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Texas Comptroller of Public Accounts STAR System
ACCESSION NUMBER: 200601509H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2006-01-12
TAX TYPE: SALES
200601509H
HEARING NO. 44,506
RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: N/A
AUDIT PERIOD: NOVEMBER 1, 2002 THROUGH APRIL 30, 2003
HEARING NO. 44,507
RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: N/A
AUDIT PERIOD: OCTOBER 1, 1990 THROUGH DECEMBER 31, 1993
SALES AND USE TAX/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
ALVIN STOLL
Administrative Law Judge
VICTOR JOHN SIMONDS
Representing Tax Division
**************
Representing Petitioner
COMPTROLLER'S DECISION
PRELIMINARY COMMENTS:
A hearing was held on November 2, 2005. The Tax Division was represented by
Assistant General Counsels Kyle Zumberge and Victor Simonds, who presented the
testimony of Comptroller Enforcement Officer Selina Thomas. Petitioner was
represented by **************. INDIVIDUAL B and INDIVIDUAL C testified for
Petitioner.
The two redeterminations present similar facts and identical issues of law and
are for that reason consolidated for decision. Official notice has been taken
of all records of the Comptroller's office that pertain to Petitioner and the
issues in this case. Unless otherwise indicated, all Section references are to
Title 2 of Texas Tax Code and all references to Rules are to Sections of Title
34, Texas Administrative Code.
PETITIONER'S CONTENTIONS:
1. Petitioner did not purchase a business.
2. In the alternative, the purchase price of the business as determined by the
Tax Division is overstated.
3. Petitioner did not acquire a business through a fraudulent transfer or sham
transaction.
FINDINGS OF FACT:
1. ************** (“Petitioner”) provides support services to the legal
profession. Petitioner duplicates and edits audio and videotapes depositions.
2. The Comptroller’s Enforcement Division determined that Petitioner was liable
for the unpaid sales taxes of a predecessor company, ************** (“COMPANY
A”). Consequently, on December 5, 2003 a Texas Notice of Tax/Fee Due was
issued for the above-referenced liability periods assessing Petitioner as
successor due to the acquisition of a previously owned business with
outstanding liabilities and/or the acquisition of a business through a
fraudulent transfer. Petitioner’s timely request for redeterminations resulted
in these proceedings.
3. COMPANY A provided support services to the legal profession. COMPANY A’s
services included video taped depositions, courtroom presentations, and other
litigation support services. COMPANY A also duplicated and edited audio and
video materials.
4. COMPANY A was audited for sales and use tax compliance for the
above-referenced periods and assessed tax deficiencies, which have not been
paid.
5. Petitioner purchased business assets from COMPANY A by Bill of Sale dated
April 16, 2003. The assets consisted of approximately 126 pieces of equipment
and included audio mixers, monitors, scanners, speakers, receivers printers,
duplicators, and cabinets. The Bill of Sale was signed by COMPANY A’s
president, INDIVIDUAL A.
6. Petitioner paid $************** for the business assets.
7. Petitioner did not obtain a Comptroller certificate stating that no tax
amounts were due.
8. After the assets were purchased, Petitioner proceeded to do business as
COMPANY B.
9. Petitioner occupied an office suite immediately adjacent to the one that had
been occupied by COMPANY A, but used COMPANY A’s former business address, which
was LOCATION A, Texas. Petitioner asked the building owner to assign
Petitioner COMPANY A’s suite number in order to capture the “walk-in business”
of former COMPANY A customers.
10. At the request of Petitioner’s owners, COMPANY A’s telephone number was
transferred to Petitioner. Petitioner paid COMPANY A’s final telephone bill of
$**************.
11. COMPANY A had reported gross sales of $************** on its 1996 federal
corporate income tax return. Subsequent returns indicate declining gross
sales. The reported gross sales for 2002 were $**************.
12. Petitioner’s profit and loss statements show income of $************** for
2003, $************** for 2004, and $************** for 2005.
13. A COMPANY A inventory for 1997 lists equipment valued at $**************.
The equipment included microphones, cameras, lights, and production equipment.
14. In addition to the assets purchased from COMPANY A, Petitioner also
acquired other equipment for use in its business.
15. Petitioner is owned by INDIVIDUAL B and INDIVIDUAL C, each of which have
50% ownership. INDIVIDUAL B and INDIVIDUAL C did not have any ownership
interest in COMPANY A, and are not related by either blood or marriage to the
owners of COMPANY A.
16. COMPANY A was owned by INDIVIDUAL A and his son INDIVIDUAL D.
17. INDIVIDUAL B is also the owner of a business known as COMPANY C at LOCATION
B, Texas. At some periods subsequent to the asset purchase, INDIVIDUAL D was
an employee of COMPANY C.
