Ask The Edd Lawyer ‐ What Is The Cuiab’S Current Policy On Hearing Refund Claims On Worker Information Return Penalties? ‐ Part 3
By Robert S. Schriebman
2017
Introduction
This is Part 3 of a 5-Part series that will examine the fairness of the CUIAB’s current position of refusing to grant an administrative hearing to any matters involving WIRPs.
The laws concerning WIRPs are found in CUIC §§ 13052 and 13052.5. Most of you who have followed WIRP articles on this website, know that a WIRP assessment must first be paid before it can be challenged. This series of articles will focus upon one small subsection of 13052.5 subsection (d). This subsection states as follows: “(d) Sections 1221 and 1222 of the Unemployment Insurance Code shall not apply to assessments imposed by this section.”
CUIC §§ 1221 and 1222 provide for administrative relief when the EDD issues a Notice of Assessment. By timing filing a Petition with the CUIAB a taxpayer does not have to pay any portion of the proposed assessment other than the WIRP portion. The WIRP must be paid promptly upon assessment. The legislature intended to punish employers who failed to issue proper and timely W2s and 1099s. A form of punishment is the absence of prepayment administrative relief. However, these statutes are absolutely silent about an administrative hearing after the WIRP has been paid.
The current position of the CUIAB is that it is not allowed to hear a WIRP matter that has only been assessed but not paid. That position reflects the clear language of subsection (d). But wait, the current position of the CUIAB is that it is not allowed to hear a WIRP matter that has been paid and where the taxpayer-employer seeks a refund!
This article will discuss the constitutionality of the CUIAB’s current position of denying administrative refund jurisdiction on CUIC §§13052 and 13052.5 penalties. I firmly believe that the Board’s current position denies a taxpayer a due process of law under the 14th Amendment of the US Constitution and Article 1 Section 7 of the California Constitution. We will review the language of CUIC § 13052 (d), the legislative intent for enacting these stiff penalties, and the benefits of having tax matters reviewed by an administrative law judge (ALJ) as opposed to a Superior Court law judge. We will also review the very important US Supreme Court McKesson decision.
Before discussing the specifics of the legal issues, it will be helpful to you to once again review the facts involving a typical EDD WIRP assessment scenario.
The Case of XYZ, Inc.
XYZ, Inc., (XYZ) owns and operates a widget manufacturing operation in San Diego, California.
The EDD conducted a worker status audit for the years 2014, 2015 and 2016. As a result of the audit, the EDD issued a Notice of Assessment for these years. A portion of the Notice of Assessment contained a Worker Information Return Penalty issued pursuant to CUIC § 13052.5 in the amount of $60,000.
On January 30, 2017 XYZ fully paid the CUIC § 13052.5 penalty.
On February 3, 2017 XYZ filed a timely Claim for Refund (Claim) with the EDD pursuant to CUIC §§ 1178 and 1179.
The EDD did not respond to XYZ’s Claim; the Claim was neither denied nor was the Claim granted. Pursuant to CUIC §1222, after the passage of 60 days, XYZ deemed, by operation of law, that the EDD denied its Claim.
On April 17, 2017, XYZ filed with the CUIAB its Petition to Protest the “Deemed Denial” of Claim for Refund. The CUIAB has refused to entertain or hear the Petition for Refund because its current position is that it has no jurisdiction to hear refund claim matters involving WIRPs. XYZ has been advised that it must now file an expensive and time consuming lawsuit for refund in the Superior Court.
Is The CUIAB Violating An Employers’ US and California Constitutional Rights To Due Process of Law?
The CUIC has in place a constitutional framework for employment and withholding tax refunds. These are found in CUIC §§ 1178, 1179, 1221 and 1222. However, the CUIAB, in interpreting subsection (d) of CUIC § 13052.5, has taken the position that it has no administrative or procedural refund jurisdiction.
