by G. Spencer Mynko, Esq.
“Responsible Individuals” Can Be Personally Liable For EDD Assessments
A question I frequently get asked by clients is: “Can I be held personally liable if my business is assessed by the EDD?” As most of you know who have read my articles, if a company receives a Notice of Assessment after an EDD audit, the company has two basic options: pay the assessment or file a notice of appeal. This article will assume that the taxpayer has exhausted their appeal rights and is now in the position of having to pay the assessment. The short answer to this question is “yes”: any director, officer, or major stockholder can be personally liable for the assessment. But like so many things in the law, personal liability of responsible individuals for EDD assessments is a complicated matter.
The Law – California Unemployment Insurance Code (CUIC) sections 1735 and 1735.1.
The California EDD can’t hold trucking company owners liable for tax assessments simply because they want to, or think it’s a good idea. It is California law that enables the EDD to hold Company owners personally liable for assessments. California Unemployment Insurance Code (CUIC) Sections 1735 and 1735.1 are the weapons used by EDD to go after responsible individuals whose corporations and LLCs fail or refuse to pay their EDD assessments.
CUIC §1735 states:
Any officer, major stockholder, or other person, having charge of the affairs of a (corporation or LLC)…who willfully fails to pay contributions…shall be personally liable for the amount of the contributions, withholdings, penalties, and interest due and unpaid.
1735 makes it clear that corporate officers, stock holders and directors can be personally liable for an EDD assessment, including penalties and interest.
These sections allow the EDD to “pierce the corporate veil” and personally assess those individuals who are ultimately responsible for treating true employees as independent contractors. Therefore, if the EDD assesses a corporation or an LLC, and that business entity fails or refuses to pay the EDD assessment, the EDD has the right to tag the responsible persons for every penny owed by the entity.
This is exactly what happened in Cote v. Emple. Dev. Dep’t (In re Cote), 2015 U.S. Dist. LEXIS 133480 – Christopher Cote was the president and sole shareholder of a transportation and distribution company called “Cote Distribution Systems, Inc.” (“CDS”). The EDD audited and found that CDS’s drivers were employees and not independent contractors. EDD then assessed retroactive tax liability on CDS for failure to withhold state employment taxes on the newly classified employees. CDS was later dissolved, so the EDD opened an audit against Mr. Cote as a responsible person for CDS. Following the personal audit, the EDD assessed the employment tax liability owed by CDS against Mr. Cote under CUIC § 1735. The court noted that “any person having charge of a corporation is personally liable for tax liability owed by that corporation if he or she “willfully fails to pay” contributions required of that corporation.”
But please note: The two key elements of CUIC 1735 are responsibility and willfulness. The EDD must be able to prove both elements before they can make the 100% assessment stick. This is why it is critical to have competent counsel defend against a personal liability tax assessment.
Who’s In Charge?
EDD audit reports typically have a section entitled “responsible corporate officer/individual liability during the audit.” Companies go belly up everyday. When that happens, the State of California will look to “responsible individuals” to pay the bill. With that in mind, EDD auditors will always ask these questions:
Who managed and directed into the operations?
Who determined what bills would be paid?
What business expenses were paid with corporate/business funds?
Who authorized these payments?
Who signed these checks?
Who will have the authority to authorize payment of the assessment?
Obviously, these questions have nothing to do with determining whether a specific worker is an employee or independent contractor. The purpose of these questions to determine who will pay the assessment bill if the corporation or LLC under audit fails or refuses to pay the eventual assessment. Every tax dollar, every penalty dollar, and every dollar of interest owed by the corporation can come back to haunt those who ran the company during the audit period. And unlike the IRS, the EDD asserts a full 100% exposure to targeted responsible individuals and a 10% non-abatable assessment penalty.
“What if I just close the corporation or LLC?”
Simply closing up shop won’t work. The case I cited above should make that clear. Furthermore, dissolved entities with substantial outstanding payroll liability are increasingly popular targets for the EDD. The EDD will run searches on former directors, officers, and owners of a corporation to see if they are connected with any new EDD account numbers. The directors and officers that are connected to a new business venture that is “substantially similar” to the dissolved entity are subject to a “trust fund recovery interview” and possible reassessment of their former payroll tax liability. The “trust fund recovery penalty” is a means by which the EDD can take steps to hold you personally liable for your companies nonpayment of payroll taxes. All of your personal assets are at risk and can be seized, including your home and any other personal property.
Finally, as a matter of common sense, if simply closing the company would work, people would be opening and closing new companies all the time. They would go on breaking the law until they were caught and then close the company, only to open a new company the next day. In my opinion, this conduct constitutes “willfully attempting to evade or defeat a tax”, and would make a responsible person liable under CUIC § 1735. So no, simply closing your company won’t work – The state of California can and will come after you, and if you were the guy or girl in charge, you will be personally responsible for the EDD assessment.
Is bankruptcy an option?
Generally speaking, no. Most tax debts cannot be wiped out in bankruptcy. If you file Chapter 7, you will still owe the taxes at the end of the bankruptcy case. If you file Chapter 13, you will have to re-pay the taxes in full in a repayment plan.
While there are exceptions, payroll taxes (exactly what the EDD assesses) and fraud penalties can never be eliminated in bankruptcy.
In the case I stated above, Mr. Cote attempted to discharge his EDD assessment in bankruptcy. The court held that because he willfully failed to pay contributions, he was personally liable for the contributions and withholdings owed to the EDD by his company, CDS. The final sentence of the opinion reads: “Because the state disability insurance withholdings and state personal income tax withholdings are taxes required to be collected under CUIC § 13020 and for which (Cote) is liable under CUIC § 13070(a) and § 987, the court finds them non-dischargeable.”