18. INDIVIDUAL D also assisted Petitioner on projects, and was paid
$************** in expense reimbursements from Petitioner during periods from
June 1, 2003 through June 30, 2004.
19. An Agreed Final Judgment was entered in the District Court of Travis
County, Cause No. GV104118, on January 24, 2002 against COMPANY A for a total
amount of $**************.
CONCLUSIONS OF LAW AND DISCUSSION:
Petitioner’s first contention should be denied.
Section 111.020 imposes successor liability on the purchaser of a business for
the tax liabilities of the seller. Under Rule 3.7(d), in determining if a
business has been bought or sold, the Comptroller examines the transaction to
determine what the parties to the transaction intended to buy and sell; the
result depends upon the type of business involved. The rule further states
that a seller may have sold a business even when few assets were transferred.
The evidence presented by the Tax Division proves that Petitioner purchased
equipment from the predecessor valued at $**************, that Petitioner paid
the predecessor’s telephone expenses and retained the predecessor’s telephone
number, and that Petitioner retained the predecessor’s suite number for the
purpose of obtaining the business of the predecessor’s remaining customers.
The predecessor quit the business, and Petitioner proceeded to operate a
business at the same location that included some, although not all, of the
predecessor’s business activities. These facts and circumstances are deemed
sufficient to make out a prima facie case that Petitioner purchased a business
as that term is used and defined in the statute and rule for successor
liability purposes. See, e.g., Comptroller’s Decision No. 42,201 (2004).
The burden of proof therefore shifts to Petitioner to prove by a preponderance
of the evidence that it did not purchase the business of the predecessor. Rule
1.40(2)(B); see also Comptroller’s Decision No. 43,660 (2004). As evidence
that a business was not purchased, Petitioner contends that it purchased only a
portion of the predecessor’s equipment and capital assets. Petitioner’s
witness testified that the predecessor retained a substantial amount of the
equipment, and that it may have purchased as little as one third of the total.
An inventory list has been submitted that places a value of $************** on
the predecessor’s inventory as of 1997, and some equipment information is
included in the depreciation schedules attached to the federal income tax
returns. But whether the equipment referenced is these documents is the same
equipment listed in the Bill of Sale is unclear. It is possible that equipment
turnover or obsolescence occurred during the intervening time, and consequently
there is not much reliable evidence to show how much equipment the predecessor
disposed of by means other than the sale to Petitioner. Under Rule 3.7(d)(2),
the purchase of all of the capital assets of a business is sufficient grounds
for successor liability. However, the Comptroller has ruled that there may be
liability as successor when less than all the equipment is purchased, when
there are other circumstances, such as operation of a similar business at the
same location. See e.g. Comptroller’s Decision Nos. 35,803 (1997) and 8,599
(1978). Petitioner’s contention that only a portion of the predecessor’s
equipment was purchased is insufficient to disprove successor liability, when
there is other evidence of an intent to purchase a business, such as the use of
the same location and telephone number. A new owner’s use of the previous
owner’s telephone number is itself evidence of a successor relationship.
Comptroller’s Decision No. 24,762 (1989).
Petitioner also states that its business differed from that of the predecessor,
in that it only performed duplication and editing services, while the
predecessor provided a wider range of litigation support services that included
video taped depositions and courtroom presentations. But Petitioner’s purchase
of the predecessor’s equipment and subsequent use in its business, and the
efforts to attract the predecessor’s former customers, are evidence that
Petitioner did continue a substantial portion of the predecessor’s business.
It is not required that the successor’s business be the same in all respects.
See e.g. Comptroller’s Decision No. 24,762 (1989). Petitioner further contends
that it had fewer employees or other personnel and lower business revenues than
the predecessor. But the predecessor’s business income was on a downward trend
prior to the purchase, and the fact that Petitioner’s business was on smaller
scale than that of the predecessor does not disprove the purchase of a
business.
Petitioner also contends that the predecessor was not a going concern and may
have ceased business several months prior to the date that Petitioner purchased
the assets. However, the fact that the predecessor quit the business before
the sale does not prevent successor liability. See Comptroller’s Decision No.
6,785 (1976). That the business would have been inactive for a long time is
not consistent with Petitioner’s admitted objective of securing the
predecessor’s business customers through the use of the same business address
and telephone number. In view of the facts and circumstances of this case, it
is concluded that Petitioner has not shown that the successor assessment is in
error.
Petitioner’s second contention should be granted in part.
Under Section 111.020(b), a successor is liable only to the extent of the value
of the purchase price paid for the business. There is no dispute that the
$************** paid for the assets should be included in the purchase price.
Petitioner also paid $************** of the predecessor’s telephone expenses,
and this should be included under Rule 3.7(c), which states that purchase price
includes any assumption of the predecessor’s debt. But the Tax Division’s
contention that the $************** paid to INDIVIDUAL D, a former employee of
the predecessor, was a part of the purchase price should not be accepted. The
evidence indicates that these payments were made after the asset purchases,
that they were expense reimbursements in connection with services that
INDIVIDUAL D performed for Petitioner, and were not part of the purchase price
paid for the business.
