Ask The California Employment Tax And Payroll Tax Attorney – How The Edd Determines Who Is A Target For Personal Level Assessment – The Scott And Cohen Decisions – Part 1
By Robert S. Schriebman
Introduction to the Next Series of Articles
This is Part 1 of a 3 Part series.
The EDD has the ability to disregard the individual legal protections afforded by corporations and LLCs and assess those behind the scenes for entity-level unpaid employment and withholding taxes. CUIC § 1735 is the operative statute giving the EDD this right and power. It is usually left up to the EDD collector to determine whether there should be personal exposure and to assess that exposure with a personal-level Notice of Assessment. In doing so, the EDD looks for two key factors:
- Responsibility
- Willfulness
Where does the EDD collector go for guidelines to determine whether or not a corporate officer or LLC member or key employee is a candidate-target for a personal assessment? Law students and lawyers are trained to review and analyze statutes. Part of this process is to examine any precedents such as an on-point case where a judge has interpreted the statute in order to provide future guidelines. Having said this, it is interesting to note that there are no decided court cases that have interpreted CUIC § 1735. This statute has been around, in one form or another, since 1977. Yet, there are no California court decisions of record that involve 1735.
Where does the EDD go to determine whether the standards of responsibility and willfulness meet the tests of 1735? EDD attorneys and collectors must look to IRS court cases and decisions of administrative law judges (ALJ). Unfortunately, most ALJ decisions involving the EDD are not available to the public. I have always found this to be odd because administrative decisions involving sales and used taxes are available.
With few or no available public law cases available to EDD collectors, they are forced to “shoot from the hip.” Most are not lawyers. Therefore, the typical EDD collector will not take the time to do a thorough investigation of a potential target for a 1735 assessment. They do not have the time, nor do they have the resources. Unfortunately, many potential 1735 targets actually cause their own assessment. The EDD will send out one or two letters informing a potential target that the EDD is considering a 1735 assessment against them. The letter asks that the target to contact the collector and offer himself or herself as a potential sacrifice. The gullible target takes the opportunity to contact the EDD to explain away his/her responsibility. This rarely works to the target’s favor.
As a general rule of thumb, if you are an officer or a shareholder of a corporation or a member of an LLC, that is enough to convince the collector to personally assess you. In a judge hearing, the burden of proof is initially on the EDD, but it is not a difficult burden to overcome. In reality the burden falls on the targeted individual to prove that he/she was not responsible for payroll tax compliance, and if they were so responsible, their conduct was not willful.
On October 31 the 11th Circuit decided the Scott case. Why is a federal case discussed in this series of articles? The EDD will consult and cite any federal tax case that they benefit from. At the end of November, the Office of Tax Appeals (OTA) issued its decision in the Cohen case. Although this case involved unpaid sales taxes, the rules for personal assessment by the CDTFA are virtually the same as with the EDD’s 1735 assessment criteria.
The Scott case and the Cohen case have a common thread. In the Scott case the targeted responsible person held the title of Corporate Secretary. In the Cohen case the targeted responsible person was the President. In addition to these officers, other officers and key employees were also held responsible. There can be more than one target in a company. Very often these types of assessments come down to finger-pointing contests. It does little or any good, as far as the EDD is concerned that one will be relieved of exposure by turning the EDD onto someone else. Both targets will be assessed, but the EDD can only collect one total sum. The EDD gets its money where and when they can.
Conclusion
In the next two articles we will look at both Scott and Cohen cases and see how the EDD mines information to use against a target individual for the failure to pay entity-level employment and withholding taxes.
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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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