Acquisitions, Mergers and Divestitures

Acquisitions, Mergers and Divestitures Council on State Taxation 2014 Intermediate/Advanced Sales Tax School Grapevine, TX May 20, 2014 Clark R. Calho...
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Acquisitions, Mergers and Divestitures Council on State Taxation 2014 Intermediate/Advanced Sales Tax School Grapevine, TX May 20, 2014 Clark R. CalhounAlston & Bird LLP One Atlantic Center 1201 W. Peachtree Street Atlanta, GA 30309-3424 (404) 881-7553 [email protected] Michael A. Jacobs Reed Smith LLP 2500 One Liberty Place 1650 Market Street Philadelphia, PA 19103 (215) 851-8868 [email protected] William M. Backstrom, Jr. Jones Walker Waechter Poitevent Carrere & Denegre, LLP 201 St. Charles Ave., Suite 5100 New Orleans, LA 70170-5100 (504) 582-8228 [email protected]

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TABLE OF CONTENTS I.

INTRODUCTION..............................................................................................................1

II.

GENERAL SALES AND USE TAX CONCEPTS .........................................................2

III.

SALES TAX ASPECTS OF THE SALE OF A BUSINESS ..........................................6

IV.

TRANSFERS OF PROPERTY IN EXCHANGE FOR AN EQUITY INTEREST IN THE TRANSFEREE.............................................................................11

V.

TREATMENT OF CONSIDERATION OTHER THAN AN EQUITY INTEREST IN THE TRANSFEREE.............................................................................14

VI.

TAX-FREE CORPORATE TRANSACTIONS UNDER SECTION 368 OF THE INTERNAL REVENUE CODE. ...........................................................................15

VII.

SURVEY OF AUTHORITIES REGARDING SALES/USE TAX ASPECTS OF BUSINESS RESTRUCTURINGS ...........................................................................20

VIII. BULK SALE AND SUCCESSOR LIABILITY PROVISIONS ..................................28 IX.

CORPORATE TRANSACTIONS MODEL .................................................................38

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i

I.

INTRODUCTION A.

Forty-five states and hundreds of political subdivisions impose sales and use taxes (collectively referred to as “Sales Tax” herein) on virtually every transfer or use of tangible personal property unless a specific exclusion or exemption applies. Nevertheless, the Sales Tax implications are often overlooked in the context of corporate mergers, acquisitions, liquidations and other transfers (“Corporate Transactions”).1 Unfortunately, overlooking the Sales Tax implications of Corporate Transactions frequently results in significant and sometimes unexpected Sales Tax liabilities. However, with proper planning, a taxpayer can often avoid most of the Sales Tax liabilities associated with a Corporate Transaction.

B.

Properly-structured Corporate Transactions may legally avoid both federal and state income taxes. Notwithstanding the tax-free nature of these transactions for federal and state income tax purposes, sloppy planning of such transactions could result in significant state and local Sales Tax consequences. Thus, due diligence in a Corporate Transaction must include careful consideration of potential state and local Sales Tax consequences.

C.

Most Sales Tax statutes are designed to tax traditional retail sales of tangible personal property (“TPP”) for consideration. However, many of the Sales Tax statutes are broadly drafted. As a result, Sales Tax statutes often tax transfers of TPP in connection with Corporate Transactions, including transfers of TPP occurring entirely within an affiliated group of corporations, unless a specific statutory exclusion or exemption (collectively referred to herein as “Exemptions”) precludes taxation of a transfer of TPP as part of a Corporate Transaction.

D.

Unfortunately, the application of the various state and local Sales Tax statutes to Corporate Transactions are frequently inconsistent and can be illogical. In addition, unlike federal and state income tax statutes, the Sales Tax statues are frequently administered in a formalistic manner. Therefore, when planning Corporate Transactions, it is important to remember that form often prevails over substance for Sales Tax purposes. In addition, planners must remember that the Sales Tax statutes may vary significantly from jurisdiction to jurisdiction.

E.

Scope of Outline 1.

This outline focuses on the state and local Sales Tax aspects of Corporate Transactions. The outline will focus initially on general Sales Tax concepts associated with Corporate Transactions. The outline also addresses the application of the general concepts to particular types of

1

A helpful chart of the various types of Corporate Transactions is attached to the end of this outline. This chart will help distinguish between stock transactions vs. asset transactions and taxable transactions vs. tax-free transactions for federal income tax purposes.

