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 2
By Robert S. Schriebman
This is Part 2 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 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.
What Factors Constitute Willfulness
Willfulness means that the failure to pay corporate-level taxes was the result of a voluntary, conscious, and intentional course of action. In order for a responsible corporate official to be held personally liable, three things must be established:
- On or after the date that the taxes became due, the responsible person had actual knowledge that those taxes were owed but were not paid.
- The targeted individual had the authority to pay the taxes or to cause them to be paid on the date the taxes were due, or the targeted individual knew the taxes were due, but did not pay them, regardless of the official due date; and
- The targeted responsible person had the ability to pay the taxes, but elected not to do so. (Cal. Code Regs. Tlt., 18 Section 1702.5 (b)(2)(A)-(C).
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)
It’s All Fact-Driven
The ultimate determination of responsibility and willfulness comes down to the facts; just the facts! The law is very straightforward. In order to impose liability on the targeted individual, the government must prove both elements: responsibility and willfulness. Usually, it is not difficult to show that the targeted individual was the responsible person. It is willfulness that is problematic. If there are more than one potential target, each person will be assessed. Unfortunately, both the EDD and the Sales Tax folks focus on only the issue of responsibility, once they find responsibility, that they make their assessment.
How Was Rolando Garcia Relieved From Personal Liability?
The OTA went through all the facts, and found that Rolando was not fluent in English, was an absentee owner, and relied totally on Burger and Wiener. The judges produced Wiener’s UI benefit claim wherein he admitted in writing that he diverted funds and created phony invoices where payment went into a side company that he owned. The OTA also held that Rolando, in good faith, signed the quarterly sales tax returns that were prepared by Wiener for his signature. Taking all of this into consideration, Rolando Garcia was relieved of personal liability.
It is very important here to note how the EDD UI report was adopted by another taxing agency and used to arrive at a decision in favor of Rolando Garcia.
Another judge on the panel of judges, agreed that Rolando Garcia was neither responsible nor was his failure to pay willful. He did fault Rolando for being an absentee owner and not questioning the amount of sales stated on the quarterly returns.
The key point to the concurring opinion was the judge’s view of the burden of proof requirement. The majority of the judges stated that the burden of proof is measured by “the preponderance of the evidence.” This means that the burden is like a scale. There must be enough facts on one side to sharply tilt the scale one way or the other.
The concurring opinion, on the other hand, stated that the burden of proof test is “more likely than not” that Rolando Garcia knew that the corporation failed to pay its taxes and chose not to cause those taxes to be paid. So in this test, one side of the scale is slightly tilted one way or the other instead of a huge weight making the decision obvious in favor of assessment or relief.
In my opinion, the differences in the scale tests set forth in this case, are almost meaningless. I have had many CUIC § 1735 cases cross my desk and many IRS Trust Fund Recovery Penalty cases as well. I can also make the same observations about petitioning for Innocence Spouse Relief. The real tests are, “a huge amount of evidence in my client’s favor.” In order to win for my clients, I found that you cannot give the government any wiggle room to argue against you. I must paint them into a corner where they have no place to go but to grant my client relief. That’s the real world burden of proof.
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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