Successor liability for state income and franchise taxes.

• Author: Cesaretti, Jonathan M.

A purchaser of assets generally has a reasonable expectation that it will not be liable for the income tax liabilities of the seller. While sophisticated buyers typically anticipate that under certain circumstances they may 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, there is a small, but important group of states that provide a statutory basis for imposing such a liability. Unlike the federal rules, the statutes of these states give 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. (A discussion of the state tax consequences of a deemed asset acquisition under Sec. 338 is beyond the scope of this item.)

Federal Successor Liability

The federal government has a number of provisions available to it to assert successor liability. The most important of these provisions is Sec. 6901. Under Sec. 6901, the federal government may, among other things, hold a third-party transferee of assets liable for the income tax liability generated by the seller. This liability may be established "at law or in equity." Included, for purposes of illustrating this point, is a nonexclusive list of the ways in which the federal government may assert successor liability:

* Bringing a federal case based on the Federal Debt Collection Procedures Act of 1990, P.L. 101-647, or a state case based on applicable state fraudulent conveyance acts;

* Bringing a case based on the trust fund doctrine, which is effectively an action in court to set aside the transfer; and

* Establishing that the buyer has nominee or alter ego liability.

Aside from the withholding of trust taxes and other situations where the buyer has legally agreed to acquire the liability, the federal government is required to show some indication of fraud or intent to evade taxes in the asset transfer.

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. This item focuses...