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Corporate Transactions. Particular attention should be focused on the application of various Exemptions in connection with Corporate Transactions.

F.

II.

2.

This outline is not intended to be a full and complete survey of the Sales Tax treatment of Corporate Transactions by the various states. In addition, it is beyond the scope of this outline to discuss each state's Exemptions applicable to Corporate Transactions. To the contrary, this outline is intended as a general reference alerting the reader to the Sales Tax issues that should be addressed when planning and structuring a Corporate Transaction. Also, it is beyond the scope of this outline to discuss any state and local corporation income and franchise tax aspects of Corporate Transactions.

3.

As with all transactions, corporate or otherwise, a taxpayer contemplating a Corporate Transaction should carefully analyze the Sales Tax implications in all affected jurisdictions.

Due Diligence. Due diligence in any Corporate Transaction is essential. Attached is a helpful guide to assist a tax planner in establishing a due diligence framework in the context of a Corporate Transaction. The guide is just that – a guide. It is not intended to be comprehensive or the “definitive” due diligence guide. In fact, the authors welcome any additions to or comments on the guide.

GENERAL SALES AND USE TAX CONCEPTS A.

Introduction 1.

Generally, Sales Taxes are imposed broadly on sales or other transfers of tangible personal property for a consideration.

2.

In the context of Corporate Transactions, the essential inquiries are as follows:

3.

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a.

Is there a “sale” or other “transfer”?

b.

Is there consideration for the “sale” or other “transfer”?

c.

Is the property transferred of a type that is subject to sales/use tax (e.g., TPP) in the jurisdiction where it is located / sitused?

d.

Are there any Exemptions that apply?

Answering these relatively simple questions on a jurisdiction-byjurisdiction basis generally will lead the tax planner to a conclusion regarding the Sales Tax aspects of a Corporate Transaction.

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B.

C.

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Definition of the Terms “Sale” or “Other Transfer” 1.

Generally, Sales Tax statutes define these terms very broadly. For example, California Rev. & Tax. Code section 6006(a) defines the term “sale” as, among other things: “Any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.”

2.

This seemingly straightforward definition of the term “sale” can be tricky. Taxpayers often overlook the fact that Corporate Transactions that involve only affiliated entities may constitute a “sale” for Sales Tax purposes. For example, the transfer of office furniture and equipment between a parent and its wholly-owned subsidiary may be subject to Sales Tax, assuming various other conditions are satisfied and no Exemptions are applicable. The failure to comprehend this concept can lead to disastrous consequences in a basic Corporate Transaction such as the “drop-down” of assets to a new entity. See, e.g., Beatrice Co. v. State Bd. of Equalization, 6 Cal. 4th 767 (1993); Int’l Paper Co. v. Cohen, 126 P.3d 222 (Colo. Ct. App. 2005).

Definition of the Term “Consideration” 1.

Like the definition of the term “sale,” the definition of the term “consideration,” although seemingly simple, can lead to disastrous Sales Tax consequences if taxpayers fail to exercise careful planning strategies. Taxpayers should pay particular attention to Corporate Transactions involving members of an affiliated group of entities.

2.

Taxpayers also must understand that there is no requirement that “consideration” for Sales Tax purposes must be paid in money. For example, “consideration” can result from the transfer of property other than money and from the assumption of indebtedness.

3.

Many corporate transferors believe that Sales Tax is not due when both assets and liabilities are transferred to a newly-established subsidiary solely in exchange for stock. This type of intercompany Corporate Transaction may be subject to Sales Tax (unless a specific Exemption is applicable) because the stock is deemed consideration for the asset transfer.

4.

Both taxpayers and tax collectors often have difficulty determining what constitutes “consideration” in the context of a Corporate Transaction, especially one involving affiliates. See, e.g., Greenfield Plaza Assocs., Inc. v. Mich. Dep’t of Treasury, Dkt. No. 278490 (Mich. Tax. Trib. June 10, 2004) (rejecting petitioner’s argument that it was excused from withholding funds in an asset sale because “some of the consideration took the form of a discharge of debt”); Browning-Ferris of Wis., Inc. v. Dep’t of

