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SOAH DOCKET NO. 304-23-11458
CPA HEARING NO. 119,115
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: April 1, 2021 THROUGH February 22, 2022
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
PATRICK TODD
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on June 5,2023, unless a motion for rehearing is timely filed; this date of finality is calculated based on the Administrative Procedure Act (APA).[1] The failure to timely file a motion for rehearing may result in adverse legal consequences.
Administrative Law Judge (ALJ) Kathy Pickup of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law. SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure. The ALJ recommended that the Comptroller adopt the PFD as written.
After review and consideration, IT IS ORDERED that the PFD is adopted as written.
The result from this Decision is Attachment A. The ALJ’s recommendation letter is Attachment B. The PFD as written is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachment A reflects a liability.[2]
The total sum of the tax, penalty, and interest is due and payable 20 days after a comptroller’s decision becomes final.[3] If such sum is not timely paid, an additional penalty of 10 percent of the taxes due will accrue.
SIGNED on this 9th day of May 2023
GLENN HEGAR
Comptroller of Public Accounts
By: Lisa Craven
Deputy Comptroller
Attachment A, Texas Notification of Hearing Results
Attachment B, ALJ’s recommendation letter
Attachment C, Proposal for Decision as written
ATTACHMENT B
State Office of Administrative Hearings
Kristofer S. Monson
Chief Administrative Law Judge
May 04, 2022
The Honorable Glenn Hegar
Comptroller of Public Accounts
LBJ Building
111 E. 17th Street, 1st Floor
Austin, TX 78701
RE: SOAH Docket: 304-23-11458.26
TCPA Hearing No.: 119,115 Taxpayer No.: **************
************** v. Texas Comptroller of Public Accounts
Dear Comptroller Hegar:
Please be advised that Petitioner filed evidence on April 19, 2023, after the Proposal for Decision (PFD) was issued in this matter on April 18, 2023. Petitioner offers evidence for the hearing. However, an Administrative Law Judge (ALJ) is barred from reopening the record once a PFD has been issued. See 1 Tex. Admin. Code § 155.153(b)(10). Therefore, new evidence cannot be considered and will not be admitted into the record if offered during the exceptions period. Having reviewed the filings of the parties and finding no errors in the findings of fact or conclusions of law, I recommend that the PFD be adopted as written.
Sincerely,
Kathy Pickup
Presiding Administrative Law Judge
ATTACHMENT C
SOAH Docket No. 304-23-11458
TCPA Hearing No. 119,115
**************
TAXPAYER NO: **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
Proposal for Decision
The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) assessed ************** (Petitioner) for successor liability and acquisition of a business through fraudulent transfer under Texas Tax Code §§ 111.020 and .024 for the sales tax liability of ************** (Predecessor). Petitioner requested redetermination, contending it is not liable for the assessment because it is a completely separate new business and that it did not acquire Predecessor’s business or the accompanying personal property fraudulently or otherwise. Staff subsequently withdrew the successor liability assessment under Texas Tax Code § 111.020. In this Proposal for Decision, the Administrative Law Judge (ALJ) finds Petitioner acquired Predecessor’s business through a fraudulent transfer or sham transaction and, therefore, the assessment should be affirmed.
I. NOTICE, JURISDICTION, AND PROCEDURAL HISTORY
Staff referred this case to the State Office of Administrative Hearings (SOAH) and, on February 8, 2023, issued Petitioner a Notice of Hearing by Written Submission. On February 16, 2023, ALJ Kathy Pickup issued an Order Setting Written Submission Hearing setting the hearing, establishing filing deadlines, and setting the record closing date of April 17, 2023. Patrick Todd represented Staff, and Petitioner was represented by **************, a member and officer of Petitioner.
There are no issues of notice or jurisdiction; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.
II. REASONS FOR DECISION
A. Evidence
Petitioner attached screenshots from Facebook to its pleadings but did not file evidence or argument for the hearing. Staff submitted the pleadings exchanged by the parties while the case was in redetermination at the Comptroller and filed the following exhibits:
1. Predecessor’s XISTAT Report - CITY A;
2. Predecessor’s XISTAT Report;
3. Predecessor’s XISUMM Report;
4. Predecessor’s Case History;
5. Petitioner’s. Certificate of Formation;
6. Petitioner’s XIADDR Report;
7. Petitioner’s Webpage Capture;
8. Certified Texas Notification of Tax;
9. Exam and Request for § 111.020/111.024 Tax Collection;
10. Petitioner’s Case History; and
11. Declaration of Jeremy Davies.
The exhibits were admitted without objection.
B. AGREED ADJUSTMENTS
Staff withdrew the successor liability assessment under Texas Tax Code § 111.020.
C. Facts Demonstrated by the Evidence
Predecessor operated COMPANY A, a bookstore and event center in CITY A, Texas. Predecessor started operating effective April 1, 2002, and went out of business on February 22, 2022, the same day its sales and use tax permit was terminated.
The Comptroller generated estimates on many occasions for Predecessor because he failed to file sales and use tax returns. Predecessor subsequently filed returns for some periods but failed to pay the tax due. Jeopardy determinations were issued for the report periods of April 2021 through February 2022. Predecessor did not request a hearing for any of the determinations, and the determinations were administratively final 20 days after the issue date, or the next business day after if the 20th day was on a weekend or holiday.
