ASK THE EDD LAWYER – WHAT IS THE CUIAB’S CURRENT POLICY ON HEARING REFUND CLAIMS ON WORKER INFORMATION RETURN PENALTIES? – PART 4
By Robert S. Schriebman
This is Part 4 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 continue our discussion on 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. In this Part 4 we will continue our review of US Supreme Court decisions concerning the requirement of administrative due process in post-deprivation matters. We will review the important rulings in Goldberg v. Kelly and discuss the three factors of due process created as a result of the Supreme Court decision in Mathews v. Eldridge.
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.
The CUIAB Is Violating An Employers’ US and California Constitutional Rights To Due Process of Law When It Takes The Position of Refusal To Grant Administrative Due Process Hearings in WIRP Refund Matters.
CUIC § 13052.5 (d), if applied to limit refund review process, is directly contrary to the McKesson holding. The payment of a penalty before its review necessitates not just any procedure, but one that is a prompt, fair, and meaningful. A broad framework for a “clear and certain remedy” described by the Supreme Court, as “meaningful backward looking relief,” can only be achieved by the CUIAB’s affirmation of the administrative law process in place to provide such procedure, in sync with constitutional protections at the heart of our system, specifically notice and opportunity to be heard in contesting a penalty taken by the EDD.
In Fuentes v. Shevin, the Supreme Court stated, “when a state seeks to deny continued enjoyment of recognized property interest, it must provide an opportunity to contest the grounds of the denial.” See Fuentes v. Shevin, 407 US 67 80-81 (1972).
Because of the position taken by the CUIAB, the EDD Settlement Office has also taken the position that it cannot settle refund claim matters involving CUIC § 13052.5 issues on their merits. XYZ is left with no real resolution recourse other than a trial in the Superior Court.
The cases go as far back as the 1920’s. In Ward v. Love County Board of Commissioners, 253 US 17 (1920), the U.S. Supreme Court reversed the Oklahoma Supreme Court’s refusal to award a refund for an unlawful tax. The Choctaw Tribe, to avoid a distress sale of its lands, paid a tax under protest, and then brought suit in state court for a refund. The refund claim was denied and the Tribe sought relief in the US Supreme Court. The U.S. Supreme Court ordered a refund, reasoning that the county could not coercively collect a tax then refuse to incur any obligation to pay it back. To do so would be short of saying it could take property arbitrarily without due process of law. This would be in contravention of the 14th Amendment, which binds the county as an agency of the state.
The fundamental requisite of procedural due process of law is the opportunity to be heard.” Grannis v. Ordean, 234 US 385, 234 US 394 (1914). The hearing must be “at a meaningful time and in a meaningful manner.” Armstrong v. Manzo, 380 US 545, 380 US 552 (1965). In the present context, these principles require that a taxpayer have timely and adequate notice detailing the reasons for the deprivation of his or her property, and an opportunity to be heard.
Goldberg v. Kelly defines due process from a procedural standpoint. In that case, the question for decision was whether a state that terminates public assistance payments to a particular recipient without affording him or her the opportunity for an evidentiary hearing prior to termination denies the recipient procedural due process in violation of the Due Process Clause of the 14th Amendment. It was held that welfare benefits are a matter of statutory entitlement for persons qualified to receive them, and procedural due process is applicable to their termination. A pre-termination evidentiary hearing is necessary to provide the welfare recipient with procedural due process. See Goldberg v. Kelly, 397 US 261, 263 (1970).
If a pre-deprivation hearing is not required by due process, as set forth in CUIC § 13052.5 (d), then a prompt post-deprivation hearing is a necessity. There is a level of certainty that “some kind of hearing” is required; one that is “appropriate to the nature of the case.” See Mathews v. Eldridge (1976) 424 US 319.
In Mathew v. Eldridge the Supreme Court set out three factors that must be considered in determining the level of due process required.
1. Existence of a Private Interest That Will Be Affected by Official Action: Are refund claims valuable “private interest” property rights, from a practical approach? To have a property interest in the constitutional sense, it is not enough that one has an abstract need or desire for a benefit or unilateral expectation.
XYZ corporate assets were paid over to the EDD. Monies owned and possessed by XYZ and then paid over to the EDD in expectation of a refund constitute private interest property rights.
2. The Risk of an Erroneous Deprivation of Such Interest Through the Procedures Used: The more important the interest at stake, the greater the efficiency of the administrative process must be. When the issues are complex and require difficult factual determinations, nearly the full panoply of procedural safeguards in civil cases may be required. See Morrissey v. Brewer (1972) 408 US 471 488-489.
The position taken by the CUIAB, in denying refund jurisdiction leaving only a refund suit in Superior Court, subjects XYZ to an erroneous deprivation of a property interest and amounts to a real life forfeiture.
3. Government’s Interest, Including Fiscal and Administrative Burdens, the Additional or Substitute Procedural Requisites Would Entail: An ALJ with the expertise to make factual and legal determinations in the specialized area of tax law is meaningful backward-looking relief, as opposed to a hearing before a non-specialist Superior Court judge. Superior Court relief is an empty right and a right without a remedy
This balancing test emphasizes first, the importance of the private interest at stake; second, the comparative accuracy of the procedure used by the government versus that desired; and third, the competing governmental interest in both the substantive merits and the need for administrative efficiency.
It is clear from a review of the Supreme Court cases mentioned in Parts 3 and 4 that the CUIAB needs to establish jurisdiction to hear WIRP refund matters. Not to do so violates both the US and California Constitutions as well as the decisions in Goldberg v. Kelly and Mathews v. Eldridge.
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.
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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