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Revenue, Dkt. No. No. 97-S-282 (Wis. Tax App. Comm’n Jan. 13, 2000) (holding that intercompany transactions not subject to Sales Tax); Wis. Dep’t of Rev. v. River City Refuse Removal, Inc., 729 N.W.2d 396 (Wisc. 2007); Beatrice Co. v. State Bd. of Equalization, 6 Cal. 4th 767 (1993) (finding that drop-down of assets and assumption of liabilities was subject to Sales Tax); Int’l Paper Co. v. Cohen, 126 P.3d 222 (Colo. Ct. App. 2005) (holding that intercompany transfer of assets solely in exchange for membership interest in newly-created LLC prior to sale of newly-created LLC was a taxable transaction because the value of the consideration (i.e., the membership interest) could be determined from the consideration paid by the third party for the membership interest); La. Revenue Ruling No. 06-002 (4/7/2006) (finding that transfers of motor vehicles to a newlycreated, wholly-owned LLC in exchange for membership interest in the LLC and payment of indebtedness related to transferred vehicles was a taxable sale for Louisiana sales/use tax purposes); Ind. Revenue Ruling No. IT 02-02 (4/10/2002) (holding that intercompany transfers of motor vehicles and other assets in a restructuring transaction were not subject to sales/use tax because there was no consideration). As discussed below, the adverse tax consequences in some of these cases possibly could have been avoided with careful planning. 5.

D.

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Decisions such as Beatrice and International Paper should serve as wakeup calls to taxpayers and their advisers. A Corporate Transaction as straightforward as a “drop-down” of assets and liabilities to a newlyformed, wholly-owned subsidiary or a “classic drop-kick” transaction might trigger adverse Sales Tax consequences. In many instances, these adverse consequences may be avoided with careful planning.

Is the Property at Issue Subject to Sales Tax? 1.

For this evaluation, it is critical to understand the structure of the Corporate Transaction. Does the Corporate Transaction involve a sale of assets or a sale of stock or other interests in an entity?

2.

Sales Tax generally applies to sales or other transfers of TPP for a consideration. Conversely, sales or other transfers of property other than tangible personal property (e.g., intangible property or real property) are not subject to Sales Tax.

3.

The most important point to remember is that what we may generally think of as one type of property (e.g., intangible property) may be defined or otherwise treated as another type of property (e.g., TPP) under a state’s laws.

4.

Once again, we look to California for a real-life example of how a taxpayer gets snared in a state-tax trap for the unwary. In Navistar Int’l Transportation Corp. v. State Bd. of Equalization, 8 Cal. 4th 868 (1994),

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the taxpayer sold all of its assets of one division to a wholly-owned subsidiary of Caterpillar, Inc. Among the assets sold were drawings and designs, manuals and procedures, and computer programs. The parties agreed on a purchase price allocation, which included allocations to all of these and the other transferred assets. The taxpayer argued that the listed items were not TPP and thus not subject to Sales Tax. The court rejected the taxpayer’s arguments and held that all of the assets were subject to Sales Tax. As with other examples in this outline, the adverse tax consequences likely could have been avoided with some careful planning.

E.

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5.

The lesson to be learned here is that if a Corporate Transaction involves an asset sale, it will be necessary to evaluate each type of asset sold to determine whether it is a type of property that may be subject to Sales Tax. Again, laws vary from state-to-state. This is especially true with computer software. In addition, Navistar highlights the importance of the purchase price allocation negotiated between the purchaser and seller. Parties to an asset sale should consider the Sales Tax consequences when negotiating the allocation of purchase price among assets purchased as part of a Corporate Transaction. For instance, a purchaser that is purchasing both IP (intangible property) and drawings and designs that embody the IP (tangible personal property) will prefer, from a Sales Tax perspective, to allocate more purchase price to the IP and less to the drawings and designs.

6.

Generally, a Corporate Transaction that involves a transfer of stock or other interest in an entity will not be subject to Sales Tax because there is no transfer of TPP. Even though such transactions may not be subject to Sales Tax, they could trigger other types of “transaction taxes,” such as stock transfer taxes, or may affect the valuation of property for other types of taxes, such as property taxes.

Exemptions and Exclusions 1.

If a Corporate Transaction involves a sale or other transfer of tangible personal property for a consideration, the next step in the analysis is to determine whether a specific Exemption applies to the transaction.

2.

There are many “typical” Exemptions. These vary from state to state and there is no substitute for careful research to find applicable Exemptions and careful planning to take advantage of such Exemptions.

3.

Some of the “typical” Exemptions, which are discussed in more detail below, are as follows: a.