Petitioner, COMPANY B, operates a bookstore and coffee shop in CITY C, Texas. INDIVIDUAL A and her husband, INDIVIDUAL B, are members and officers of Petitioner and were employed by Predecessor. Petitioner first began operations at the business location of the Predecessor. Petitioner then moved to a location in CITY B, Texas, and subsequently moved to its current location in CITY C, Texas.
INDIVIDUAL A managed the business on Predecessor’s behalf since at least 2020, including handling the finances, such as paying rent and reporting and remitting sales taxes. INDIVIDUAL A and INDIVIDUAL B formed Petitioner in January 2022 while still managing Predecessor. When Predecessor went out of business in February 2022, Petitioner began operating at the location of Predecessor’s business, using Predecessor’s business name and inventory. Petitioner paid no money to Predecessor for the capital assets, name, goodwill, or inventory of Predecessor’s business. Predecessor’s location was closed in February 2022, and Petitioner’s current location opened in April 2022. Most of Predecessor’s inventory was moved to Petitioner’s new location.
On May 17, 2022, Staff issued a Texas Notice of Tax/Fee Due for limited sales, excise and use tax assessing successor liability due to the acquisition of a previously owned business and acquisition of a business through fraudulent transfers pursuant to Texas Tax Code §§ 111.020 and 111.024. Petitioner requested a redetermination hearing contending it is not liable for the assessment because it is a completely separate new business and that it did not acquire Predecessor business or the accompanying personal property fraudulently or otherwise. Staff withdrew the successor liability assessment under Texas Tax Code § 111.020 but contends there was a fraudulent transfer of the business and referred the matter to SOAH.
D. ALJ Analysis and Recommendation
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: (1) with intent to evade, hinder, delay, or prevent the collection of any tax, penalty, or interest owed under this title; or (2) 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. 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. 101,355 (2013), 104,681 (2012), 100,503 (2009); see also 34 Tex. Admin. Code § 1.26(e).
Under Texas Tax Code § 111.024, it is the acquisition of a business or assets, and not strictly the purchase of a business or assets, that is considered. See e.g., Comptroller’s Decision No. 116,532 (2021). When determining if a business or business assets haves been sold or acquired, the Comptroller will examine the transaction to determine the parties’ intent. See 34 Tex. Admin. Code § 3.7(d). It is not necessary that all the assets of a business be purchased in order to support a finding that a business was acquired. See, e.g., Comptroller’s Decision Nos. 106,477 (2012), 39,951 (2003), 34,910 (1996). A seller may have sold a business even when few assets were transferred. Id. 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 fixed assets and realty necessary to operate a similar business as the seller at the same location. See 34 Tex. Admin. Code § 3.7(d).
Here, the evidence in the record demonstrates that Petitioner was formed in January 2022 and subsequently operated a bookstore and coffee shop at the location of Predecessor’s business. Staff demonstrated, prima facie, that Petitioner acquired the business or the assets of the business from Predecessor, and Predecessor did not receive a reasonably equivalent value in exchange for the transfer of assets to Petitioner. See Tex. Tax Code § 111.024(b)(2). As there was no consideration paid for Predecessor’s assets, the transfer of Predecessor’s assets to Petitioner is considered to be a fraudulent transfer or a sham transaction and Petitioner is liable for any tax, penalty, and interest owed by Predecessor. See Tex. Tax Code § 111.024(a), (b)(2). It is Petitioner’s burden to show assessment error. See 34 Tex. Admin. Code § 1.26 (e); see also Comptroller’s Decision No. 106,477 (2012).
The ALJ concludes Petitioner failed to demonstrate, by a preponderance of the evidence, that the assessment at issue is in error. Therefore, for the reasons set out above, the ALJ finds Petitioner acquired the assets of Predecessor through a fraudulent transfer and is, therefore, liable for any tax, penalty, and interest owed by Predecessor See Tex. Tax Code § 111.024(a), (b)(1), (2). The assessment at issue should be upheld in its entirety.
III. FINDINGS OF FACT
1. ************** (Predecessor) operated a bookstore and event center in CITY A, Texas COMPANY A.
2. Predecessor started operating effective April 1, 2002, and went out of business on February 22, 2022, the same day its sales and use tax permit was terminated.
3. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) generated estimates on many occasions for Predecessor because he failed to file sales and use tax returns.
4. Predecessor subsequently filed returns for some periods but failed to pay the tax due.
5. Jeopardy determinations were issued to Predecessor for the report periods of April 2021 through February 2022.
6. Predecessor did not request a hearing for any of the determinations, and the determinations were administratively final 20 days after the issue date, or the next business day after if the 20th day was on a weekend or holiday.
7. ************** (Petitioner), COMPANY B, operates a bookstore and coffee shop in CITY C, Texas.
8. INDIVIDUAL A and her husband, INDIVIDUAL B, are members and officers of Petitioner.
9. INDIVIDUAL A and INDIVIDUAL B were employed by Predecessor.
10. Petitioner was formed in January 2022 and subsequently operated a bookstore and coffee shop at the location of Predecessor’s business.
