ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD SUCCESSOR LIABILITY RULES WILL MAKE YOU PAY FOR THE SAME BUSINESS TWICE – PART 1
By Robert S. Schriebman
This is Part 1 of a 2- Part series discussing what is known as successor liability. It is a little known trap for the unwary that is used by EDD collectors. In short, an EDD collector will attempt to collect a seller-employer’s past due EDD debt from a buyer who does not take steps to protect the purchase of the employer’s business. Cases in this area are few and far between. In Part 2, we are going to discuss a recent sales tax case that, in principal, yields the same bad news for an unfortunate purchaser of a pizza business. The unfortunate buyer found herself paying twice the price for the pizzeria.
Before discussing the pizza case, let’s explore the basic rules and concepts of successor liability. We will look at the EDD statutes concerning successor liability and offer some tips on how to avoid falling into the successor liability trap.
Sometimes successor liability can be charged against the business buyer solely by a tax collector without much due process. In other words, there may not be an opportunity for adequate notice under the law and no opportunity to be heard allowing the charge of successor liability to be litigated in front of a judge before the unwary buyer has to pay a second time. The EDD statutes will not permit successor liability without first receiving a Notice of Assessment pursuant to CUIC §§ 1206 and 1731. This provides basic due process for the buyer.
EDD Rules Relating to Successor Liability
Pursuant to CUIC §§ 1731 – 1733, any purchaser who does not avail himself/herself of the protection provided in the law becomes liable as of the date of the purchase of the business for the amount due from the seller. However, and this is a very important point with the EDD, no collection action can be taken against the purchaser until a Notice of Assessment is issued and becomes final. The EDD will usually direct its efforts to collect against the seller. This policy will be adhered to only as long as it is apparent that collection in full can be made within the reasonable period of time, either directly from the seller or from his/her assets held by a third person. EDD collectors have a lot of discretion. This means that this policy may be disregarded if it appears that by delaying action against the buyer, collection of the amount due will be jeopardized.
A purchaser’s liability may not be the entire amount owed by the seller. The purchaser is liable up to the purchase price of the business. This can occur if the buyer or the seller neglected to obtain a release certificate from the EDD while the purchase transaction was in escrow. I have seen too many cases where, sadly, to save money the parties do not open an escrow, but just hand over the money with minimal or no paperwork – the old handshake way. Remember what Samuel Goldwyn said, “An oral contract is not worth the paper it’s written on.” The measurement of recoverable liability, i.e., the “purchase price” can include the amount of accounts receivable.
A purchaser can be liable for not only the taxes that are owed, but also for the same penalties and interest charges as owed by the seller, except that the seller is not liable for penalties which have not been determined and are unpaid at the time of sale if the penalties are based upon negligence, intentional disregard of the law, fraud, or intent to evade any employment and withholding taxes. If these penalties are determined but unpaid at the time of the sale, the seller is also liable for these amounts in addition to all others.
Buyer Beware – Protect Yourself
A wise buyer will insist on obtaining a Clearance Certificate from the EDD prior to the close of escrow. This certificate is absolutely essential if the buyer wishes to avoid any type of transferee or successor liability. A deposit in escrow is not sufficient. The escrow company must actually disburse the funds to the EDD and obtain the correct certificate. If the buyer permits funds in escrow to be distributed without first securing the Clearance Certificate from the EDD, there is no protection.
Buyers and sellers of businesses should notify the EDD of a change in ownership or a discontinuation of the business. The buyer should obtain a Certificate of Release from the EDD to avoid transferee liability problems.
In Part 2 we will look at a sales tax situation where the buyer was held completely and personally liable for the full amount of the purchase price. This poor buyer found herself paying twice for the same business.
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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