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 2
By Robert S. Schriebman
Introduction to the Next Series of Articles
This is Part 2 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:
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.
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.
In this Part 2, I will discuss the Scott case.
The Scott Case
Ashley C. Scott v. US (11th Cir, October 31, 2022)
Ashley was a Corporate Secretary of her father’s HVAC company. Between 2004 through 2007, the company had unpaid payroll taxes of close to $1 million. The IRS assessed Ashley the Trust Fund Recovery Penalty (TFRP) of over $680,000. The primary issue in the case was whether Ashley had the absence of control over her father’s company to have been able to avoid the company’s non-payment of its payroll taxes.
There were two jury trials in this case: The first jury trial in the District Court found Ashley to be a responsible person but her actions were not willful. Therefore, Ashley walked on the TFRP. In the second jury trial in the District Court, her actions were found to be willful. Therefore, Ashley was on the hook for the entire $680,000 TFRP. Ashley appealed to the 11th Circuit Court of Appeals. The 11th Circuit had to decide whether the jury properly concluded that Ashley’s actions constituted willfulness. Even if Ashley was held to be a responsible person, if she could convince the 11th Circuit that her actions were not willful, she would be able to escape being held personally liable for the TFRP.
If Ashley had sufficient control over the company’s day-today fiscal affairs, this would be a clear indication of willfulness.
Pursuant to IRC § 6671(b) a responsible person includes, “…an officer or employee of a corporation or a member or employee of a partnership who as such officer… is under a duty to pay trust fund taxes.” It’s all fact driven. Responsibility is a matter of status, duty, and authority. It is also control over the company’s financial affairs, and authority to disburse corporate funds. That is to say if one has discretionary authority to pay some bills, but not others, to pay some creditors, but not others, this is a clear indication of responsibility. The exercise of that authority may constitute willfulness.
The District Court jury found that Ashley was the Corporate Secretary. She signed payroll tax returns and described herself as the Accounting Manager. She had signature authority over the bank account. She was the “point person” for outside accounts. Sometimes she would pay creditors. Ashley was in charge of the company’s payroll. She sent payroll checks to both the IRS and the Florida equivalent of the EDD.
The corporation consisted solely of Ashley and her father. Ashley would shop for business supplies without asking her father’s permission. During the jury trial the outside accountant testified that he notified Ashley many times about the unpaid payroll taxes.
Ashley argued that she did not know what it meant to be the corporate secretary. The 11th Circuit found this argument to be irrelevant. As Corporate Secretary Ashley negotiated installment payment arrangement with the IRS. She could decide what bills to pay and when to pay them. She was in charge of the company’s payroll. She signed quarterly payroll tax returns but pointed out to the 11th Circuit that she did not write payroll checks. This argument was brushed aside.
Ashley argued that she should not be assessed the TFRP because she was not a shareholder. This automatically pointed the finger of blame at her father.
Although Ashley was not a shareholder, she was the corporation’s secretary. The 11th Circuit concluded, “She had skin in the game.” The bottom line to the Scott case is that if you are a designated corporate officer and had the authority to disburse funds, you had control over corporate finances, and these factors constituted both responsibility and willfulness.
While the EDD’s CUIC § 1735 does not have any annotated state court decisions, the EDD will use a case like the Scott case to conclude that the targeted individual is the responsible person. Since actions speak louder than words, the EDD will use the facts to find that the targeted person’s actions were willful.
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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