ATTACHMENT C
SOAH Docket Nos. 304-23-06950; -06951 Suffix: 13/26
TCPA Hearing Nos. 118,449 and 118,451
**************
TAXPAYER NO: **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINSITRATIVE HEARINGS
Proposal for Decision
The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) assessed ************** (Petitioner) for successor liability under Texas Tax Code §§ 111.020 and .024 for the franchise and sales tax liabilities of COMPANY A (Predecessor). Petitioner requested redetermination, contending it did not acquire its business from Predecessor. In this Proposal for Decision (PFD), the Administrative Law Judge (ALJ) finds Staff failed to meet its prima facie burden to establish Petitioner’s liability as a successor under Texas Tax Code § 111.020. However, the ALJ finds Petitioner acquired Predecessor’s business through a fraudulent transfer or sham transaction and, therefore, the assessment should be affirmed.
NOTICE, JURISDICTION, AND PROCEDURAL HISTORY
Staff referred these cases to the State Office of Administrative Hearings (SOAH) and, on December 9, 2022, issued Petitioner Notices of Hearing by Written Submission. On December 21, 2022, ALJ Kathy Pickup issued Order No. 1, which joined the cases for the purpose of issuing a single PFD and set the written submission hearing. Petitioner was represented by ************** and Janice Cahalane represented Staff. The record closed March 13, 2023.
There are no issues of notice or jurisdiction in this proceeding; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion here.
REASONS FOR DECISION
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Staff submitted the pleadings the parties exchanged before the cases were referred to SOAH and offered the following exhibits for both hearings:
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Texas Notice of Tax/Fee Due Against Petitioner;
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Texas Notice of Tax/Fee Due Against Predecessor;
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Texas Tax Code Sections 111.020 and 111.024 Combined Successor and Fraudulent Transfer Worksheet;
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Enforcement Division’s Request for Section 111.020/111.024 Tax Collection on Termination of Business/Liability in Fraudulent Transfer;
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Comptroller’s Customer Information Control System (CICS) XIMAST Inquiry Results for Petitioner and Predecessor;
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Predecessor’s Application for Texas Sales Tax Permit and/or Use Tax Permit;
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Petitioner’s Application for Texas Sales Tax Permit and/or Use Tax Permit;
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Predecessor’s Sales and Use Tax Filing, Period Ending December 31, 2019;
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Secretary of State Inquiry Records Identifying Management of Petitioner and Predecessor;
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Petitioner’s Certificate of Formation;
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Assumed Name Certificate;
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Predecessor’s Texas Franchise Public Information Report;
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Screenshots from Petitioner’s Website and Facebook Page;
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CICS Inquiry Results for Predecessor for Franchise Tax, Dated October 21, 2021, Including XISUMM, XISTAT, XICOLL, XIDATA, XIDETM, and XITXPI;
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CICS Inquiry Results for Predecessor for Sales and Use Tax, Dated October 21, 2021, Including XISUMM, XISTAT, XIJRIS, XICOLL, XIAUDS, XIABASM2, XIDETM, and XITXPI;
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Current CICS Inquiry Results for Predecessor, Including XISTAT, XICOLL, and XIAUDS for Both Franchise Tax and Sales and Use Tax;
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Current CICS Inquiry Results for Petitioner, Including XISTAT, XICOLL, and XIAUDS for Both Franchise Tax and Sales and Use Tax;
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Petitioner’s Statement of Grounds; and
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Petitioner’s Exhibit Nos. 1 through 8.
Petitioner offered the following exhibits:
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Company Agreement of Petitioner;
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Removal of INDIVIDUAL A as Manager of Petitioner;
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City Property Lease;
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Justice of the Peace Courts Case Summary;
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Written Notice to Exercise One Year Option Period Regarding City Property Lease;
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EIN Assignment for Petitioner;
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Petitioner’s Certificate of Formation;
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Petitioner’s Certificate of Amendment; and
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Schedule C of INDIVIDUAL B's 2021 Federal Tax Return.
The parties’ exhibits are admitted into the record without objection.
Staff did not agree to make adjustments to the assessments.
Predecessor was a tire/wheel dealer based in CITY, Texas. Staff assessed Petitioner for the unpaid franchise and sales and use tax liabilities of Predecessor. Both assessments included tax, 10% penalty, and interest. Hearing No. 118,449 relates to the unpaid estimated franchise tax owed by Predecessor for report year 2020, which Staff estimated to be equal to the tax amount that Predecessor reported for 2018. Hearing No. 118,451 relates to the unpaid sales and use tax compliance audit liability of Predecessor for the period April 1, 2016, through December 31, 2019.
