When a business has been hit with substantial tax liability, it can often be tempting to pack things up and abandon the business. Often, taxpayers consider the possibility of opening a new business in its place, as a means to “start fresh.” However, this can put the taxpayer and the new business at incredible risk of action by the Texas Comptroller for a “fraudulent transfer” or an assertion of “successor liability.” These are discussed further below.
Please note that these are not all of the risks of taking action to avoid state tax liabilities – just some of the more prevalent.
Successor Liability
Texas Tax Code § 111.020 states:
“If a person who is liable for the payment of an amount under this title sells the business or the stock of goods of the business or quits the business, the successor to the seller or the seller’s assignee shall withhold an amount of the purchase price sufficient to pay the amount due until the seller provides a receipt from the comptroller showing that the amount has been paid or a certificate stating that no amount is due.” [1]
Simple enough. Right? Well…
“The purchaser of a business or stock of goods who fails to withhold an amount of the purchase price as required by this section is liable for the amount required to be withheld to the extent of the value of the purchase price.” [2]
In other words: If someone purchases a business that has an outstanding state tax liability, and they don’t withhold part of the purchase price (equal in amount to the tax liability), the purchaser becomes liable for the tax liability to the extent of the entire purchase price.
The language is even murkier than that. The Comptroller often finds that being a “successor” does not require an actual “transaction” between a seller and purchaser. Closing one business, and opening a new business in the same industry, is typically sufficient for the Comptroller to at least allege that a successor relationship exists.
Fraudulent Transfers
Texas Tax Code § 111.024 states that “a person who acquires a business or the assets of a business from a taxpayer through a fraudulent transfer or a sham transaction is liable for any tax, penalty, and interest owed by the taxpayer. [3]. In determining whether a “fraudulent transfer” or “sham transaction” has occurred, the Comptroller looks to whether (i) the transaction was made with the intent to evade, hinder, delay, or prevent the collection of tax, penalty or interest, or (ii) the taxpayer undertook the transaction without receiving a “reasonably equivalent value” in exchange for the business or business assets. [4]
Each of these elements requires a consideration of the individual facts and circumstances of the case in issue. However, in determining whether the “intent” to evade, hinder, delay, or prevent collection exists, the Tax Code provides a list of factors that may be considered:
- Whether the transfer was to a current or former business insider, associate, or employee of the taxpayer or to a person related to the taxpayer within the third degree of consanguinity by blood or marriage;
- Whether the transfer was to a third party who subsequently transferred the business or assets of the business to a current or former business insider, associate, or employee of the taxpayer or to a person related to the taxpayer within the third degree of consanguinity by blood or marriage;
- Whether the taxpayer retained possession or control of the business or the assets of the business after the transfer or transaction;
- Whether the taxpayer’s business and the transferee’s business are essentially operated as a single business entity at the same location;
- Whether before the transfer or the transaction occurred, the taxpayer had either been subjected to or apprised of impending collection action by the comptroller or by the attorney general;
- Whether the transfer or transaction was concealed;
- Whether the taxpayer was insolvent at the time of the transfer or became insolvent not later than the 31st day after the date the transfer or transaction occurred; or
- Whether the transfer or transaction involved all or substantially all of the taxpayer’s assets. [5]
The Comptroller often asserts successor liability and the existence of a fraudulent transfer at the same time. Thus, taxpayers taking drastic action to avoid tax liabilities may find themselves needing to defend against the Comptroller on multiple fronts.
[1] Tex. Tax Code § 111.020(a).
[2] Tex. Tax Code § 111.020(b).
[3] Tex. Tax Code § 111.024(a).
[4] Tex. Tax Code § 111.024(b).
[5] Tex. Tax Code § 111.024(c).