Specific Exemptions for statutory mergers or consolidations;

b.

Specific Exemptions for certain corporate formations;

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III.

c.

Specific Exemptions for certain corporate liquidations;

d.

Specific Exemptions for certain capital contributions;

e.

Isolated or occasional or casual sale exemption; and

f.

Sale for resale exemption.

SALES TAX ASPECTS OF THE SALE OF A BUSINESS A.

Introduction. State Exemptions from Sales Tax often vary significantly. When examining the Sales Tax implications of a Corporate Transaction, it is important to first consider the jurisdictions that may potentially impose a Sales Tax and the elements of the Corporate Transaction that are potentially subject to the Sales Tax. Once the taxing jurisdictions have been identified, the Sales Tax statutes, regulations, administrative interpretations and jurisprudence of each jurisdiction should be examined to determine each jurisdiction’s relevant Exemptions, if any.

B.

General Sales Tax Exemptions Applicable to Corporate Transactions 1.

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Isolated, Occasional or Casual Sale Exemption. Most states provide an Exemption for an isolated, casual or occasional sale (the “Casual Sale Exemption”). However, the scope of the Casual Sale Exemption varies widely from state to state. Some Exemptions are very narrow and others have broad application. Also, in some states, transactions involving titled vehicles are not treated as a Casual Sale. The following are several examples of state Casual Sale Exemptions. a.

The Illinois Casual Sale Exemption. Illinois has a taxpayerfriendly Casual Sale Exemption that exempts the sale of any assets where the seller is not engaged in the business of selling the particular type of property that is transferred in the Corporate Transaction. 35 Ill. Comp. Stat. 120/1; Ill. Admin Code tit. 86, § 130.110(a). The Illinois exemption is often relied on to exempt all assets transferred in a Corporate Transaction except the inventory of the transferring business. However, a selling business’ inventory may also be exempted from Illinois Sales Tax as a salefor-resale as long as the purchaser produces a valid resale exemption certificate. See Section III.C, infra. For an illustration of how the Illinois Casual Sale Exemption works, see Ill. Private Letter Ruling No. ST 91-0251-PLR (3/27/1991).

b.

The California Casual Sale Exemption. California’s Casual Sale Exemption exempts two specified forms of Corporate Transactions. Accordingly, the Exemption will not be applicable to most Corporate Transactions, and its application in the context of a Corporate Transaction is thus limited at best. Cal. Rev. & Tax. Code § 6006.5.

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c.

d.

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(1)

The first exempt Corporate Transaction is the sale of assets not held or used by the seller in the course of its business activities, if the seller is required to hold a seller’s permit for such activities (or would be required if the seller’s activities were conducted in California). Further, the Exemption only applies to this type of Corporate Transaction if the sale of the assets is not one of a series of sales sufficient in number to constitute an activity which would require the seller to hold a seller’s permit if the activity were conducted in California. Id. § 6006.5(a).

(2)

The second type of exempt Corporate Transaction is any transfer of all or substantially all of the assets held or used in the conduct of the seller’s activities (if such activities require a seller’s permit or would require a seller’s permit if conducted in California), as long as the underlying ownership of the assets remains substantially similar. Id. § 6006.5(b).

(3)

Cases that illustrate the narrow application of California’s Casual Sale Exemption include Davis Wire Corp. v. State Bd. of Equalization, 17 Cal. 3d 761 (1976), Hotel Del Coronado Corp. v. State Bd. of Equalization, 15 Cal. App. 3d 612 (1971), and Chemed Corp. v. State Bd. of Equalization, 192 Cal. App. 3d 967 (1987).

The Texas Casual Sale Exemption. Texas’s Casual Sale Exemption applies to the sale of “the entire operating assets” of a “business or of a separate division, branch, or identifiable segment of a business.” Tex. Tax Code Ann. § 151.304(b)(2). Therefore, for the Texas Casual Sale Exemption to apply, it is not necessary for a corporation to sell all of its assets as long as the assets sold can be identified as a separate division of the corporation. (1)

A separate division will be found “if…the income and expenses attributable to the separate division…could be separately ascertained from the books of account or record.” Id. § 151.304(c).

(2)

The Exemption only requires the sale of “operating assets.” Id. § 151.304(b)(2). A corporation’s inventory is not an operating asset and need not be sold. Tex. Comptroller’s Decision No. 19,708 (10/6/1986).