Petitioner’s third contention should be granted.
A person who acquires a business or the assets of a business from a taxpayer
through a fraudulent transfer or sham transaction is liable for any tax,
penalty, and interest owed by the taxpayer. SECTION 111.024(a). A transfer of
a business or the assets of a business is considered fraudulent or a sham
transaction if the transfer was made with the intent to evade, hinder, delay or
prevent the collection a state tax, or without receiving reasonably equivalent
value in exchange for the transfer. As grounds for the assessment, the Tax
Division cites the first criterion, that the transfer here was for the purpose
of evading state taxes. There is no claim that inadequate consideration was
given.
In determining whether the transfer was made with intent to evade, hinder,
delay, or prevent the collection of tax, Section 111.024(c) states that
consideration may be given, among other factors, to whether:
(1) 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;
(2) 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;
(3) the taxpayer retained possession or control of the business or the assets
of the business after the transfer or transaction;
(4) the taxpayer's business and the transferee's business are essentially
operated as a single business entity at the same location;
(5) 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;
(6) the transfer or transaction was concealed;
(7) 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
(8) the transfer or transaction involved all or substantially all of the
taxpayer's assets.
Petitioner is a limited liability company owned by two brothers, INDIVIDUAL B
and INDIVIDUAL C. The predecessor was a corporation owned by INDIVIDUAL A and
INDIVIDUAL D, who were father and son. Prior to the transfer in question, the
INDIVIDUALS B AND C and the INDIVIDUALS A AND D were engaged in the business of
providing legal support services in the ************** area, and were
acquainted with each other on that basis. But the INDIVIDUALS B AND C were not
current or former business insiders, associates, or employees of the
predecessor, nor were they related by blood or marriage to the INDIVIDUALS A
AND D. Although subsequently INDIVIDUAL D was temporarily an employee of a
company related to Petitioner, and performed services for Petitioner, there is
no evidence that either of the INDIVIDUALS A AND D retained possession or
control of the business or the assets after the transfer. The first three
factors therefore have not been established in this case.
With regard to the fourth factor, Petitioner operated a business similar to
that of the predecessor at the same business address, but the predecessor’s
business and the Petitioner’s business were not operated as a single business
entity. The fact specified in the fifth factor has been proved: the
predecessor was the subject of collection actions by the Comptroller and the
Attorney General prior to the transfer but there is no evidence that
Petitioner’s owners were aware of this. With regard to the remaining factors,
there is no evidence that the transfer was concealed or regarding the
predecessor’s insolvency, and some but not all of the assets were transferred.
Because Section 111.024 is an imposition statute, the burden of proof is on the
Tax Division to make a prima facie showing that the transfer was made with the
intent to evade, hinder, delay, or prevent the collection of a state tax.
Comptroller’s Decision Nos. 44,886 and 44,890 (2005). As seen from the
foregoing discussion, most of the factors enumerated in the statute do not
support the Tax Division’s case, and the factors that have been established do
not, under the circumstances of this case, prove fraud or an intent to evade
the tax. Collection actions had been taken against the predecessor prior to
the transfer, but there is no evidence that Petitioner’s owners acted from any
motive other than purchasing business assets in an arms-length transaction.
Finally, while Petitioner did purchase a substantial portion of the
predecessor’s assets, that fact by itself is not determinative in the absence
of other evidence of fraudulent intent.
RECOMMENDATION:
The assessment as successor due to the acquisition of a previously owned
business with outstanding liabilities should be upheld in the amount of
$**************, plus any applicable penalty and interest. The assessment for
the acquisition of a business through a fraudulent transfer should be
dismissed.
Signed January 12, 2006.
ALVIN STOLL
Administrative Law Judge
HEARING NOS. 44,506 and 44,507
ORDER OF THE COMPTROLLER
The above decision of the Administrative Law Judge, resulting in Taxpayer's
liability as set out in Attachment "A" which is incorporated by reference, is
approved and adopted in all respects. This decision becomes final twenty-three
(23) days from the date of this Order, and the total sum of the tax and
interest amounts is due and payable within twenty (20) days thereafter. If
such sum is not paid within such time, an additional penalty of ten percent of
the taxes due will accrue, and interest will continue to accrue.
If a rehearing is desired, a Motion for Rehearing must be filed with the
Administrative Law Judge no later than twenty-three (23) days after the date of
this Order, and must state the grounds upon which the motion is based.
RENDERED and ISSUED January 12, 2006.
CAROLE KEETON STRAYHORN
Texas Comptroller
ACCESSION NUMBER: 200601509H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2006-01-12
TAX TYPE: SALES