Tax Penalties After V MOB: What to Know and How to Fight Back.

• Author: Hogan, Steven M.
• Position: Florida

A2020 decision from the Second District Court of Appeal drastically changed how tax penalties work in Florida. The case, VMOB, LLC v. Florida Department of Revenue, 292 So. 3d 23 (Fla. 2d DCA 2020), has far-reaching implications for taxpayers faced with personal liability assessments under F.S. [section]213.29.

This article's primary purpose is to explain what VMOB did and why its decision is so potentially hazardous to taxpayers who are unaware of it. The secondary purpose is to provide a counter-argument to the conclusions reached by VMOB so that if a court reviews the matter in the future, a different result might be obtained.

The Issue in VMOB: Personal Liability Assessments

Under F.S. [section]213.29, the Florida Department of Revenue can hold an officer or director of a company personally responsible for the company's tax liability if it finds that the officer or director acted to "willfully evade or defeat" the tax. (1) The statute does this by authorizing the department to issue a personal liability penalty against the responsible business actor "equal to twice the total amount of the tax evaded or not accounted for or paid over." (2) For example, if the department finds that a business actor willfully evaded a $100,000 business tax payment, the department may issue a $200,000 penalty against the responsible business actor.

However, [section]213.29 also has an abatement provision that provides that "the [penalty] imposed hereunder shall...be abated to the extent that the tax is paid." (3) The question in VMOB is what this abatement provision actually means.

Traditionally, the abatement provision of [section]213.29 was read to mean that the penalty was abated in proportion to the tax amount paid. Taking the example above, if the taxpayer who owed $100,000 and received a $200,000 penalty paid off the $100,000 in tax, the $200,000 penalty would be abated in full. Effectively, because the penalty is twice the business tax liability, when $1 is paid towards the tax, the penalty is abated by $2. (4) This traditional interpretation works out to a 1:2 abatement ratio, where every dollar in tax will eliminate $2 in penalty. As discussed below, both parties in VMOB briefed the case with this idea in mind.

Despite this, the Second District Court of Appeal in VMOB came to a different conclusion. The Second DCA held that the abatement provision in [section]213.29 operates as a 1:1 abatement ratio, where every $1 in tax paid abates only $1 in penalty. (5) A 1:1 abatement ratio means that the taxpayer referenced above who faces a $200,000 penalty cannot eliminate it by paying the underlying tax--the best the taxpayer can do is reduce the $200,000 penalty to $100,000 by paying the underlying tax.

Accordingly, the Second DCA interpreted [section]213.29 such that half of every personal liability penalty assessment is "unabateable" by payment of the tax despite the language of the statute. Based on the historical function of the statute, this article shows that the Second DCA's interpretation of the statute is not a reasonable interpretation.

The Facts of VMOB and Arguments of the Parties

Before delving into the Second DCA's conclusions, it is instructive to review the facts that led to the decision and the arguments made by the parties. Specifically, it is important to illustrate that neither party took the position that the Second DCA ultimately articulated.

In 2017, the department issued a penalty against Ms. Bartlett, the managing member and registered agent of VMOB, LLC. (6) The department's notice identified business tax due but unpaid amounting to $40,530.02, resulting in a penalty of $81,060.04--double the unpaid tax amount. (7) Ms. Bartlett exercised her right to a hearing and was referred to the Department of Administrative Hearings (DOAH). (8) While the case was pending, VMOB made substantial payments against its $40,530.03 balance, and only $8,790.56 (9) was outstanding when DOAH heard the case. (10)

At DOAH, Ms. Bartlett argued that the penalty amount should be limited to twice the outstanding balance at the time of the hearing, which would have been $17,581.12. (11) The ALJ disagreed and recommended the department issue a final order imposing a penalty against Ms. Bartlett of $81,060.04, twice the amount that was not paid when due. (12)

On appeal, Ms. Bartlett repeated the argument she made at DOAH--that VMOB made substantial payments towards the taxes that were the subject of the penalty before the DOAH hearing, so the penalty should have been limited to twice the outstanding tax balance at the time of the DOAH hearing: $17.581.12. (13) She argued that [section]213.29 supports this conclusion in two ways.

First, Ms. Bartlett argued that she could not be liable for $81,060.04 if her business only owed $8,790.56 because the language of [section]213.29 provides that her penalty is limited to "twice the total amount" not "paid over." (14) Thus, pragmatically, if VMOB owes an amount not "paid over" of $8,790.56, her penalty should be limited to twice that amount

--$17,581.12. (15)

Second, Ms. Bartlett noted that the statute provided the penalty "shall be abated to the extent that the tax is paid." (16) VMOB's original amount due was $40,530.02, and the ALJ found that $31,779.06 had been paid, leaving a balance of $8,790.56. (17) Therefore, again, Ms. Bartlett's penalty is limited to twice $8,790.56, which is $17,581.12. (18)

The department offered a different interpretation of the statute. In its answer brief, the department argued that Ms. Bartlett's penalty should be abated once the tax has been paid in its entirety. (19) Thus, although VMOB made payments that decreased its outstanding balance during the pendency of Ms. Bartlett's case with DOAH, the department argued that the statute's language--"shall be abated to the extent that the tax is paid"--supports its position that Ms. Bartlett's penalty should not decrease along with the business's outstanding tax balance. (20) Instead, the penalty should only be extinguished once the business pays its balance entirely. (21)

While Ms. Bartlett and the department presented differing views about the amount of the...