ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE WOERNER BROTHERS MAKE A LOONEY MISTAKE; THAT’S ALL FOLKS
By Robert S. Schriebman
The Woerner brothers, Dean and Stanley, owned and operated Western Plywood, Inc. in the San Francisco bay area. Western Plywood filed late sales and use tax returns for the fourth quarter of 2011 and the first quarter 2012 and did not pay those taxes. The tax liability with penalties totaled more than $600,000. Western Plywood sold its business to Woodbank, Inc. for over $300,000 but none of the sales proceeds were applied to back taxes. The California Department of Tax and Fee Administration (CDTFA) issued personal assessments against Dean and Stanley and they appealed the proposed assessment to the Office of Tax Appeals (OTA).
In their appeal, both Dean and Stanley admitted they were the persons responsible for Western Plywood’s tax compliance. They also admitted that they had actual knowledge of Western Plywood’s unpaid tax liabilities. They further acknowledged that they had the authority to cause Western Plywood to pay these past due taxes and that Western Plywood had the funds available to pay them. Yet, both Dean and Stanley sought a hearing before the OTA to try to convince a judge that they should not be held liable – this is a ‘Looney Tunes’ strategy if there was ever one!
Here is what the OTA had to say.
The OTA Judge – “That’s All Folks”
Having followed OTA decisions for quite some time, I can tell you candidly that this forum is not taxpayer friendly. The Woerner brothers’ case was no exception.
The case is instructive for all California taxing agencies especially the EDD when it comes to corporate and LLC assessments against responsible officers pursuant to CUIC § 1735. The same criteria and the same legal reasoning govern EDD exposure. So read and learn.
R&TC § 6829 provides that a person is personally liable for the tax, penalties, and interest owed by a corporation or LLC if all of the following elements are met:
- The corporation’s or LLC’s business has been terminated, dissolved, or abandoned;
- The corporation or LLC collected sales tax on sales but failed to remit those taxes to the state;
- The targeted person had control or supervision for compliance and the payment of taxes;
- The targeted person willfully failed to pay the taxes or caused the taxes to be paid. This means the targeted person had knowledge that the taxes were not being paid, had the authority to pay those taxes, but elected not to do so.
Whether we are talking sales taxes, employment or withholding taxes, and whether or not we are dealing with the State of California or the IRS, the basic rules are the same. The elements are always (1) responsibility, and (2) willfulness.
The Woerner brothers both admitted to responsibility and willfulness. If they knew going in that they had no case, what was their defense?
Woerner Brothers’ Defense Argument
Western Plywood, Inc. sold its assets to Woodbank, Inc. in 2012.
The Woerner brothers argued, in their defense, that Woodbank, Inc. by written contract, agreed to pay Western Plywood’s outstanding tax liabilities – Woodbank waffled! The judge ruled that the agreement between Western Plywood and Woodbank was not binding on the State of California. The judge was right. Although the State was a third party beneficiary, the State had a right to collect from Woodbank. It appeared from the decision that Woodbank’s principals defaulted in their contractual promise to pay Western Plywood’s taxes. That is between the two of them. The Woerner brothers remain on the hook for Western Plywood’s unpaid taxes.
Lesson Learned From the Woerner Brothers’ Matter
The most important lesson: the Woerner brothers were too quick to admit responsibility and willfulness. Most likely they did not have the advice of experienced tax counsel. It appears that they merely admitted liability in order to be cooperative or to create a good impression with the sales tax people. The important takeaway is to keep in mind that the burden of proof on personal exposure for corporate or LLC unpaid taxes rests with the government. This is especially true with the EDD. The EDD has to prove responsibility and willfulness. The taxpayer-responsible person does not have to say a word. Often the EDD will try to get the targeted individual to admit liability without the EDD doing its homework. The IRS, on the other hand, will conduct an extensive investigation, such as, issuing a bank summons to obtain copies of cancelled checks and the bank signature cards. I have yet to see the EDD go to this extent.
EDD Duress Tactics
If a corporation or LLC owes the EDD, and wants an installment payment arrangement, the EDD will send a targeted individual a document entitled “Corporate Information Questionnaire.” This document seeks information on responsibility and willfulness and has almost nothing to do with the company’s financial ability to pay back taxes. The questionnaire is signed under penalty of perjury and it is very intimidating. It is nothing more than a disguised confession to both of the elements the EDD needs to prove in order to issue a valid assessment pursuant to CUIC § 1735. If the targeted individual refuses to complete the form and sign it, the EDD may not grant an installment agreement and will instead begin a series of unannounced bank account levies. This is a real Catch 22. You are caught between a rock and a hard place. If this does not smack of duress, I do not know what does!
The Woerner brothers had no chance at all. They made too many mistakes early on. It is never a good idea to try to impress the taxman by being overly cooperative. It is a serious mistake to think that the sales tax people or the EDD is your friend and is here to help you.
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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