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 3
By Robert S. Schriebman
Introduction to Part 3
This is Part 3 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:
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.
In the Cohen case the targeted responsible person was the President. In addition to Cohen, another officer, Cigliano, was 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 no 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 it can.
In this Part 3, I will discuss the Cohen case.
The Cohen Case
In the Matter of the Appeal of B. Cohen (2022-OTA-378)
Cohen and Cigliano owned and operated a seafood restaurant in Westlake Village, CA. The restaurant got behind on its sales tax compliance during the year 2013, but eventually the tax portions were paid leaving only unpaid penalties and interest totaling about $18,000. Cohen was the corporation’s President and owned 50% of the corporate stock. Cigliano was the corporation’s Secretary and owned the other 50%. Cigliano handled the finances and prepared and filed electronically the sales tax returns for 2013. The business ran into financial difficulties causing Cohen to loan the corporation $230,500 to cover its debts. During 2013, the corporation paid its food vendors and employees. Investigators from the CDTFA interviewed several food vendors and obtained documentary proof that these vendors were paid in 2013 after taxes were owed. In October 2013, Cohen ceased to be a corporate officer. The corporation was eventually dissolved in December 2014.
The CDTFA investigation determined that Cohen, as President, had control or supervision over sales tax matters and authority to cause the corporation to make payments of expenditures other than sales taxes. Monies that could have gone to pay back sales taxes were used to pay other liabilities including EDD payroll taxes. Cohen was personally assessed as President and Cigliano personally assessed as Secretary. Only Cohen sought relief by filing a petition with the Office of Tax Appeals (OTA).
The OTA Decision
Many situations involving the assessment of corporate or LLC payroll taxes against a so-called “responsible person” become finger-pointing contests between the owners of the business, corporate officers and key employees. In my experience from handling these types of cases for decades, finger-pointing contests rarely if ever deflect personal exposure totally onto someone else. The key elements are always responsibility and willfulness.
According to the regulations that interpret statutory law, a responsible person includes any person having control or supervision of, or who is charged with the responsibility for filing payroll tax returns (EDD), or sales tax returns (CDTFA), or the payment of those taxes, or a person having a duty to act for the corporation or LLC in complying with the payroll tax law or the sales tax law
The President of a corporation is the general manager and chief executive officer and has the implied power to bind the corporation and take those actions necessary in the handling of ordinary business affairs. Therefore, there is a prima-facie case of satisfying the element of responsibility. In other words, the President is usually the prime target for a personal level assessment.
Being the responsible person in a corporation, standing alone, is not sufficient to impose personal liability. You need a second element – willfulness. The finding of willfulness is always fact driven. Actions speak louder than words. According to the Cohen case, the term “willfully fails to pay or cause to be paid” means that the failure was the result of a voluntary, conscious, and intentional course of action. Willfulness does not require an evil intention, bad purpose, or bad motive. To be held willful, both the EDD and the CDTFA must establish the following elements:
- The responsible person must know that the taxes are due and owed.
- The responsible person had the authority to pay the past due taxes.
- The responsible person had the ability to pay the past due taxes but chose not to do so.
Cohen knew the taxes were due and owing. In fact, he lent the corporation $230,500 to pay its debts. Food vendors were paid, and so were employees. Payroll taxes were paid to both the IRS and the EDD. Everyone got paid except the CDTFA.
Cohen was found to be both responsible and his failure to pay sales taxes was found to be willful.
Both the Cohen and Scott cases basically follow the same pattern. In Scott the responsible person was the Corporate Secretary and in Cohen the Corporate President. Both were found to be willful as they had the money to pay the back taxes, and they knew the taxes were owed. What I found disturbing about the Cohen case, was the judge’s finding fault with Cohen for paying payroll and payroll taxes before paying sales taxes. I found it odd that a judge would fault an employer for paying employees before paying taxes. Employees depend upon receiving their paychecks after working to earn them. I was also taken aback by the OTA judge’s faulting the payment of payroll taxes before paying sales taxes. One should not be faulted by paying one taxing agency of the same government over another taxing agency.
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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