ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – SUCCESSOR LIABILITY AND HOW TO AVOID BEING A TARGET – THE RUZBEHJON CASE – PART 2
By Robert S. Schriebman
This is Part 2 of a 2-Part Series that will discuss procedures used by EDD collectors for unpaid corporate level or LLC level payroll taxes.
In May 2019, the California Office of Tax Appeals (OTA) issued a decision in the Ruzbehjon, Inc. matter. This case involved the non-payment, at the corporate level, of sales taxes owed by the corporation prior to its sale. Even though this is a matter involving the California Department of Tax and Fee Administration (CDTFA), the principles are very important and equally apply to the non-payment of EDD corporate level/LLC payroll taxes.
The Ruzbehjon, Inc. Case
The Ruzbehjon, Inc matter was decided by the administrative Office of Tax Appeals (OTA) on May 29, 2019. The matter involved a restaurant corporation that owed sales and use taxes in the amount of $39,000 for the years 2008 and 2009. The judge was a bit vague on exactly what was sold by the corporation to the purchaser as the judge stated, “…purchased the restaurant business from the corporation.” Later in the decision, it appeared that the buyer, Mr. Farahanipour (Mr. F.) actually purchased the stock of the company which carried with it all of the corporation’s underlying assets. Mr. F., in his zeal to own the restaurant, never took the time to obtain proper releases from the CDTFA. This paperwork usually consists of Tax Clearance Certificate or a Certificate of Release stating that the corporation’s taxes, interest and penalties had been paid in full. It also appears that this transaction occurred without the assistance of competent legal counsel. Mr. F. tried to argue that he should not be personally liable for unpaid corporate taxes, but his argument failed on deaf ears. Mr. F. was held personally liable to the extent that his purchase price covered unpaid sales tax liabilities of the seller.
The facts presented in the OTA decision did not go into the details of the sales transaction itself. But from reading between the lines I suspect that the buyer and seller did not seek experienced legal counsel or go through a formal escrow process. An escrow company would have insisted on obtaining a certificate from the EDD stating that the buyer bought free and clear of any back taxes owed by the seller.
Important Statutes Violated – Doing It Properly
The statutes violated in the Ruzbehjon case are Revenue and Taxation Code (RTC) statutes involving sales and use taxes. The EDD has similar statutes and procedures involving successor or transferee liabilities. The same basic statutory structure is found in the CUIC §§ 1731 – 1733.
RTC § 6811 provides that if the seller sells its business with unpaid sales or use taxes, whether the sale be assets or stock, it is incumbent upon the buyer to withhold from the purchase price an amount sufficient to cover the seller’s liability unless the seller can produce a receipt of certificate that the back taxes were paid. The buyer has the responsibility of ascertaining beforehand if there were unpaid taxes and, if so, the buyer must deny the seller the benefit of that portion of the purchase price that represents the unpaid tax liability. In other words, the obligation of the buyer is not to give to the seller the funds that the seller owes in back taxes.
If the purchaser fails in this duty, the purchaser becomes personally liable for the payment of the amount that should have been withheld to the extent of the purchase price (RTC § 6812(a) and California Code of Regulations, Title 18, Section 1702(b)).
The above statutes and the cited regulation provide that the liability of the successor or purchase of a business or stock of goods includes all taxes incurred by the former owner as a result of operating the business and that remain unpaid at the time of the purchase of the business or stock of goods.
There are statutes of limitations that require that the taxing agency issue a Notice of Successor Liability, or equivalent within a specific period of time once the taxing agency has been made aware that the sale or transfer occurred
The best way for a buyer to be protected from facing successor liability, is to be diligent and proactive. Retain the services of an experienced business or transaction professional, usually an attorney. Open an escrow with an experienced escrow company that will make sure all required certificates and releases are obtained before the close of escrow. Do not do it yourself.
Conclusion – Protecting Yourself From The EDD
A wise buyer will insist on obtaining a Clearance Certificate from the EDD prior to the close of escrow. This certificate is absolutely essential if the buyer or other successor wishes to avoid any type of transferee or successor liability. A successor cannot be relieved of liability because he or she deposited the purchase price, or a portion thereof, in escrow from which the EDD did not receive payment. If the buyer permits funds in escrow to be distributed without first securing the Clearance Certificate from the EDD, the fact that an escrow was conducted is of no significance.
Buyers and sellers of businesses should notify the EDD of a change in ownership or a discontinuation of the business. The buyer should obtain a Certificate of Release from the EDD to avoid transferee liability problems.
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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