Predecessor was dissolved and was evicted from its business premises on February 4th, 2020. Subsequently, INDIVIDUAL B, Petitioner’s owner, was approached by INDIVIDUAL A, a former member of Predecessor, and proposed she open a new wheel shop in Predecessor’s former premises with himself as the manager. He stated the location would be ideal as it was already used as an after- market wheel shop for close to 10 years, which created significant market share in the area, and suggested that the new business could benefit from Predecessor’s existing customer contacts, Facebook page, and other marketing materials, as long as he would be employed as manager.
INDIVIDUAL B formed Petitioner as a Texas limited liability company on May 7, 2020, for the purpose of operating an automotive wheels and after-market customization shop, COMPANY A-1. Petitioner operates the shop at **************, the same location previously used by Predecessor. INDIVIDUAL A was the manager of Petitioner.
On May 18, 2020, Petitioner executed a new lease agreement on the business premises. The lease agreement was signed by INDIVIDUAL B on behalf of Petitioner. Following the formation of Petitioner and after it was in operation for a few months, INDIVIDUAL B had some operational conflicts with INDIVIDUAL A’s management of the business. Therefore, in October 2020, INDIVIDUAL B elected to remove INDIVIDUAL A as manager of Petitioner. This removal was subsequently reflected with the Texas Secretary of State through the filing of a Certificate of Amendment on June 14, 2021.
Staff determined that Petitioner acquired Predecessor’s business and was responsible for Predecessor’s outstanding state tax liabilities as a successor, or because it acquired the business through a fraudulent transfer or sham transaction. On October 12, 2021, Staff issued Texas Notices of Tax/Fee Due assessing Petitioner with Predecessor’s franchise tax for 2020 and sales tax liabilities for the period April 1, 2016, through December 31, 2019. Each assessment included tax, 10% penalty, and interest. Petitioner timely requested redetermination for both assessments, contending it did not acquire its business from Predecessor. Staff disagreed and referred the matters to SOAH.
D. ALJ’s Analysis and Recommendation
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Texas Tax Code § 111.020 provides that if a person who is liable for an amount under Title 2 sells the business or the stock of goods of the business or quits the business, then the successor to the seller shall withhold an amount from the purchase price sufficient to pay the amount due, unless the seller first obtains a receipt from the Comptroller showing that the amount has been paid or a certificate stating that no amount is due. If the purchaser of the business or stock of goods fails to do so, the purchaser is liable for the delinquent taxes to the extent of the value of the purchase price.
Texas Tax Code § 111.020 is an imposition statute. Therefore, in a successor liability redetermination hearing, Staff bears the initial burden to establish, prima facie, that imposition of successor liability is appropriate. See, e.g., Comptroller’s Decision No. 107,836 (2014). A prima facie case is one that allows a fact finder to infer the fact at issue and rule in the party’s favor. See Black’s Law Dictionary (11th ed. 2019); see also Comptroller’s Decision No. 104,533 (2012). Staff must show that Predecessor sold its business or stock of goods to Petitioner, that Predecessor was liable for a sales and use tax deficiency, and that its liability was final and unpaid at the time Petitioner was assessed as a successor. See Comptroller’s Decision Nos. 109,500 (2014), 106,871 (2013).
When determining if a “business” has been or will be sold, the Comptroller will examine the transaction to determine what the parties to the transaction intended to buy and sell. 34 Tex. Admin. Code § 3.7(d). A seller may have sold a business even when few assets were transferred. Depending on the type of business involved, a business may be sold if an owner sells:
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a building, land, furniture, fixtures, inventory, and the right to use the seller’s trade name; or
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all the capital assets of a business; or
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the name and goodwill of a business; or
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all the inventory of a business; or
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fixed assets and realty necessary to operate a similar business as the seller at the same location.
Id.
The evidence in the record establishes that Petitioner’s owner made an initial capital contribution in the amount of $100,000 and a capital commitment in the amount of $25,000. However, there is no evidence demonstrating that any consideration passed between Predecessor and Petitioner. Because there is no evidence demonstrating that at least some consideration passed between the parties in exchange for the business transfer, Staff failed to meet its prima facie burden to establish Petitioner’s liability as a successor under Texas Tax Code § 111.020.
2.Texas Tax Code § 111.024
Staff also contends Petitioner acquired the business or the assets of the business through a fraudulent transfer or sham transaction. Texas Tax Code § 111.024(a) provides 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. Texas Tax Code § 111.024(b) provides that a transfer of a business or the assets of a business is considered a fraudulent transfer or a sham transaction if the taxpayer made the transfer or undertook the transaction:
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with intent to evade, hinder, delay, or prevent the collection of any tax, penalty, or interest owed under this title;
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without receiving a reasonably equivalent value in exchange for the business or business assets subject to the transfer or transaction.
