Business Acquisition – Due Diligence/Successor Tax Liability

Purchasing a business, either large or small, should never be completed without the assistance of an attorney. I have seen many purchases where an attorney was not used which resulted in serious financial consequences to the purchaser because the purchaser exercised little or no "due diligence." By that term I mean those minimum tasks that should be performed before the closing of the transaction. One of those tasks is to ensure that the purchaser does not get tagged by the state’s taxing authority with "successor liability" for unpaid state taxes owed by the business. I will explain how this works in Texas, but most states will have similar successor liability statutes that should be consulted if you will be purchasing a business in some other state.

Successor liability statutes impose certain pre-closing state tax liabities on the purchaser of a business. In Texas, that concept is found at Section 111.020 of the Texas Tax Code and reads as follows:

(a)   If a person who is liable for the payment of an amount under this title sells the business or the stock of goods of the business or quits the business, the successor to the seller or the seller’s assignee shall withhold an amount of the purchase price sufficient to pay the amount due until the seller provides a receipt from the comptroller showing that the amount has been paid or a certificate stating that no amount is due.

(b)   The purchaser of a business or the stock of goods who fails to wihhold an amount of the purchase price as required by this section is liable for the amount required to be withheld to the extent of the value of the purchase price . . .

A purchaser who does not heed this language could be in for a rude awkening. Let’s say the purchaser pays the seller $100,000 for the business and closes the sale without determining that all State owed taxes have been paid. To keep it simple, let’s say the business owes $100,000 in State taxes and the State comes calling 6 months after the closing and demands payment from the purchaser. The purchaser tries to contact the seller, but determines the seller is staying at a villa in Mexico paid for with the purchaser’s money. The purchaser is now on the hook to the State for $100,000, i.e. for a total outlay of DOUBLE the purchase price, once to the seller and once to the State.

The purchaser’s only "out" may be to convince the State that a "business" wasn’t purchased. Good luck, because in determining when a "business" has been or will be sold, the Texas Comptroller will examine the transaction to determine what the parties intended to buy and sell. The answer will depend on the nature of the business, but a seller may be found to have sold a "business" even when only a few assets were transferred.

So what’s a purchaser to do? Really quite simple – request a tax clearance certificate from the Texas Comptroller stating (i) the amounts that the seller owes the State, or if none, (ii) releasing the purchaser from liability that would otherwise extend under Section 111.020 of the Texas Tax Code. And for goodness sakes, don’t close the transaction before the State’s issuance of the clearance certificate. The certificate is worthless if the parties close the transaction prior to issuance of the certificate.

Purchasers, it’s all about due diligence. Do it, and if you do, retain an attorney to make sure it’s done right.

And now the disclaimer. What, you thought there wouldn’t be one? Nothing in this post should be considered legal advice. let’s face it, chances are good that you don’t know me and I probably don’t know you. My aim is simple – to provide the reader with some useful, but general, information about the topic. You should not rely on any information in this post without some assurance that the material is still current at the time it is read and that it applies to your particular circumstances. If you want a legal opinion with teeth, consult your personal lawyer about your particular circumstances. If you don’t have a lawyer and like what you see here, perhaps you should contact my law office to determine if I might be a good fit for you. To do so, simply click on my name above and you will be directed to my website, or you can reach me by telephone at (713) 626-2221. Messages left during non-business hours will be returned no later than the next business day. When responding, please refer to this Blog No. 56.

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Philip William Boyko

Licensed since 1977

Member at firm Philip W. Boyko, Attorney at Law

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Philip William Boyko

Licensed since 1977

Member at firm Philip W. Boyko, Attorney at Law

AWARDS

AV Preeminent

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