ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – BEING A SHAREHOLDER, DIRECTOR, OR OFFICER DOES NOT AUTOMATICALLY MAKE YOU RESPONSIBLE FOR UNPAID EDD PAYROLL OR SALES TAXES – PART 1: GUIDELINES YOU NEED TO KNOW
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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – BEING A SHAREHOLDER, DIRECTOR, OR OFFICER DOES NOT AUTOMATICALLY MAKE YOU RESPONSIBLE FOR UNPAID EDD PAYROLL OR SALES TAXES – PART 1: GUIDELINES YOU NEED TO KNOW

By Robert S. Schriebman 2020

Introduction

This is Part 1 of a 2-Part series that will discuss the elements needed by the EDD and the CDTFA in order to make a personal level assessment for unpaid corporation or LLC taxes.  In this Part 1 I will discuss the recent case of S. Arnold and the elements of responsibility and willfulness that caused Mr. Arnold to be personally assessed for unpaid corporate level sales taxes.  In Part 2 I will discuss additional elements of knowledge, authority, and the ability to pay.

Background

When a corporation or LLC owes delinquent EDD payroll or sales taxes, it is the job of the Collector to determine if there should be personal individual liability and if so, who should be assessed? The Collector will attempt to determine liability, but the determination will be more of a shotgun approach than an in-depth audit. The usual suspects are corporate officers, managers, or supervisors. Shareholders and directors also have exposure, but they can usually show that they have not been actively involved in the day-to-day fiscal affairs of the business.

There are several articles on this website that deal with individual liability for unpaid corporate and LLC payroll and sales taxes. The cases discussed in these articles generally deal with issues of responsibility and willfulness. Those have traditionally been the primary factors warranting personal level assessments.

On March 6, 2020 the Office of Tax Appeals (OTA) issued its decision In the Matter of the Appeal of S. Arnold, OTA Case No. 18043005. This case is noteworthy because the OTA discuss the additional elements of authority and knowledge. While the case involves unpaid sales taxes, it can be a guideline for EDD personal level assessments made pursuant to CUIC § 1735.

The Appeal of S. Arnold

Arnold was the president and sole shareholder of Legends, a furniture retailer located in San Diego, CA. Legends was incorporated in 1997 and ceased doing business in 2012. Legends owed unpaid sales taxes for periods 2007 – 2010. During this period, Ms. S was the office manager. She handled the bookkeeping and prepared all checks that required Arnold’s signature. The then SBE conducted an audit and determined that Arnold should be personally assessed for corporate level deficiencies. It was clear that Arnold was in control of the day-to-day fiscal affairs of the corporation.

The OTA determined that Arnold was ultimately responsible, but their analysis and discussion of various elements provides a guideline not only for sales tax assessments, but for EDD personal level 1735 assessments.

Establishing the Element of Responsibility

The law provides that any responsible person who willfully fails to pay, or cause to be paid, the taxes due from a corporation or an LLC shall be personally liable for unpaid taxes, interest, and penalties that are owed upon the termination of the business. This rule is the same for the CDTFA as well as the EDD.

Obviously, personal liability can be imposed only upon a responsible person. This means any person having control or supervision of, or who was charged with the responsibility for, the filing of returns or the payment of these taxes. Simply because a person was an officer, member, manager, employee, director, shareholder or partner of a business is not, in and of itself, sufficient proof to establish that the person is a “responsible person.” This concept is difficult for tax collectors to appreciate or understand. Collectors take a “shotgun” approach and even charge people whose signatures are on bank signature cards as responsible targets. These people will be assessed even if they were not actively involved in the business at all!

There are presumptions that a CEO or president has broad implied or actual authority to do all acts customarily connected with running the day-to-day fiscal affairs of the business. As part of this shotgun approach, more than one person may be held liable for unpaid EDD payroll or sales taxes, as long as the requirements for imposing such liability on each person are satisfied.

Guidelines for Establishing the Element of Willfulness

After establishing that Arnold met the element of responsiblity, the OTA then discussed the guidelines for willfulness.

Willfulness means a voluntary, conscious and intentional course of action. One need not have an evil purpose of motive. In order to prove willfulness, both the sales tax people and the EDD must establish the following:

  • On or after the date that the taxes came due, the responsible person had actual knowledge that the taxes were due, but not being paid.
  • The responsible person had the authority to pay the taxes or to cause them to be paid (i) on the date that the taxes came and (ii) when the responsible person had actual knowledge as defined in A. above. A responsible person who was required to obtain approval from another person prior to paying the taxes at issue and was unable to act on his or her own in making the decision to pay the taxes does not have the authority to pay the taxes or to cause them to be paid.
  • When the responsible person had actual knowledge as defined in A. above, the responsible person had the ability to pay the taxes but chose not to do so.

Cal.Code Regs., tit.18, §1702.5(b)(2).

Conclusion

In Part 2 I will discuss additional elements of knowledge, authority, and the ability to pay.

***

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 40 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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