The Georgia Casual Sale Exemption. Georgia limits the application of its Casual Sale Exemption to Corporate Transactions pursuant to which assets are sold “in a complete and bona fide

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liquidation of a business of the seller.” Ga. Comp. R. & Regs. 560-12-1-.07(2)(c). The Georgia Casual Sale Exemption differs from the Texas Casual Sale Exemption in that the business sold must be at a separate location from the assets retained, as “business” is defined as “a separate place of business.” Id. Therefore, in situations where several businesses are headquartered at the same location for Georgia Sales Tax purposes, the sale of the assets of a single business when the others are retained will not qualify for Georgia’s Casual Sale Exemption.

2.

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e.

The New York Casual Sale Exemption. New York does not provide a meaningful Casual Sale Exemption for Corporate Transactions. New York’s Casual Sale Exemption is normally limited to the sale of TPP up to the de minimis amount of $600 and does not apply to the bulk sale of business assets. N.Y. Tax Law § 1115(a)(18); N.Y. Comp. Codes R. & Regs. tit. 20, § 528.19.

f.

The Oklahoma Casual Sale Exemption. Oklahoma’s Casual Sale Exemption exempts the transfer of assets “in connection with the winding up, dissolution or liquidation of a corporation only when there is a distribution in kind to the shareholders of the property of such corporation.” Okla. Stat. tit. 68, § 1360(1)(b).

g.

The Florida Casual Sale Exemption. Florida exempts “occasional or isolated sales or transactions involving tangible personal property or services by a person who does not hold himself or herself out as engaged in business or sales of unclaimed tangible personal property.” Fla. Stat. § 212.02(2).

h.

The Virginia Casual Sale Exemption. Virginia’s Casual Sale Exemption exempts a “sale of tangible personal property not held by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all of the assets of any business.” Va. Code Ann. §§ 58.1-609.10(2), -602; Va. Pub. Document Ruling No. 91290 (11/18/1991).

i.

Other authorities discussing the Casual Sale Exemption are discussed in Section VII, infra.

The Sale for Resale Exemption. Every jurisdiction that imposes a Sales Tax provides an Exemption for the sale of TPP for resale (the “Sale for Resale Exemption”). The purpose of the Sale for Resale Exemption is to avoid the imposition of multiple levels of Sales Tax on transfers of the same TPP down the supply chain to the ultimate consumer. The importance of the Sale for Resale Exemption in the context of the transfer of assets in Corporate Transactions is that assets which are not covered by

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the Casual Sale Exemption, such as inventory, sometimes can be exempted from a state’s imposition of the Sales Tax as a Sale for Resale. For example, in Illinois, the broad Casual Sale Exemption applies to all assets except inventory-type assets. However, the Sale for Resale Exemption would exempt the transfer of inventory in situations where the assets are transferred to a purchaser that is similarly positioned to sell the assets in a trade or business. Without the Sale for Resale Exemption, the transfer of the inventory from the seller to the purchaser would be subject to Illinois Sales Tax as would the ultimate sale of the inventory to the consumer. Therefore, the Sale for Resale Exemption applies to prevent multiple imposition of the Sales Tax to the same items of inventory. PLANNING TIP: To take advantage of the Sale for Resale Exemption in most states, the transferee of the assets in the Corporate Transaction must be registered as a dealer for Sales Tax purposes in the appropriate jurisdictions and must provide the transferor with a valid resale exemption certificate at the time of the Corporate Transaction. Failure of the transferor to obtain the necessary resale exemption certificates from the transferee could trigger an unwanted and unnecessary Sales Tax. Planning and due diligence are the keys! 3.

C.

Corporate Transactions Qualifying for Treatment under Section 338 of the Code 1.

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The Manufacturing Machinery and Equipment Exemption. Several states provide an exemption for the sale of manufacturing machinery and equipment used by the purchaser primarily in the process of manufacturing TPP for sale (the “Machinery and Equipment Exemption”). Therefore, in states where the Casual Sale Exemption is limited, the transfer of machinery and equipment in a Corporate Transaction may be exempt from the imposition of Sales Tax under the Machinery and Equipment Exemption. See, e.g., N.Y. Tax Law § 1115(a)(12); N.Y. Comp. Code R. & Regs. tit. 20, § 528.13(a)(1)(i). However, a purchaser wishing to rely on the Machinery and Equipment Exemption must comply with all documentation requirements. For example, to qualify for New York’s machinery and equipment exemption, the seller of qualifying assets contained in a bulk sale of business assets must obtain an exempt use certificate from the purchaser in order to qualify for the exemption. N.Y. Comp. Code R. & Regs. tit. 20, § 528.13(a)(4).

