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
SALES AND USE TAX
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
ROBERT L. FREDERICK
Administrative Law Judge
JOHN CODY PERKINS
Representing Tax Division
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
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
FINDINGS OF FACT
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
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
manufactured by CAR MANUFACTURER, CAR MANUFACTURER A, CAR MANUFACTURER B, CAR
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 **************.
CONCLUSIONS OF LAW
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
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
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.
ROBERT L. FREDERICK
Administrative Law Judge
HEARING NO.: 25,579
ORDER OF THE COMPTROLLER
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
ACCESSION NUMBER: 9109H1135A01
DOCUMENT TYPE: H
TAX TYPE: SALES