Walking Away From Your Edd Corporation Assessment
By Robert S. Schriebman
The EDD has audited your corporation and has issued a Notice of Assessment. Let us suppose that the amount of the proposed assessment is huge. You have decided that you simply want to walk away from the corporation, not pay the EDD assessment, and not go through the expense of hiring professional representation. Can you simply walk away from the business? Will the EDD find out that you walked away? What can the EDD do to you as the corporate owner and CEO? Do you have any personal exposure to the California Franchise Tax Board?
All of these are tough questions, and they have no clear cut answers. The purpose of this article will be to give you a basic overview of your personal exposure to the EDD and the FTB as well.
If you allow the EDD corporate-level assessment to become final without filing a petition to the CUIAB, the assessment will become an account receivable on the books of the EDD. The debt will eventually be assigned to an EDD collector. The EDD collector may attempt to contact the corporation by telephone or letter. If no response is received the EDD collector will consider taking enforced collection action. This could be a levy on the corporate bank account. The EDD can also file a Notice of Lien to protect the EDD’s right to corporate assets. If this level of enforced collection is not successful the EDD collector may issue a warrant and hire a keeper who will enter the business premises and seize corporate assets.
Will the EDD come after you personally? Most likely. Section 1735 of the Unemployment Insurance Code (CUIC) allows the EDD to disregard the corporate entity and assess responsible individuals within the corporation the exact same deficiency owed by the company. This is a dollar-for-dollar individual-level assessment. If the EDD does elect to assess you individually you will receive another Notice of Assessment which will give you the right to file an individual-level petition before the CUIAB.
If you walk away from your corporation and do not go through the legal formalities of winding up and dissolving it you may have the FTB to deal with. The FTB is allowed to assess $800 minimum franchise tax each year until the company is formally dissolved. While the FTB does not usually come after the responsible individual within the company for this annual fee, the FTB does have collection tools available to it to do so. It is foolhardy to just walk away from the company accruing EDD and FTB deficiencies.
Some people walk away from their corporation by selling it to a third party as an entity or selling the corporate assets leaving nothing but an empty shell. If legal formalities are not observed in any kind of sale or transfer, both the EDD and FTB can collect corporate level taxes from transferees. For example, the EDD has successor liability statutes set forth in CUIC §§ 1731 – 1733. Any purchaser that does not avail himself or herself of the protection provided in the law becomes liable as of the date of the purchase of the business or as of the date his or her predecessor’s liability becomes final, whichever is later, for the amount owed by the predecessor. This law is very complicated and deserves a dedicated article which I hope to write in the future.
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.