Rare Taxpayer Win on Washington State Successorship Liability
by Department of Revenue appeals decision released June 24, 2016, is a surprising taxpayer success, and one which should be read and studied by anyone facing a possible successor situation. While the decision contains a taxpayer favorable set of facts to be sure, one must admire the taxpayer’s skill in understanding the law and marshaling evidence that was unbeatable.
The facts as stated Det. 35 WTD 280 were, in essence, that the business license of a used car dealership (the defunct business ) was revoked for non payment of state taxes. After the dealership’s closure, an agent for DOR visited the premises and saw that an auto body shop (the taxpayer) was operating as a sole proprietorship. After reviewing the facts the Department decided that the taxpayer, who ran his body shop in the back of the same larger premises that the defunct business had used for its showroom, was using in his own shop a paint booth and frame machine formerly used by the defunct business. DOR asserted that the body shop was a successor and based its assessment on two allegations: 1) An allegation that the taxpayer acquired assets of the defunct business in the form of the paint booth and the frame machine; 2) a finding that taxpayer was operating at the defunct business’s business location, using the same signage, reputation, and goodwill of the defunct business.
The decision did not turn on a legalistic interpretation of how the successorship law should be interpreted; it turned on taxpayer’s comprehensive and well organized presentation of facts which showed that the Compliance Division had not established its case. The combination of taxpayer’s thorough demonstration of the unique circumstances of the case, and the taxpayer’s showing that Compliance had not produced concrete evidence supporting its assessment meant a win for taxpayer.
The successful argument showed that the taxpayer had for some unspecified period of time independently operated its own body shop in a portion of the same premises the defunct business had used; that the corporate officer of the defunct business (but not the business itself) had borrowed funds from the taxpayer and had pledged the paint booth and frame machine (which were not established as assets owned by the defunct business as an entity); that the taxpayer acquired the two assets when the owner of the defunct business (the corporate officer) defaulted on his loan; that there was no proof that taxpayer had actually acquired and was using “signage, reputation and goodwill of the defunct business,” and there was no proof that the value of any assets allegedly required met the percentage thresholds required to trigger successor liability.
Appeals first succinctly stated the legal requirements for successor liability as follows:
Taxpayer is, therefore, a successor to the Defunct Business if: (1) the Defunct Business quit, sold out, exchanged, or disposed of its business; (2) the Defunct Business sold or otherwise conveyed, directly or indirectly; (3) in bulk or in the ordinary course of the Defunct Business’s business; (4) more than fifty percent of the fair market value of either tangible or intangible assets; (5) to Taxpayer.
Appeals noted the following:
First, the taxpayer did not acquire any of the defunct business (tangible) assets, because taxpayer’s contract showed that the paint booth and frame machine had been acquired by the taxpayer from a “corporate officer” of the defunct business in his personal capacity and not from the defunct business itself. There was also no evidence in the record that the value of those pieces of machinery constituted more than fifty percent of the value of the [tangible assets of] Defunct Business.
Second, while the taxpayer operated his business in the same general location as the defunct business, the taxpayer had in fact earlier run his business in a separate part of the general location, and under lease from the third party landlord. Thus, taxpayer had not acquired his lease from the defunct business.
Third, there was no evidence that the taxpayer acquired any of the defunct business’s “intangible assets” such as its line of business, trade name, telephone number, customer list, or goodwill. Although the two businesses overlapped to some extent, there was no evidence that taxpayer acquired the defunct business’s customer lists or that he had acquired any goodwill from the defunct business. While the signage on the building stated the defunct business’s name, not taxpayer’s, there was no evidence that taxpayer could be reached at the telephone number listed on the sign! For those reasons, Appeals determined taxpayer did not acquire any of the Taxpayer’s intangible assets.
Appeals was left with little option but to conclude that “In this case, most of the indicia of a successorship are missing.” As we said above, the facts in this case were unique. But they are worth study by a prospective purchaser who may be looking at acquiring a business but is concerned with potential successor liability. Certainly the best defense is to withhold enough to cover any possible assessment that may be made, and to give DOR notice of the purchase which will trigger the 6 month’s statute of limitations for successor assessment. But if that cannot be done, then the facts laid out in Det. 35 WTD 280 will provide a roadmap to possible facts and circumstances which defeat successor liability.