Staff has a prima facie burden to establish that Petitioner falls within the category of taxpayers the Legislature intended to tax in a Section 111.024 assessment. See Comptroller’s Decision Nos. 114,887 (2022), 114,667 (2018) (2019), 44,886 and 44,890 (2005). If Staff meets its burden, then Petitioner is required to show, by a preponderance of evidence, that the assessment is incorrect. See Comptroller’s Decision Nos. 114,887 (2022), 114,667 (2018)(2019), 101,355 (2013), 104,681 (2012), 100,503 (2009); see also 34 Tex. Admin. Code § 1.26(e).
As set out above, Petitioner did not purchase Predecessor’s business. However, under Section 111.024, it is the acquisition of a business, and not strictly the purchase of a business, that is considered. Here, the evidence in the record demonstrates that Petitioner was formed May 7th, 2020, and subsequently operated an automotive wheels and after-market customization shop at the location of Predecessor’s business. The ALJ concludes Petitioner acquired Predecessor’s business, and the question turns to whether Petitioner is liable as a successor.
To determine whether Petitioner is liable as a successor under Section 111.024(b)(2), the question is whether the transfer to Petitioner was completed without Predecessor receiving a reasonably equivalent value in exchange for the business or business assets subject to the transfer. In the present case, as established above, there was no exchange of consideration for the transfer of the business to Petitioner. Therefore, the ALJ finds that Staff demonstrated, prima facie, that Petitioner acquired the assets of Predecessor’s business without Predecessor receiving a reasonably equivalent value in exchange for the assets subject to the transfer. The transfer of the business is considered fraudulent, and Petitioner is liable for any tax, penalty, and interest owed by Predecessor. See Tex. Tax Code § 111.024 (a),(b)(2). The assessment of successor liability against Petitioner under Texas Tax Code § 111.024 should be upheld.
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COMPANY A (Predecessor) was a tire/wheel dealer based in Houston, Texas.
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The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) assessed ************** (Petitioner) for the unpaid franchise and sales and use tax liabilities of Predecessor.
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Both assessments included tax, 10% penalty, and interest.
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Hearing No. 118,449 relates to the unpaid estimated franchise tax owed by Predecessor for report year 2020, which Staff estimated to be equal to the tax amount that Predecessor reported for 2018.
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Hearing No. 118,451 relates to the unpaid sales and use tax compliance audit liability of Predecessor for the period April 1, 2016, through December 31, 2019.
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Predecessor was dissolved and was evicted from its business premises February 4th, 2020.
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On May 7, 2020, Petitioner was formed as a Texas limited liability company by its owner, INDIVIDUAL B, for the purpose of operating an automotive wheels and after-market customization shop, COMPANY A-1.
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Petitioner’s owner made an initial capital contribution in the amount of $100,000 and a capital commitment in the amount of $25,000.
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On May 18, 2020, Petitioner executed a new lease agreement on the business premises.
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The lease agreement was signed by Petitioner’s owner.
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Petitioner’s lease includes an indemnity clause where Petitioner agrees to indemnify the landlord for any claims asserted by one of Predecessor’s previous owners, INDIVIDUAL C, related to the execution of the lease without her agreement or concurrence and/or any claim to any property situated at the leased premises at the termination of the prior lease, or any other property claimed by INDIVIDUAL C allegedly owned by Predecessor.
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Petitioner operates at **************, the same location previously used by Predecessor.
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INDIVIDUAL A, Predecessor’s previous owner and manager, was appointed manager of Petitioner.
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Petitioner and Predecessor were both operated and managed by INDIVIDUAL A.
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Petitioner continued operating the same type of business in the same location, using the same address, phone number, and business assets, including Predecessor’s customer lists, Facebook page, and website.
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Petitioner’s Facebook page and website indicate that Petitioner’s business was in operation for over ten years, despite Petitioner being formed in 2020.
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Following the formation of Petitioner and after it was in operation for a few months, INDIVIDUAL B had some operational conflicts with INDIVIDUAL A’s management of the business.
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In October 2020, INDIVIDUAL B elected to remove INDIVIDUAL A as manager of Petitioner. This removal was subsequently reflected with the Texas Secretary of State through the filing of a Certificate of Amendment on June 14, 2021.
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On October 12, 2021, Staff issued Petitioner Texas Notices of Tax/Fee Due assessing successor liability based on the purchase of a business previously owned by Predecessor with an outstanding tax liability under Texas Tax Code § 111.020, or acquisition of the business through fraudulent transfer under Section 111.024.
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Petitioner was assessed with Predecessor’s franchise tax for 2020 and sales tax liabilities for the period April 1, 2016, through December 31, 2019. Each assessment included tax, 10% penalty, and interest.
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Petitioner timely requested redetermination for both assessments.
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Staff referred the contested cases to the State Office of Administrative Hearings (SOAH), and, on December 9, 2022, issued Petitioner Notices of Hearing by Written Submission. The notices contained a statement of the nature of the hearings; a statement of the legal authority and jurisdiction under which the hearings were to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the factual matters asserted or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.
