Texas Comptroller of Public Accounts    STAR System


HEARING NO. 27,579

IN RE: **************

TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: May 1, 1984
through November 30, 1987 



Administrative Law Judge

Representing Tax Division

Representing Petitioner


PETITIONER was assessed sales tax as the successor to COMPANY A for tax owed by 
COMPANY A. Pursuant to Tex.Tax Code Ann. Section 111.020 (Vernon Supp. 1991).

A hearing was held on June 20, 1991 over the telephone PERSON A testified for 

A taxpayer may have an oral hearing or a "written submission" hearing. The 
record in an oral hearing, under the rules in effect when this hearing was 
held, is that which is admitted or noticed during the hearing. Normally, all 
pertinent records of the Comptroller are part of the record in a written 
submission hearing.

A "telephone" hearing is a hybrid allowed by agreement of the parties. Since 
Petitioner has challenged the assessment against COMPANY A, the records of the 
case pertaining to the fact findings made below are hereby notice, subject to 
objection concerning their accuracy.

On August 14, 1991, the Petitioner, filed Exceptions to the July 24, 1991 
Proposed Comptroller's Decision. The Tax Division filed its response to these 
Exceptions on August 21, 1991. The Administrative Law Judge and the Comptroller 
have considered both the Exceptions and the response thereto, and this 
Comptroller's Decision represents the ruling thereon."


Petitioner is not liable, as successor, for any tax due in periods before 
Petitioner's ownership of its business because (or in the alternative):

1. The redetermination hearing of COMPANY A was not completed according to 
proper notification and hearing. Petitioner may not be held liable as a 
successor to a defective redetermination of the predecessor.

2. If the redetermination of COMPANY A was properly completed then:

a. Petitioner did not purchase the business, stock of goods or inventory from 
COMPANY A as contemplated by the successor liability provisions of the Tax 

b. Petitioner did not assume the liability for sales tax owned by COMPANY A.

c. The Comptroller failed to mitigate damages as required by law.

d. The Comptroller is estopped from collecting these taxes from Petitioner.

e. The Comptroller waived its right to collect these taxes from Petitioner.

f. Collection of these taxes from Petitioner is barred by the statute of 


Facts related to COMPANY A:

1. COMPANY A was audited by an employee of the Comptroller and was assessed 
sales tax on December 6, 1988 for the tax period May 1, 1984 through November 
30, 1987. The total assessment including interest as of that date was 
$**************. The assessment was addressed to " COMPANY A, ADDRESS, 
**************, Texas ZIP CODE". That was COMPANY A's address as shown on the 
Comptroller's records.

2. PERSON A was employed on Petitioner's behalf during all relevant time 
periods of COMPANY A's audit and hearing. He discussed the ongoing or completed 
audit of COMPANY A with the auditor(s). PERSON A' business address during some 
of the tie periods involved here was COMPANY B, ADDRESS, **************, Texas 

3. PERSON A received the assessment against COMPANY A and responded on December 
13, 1988 by asking for a redetermination hearing. His letter, on COMPANY B 
letterhead (Petitioner's dba), said that he was responding "for the account of 
COMPANY A." But the reason for the response was that "COMPANY B did not 
purchase COMPANY A." He said that the Comptroller should look to COMPANY A for 
the liability. A redetermination hearing was set up for COMPANY A and it was 
assigned number 25,131.

4. The Tax Division wrote a Position Letter to "Mr. PERSON A, Comptroller, 
COMPANY A " at COMPANY A's address saying that "Petitioner, a corporate entity, 
purchases the assets of COMPANY A " and it was liable as a successor. Neither 
PERSON A nor COMPANY A responded further and Comptroller's Administrative 
Decision No. 25,131 (1989) was issued against COMPANY A on August 14, 1989 
based upon that failure to respond. The whole deficiency was upheld.

5. A lien was filed on October 10, 1989 in ************** County, Texas against 
COMPANY A for the final deficiency. Notice of the lien was mailed to  "COMPANY 
A, ADDRESS, **************, Tx ZIP CODE" on November 17, 1989. COMPANY A 
acknowledged receipt of the lien notice by letter of November 28, 1989 and said 
the Comptroller should proceed against Petitioner as COMPANY A's successor.