Federal Income Tax Treatment of Section 338 Corporate Transactions. For federal income tax purposes, a purchaser that makes a qualified purchase of 80% or more of a target corporation’s stock in a Corporate Transaction can elect to have the basis of the target’s assets adjusted to reflect the purchase price of the stock. This is known as a Section 338 Election. Typically, the result of the Section 338 Election is that the basis of the target’s assets is adjusted to their fair market value as of the date of the purchaser’s acquisition of the stock. In practice, the vast majority of

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Section 338 Elections are made under Section 338(h)(10), where both the buyer and the seller elect to treat the stock purchase as if the target corporation sold its assets to itself while a member of the selling parent’s consolidated return group. The deemed sale is then deemed to be followed by a liquidation of the “old” subsidiary into the selling group’s parent, which subsequently sells the stock of the “new” subsidiary to the purchaser. Therefore, for federal income tax purposes, the selling group recognizes and reports any capital gain realized on the deemed sale of the subsidiary’s assets.

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2.

Possible Sales Tax Issue. Some state tax administrator might attempt to argue that the deemed sale of the subsidiary’s assets to itself, followed by a deemed liquidation into its parent, followed by the parent’s sale of stock to the purchaser create potentially taxable transfers of TPP. However, the deemed sale for purposes of Section 338 is merely a fictional device that is used to calculate the basis adjustment required to adjust the basis of the assets to their fair market value as of the date of the purchaser’s acquisition of the stock. There are no legal transfers of TPP. Instead, the only legal transfers involve stock transfers.

3.

State Income Tax Treatment of Section 338 Elections. Section 338 Elections generally, although not always, are recognized for state income and franchise tax purposes. See below for examples from select states. a.

Illinois allows corporate taxpayers making a Section 338 Election to also make a similar election for Illinois income tax purposes. However, the income tax on the capital gain arising from the deemed sale from the Section 338(h)(10) election will only apply to the selling group if the target corporation files an Illinois combined return with the selling group for the tax period immediately before the sale of the target stock. Ill. Private Letter Ruling No. IT 89-0141-PLR (5/24/1989); IT 94-0012-GIL (3/9/1994).

b.

California allows corporate taxpayers to choose to have a Section 338 Election made for federal purposes not apply for California purposes, or to choose to make a Section 338(h)(10) election for California purposes without a corresponding federal election. Cal. Rev. & Tax. Code § 23051.5(e)(3).

c.

Until recently, New Jersey did not recognize Section 338 Elections. See Gen. Building Products Corp. v. New Jersey, 14 N.J. Tax 232 (1994), aff’d, 664 A.2d 1291 (N.J. Super. Ct. App. Div. 1995). However, when the federal practice changed to no longer require the filing of a consolidated return as a prerequisite for a Section 338 election, New Jersey amended its corporate business tax regulations to make them consistent with the federal

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treatment of Section 338 Elections. See Mandelbaum v. Dir., Div. of Taxation, 20 N.J. Tax 141, (2002). 4.

IV.

State Sales Tax Treatment of Section 338 Elections. For Sales Tax purposes, few states have officially taken a position on the issue of whether a deemed sale of assets under Section 338(h)(10) will be treated as a taxable sale of TPP, or as the sale of stock, which is an intangible asset excluded from the Sales Tax. Among the states that have: a.

Virginia has ruled that the deemed sale under a Section 338(h)(10) election is not a sale of TPP for purposes of the imposition of its Sales Tax. Va. Pub. Document Ruling No. 94-106 (4/8/1994). Virginia’s ruling recognizes that although Section 338(h)(10) elections treat a transaction as an asset sale for federal income tax purposes, the reality of the transaction is that it is a sale of stock. Therefore, a deemed sale under Section 338(h)(10) is not subject to the imposition of the Virginia Sales Tax because only stock, an intangible asset that is not subject to Virginia’s Sales Tax, is transferred in the Corporate Transaction. See also Va. Pub. Document Ruling No. 96-230 (9/17/1996).

b.