11. Petitioner moved to a location in CITY B, Texas, and subsequently moved to its current location in CITY C, Texas.
12. INDIVIDUAL A managed the business on Predecessor’s behalf since at least 2020, including handling the finances, such as paying rent and reporting and remitting sales taxes.
13. INDIVIDUAL A and INDIVIDUAL B formed Petitioner in January 2022 while still managing Predecessor.
14. In February 2022, Petitioner began operating at the location of Predecessor’s business, using Predecessor’s business name and inventory.
15. Predecessor’s location was closed in February 2022, and Petitioner’s current location opened in April 2022.
16. Most of Predecessor’s inventory was moved to Petitioner’s new location.
17. Petitioner paid no money to Predecessor for the capital assets, name, goodwill, or inventory of the Predecessor business.
18. Predecessor and INDIVIDUAL A were apprised of the impending collection action by the Comptroller.
19. On January 25, 2022, Enforcement staff contacted both Predecessor and INDIVIDUAL A regarding the sales tax owed.
20. On February 17, 2022, a seizure was conducted at the Predecessor business location.
21. Petitioner operated a bookstore at the same location from which Predecessor operated its bookstore business in CITY A, Texas.
22. Petitioner continued to operate as if it was Predecessor and failed to disclose it acquired Predecessor’s business or business assets on its application for a sales and use tax permit.
23. On May 17, 2022, Staff issued a Texas Notice of Tax/Fee Due assessing Petitioner with Predecessor’s sales tax liability pursuant to Texas Tax Code §§ 111.020 and 111.024.
24. Petitioner timely requested redetermination.
25. Staff referred the contested case to the State Office of Administrative Hearings (SOAH), and, on February 8, 2023, issued Petitioner a Notice of Hearing by Written Submission. The notice contained a statement of the nature of the hearing; a statement of the legal authority and jurisdiction under which the hearing was 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.
26. On February 16, 2023, ALJ Kathy Pickup issued an Order Setting Written Submission Hearing setting the hearing and establishing filing deadlines.
27. The record closed on April 17, 2023.
28. Staff withdrew the successor liability assessment under Texas Tax Code § 111.020.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this matter pursuant to Tex. Tax Code ch. 111.
2. 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 pursuant to Tex. Gov’t Code ch. 2003.
3. Staff provided proper and timely notice of the hearing pursuant to Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.
4. 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).
5. 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).
6. Under Texas Tax Code § 111.024, it is the acquisition of a business or assets, and not strictly the purchase of a business or assets, that is considered. See e.g., Comptroller’s Decision No. 116,532 (2021).
7. When determining if a business or business assets haves been sold or acquired, the Comptroller will examine the transaction to determine the parties’ intent. See 34 Tex. Admin. Code § 3.7(d).
8. It is not necessary that all the assets of a business be purchased in order to support a finding that a business was acquired. See, e.g., Comptroller’s Decision Nos. 106,477 (2012), 39,951 (2003), 34,910 (1996).
9. A seller may have sold a business even when few assets were transferred. See, e.g., Comptroller’s Decision Nos. 106,477 (2012), 39,951 (2003), 34,910 (1996).
10. 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 fixed assets and realty necessary to operate a similar business as the seller at the same location. See 34 Tex. Admin. Code § 3.7(d).
11. 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. 44,886 and 44,890 (2005).
12. 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. 101,355 (2013), 104,681 (2012), 100,503 (2009); see also 34 Tex. Admin. Code § 1.26(e).
13. Staff’s evidence is sufficient to establish a prima facie case that the business transfer was fraudulent or a sham transaction as those terms are defined in Texas Tax Code § 111.024.
14. Petitioner failed to demonstrate, by a preponderance of the evidence, that the assessment at issue is in error.
15. Staff met its prima facie burden to show the transfer of Predecessor’s business to Petitioner was made without receiving a reasonably equivalent value in exchange for the business or business assets subject to the transfer or transaction.
16. Petitioner acquired Predecessor’s business through a fraudulent transfer or sham transaction and is therefore, liable for any tax, penalty, and interest owed by Predecessor.
17. The assessment should be affirmed.
SIGNED April 18, 2023
KATHY PICKUP
PRESIDING ADMINISTRATIVE LAW JUDGE
ENDNOTES:
[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg. For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf
[2] At present, insufficient information is available to determine which items and amounts are disputed or undisputed for purposes of Tex. Tax Code, Ch. 112. In the absence of this information, the Comptroller will assume the entire amount of the assessment, as it appears in Comptroller’s Decision Attachment A, the Notification of Hearing Results, remains in dispute. If Petitioner intends to sue the comptroller to dispute an amount of tax, penalty, or interest assessed in a deficiency redetermination or jeopardy determination under Tex. Tax Code, Ch. 111, Petitioner is required to file a motion for rehearing that “states the specific grounds of error and the disputed amounts associated with the grounds of error.” Tex. Tax Code § 112.201(a)(3). Petitioner should refer to Tex. Tax Code, Ch. 112, for further guidance regarding a suit after redetermination.