6. The Comptroller certified COMPANY A's deficiency to the Attorney General for 
the State of Texas. The Attorney General wrote COMPANY A a "demand letter" for 
those taxes on February 22, 1990. COMPANY A did not pay the assessment. No suit 
has been filed.

Facts related to Petitioner:

7. a. By purchase agreement made on November 16, 1987, Petitioner acquired 
certain assets from COMPANY A (also called Seller) and PERSON B., as owner of 
all issued and outstanding capital stock of seller. The purchase included "all 
of the assets, properties, business and goodwill of Seller (except the excluded 
assets described in the second and third sentences of this paragraph) used in 
the operation of the dealership of every kind and description, real, personal 
and mixed, tangible and intangible (including, without limitation, the sales, 
service other business records of Seller, all related mailing lists, licenses 
(to the extent transferable), CAR MANAUFACTURER franchises and dealership 
agreements, permits, claims, leasehold rights and improvements, sales data, 
customer lists and all other rights and privileges, equipment, and machinery), 
all as the same shall exist as of the Closing Date...."

b. The transferred assets did not include: "(i) the financial records 
consisting of trial balances, general ledgers, CAR MANUFACTURER monthly 
reporting statements, checks and vendor records, (ii) the minute books and the 
stock record books of Seller, (iii) any of Seller's automobile or parts 
inventory, (iv) any of Seller's employee benefit plans and related trust 
accounts, funds, insurance policies and investments (other than currently 
existing medical and life insurance plans and groups policies for the benefit 
of employees), (v) except as set forth in Section 7(a), the right to the use 
and ownership of the name "COMPANY A ", and (vi) those assets relating to 
businesses of Seller other than the operation of the Dealership.

c. The purchase was for $************** payable at closing. The Seller 
warranted that it had good title to the transferred assets and that they were 
free of all liens and encumbrances, except as noted. The parties disavowed any 
intent for the contract to benefit any third party. The Seller was prohibited 
for a time from engaging in the business of selling new or used vehicles 
MANUFACTURER C or CAR MANUFACTURER D in **************, Texas.

d. The agreement was signed by COMPANY A personally and as president of COMPANY 
A. COMPANY A's personal and business address are both shown as **************, 
**************, **************, Texas, **************. Petitioner signed as 

8. Petitioner was assessed on October 11, 1990 as successor to COMPANY A in the 
amount of $**************. That assessment included the same amount of penalty 
and interest assessed COMPANY A but it included interest accrued since COMPANY 
A's assessment. Petitioner's current business address is **************, 
**************, Texas **************.


The assessment against Petitioner is premised on the liability of its putative 
predecessor, COMPANY A. Is COMPANY A liable for any tax?

COMPANY A was the taxpayer that was audited and assessed. COMPANY A was the 
entity liable to the Comptroller for taxes becoming due while COMPANY A 
operated the business.

Audits and tax assessments do not create tax liability. Liability is created by 
business transactions that are defined by the tax code to be taxable. An audit 
is the mechanism by which the Comptroller verifies that the taxpayer did or did 
not pay the correct amount of taxes during the period audited. An assessment is 
notice to the taxpayer that the Comptroller believes an underpayment exists.

If the audit of COMPANY A is correct, and nobody has suggested that it was not, 
then COMPANY A should have paid those taxes in the periods when they were 
originally due. COMPANY A owed the taxes then. COMPANY A owed those taxes when 
the assessment was made. And, COMPANY A still owes those taxes now. That tax 
obligation is independent of the assessment although the assessment has other 
legal ramifications.

Successor liability is assessed against the successor to "a person who is 
liable for the payment of an amount under this title ..." Tax Code Section 
111.020(a). This provision does not require that a liability of the predecessor 
be "assessed" or be "final" as a condition precedent for liability to attach to 
the successor.

That interpretation is consistent with Tax Code Section 111.020(e), providing a 
four year period of limitations, that "begins when the former sells the 
business ... or when a determination [an assessment] is made against the former 
owner, whichever event occurs later." Thus, successor liability is possible 
when either the business is sold or an assessment is made against the 

The Tax Code gives the buyer of a business immunity from successor liability if 
the buyer withholds payment to the seller until it timely gets a certificate of 
no tax due from the Comptroller. The request for such a certificate commonly 
triggers an audit of the predecessor. If a liability is found then the buyer, 
if it has gone on with the purchase, is liable to the extent it has not 
withheld payment for the business from the predecessor. Thus, it is 
contemplated by the Tax Code that one may be a successor to a tax liability 
even though the predecessor had not been audited at the time of the purchase.

