Successor Liability for Unpaid Taxes – Tax Authorities

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Liability of successor

Generally, the buyer of assets does not assume the debts of the seller. Successor liability is, however, an exception to the general rule. Under the doctrine of successor liability, the IRS may seek to collect unpaid taxes from a “successor”—often a purchaser of business assets.

Successor liability is generally determined under state law, although some courts have bolstered state law with a so-called federal common law of successor liability.

When does successor liability apply?

In most jurisdictions, successor liability imposes liability in the following circumstances:

  • where the purchaser or successor expressly assumes liability;

  • when the transaction amounts to a de facto merger;

  • where the successor is a mere continuation of the selling company (for example, the buyer is carrying on substantially the same business or product line as the seller); and

  • when the transaction is concluded fraudulently to avoid liability.

Express assumption of responsibility

Where a buyer expressly assumes the obligations of the seller, the buyer inherits those obligations and is liable for their payment under the doctrine of successor liability. Unless the scope of an express assumption provision is at issue, most successor liability cases do not involve disputes under the express assumption arm, as liability is generally clear.

De facto merger and mere continuation

When a taxpayer ceases to carry on business, a second or successor corporation may become subject to tax if the second corporation is a mere continuation of the taxpayer or if the predecessor and successor have undergone a def factor merger.

The interrelated concepts of de facto merger and mere continuation consider factors such as continuity of management, personnel, location, assets and operations.

When a taxpayer ceases to carry on business, a second or successor corporation may become subject to the taxpayer’s taxes if the second corporation is a mere continuation of the taxpayer.

In determining whether there is a de facto amalgamation or a mere continuance, courts have generally considered whether:

  • the second corporation continues the business or performs the same functions as the taxpayer;

  • the employees of the taxpayer become the employees of the second company;

  • the taxpayer and the second corporation are owned or controlled by the same individual or individuals;

  • the business activities of the successor are carried on at the same place;

  • less than full consideration is paid for the transferred assets; and

  • business relationships remain relatively static.

Fraudulent transfers to escape liability

Successor liability may also arise when a taxpayer engages in a fraudulent transaction in order to avoid liability. Courts have considered a number of factors to determine whether a taxpayer engaged in a fraudulent conveyance with the intent to avoid liability, including the following factors:

  • the transfer or obligation was to an insider;

  • the obligor retained possession or control of the transferred property after the transfer;

  • the transfer or obligation has been disclosed or concealed;

  • before the transfer was made or the obligation arose, the obligor had been sued or threatened with suit;

  • the transfer concerned almost all of the debtor’s assets;

  • the debtor fled;

  • the debtor took away or concealed property;

  • the value of the consideration received by the obligor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

  • the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation arose;

  • the transfer took place shortly before or shortly after a substantial debt was incurred; and

  • the debtor transferred the essential business assets to a preferred creditor who transferred the assets to an insider of the debtor.

For more information, see The IRS, Fraudulent Transfers, and Transferee Liability.

Other resources regarding successor liability:

I) Liability of successorWiki;

ii) Liability of successorScholarship Repository;

iii) Liability of successorwestlaw

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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