Subsection (d) states in substance, that CUIC §§ 1221 and 1222 shall not apply to assessments imposed by this section. The statute is deliberately silent when it comes to refunds. We have to assume that the legislature knows the difference between “assessments” and “refunds,” that is why there is extant clear statutes for the refund process. The legislature did not preclude CIUAB refund jurisdiction when it enacted subsection (d).
The legislature intended to enact punitive legislation against an employer who fails to properly issue W2s and 1099s by specifically denying the employer’s prepayment due process. But nothing was said about post-payment or post-deprivation due process. Denying refund administrative jurisdiction was and is an unjustifiable position by the CUIAB and violates the procedural due process clauses of both the US and California Constitutions. Its denial constitutes state action in preventing a post-deprivation administrative remedy. The legislature did not intend a blanket application of the denial of all post-deprivation refund claim review rights that have been in place in the CUIC for decades. XYZ is entitled to the post-payment refund remedies afforded by the statutory structure.
Specific grounds and merits for a claim for refund must necessarily be reviewed by an ALJ with the experience and expertise required to timely and objectively review the fairness of a penalty already paid, not a penalty merely assessed. CUIC §§ 1221 through 1224 were not repealed when CUIC § 13052.5 was enacted.
The CUIAB’s current position of denying administrative procedural jurisdiction and requiring a taxpayer to seek judicial relief in the Superior Court, in the real world, amounts to a forfeiture for the small to medium sized business, as will be explained below. The CUIAB’s current position in this matter does not amount to a plain and common sense reading of subsection (d). Its current position is not a constitutional application of subsection (d) within the meaning of P-T-31.
Failure to grant XYZ administrative refund due process violates the very essence of both due process provisions in the US and California Constitutions.
In McKesson Corp. v. Division of Alcoholic Beverages & Tobacco 496 US 18 (1990), McKesson was a distributor of alcoholic beverages doing business in Florida. In 1985, the Florida legislature revised its liquor tax laws to correct a discriminatory tax scheme that gave preferential treatment to companies whose beverages were made from products grown in Florida. The revisions deleted the express preferences for Florida products and instead provided tax rate reductions for use of specific types of crops, all of which were commonly grown in Florida and used to make alcoholic beverages. McKesson paid the taxes without discount until June 1986, when it sought a refund of the excess taxes, claiming the tax was unlawful. After the state denied the request, McKesson sued the Division of Alcoholic Beverages and Tobacco and other state agencies in state court, seeking injunctive and declaratory relief under the Florida and United States Constitutions, as well as a refund of the excess taxes under state and federal law. The trial court granted McKesson’s motion for partial summary judgment, holding that the tax scheme violated the Commerce Clause and enjoining future enforcement. The trial court, however, did not order a refund or any other relief regarding the previously paid taxes. The parties cross-appealed, and the Florida Supreme Court affirmed. With regard to the refund issue, the Florida Supreme Court found that the state collected the taxes in “good faith reliance on a presumptively valid statute,” and that a refund would be a windfall to McKesson, who likely passed the cost of the taxes on to its customers. The United States Supreme Court granted certiorari on whether McKesson was entitled to a partial tax refund under federal law. It held that McKesson was not afforded meaningful backward looking relief, as entitled by procedural due process that is inherently applicable in the context of taxation. Because exaction of a tax is a deprivation of property, the Due Process Clause must be satisfied. This mandates a “procedural mechanism” for the taxpayer to contest the tax. See also Johnson Controls v. Miller 130 S Ct. 3324 (2010).
Conclusion
In the next article we will continue our discussion of whether the CUIAB’s current position in denying XYZ administrative due process is a violation of both US and California Constitutions. There is currently pending Assembly Bill 1695 that seeks to eliminate subsection (d), in its entirety, from the CUIC § 13052.5. If subsection (d) is repealed will it mean that WIRP refund matters will be heard before the CUIAB? Will it be possible to settle WIRP matters “out of court?” It’s too early to tell.
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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 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.
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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