Ask The California Employment Tax And Payroll Tax Attorney – Taking A Fresh Look At EDD Personal Level Assessments Pursuant To Cuic § 1735 – Part 1
By Robert S. Schriebman 2020
Introduction
This is Part 1 of a 2-Part series that will take a fresh look at assessment procedures involving CUIC § 1735. This website has no shortage of articles dealing with CUIC § 1735. Lately, there have been a number of cases from the Office of Tax Appeals (OTA) imposing personal liability for unpaid corporate or LLC sales and use taxes. The elements for personal level assessments between the Revenue & Taxation Code (R&TC) and the CUIAB are similar. While the parallels between the two codes allow a valid comparison, I believe that there are substantial differences. These differences were brought home to me recently. A client was individually assessed by the EDD for corporate deficiencies going back 8 years! The usual 1735 assessment involves 12 quarters or 3 years. The 8-year individual assessment was issued 10 years from the earliest designated year in the original corporate level Notice of Assessment (NA). Needless to say, I was perplexed by the EDD’s seeming ability to issue an assessment covering a period of 10 years when its rules specifically state that the maximum period is 8 years unless fraud is present. There was no fraud assessed against this particular client.
I did what any conscientious lawyer would do – I went back to the books and took a fresh look at CUIC § 1735 and its companion assessment statute CUIC § 1132. This series of articles will discuss the basics of 1735 and the statute of limitations for assessment in the EDD code.
The Basics of CUIC § 1735
When one reads this code section, one is struck by the absence of any administrative or judicial interpretation. Any officer, major stock holder, or other person having charge of the affairs of a corporation, LLC, or LLP who willfully fails to pay payroll taxes shall be personally liable for every dime owed by the employing unit. The first key element is a willful failure to pay what the entity owes. When the EDD issues a personal level assessment the burden of proof is on the EDD to establish willfulness. The second key element is responsibility for the failure to pay. The EDD also has the burden of proving responsibility.
There Are 4 Key Elements
When we compare this statute to its companion provisions in the R&TC, we find that there are in reality 4 elements that the EDD needs to prove:
- Payroll taxes are owed by the corporation, LLC or LLP
- Those payroll taxes were not paid timely or were not paid in whole or in part.
- Responsibility or responsible person.
- Willful failure to comply.
Once the EDD determines to assess personal liability, it’s a slam dunk for them to prove that taxes were owed and unpaid. The first 2 elements need very little discussion.
Establishing the Element of Responsibility
In order to establish the element of responsibility, the EDD must show knowledge on the part of the targeted individual. This element is fact-driven. The EDD will usually show that the target was a hands-on manager who reviewed such things as tax returns and bank statements, and was aware of the nature and extent of payroll obligations. Most small business owners micro-manage and are usually involved 24/7. The EDD will then attempt to prove the element of authority. A responsible person, the target of the assessment, must have the authority to pay taxes or cause them to be paid (i) on the date the taxes became due, and (ii) when the responsible person had actual knowledge. The person who signs the checks has the knowledge. Check signing authority, standing alone, is not sufficient. Just because a person’s signature is on record at the bank, is not sufficient evidence of authority.
When it comes to EDD taxes, we see the same pattern in signing and filing quarterly and annual payroll tax returns. This is why the element of authority is not difficult for the EDD to prove. When there are two or more shareholders or officers, these types of situations become a finger pointing contest, and the results hardly ever works in the individual’s favor. The best defense is to obtain the testimony of coworkers who will testify as to whom actually ran the day-to-day fiscal affairs of the business.
Some Basic Questions Need Be Asked
When a potential client comes to me with this type of exposure, I ask some basic questions:
- What was your job title?
- What was your job description?
- Describe your daily routine
- Did you work under the direction or control of someone else?
- Were you supervised?
- Did you sign checks during the periods in issue?
- Who has the authority to sign checks?
- Did you prepare and sign quarterly payroll returns?
- Did you contact the EDD? (by phone or in writing)
- Did you negotiate an installment payment arrangement for the unpaid taxes?
Guidelines for Establishing the Element of Willfulness
Willfulness means a voluntary, conscious and intentional course of action. One need not have an evil purpose of motive. In order to prove willfulness, the EDD must establish the following:
A. On or after the date that the taxes came due, the responsible person had actual knowledge that the taxes were due, but not being paid.
B. The responsible person had the authority to pay the taxes or to cause them to be paid (i) on the date that the taxes came and (ii) when the responsible person had actual knowledge as defined in A. above. A responsible person who was required to obtain approval from another person prior to paying the taxes at issue and was unable to act on his or her own in making the decision to pay the taxes does not have the authority to pay the taxes or to cause them to be paid.
C. When the responsible person had actual knowledge as defined in A. above, the responsible person had the ability to pay the taxes but chose not to do so.
Not everyone who is an officer or manager/supervisor has exposure. People who are hired during or after the non-compliance should not be assessed. For example, a person who has only a title but no hands-on involvement, should not be a target. Also, persons who took over operations when there was no money available to pay the payroll tax deficiencies should not be legally responsible.
Conclusion
In this part 1, I discussed the basics of CUIC § 1735. In Part 2, we will look at the statute of limitations for imposing personal liability.
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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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