Ask The California Employment Tax And Payroll Tax Attorney – How To Escape Individual Exposure For Corporate Level Taxes – What Is The Meaning Of Willfulness? – Part 1
By Robert S. Schriebman
This is Part 1 of a 2-Part series discussing the elements of willfulness in the assessment at the personal level of unpaid corporate sales and use taxes. The case is instructive because it breaks down the elements of the requirement of willfulness before taxes can be personally assessed against potentially responsible corporate officers, directors, and shareholders. Even though the case discusses California sales and use taxes, the decision can apply to unpaid EDD employment and withholding taxes.
In October 2019, the California Office of Tax Appeals (OTA) issued its decision in the case of Rolando Garcia (Rolando Garcia SR AP 53-008507). It was an unusual decision because the Board has a history of ruling in favor of individual personal liability for unpaid corporate sales and use taxes. The case is unique in that the ruling was in favor of the Rolando Garcia and he was relieved of an assessed liability for almost $200,000 in unreported taxable sales.
The case is important because it is instructive and sets forth criteria that can be used to relieve corporate officers, directors, and shareholders from personal exposure to unpaid EDD corporate-level deficiencies assessed pursuant to CUIC §1735. In fact the judges in the Garcia matter used a prior EDD unemployment insurance claim investigation to relieve Garcia of personal exposure.
This article will discuss the facts in the Garcia case, and set forth the elements of willfulness used by the OTA to relieve Garcia of previously assessed taxes. The case also establishes who has the burden of proof when it comes to assessing a responsible corporate officer, director or shareholder personally liable for unpaid corporate level assessments.
The Facts in the Garcia Case
Rolando Garcia was a successful businessman who owned and operated a trucking company. He did not speak or write English. Having made his money in trucking, Garcia wanted to expand and diversify his business holdings. He decided to form Caribbean BBQ Islands, Inc, a company that manufactured and sold custom barbeque islands. His trucking company was a fulltime operation, so Garcia hired the services of two advisor-managers – let’s call them Burger and Wiener. Garcia continued to be an absentee owner relying totally on Burger and Wiener.
Rolando Garcia and his wife were the only individuals listed on the corporate bank account. Rolando’s signature was the only one that appeared the corporations’ sales and use tax returns.
Embezzlement by Burger and Wiener
Through a series of phony companies and phony invoices, Burger and Wiener managed to embezzle almost $200,000 of corporate income. These transactions were hidden from Rolando Garcia. When he filed sales tax returns, they did not reflect close to $200,000 in sales. When Rolando found out he fired both Burger and Wiener. Wiener had the chutzpah to file a claim for unemployment benefits wherein he admitted to the EDD that he was the mastermind behind the embezzlement. The EDD denied his UI claim, but kept a record of Wiener’s admissions. This record would later be used to prove that Rolando Garcia should not be held personally liable for unpaid taxes.
Sales and Use Tax Audit
The Board of Equalization (now the CDTFA) conducted an audit and discovered that the corporation underreported close to $200,000 in taxable sales. A Notice of Determination (NOD), an assessment, was issued to the corporation but no petition was filed as the corporation was inactive. The CDTFA then went after Rolando Garcia and held him personally liable for unpaid corporate-level sales and use taxes. He appealed arguing that he was not responsible and his failure to have the corporation pay was not willful. In relieving Rolando Garcia of liability the OTA provided valuable guidance.
The guidance provided by the OTA is very instructive because it can be used defensively in any situation where a California taxing agency seeks to hold persons individually responsible for corporate-level or LLC-level unpaid taxes. This is especially instructive for EDD assessments issued pursuant to CUIC § 1735.
The Element of Willfulness
R&TC § 6829(a) provides that upon the termination, dissolution, or abandonment of the business of a corporation, any person having control or supervision of, or who was charged with the responsibility for the filing of returns or the payment of tax, may be personally liable for the corporation’s unpaid tax, interest and penalties, if the person willfully failed to pay corporate-level taxes. (Cal. Code Regs., tilt. 18 § 1702(a))
Normally, a corporate officer who has check-signing authority, or who signs quarterly tax returns is a potential target for assessment. However, merely having your signature on a bank signature card, with nothing more, does not mean the corporate officer is responsible for compliance.
Burden of Proof
In the Garcia case, the CDTFA had the burden of proof, by a preponderance of the evidence that Rolando Garcia willfully failed to pay or caused to be paid the corporation’s tax liabilities. (Cal. Code Regs., tilt. 18 § 1702(d)) The same can be said for the EDD when it seeks to hold a responsible person liable for unpaid corporate level employment and withholding taxes. (CUIC § 1735)
In Part 2 we will review the elements of willfulness and see how they apply to relieve Rolando Garcia of personal liability. There is also a concurring opinion from another judge who heard the case who believes that the burden of proof does not mean a preponderance of the evidence.
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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