ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – MARIJUANA DISPENSARY OWNER FACES PERSONAL LIABILITY FOR UNPAID SALES TAX
By Robert S. Schriebman
A partnership can be a blessing or a curse. When the business is new and things are going well, everything seems to be a blessing; but, when things go south, and one partner blames the other, it’s a curse. The word “partnership” is a very vague term. It’s clear that a partnership relationship occurs when there is a written and formal partnership agreement. Even without a formal agreement, a partnership can be created. This is known as a “de facto” partnership, or a silent partnership. All of this can get very complicated as you will soon see in the recent case of L. Gasich decided by the Office of Tax Appeals (OTA) in February 2020 and again in August 2020.
L. Gasich (first name unknown) was the sole shareholder, president, secretary, and treasurer of South Bay Organic Solutions, Inc. (SBOS) operating out of San Jose, California during 2011. He had a financial backer, Todd Hill, who occasionally would loan him money for the marijuana dispensary operation. Occasionally, the two would exchange emails discussing the business operations. Hill took no active part in managing the day-to-day fiscal affairs of the dispensary. In late 2011, things started going south. In January 2012, Gasich prepared and filed a final sales tax return, reporting taxable sales but did not pay those taxes. The then SBE conducted an investigation and determined that Gasich should be personally assessed for unpaid corporate level sales tax.
While the Gasich matter appears at first to be a slam dunk personal assessment situation, the case has some interesting twists that are important and that should be kept in mind when starting a new business:
- It is important to see how easy it can be to fall into an unintended partnership trap where the partners have joint and several liability for unpaid taxes.
- When things go south, a former good working relationship may generate into a figure-pointing contest between business associates.
- If you want to escape personal liability from corporate level unpaid tax assessment, it is important to have written proof of non-responsibility as well as third party witnesses who can vouch for you.
Let’s look at the case of L. Gasich and see how the OTA arrived at its decision to hold Gasich personally liable.
The Case of L. Gasich (In the Matter of the Appeal of L. Gasich, OTA Case No. 19034563)
L. Gasich was the sole owner and operator of a marijuana dispensary during 2011. Toward the end of 2011, the business failed. Gasich closed the business at the end of 2011 and filed a final sales tax return in January 2012 but did not remit any sales tax. The SBE determined that he should be personally assessed as the sole responsible person within the corporation.
Gasich pointed the finger at another person, Todd Hill, whom he claimed directed the payment of bills, wrote all the checks, held the checkbook and had check signing authority. Gasich argued that Hill was a partner in the business and as such should have personal exposure as well. It turned out that Hill had no check signing authority, only subleased the business premises operated by Gasich, and only loaned money from time-to-time to the business. In late 2011, Gasich sent Hill an email stating, “Sales have flattened out and as business partners, we need to be developing and working out a plan together.” Gasich also said that he left the company in August 2011, and filed for unemployment benefits with the EDD.
The OTA, after examining the evidence, concluded that Gasich lied about his relationship with Todd Hill. At the most Hill was only an investor or silent partner. There was no written partnership agreement between Hill and Gasich and it was uncertain who owned the business. However, it was clear that Gasich was the corporate president, secretary and treasurer because of his filings with the Secretary of State. Further, the OTA checked EDD records to learn that Gasich filed for unemployment benefits in February 2012 after he filed the final sales tax return and closed the business.
The OTA Rules That Gasich Is Personally Liable for Unpaid Sales Taxes
The law provides that any responsible person, who willfully fails to pay sales tax due from a corporation or LLC, shall be personally liable when the business terminates. There are four elements that must be met by the government in order to impose responsible person liability:
- Collection of sales tax from customers
- Termination of the business
- Personal responsibility
- Willful failure to pay or cause to be paid
The OTA quickly found the first two elements were met: sales taxes were owed and the business terminated. However, some discussion was needed on the issues of responsibility and willfulness.
The OTA found that Gasich was the archetype example of a “responsible person.” These cases are all decided on the facts. Legal issues are short and clear. Gasich was the only authorized signer on the corporate bank account, and he held himself out to be all the corporate officers (in California one person is allowed to be all corporate officers at the same time). He prepared and filed the only sales tax return in issue. Although he pointed the finger of blame at Todd Hill, Gasich was the only person authorized to sign checks. Therefore, it was clear that Gasich was the responsible person.
The term “willfully fails to pay or to cause to be paid” means that the failure was the result of a voluntary, conscious and intentional course of action. Willfulness has nothing to do with a bad motive or bad purpose. In order for willfulness to apply, the government must show the following:
- The targeted individual had actual knowledge that the taxes were due but not paid.
- The targeted individual had the authority to pay the taxes or to cause them to be paid on the date they became due. On the other hand, a responsible person, who was required to obtain approval from another person prior to paying the taxes, and who could not act on his/her own, is not a willful person.
- The targeted individual had the ability to pay the taxes but chose not to do so.
Gasich was the only person in the corporation who had check signing authority. He admitted that he collected sales tax from customers and he understood his legal duty to pay over those taxes to the state. However, Gasich pointed the finger at his alleged partner, Todd Hill, and told the OTA that Hill controlled all the finances. This too was a lie. Todd Hill was merely an investor and silent business partner. The OTA found that during the final quarter of 2011, Gasich paid rent, utilities, and his employees. Therefore, he had the ability to pay the taxes. His failure to do so was willful.
With regard to the final point of having the ability to pay, it seems to me that the OTA looked in the wrong place. When the IRS asserts the Trust Fund Recovery Penalty (TFRP) against a targeted individual, they look to that person’s ability to pay the TFRP assessment, not the ability of the business to pay its regular bills. It is submitted that the OTA should have focused upon whether Gasich had the personal ability to pay the proposed assessment. Afterall, what is the point of assessing personal liability if it can’t be paid in the first place? All the OTA is really doing is putting a person like Gasich in the position of having to submit an Offer in Compromise (OIC) if he can’t pay the assessment? The government will only wind up with a few cents on the dollar. This may result in a waste of governmental resources and a waste of taxpayers’ money.
Gasich Petitions for a Rehearing
In February 2020, the OTA reached a decision that Gasich was personally liable for substantial unpaid corporate level sales tax.
In August 2020, Gasich petitioned for a rehearing on the grounds that he had two witnesses, former employees, who would testify in his favor. The OTA refused the rehearing request.
In order for a rehearing to occur, one of the following conditions must be met:
- An irregularity that prevented a fair consideration of the earlier case.
- An accident or surprise that occurred which ordinary caution could not have prevented.
- Newly discovered relevant evidence.
- Insufficient evidence to justify the written opinion or the opinion is contrary to law.
- An error in law that occurred during the proceeding.
The rehearing appeal centered around Gasich’s claim that he had newly discovered evidence. A claim a newly discovered evidence is generally viewed with suspicion, distrust, and disfavor. The OTA held that the two witnesses were available to appear during the original hearing, but Gasich failed to produce them. Therefore, the rehearing was denied.
The relationship between Gasich and Hill quickly degenerated in a short time during the few months that the dispensary was in business. Todd Hill could have been a silent partner, but this was viewed by the OTA as Hill being a limited partner in fact. Limited partners have no management or control over the business. They either reap the reward or take a loss. It all came down to a finger pointing contest where the facts governed and Gasich’s conduct proved louder than his words. I have always been wary of the word “partner,” and the case L. Gasich is an example of why I feel this way.
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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