Petitioner has not alleged that it timely got a no tax due certificate or that 
it withheld any of the purchase price. Thus, if Petitioner may be held liable 
as a successor whether or not COMPANY A had been assessed at the time of the 
purchase, Petitioner may be held liable once it is found that COMPANY A owes 
taxes, a fact that has not here been directly contested.

Petitioner's collateral attack on COMPANY A's assessment goes to the procedural 
issue of whether COMPANY A had an opportunity to contest the assessment.

Since that assessment against COMPANY A was properly served by the Comptroller 
and actually received at its address there are only two possibilities about 
contesting the assessment. Either, COMPANY A got notice and chose to not 
contest it (which, is consistent with COMPANY A's subsequent actions) or PERSON 
A diverted the notice and COMPANY A was effectively deprived of the opportunity 
to contest the assessment.

If the first possibility is what happened then the deficiency became final, by 
default, with issuance of Comptroller's administrative Decision No. 25,131. If 
the second possibility occurred then it would be inequitable to allow 
Petitioner to benefit from PERSON A actions, by considering a collateral attack 
on the assessment, since PERSON A was employed by Petitioner when he got the 
assessment that was properly sent to COMPANY A.

It is concluded that Petitioner is potentially liable as successor to COMPANY A 
because (1) COMPANY A owed taxes when the business was sold and (2) 
Petitioner's collateral attack on COMPANY A's final assessment should be 
rejected under the facts of this case.

Is Petitioner a successor to COMPANY A?

Petitioner suggests that it bought mostly goodwill. But basically, Petitioner 
bought everything owed by COMPANY A except the inventory. Petitioner paid 
$************** and COMPANY A agreed to not compete, to assist in transferring 
the dealership franchises, and, with a few exceptions, to convey "all assets, 
properties and goodwill ... used in the operation of the Dealership...."

Petitioner is the successor to COMPANY A.

The Tax Code prescribes the duties of taxpayer to the State of Texas and 
taxpayers may not avoid those duties by contract. Petitioner and COMPANY A may 
dispute between themselves who is liable for the tax. But their agreement as to 
this liability can not affect the parties' liability to the Comptroller. 
Comptroller Administrative Decision No. 25,532 (1989).

The Tax Code imposes no duty on the Comptroller to mitigate damages or to 
proceed first or exclusively against the predecessor before proceeding against 
the successor. Successor liability attaches if the successor does not timely 
get a "no tax due statement" from the Comptroller. Administrative Decision Nos. 
7,066 (1976) and 10,030 (1979).

No evidence has been presented that suggests that the Comptroller should be 
estopped from proceeding against Petitioner or that the Comptroller waived its 
right to collect these taxes.

The statute of limitations for collection of tax from the successor is four 
years from the time a determination is made against the predecessor or when the 
business was sold, whichever event occurs later. Tax Code Section 111.020(e). 
Comptroller's Decision No. 10,030 (1979). Petitioner was assessed timely.

Petitioner's contentions are rejected.


It is recommended that the deficiency be upheld as originally issued.

Signed this 23rd day of September, 1991.

Administrative Law Judge

HEARING NO.: 25,579


The above decision of the Administrative Law Judge, resulting in Taxpayer's 
liability as set out in Attachment "A" which is incorporated by reference, is 
approved and adopted in all respects. This decision becomes final twenty (20) 
days from the date of this Order, and the total sum of the tax, penalty and 
interest amounts is due and payable within twenty (20) days thereafter. If such 
sum is not paid within such time, an additional penalty of ten percent of the 
taxes due will accrue, and interest will continue to accrue.

If a rehearing is desired, a Motion for Rehearing must be filed with the clerk 
of the Administrative Law Judges twenty (20) days from the date of this Order, 
and must state the grounds upon which the motion is based.

SIGNED this the 24th day of September, 1991.

Comptroller of Public Accounts
of the State of Texas

DATE: 09/24/1991