ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD SUCCESSOR LIABILITY RULES WILL MAKE YOU PAY FOR THE SAME BUSINESS TWICE – PART 2
By Robert S. Schriebman
This is Part 2 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 this 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.
The Case of Abirami Baskarapandian
The Case of Abirami Baskarapandian dba Universal Print Company (OTA Case No. 18011966 (2019).
Let’s call the buyer Mrs. B. In September 2013, Mrs. B purchased the operating assets of Mr. G, a California corporation. Mr. G’s president owed a large amount of unpaid sales taxes, much larger than the $20,000 Mrs. B paid him. Mr. G. then filed a Notice of Close-Out for Seller’s permit with the then SBE. (Now known as the CDTFA) Mrs. B also took over the lease of the premises and began selling pizzas. She also added the business as a sub-location to an existing seller’s permit she held as a sole proprietor Abirami Baskarapandian, dba: Universal Print Company. Later in September 2013, Mrs. B formed a California corporation named Arusuvai, Inc.
Mrs. B failed to request a Tax Clearance Certificate from the SBE prior to purchasing the pizza business and she did not withhold from the purchase price an amount sufficient to satisfy Mr. G’s unpaid sales taxes.
The SBE issued to Mrs. B a Notice of Successor Liability for the full amount of $20,000 she paid for the pizza business. The SBE said that since Mr. G owed more than $20,000 in sales taxes, the entire $20,000 purchase price should have been paid over to the SBE and not given to Mr. G.
Is the SBE correct? Let’s look at the decision.
The OTA Decision
R&TC § 6811 is short and powerful. If any person who owes sales taxes, sells his/her business or quits the business, any successor is obligated to withhold from the purchase price the amount to cover back sales taxes until the original owner obtains a Tax Clearance Certificate stating that no amount is due. A person who purchases that business may become liable as a successor if that buyer does not set aside from the purchase price an amount sufficient to pay those taxes The purchaser will be released from the obligation to withhold if her/she obtains a Certificate from the sales tax authorities stating that no taxes, interest, or penalties are due from the buyer. R&TC § 6812(b)
R&TC § 5812(b) states that if a purchaser of a business fails to withhold from the purchase price, as required, he/she becomes personally liable for the payment of the amount required to be withheld to the extent of the purchase price.
In reading R&TC §§ 6811 and 6812, I noticed something very important missing from the law. That is the requirement that before a successor is held liable for unpaid sales taxes, the tax collector should be made to show that collection from the original seller is either impossible or fruitless. There is no such requirement. The law is essentially a “lazy man’s” statute that allows the government to attack the course of least resistance. I’ll talk about this later.
Mrs. B’s Arguments
After Mrs. B acquired the pizza business, she formed a wholly owned corporation known as Arusuvai, Inc. and transferred all of the assets of the pizza business to her new enterprise. She argued that successor liability should attach to Arusuvai and not to her. In other words, she should not be personally liable for Mr. G’s unpaid taxes. The OTA shot her down. She bought the pizza business on September 1, 2013 but formed the corporation on September 30, 2013. She did not transfer ownership of the business until January 1, 2014. In reality, the corporation did not purchase the business. The OTA was right and this is just one more example of people doing things backwards.
Mrs. B’s second argument was that she was not aware that the pizza business owed sales taxes and that the buyer mislead her into believing that there were no past due debts. She further argued that she was not aware of the requirement to withhold from the purchase price or to seek a tax clearance. The OTA said that although that they believed Mrs. B’s arguments, they were not relevant to a determination of successor liability.
Mrs. B was shot down twice.
What the OTA Omitted in Its Decision
While the OTA judge shot down each one of Mrs. B’s arguments, not once did the judge raise the point that the state had the burden of showing that it made every effort to collect back taxes from the seller before imposing successor liability on the buyer. This fact was never mentioned by the judge. In my opinion there should be no successor liability imposed on a buyer unless and until the state can prove that it exhausted every available means to collect those same taxes from the seller without success. After all, if a seller was paid for the assets of the business knowing taxes were owned, and failed to remit those taxes, that seller should be held personally liable for any unpaid corporate or LLC deficiency before trying to collect from the buyer.
The EDD’s Position
The EDD equivalent statute has the same shortcoming. It too does not have to make any showing that it tried to collect unpaid employment and withholding taxes from the seller. The EDD does have CUIC § 1735 and should be made to show that it timely issued this assessment against the seller to no avail before going after any successor or transferee.
The EDD affords the target of successor liability an opportunity for due process by requiring that a Notice of Assessment first be issued before liability can be imposed. This means many things. First, the Notice must be issued timely pursuant to CUIC § 1132. Second, if a timely petition is filed, the buyer will have an opportunity to litigate the matter before an administrative law judge. Third, there may be an opportunity to reduce the exposure by settling the matter with the EDD Settlement Unit.
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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