amended Virginia income tax return if the amount of the federal taxable income is changed by the IRS. A taxpayer is required to file the returns within 90 days after the final determination and either concede the accuracy of the IRS determination or state why it is erroneous. As of this date, the Taxpayer has not filed amended returns as required by Code of Virginia Sec. 58.1-311, nor has it provided any evidence that the IRS' attribution of the additional receipts to the corporation or dividend to the Taxpayer were erroneous. Consequently, the department correctly assessed additional corporate and individual income tax.
You contend that under Code of Virginia Sec. 58.1-1813, the Taxpayer would not be liable for the Corporation's income tax liability because he had no knowledge of his employee's embezzlement. Code of Virginia Sec. 58.1-1813 is not relevant to this case. This code section provides that corporate tax liability may be converted to a responsible corporate officer if the responsible corporate officer is unwilling to pay the corporation's state taxes. In the instant case, the Corporation's additional income tax liability resulting from the IRS audit has not been converted to the Taxpayer.
However, 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 Sec. 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.)
Accordingly, the assessments of corporate and individual income tax for the 1993 through 1995 taxable years have been upheld and the interest updated pursuant to the enclosed schedule. Please send your payment in full to *****, Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 232181880 within 30 days to avoid the accrual of additional interest.
If however, the Taxpayer can show that the IRS changed its audit findings in favor of the Taxpayer and the Corporation, the Taxpayer would have two years from the date of payment of the assessments to recover any overpayment. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/15731B
Rulings of the Tax Commissioner