California OTA Finds CEO Personally Liable for Sales Tax in Company’s Fraudulent Reporting

The California Office of Tax Appeals (OTA) released an opinion in Matter of Goldstein finding that J. Goldstein, CEO of National Imaging Company dba Reseda Mobil (NIC), was personally liable for the tax and penalties related to an audit.

From December 18, 2001, through April 24, 2007, NIC held a seller’s permit while operating a gas station, convenience store, and auto shop. In March 2007, the CDTFA sent an audit engagement letter to NIC and received no reply, leading to the CDTFA using an indirect audit method to examine the period from January 1,2003, through April 24,2007. The audit found NIC underreported taxable sales by $4,778,244 while collecting sales tax reimbursement. A notice of deficiency for just over $500,000 for tax and penalties was issued on March 14,2008. A supplemental report from the department determined N. Moore, the previous president of the company, was responsible for the tax accrued in the period from January 1, 2003, to July 10, 2005, and Goldstein was found personally liable for the remainder- $249,079.70. Cal Rev & Tax Code Section 6829 9(c) sets out the requirements for personal liability. The corporation must have been terminated and must have collected but not remitted sales tax, which both parties agreed NIC had done. The CDTFA then also argued the two additional points as required by the Code: Goldstein must have had supervision of or a duty to act for the corporation regarding sales tax and must have willfully failed to pay the taxes from the corporation.

In Goldstein’s timely appeal, he argued against the final two factors and against the findings as a whole. First, he claimed Moore held full responsibility until November 2005 and that he was simply doing Moore’s bidding and had no real control, supervision, or responsibility for the sales tax returns as required under the California Revenue and Tax Code. In addition, Goldstein claimed his power over and knowledge of NIC’s tax liabilities had been overstated. Goldstein made additional pleas for reconsideration of the penalty and the fraud charges as well, arguing the amount due should be reduced, claiming the markup for gasoline sales was too high in the indirect audit and that the records NIC had not provided were taken by Moore.

However, the OTA agreed with the CDTFA. Goldstein appeared to be responsible in many ways: he was recorded on signed filings with the secretary of state’s office as a CEO, CFO, president, secretary, and sole director and he had been in multiple discussions with the CDTFA regarding sales tax. Finally, the OTA rejected attempts to claim a lack of knowledge, highlighting numerous communications Goldstein had with the CDTFA during Moore’s tenure, pointing out it was unlikely as Goldstein’s power increased, his knowledge decreased. Further, the OTA noted Goldstein had not proved failure to pay was either reasonable or beyond his control.

The CDTFA’s indirect audit method was also upheld by the OTA in this decision, as was the 25% fraud penalty the CDTFA had levied on Goldstein. There was no direct evidence to commit fraud or evade sales tax, but the OTA found the underreporting of almost $4.8 million in taxable sales, simultaneous collection of tax reimbursements, failure to provide records, failure to file federal returns in 2005 and 2006, and its closure shortly after the CDTFA audit notice all worked together to establish that a significant portion of the underreported sales was due to fraud.

(2022 – OTA – 355; OTA Case number 20025885; CDTFA Case ID 442332; In the Matter of the Appeal of J Goldstein, issued 1/3/2022, released week of 11/7/2022)

Posted on January 9, 2023