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On December 21, 2022, ALJ Kathy Pickup issued Order No. 1, which joined the cases for the purpose of issuing a single Proposal for Decision and set the written submission hearing.
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The record closed on March 13, 2023.
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The Comptroller has jurisdiction over this matter. See Tex. Tax Code ch. 111.
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SOAH has jurisdiction over matters related to the hearing in this matter, including the authority to issue a proposal for decision with findings of fact and conclusions of law. See Tex. Gov’t Code ch. 2003.
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Staff provided proper and timely notice of the hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
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If a person who is liable for an amount under Title 2 of the Texas Tax Code (State Taxation) sells the business or the stock of goods of the business or quits the business, then the successor to the seller shall withhold an amount from the purchase price sufficient to pay the amount due, unless the seller first obtains a receipt from the Comptroller showing that the amount has been paid or a certificate stating that no amount is due. Tex. Tax Code § 111.020(a); 34 Tex. Admin. Code § 3.7(a).
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If the purchaser of the business or stock of goods fails to obtain a receipt from the Comptroller showing that the amount has been paid or a certificate stating that no amount is due, the purchaser is liable for the delinquent taxes to the extent of the value of the purchase price. Tex. Tax Code § 111.020(b); 34 Tex. Admin. Code § 3.7(a).
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Staff bears the initial burden to establish, prima facie, that imposition of successor liability is appropriate. See, e.g., Comptroller’s Decision No. 107,836 (2014).
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Once Staff meets its prima facie burden, the burden shifts to Petitioner to prove by a preponderance of the evidence that the imposition of successor liability was incorrect. 34 Tex. Admin. Code § 1.26(e).
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Under Section 111.020, Staff’s evidence must establish that a person (the predecessor) sold a business or stock of goods, and that some amount of consideration passed from the alleged successor. See, e.g., Comptroller’s Decision No. 111,401 (2015).
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Staff’s evidence must demonstrate that the Predecessor’s tax liability was final and unpaid when the assessment against Petitioner was made. See, e.g., Comptroller’s Decision Nos. 106,871 (2013), 108,677 (2014).
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When determining if a business has been sold, the Comptroller will examine the transaction to determine what the parties to the transaction intended to buy and sell. 34 Tex. Admin. Code § 3.7(d).
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Depending on the type of business involved, a business may be sold if an owner sells a building, land, furniture, fixtures, inventory, and the right to use the seller’s trade name; all the capital assets of a business; the name and goodwill of a business; all the inventory of a business; or the fixed assets and realty necessary to operate a similar business as the seller at the same location. 34 Tex. Admin. Code § 3.7(d).
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Petitioner acquired Predecessor’s business or assets of the business.
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There is no evidence demonstrating that any consideration passed between Predecessor and Petitioner.
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Staff failed to meet met its prima facie burden to show that imposition of successor liability against Petitioner under Texas Tax Code § 111.020 is appropriate.
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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. Tex. Tax Code § 111.024(a).
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A transfer of a business or the assets of a business is considered to be a fraudulent transfer or a sham transaction if the taxpayer made the transfer or undertook the transaction with intent to evade, hinder, delay, or prevent the collection of any tax, penalty, or interest owed under this title; or without receiving a reasonably equivalent value in exchange for the business or business assets subject to the transfer or transaction. Tex. Tax Code § 111.024(b)(1), (2).
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For an assessment under Texas Tax Code § 111.024, Staff has a prima facie burden to establish that Petitioner falls within the category of taxpayers the Legislature intended to tax. See Comptroller’s Decision Nos. 114,887 (2022), 114,667 (2018)(2019), 44,886 and 44,890 (2005).
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If Staff meets its prima facie burden, then Petitioner is required to show, by a preponderance of evidence, that the assessment is incorrect. See Comptroller’s Decision Nos. 114,887 (2022), 114,667 (2018)(2019), 101,355 (2013), 104,681 (2012), 100,503 (2009); see also 34 Tex. Admin. Code § 1.26(e).
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Staff demonstrated, prima facie, that Petitioner acquired the business or the assets of the business from Predecessor, that Predecessor had outstanding tax liabilities at the time of the acquisition, and that Petitioner did not obtain a receipt from the Comptroller showing that the amount had been paid.
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Staff’s evidence demonstrates, prima facie, Predecessor did not receive a reasonably equivalent value in exchange for the business or business assets. See Tex. Tax Code § 111.024(b)(2).
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Petitioner failed to show error in the successor liability assessments.
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Petitioner, as a successor to Predecessor, is liable for any tax, penalty, and interest owed by Predecessor.
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The assessments against Petitioner should be upheld.
Signed March 14, 2023.
Kathy Pickup
Presiding Administrative Law Judge