TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER A. GENERAL RULES

34 TAC §3.15

The Comptroller of Public Accounts proposes new §3.15, concerning penalty for fraud, intent to evade tax or the alteration, destruction, or concealment of records under Tax Code, §111.061(b) (Penalty on Delinquent Tax or Tax Reports).

Comptroller Decisions have held that the fraud penalty under Tax Code, §111.061(b) may be imposed when an officer or director engaged in or acquiesced in the fraudulent conduct. For example, see Comptroller Decision No. 31,500 (1994). Over time, these examples of sufficient evidence have devolved into examples of required evidence. Recent decisions have required proof that an officer or director was "involved in the day-to-day affairs of the company" to such an extent that the officer or director "was aware or should have been aware of the underreporting of tax." For example, see Comptroller Decision Nos. 110,156 (2017) and 109,842 (2017). Other decisions have required proof that an officer or director was "directly involved" in the fraudulent activities. See Comptroller Decision No. 113,389 (2017). Because these requirements are unnecessarily restrictive and not in the statute or in the common law, the comptroller is proposing this rule to more closely follow the statutory language and the intent of the legislature.

Although the imposition of personal liability on an individual under Tax Code, §111.0611 (Personal Liability for Fraudulent Tax Evasion) is generally limited to officers, managers, or directors actively participating in a fraudulent scheme, the imposition of the additional fraud penalty on the taxpayer under Tax Code, §111.061(b) is not so limited. Tax Code, §111.061(b) simply requires that the taxpayer engage in the proscribed conduct. There is no statutory requirement that officers or directors actively participate in or even be aware of the proscribed conduct.

Under the common law, corporations may be liable for exemplary damages resulting from the actions of a "vice-principal." Fort Worth Elevators Co. v. Russell, 70 S.W.2d 397, 406 (Tex. 1934). The term "vice principal" includes "(a) Corporate officers; (b) these who have authority to employ, direct, and discharge servants of the master; (c) those engaged in the performance of nondelegable or absolute duties of the master; and (d) those to whom a master has confided the management of the whole or a department or division of his business." Fort Worth Elevators, 70 S.W.2d at 406 (emphasis added).

Nondelegable or absolute duties include the selection of employees, the establishment of appropriate company regulations, and compliance with safety regulations. See, Fort Worth Elevators Co. v. Russell, 70 S.W.2d at 406 (employee selection and regulation); Mo. Pac. R.R. Co. v. Lemon, 861 S.W.2d 501, 521 (Tex. App. - Houston [14th Dist.] 1993, writ dism'd) (safety regulations).

For absolute duties such as safety law compliance and tax law compliance, business enterprises should not be able to "substantially escape all punitive liability by performing its corporate acts through inferior officers or servants." See, Fort Worth Elevators, 70 S.W.2d at 406. Therefore, subsection (a) of the proposed rule provides that the comptroller may impute to the taxpayer not only the acts of officers, directors, managers, and the governing authority of the taxpayer, but also any agent or employee with the actual or apparent authority to prepare or submit information to the comptroller. Taxpayers should not be enabled to avoid liability by shifting important tax-reporting functions to minor employees or agents and then claim ignorance of their conduct.

Subsection (b) provides that the comptroller may consider whether a person is engaged in an independent course of conduct that does not further any purpose of the taxpayer. This language is based on section 7.07(2) of the Restatement 3d of Agency, which has been adopted by the Texas Supreme Court in other contexts. See, Laverie v. Wetherbe, 517 S.W.3d 748, 753 (Tex. 2017). This provision reflects the concept that "an employee whose conduct is unrelated to his job, and therefore objectively outside the scope of his employment, is engaging in that conduct for his own reasons." Id. at 754. For example, embezzlement from an employer would not be within the scope of employment. If the embezzlement resulted in the underreporting of tax without financial gain to the employer, the comptroller might determine that the acts of an employee should not be imputed to a taxpayer. On the other hand, if the employee engaged in fraud that would have benefitted the taxpayer if undetected, the comptroller might impute the fraud of the employee to the taxpayer.

Subsection (b) does not prevent the comptroller from considering other facts and circumstances in determining whether the act of an employee or agent should be imputed to the taxpayer. For example, the comptroller might consider whether the taxpayer was reckless in employing or delegating responsibility to the person.

Finally, subsection (c) clarifies that the imposition of penalty on the taxpayer is distinct from the imposition of personal liability on an individual.

Based on these principles, the comptroller proposes this rule to more fully state the criteria upon which the agency may assess a penalty under Tax Code, §111.061(b). The comptroller proposes to apply the rule to cases pending on and after the effective date.

Tom Currah, Chief Revenue Estimator, has determined that during the first five years that the proposed new section is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal creates a new rule.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the proposed amendment would benefit the public by clearly providing the criteria upon which the additional penalty may be imposed, and by following statutory language and legislative intent. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. The proposed new rule would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no anticipated significant economic costs to the public.

Comments on the proposal may be submitted to James Arbogast, Chief Counsel for Hearings and Tax Litigation, Texas Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3528, or james.arbogast@cpa.texas.gov. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

The new section is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture) and §111.0022 (Application to Other Laws Administered by Comptroller), which provide the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2, as well as taxes, fees, or other charges which the comptroller administers under other law.

The new section implements Tax Code, §111.001 (Comptroller to Collect Taxes) and §111.061 (Penalty on Delinquent Tax or Tax Reports).

§3.15.Penalty for Fraud, Intent to Evade Tax or the Alteration, Destruction, or Concealment of Records.

(a) In determining whether to impose the additional penalty under Tax Code, §111.061(b), the comptroller may impute to the taxpayer the acts or omissions of:

(1) any officer, director, manager, or governing authority of the taxpayer; and

(2) any agent or employee with the actual or apparent authority to prepare information for or submit information to the comptroller.

(b) To avoid imputing the acts or omissions of a person to the taxpayer, the taxpayer may present evidence that the person was engaged in an independent course of conduct that did not further any purpose of the taxpayer.

(c) The comptroller may impose the additional penalty on the taxpayer without regard to whether an officer, manager, director, partner, or other person is personally liable for fraudulent tax evasion under the Tax Code.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 27, 2018.

TRD-201802841

William Hamner

Special Counsel for Tax Administration

Comptroller of Public Accounts

Earliest possible date of adoption: August 12, 2018

For further information, please call: (512) 475-0387