A purchaser of assets generally expects that it will not be liable for the income tax liabilities of the seller. While sophisticated buyers may anticipate that they will be liable for so-called trust fund taxes (e.g., withholding, sales tax, etc.), few buyers expect that they will be liable for the seller’s unpaid share of income and income-based franchise taxes.
However, a few important states impose such a liability. These states give their tax administrators authority to collect the seller’s income tax liability from the buyer even if there is no indication of fraud or an intent to evade tax.
State Income and Franchise Tax Successor Liability
A number of states provide a bulk-sale procedure whereby a buyer of assets must report the purchase to the state within a certain statutory time period (and meet certain statutory requirements and make required filings) to absolve itself of successor liability for nearly all outstanding state taxes. In most cases, the liability and the procedure are limited in scope to sales taxes.
States generally impose successor liability pursuant to statutes and regulations for sales taxes and other transaction-level taxes, such as gross receipts taxes. Certain states, notably Illinois and Pennsylvania, have statutes that explicitly impose successor income tax liability for those taxpayers that do not engage in the bulk-sale notification procedure.
Illinois provides that a buyer may succeed to the income tax liabilities of the seller when a “major part” of the business is purchased outside of the usual course of business. A major part of the business is defined as the inventory the taxpayer is engaged in selling, the furniture or fixtures, the machinery and equipment, or the business’s real property. A sale of any one or more of these components constitutes a bulk sale. The buyer may be held liable for the seller’s income tax if the buyer does not notify the state by following the bulk-sale notification procedures outlined in the statute.
Pennsylvania provides that a buyer may succeed to the corporate income tax liabilities (as well as other unpaid tax obligations) of the seller when the purchaser buys 51% or more of its stock of goods, wares, or merchandise of any kind, fixtures, machinery, equipment, buildings, or real estate. For the buyer to avoid this liability, the seller is required to provide notification at least 10 days prior to the completion of the sale.
As a way to further increase revenue, other states that have a bulk-sale notification requirement for sales tax may attempt to extend the requirement to income taxes, as well.
For a detailed discussion of the issues in this area, see “Successor Liability for State Income and Franchise Taxes,” by Jon Cesaretti, J.D.; Megan Holford, CPA; and John Olsen, CPA, in the September 2012 issue of The Tax Adviser.
—Alistair M. Nevius,
The Tax Adviser
Also look for articles on the following topics in the September 2012 issue of The Tax Adviser:
- A look at recent developments affecting estate planning.
- A discussion of a recent abusive S corporation tax shelter.
- An analysis of issues surrounding tangible property leaseback obligations.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends, and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or email email@example.com for a subscription to the magazine or to become a member of the Tax Section.