ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – GETTING A BAD JUDGE – THE SAD CASE OF RICHARD WEISS – PART 1
By Robert S. Schriebman
This case involves personal liability for unpaid corporate level sales taxes. It is important because the same basic principles and reasoning will apply to EDD personal assessments for unpaid corporate level employment and withholding taxes. Before getting into the case, I would like to share with you, sage advice I was given by a very experienced trial lawyer.
The two of us have been friends since we were 11 years old. We both became lawyers. On this particular day we were having lunch and we were discussing an EDD case that I wanted to take to a full hearing before the CUIAB. My friend listened to all my arguments and considered the strong points of my case. He looked me straight in the eyes and said, “Bob, you have a good case, a strong case, but what if you get a bad judge?” Whether it is the CUIAB or any other forum, there are always good judges and bad judges. I discussed the case with my client and he felt it was in his best interest to settle.
Richard Weiss had a good case. He had sound arguments why he should not be held personally responsible for the unpaid sales taxes owed by his small corporation Star Video, Inc. Richard took his case to the Office of Tax Appeals (OTA). The case was decided by Judge A. Kwee. In this Part 1, we will study Judge Kwee’s decision. At first reading it seems to be in line with most of the OTA cases that have ruled against people in Richard’s situation. But, in Part 2 we will review the dissenting opinion that will show how Judge Kwee twisted the truth to hold Richard personally liable.
In the Matter of the Appeal of Richard S. Weiss, OTA Case Number 18043018 issued June 20, 2019.
The Case of Richard Weiss – The Facts
Richard Weiss and James Miller equally owned Star Video, Inc. (Star); a third owner resigned in late 2007 because of embezzlement. Star owed unpaid sales taxes for the period beginning October 1, 2007 through September 30, 2009. Sales tax returns were filed without payment. James managed the company and Richard was primarily a salesman. James was the president and Richard the vice president. A secretary filed a form with the Secretary of State in 2009 stating that Richard was the CFO. Richard, aware that sales taxes were owed, was in constant communication with the sales tax people and at one point discussed the possibility of entering into an installment payment arrangement. Richard resigned in December 2009 and the business terminated in August 2010. In 2013 the FTB suspended Star for the nonpayment of franchise taxes.
According to Judge Kwee, Richard testified, “Everything was done by whatever I could do to keep everyone employed by making our rent, utility’s, vender’s payments.” (spelling errors not mine) In Part 2 we will learn that this is not all Richard had to say, but what Judge Kwee wanted to hear.
Richard also testified that he loaned his corporation over $100,000.
Judge Kwee’s Decision
Judge Kwee found that Richard was the responsible person for personal liability for unpaid corporate level sales taxes. In his ruling he set forth important points you need to know about the elements of responsibility and willfulness that have always been the key elements for personal level liability for both sales taxes and EDD payroll taxes.
Personal liability may only be imposed if the State establishes that, while the person was a responsible person, the corporation collected sales taxes and failed to remit them when due (RTC § 6829). There are four elements that must be met in order to impose responsible person liability:
- Collection of sales taxes (required for sales tax exposure but not required by EDD)
- Termination of the business (required for sales tax exposure but not required by EDD)
- Responsible person
- Willful failure to pay or cause to be paid.
Elements 1 and 2 were found by Judge Kwee to be present. So, he focused on responsibility and willfulness. He also failed to discuss the fact that Star was sold, but paid no attention to the issue of successor liability of the purchaser.
Judge Kwee found that Richard was a vice president and a director of the company. He also found Richard to be the CFO because of the Secretary of State filing. He placed great emphasis on the fact that Richard had been in constant contact with the sales tax people to the point of inquiring about an installment payment arrangement. He ignored Richard’s arguments that he was primarily a salesman. He further held that Richard was not responsible during the period that the embezzling partner stole money from the company – that was Richard’s only break.
In Part 2 we will see how Judge Kwee twisted reality to find Richard responsible.
Willfulness means that the failure to pay was the result of a voluntary, conscious and intentional course of action. Willfulness can be found even though a person does not have a bad purpose or motive. There are three factors involved in the finding of willfulness regardless of whether we are talking about sales taxes or EDD payroll taxes:
- On the date that the taxes became due, the responsible person had actual knowledge that the taxes were due but not paid.
- The responsible person had the authority to pay the taxes or cause them to be paid. However, if that person was required to obtain approval from another person, or was unable to act on his/her own, then that person may not be properly charged.
- The targeted person had actual knowledge and the ability to pay, but chose not to do so.
Judge Kwee further held that even though James Miller was also a responsible person, this fact by itself had no relevance in determining whether Richard should be found personally liable. According to Judge Kwee, “It is not our role to determine whether a person is more or less responsible for the corporation’s unpaid liabilities.”
Judge Kwee found that it was more likely than not that Richard had the requisite authority. Richard had discussed Star’s situation with the sales tax people several times during 2008 and 2009. He also appeared at the sales tax office in Van Nuys, CA to try to work out a resolution. He also requested that a payment arrangement be made. He was an owner and director of the corporation. He loaned the corporation $100,000 and would not have done so unless he had control.
Adding up all these factors Judge Kwee held Richard personally responsible. He did not go into any discussion about the exposure of James Miller. Star was sold in 2010 but Judge Kwee never raised the issue of successor liability for Star’s unpaid sales taxes. However, we will see in Part 2 that the good judge made a bad decision.
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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