Florida also has ruled that a deemed asset sale under Section 338(h)(10) is not a taxable event for Florida Sales Tax purposes. Fla. Tech. Assistance Advis. No. 89A-054 (10/19/1989).

c.

In TJX Companies, Inc., Dkt. No. 812048 (N.Y. Div. Tax App. Nov. 9, 1995), the ALJ held that no Sales Tax was due on the sale of stock that was preceded by a transfer of assets from the parent to the subsidiary in anticipation of the sale of stock.

TRANSFERS OF PROPERTY IN EXCHANGE FOR AN EQUITY INTEREST IN THE TRANSFEREE A.

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General. Most state Sales Tax statutes exempt transfers of TPP in exchange for an equity interest in the transferee entity. Such exemptions typically limit application of the exemptions to transfers of property pursuant to which the only consideration received by the transfer is an equity interest of the transferee entity. In the context of corporations, the exemptions are analogous to the income tax exemption for transfers of property to controlled corporations under Section 351 of the Internal Revenue Code. However, for Sales Tax purposes, the exemptions for transfers of TPP to controlled corporations may vary considerably from state to state.

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B.

Examples of State Sales Tax Exemptions for Corporate Restructurings 1.

2.

Some states exempt transfers of TPP to a controlled corporation made at any time. a.

The Illinois Exemption. Illinois exempts any transfer of property by a person not engaged in the business of selling that property. 35 Ill. Comp. Stat. 120/1; Ill. Admin. Code tit. 86, § 130.110(a). Therefore, for Illinois Sales Tax purposes, the transfer of all TPP except inventory is exempt. Further, inventory transferred to a subsidiary company in exchange for an equity interest will be exempt under the Sale for Resale exemption as long as the subsidiary is in the business of selling the inventory at retail and provides the transferor with a valid sale-for-resale exemption certificate.

b.

The Missouri Exemption. Missouri exempts any transfer of TPP to a corporation solely in exchange for stock or a security of the corporation and any transfer to a corporation that constitutes a capital contribution by the shareholder. Mo. Rev. Stat. § 144.011(3), (4). Unlike non-recognition transfers under I.R.C. Section 351, Missouri’s exemption applies to any transfer of TPP in exchange for stock or security of a corporation, regardless of the amount of control the transferor has of the transferee. For purposes of the Missouri exemption, the meaning of the term “security” is not defined.

c.

The Georgia Exemption. Georgia’s exemption applies only to transfers of TPP pursuant to a business reorganization when the owners, partners or stockholders maintain the same proportionate interest or share in the newly formed business reorganization. Ga. Code Ann. § 48-8-3(21).

Some states only exempt transfers of TPP in exchange for an equity interest in the transferee at the time the transferee entity is organized. As a result, transfers of TPP to entities occurring after a reasonable time may be subject to the Sales Tax. For example: a.

The New York, New Jersey, and Vermont Exemptions. New York, New Jersey and Vermont exempt transfers of TPP to a corporation “upon its organization in consideration for the issuance of its stock.” See N.Y. Tax Law § 1101(b)(4)(iv)(D); N.J. Rev. Stat. § 54:32B-2(e)(4)(E); Vt. Stat. Ann. tit. 32, § 9742(5). (1)

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It is not clear how long after an incorporation that TPP can still be transferred to a corporation and still fall within the “upon its organization” requirement. For example, in Noar Acquisitions, Mergers and Divestitures

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Trucking Co., Inc. v. State Tax Comm’n, 139 A.D.2d 869 (N.Y. App. Div. 1988), the court held that transfers occurring 10 to 22 months after the business started were taxable. In In Re: Petition of K-B Transport, Inc., Dkt. No. 803124 (N.Y. Div. Tax App. Sept. 1, 1988), a transfer of TPP in exchange for stock that occurred 20 months after incorporation was held to be exempt where the delay was caused by regulatory problems.

b.

3.

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(2)

A transfer of TPP upon the activation of a dormant “shell” corporation would not qualify for New York's exemption because the transfer did not occur upon the corporation’s organization. See N.Y. Comp. Codes R. & Regs. tit. 20, § 526.6(d)(5)(iii). PLANNING TIP: As a result, in any state where the exemption for the transfer of TPP to a transferee corporation in exchange for equity is limited to the initial organization of the transferee, a newlyformed corporation should be used for the Corporate Transaction.

(3)

In New York, a transfer of TPP to an existing corporation as a capital contribution when no additional stock is issued is not taxable. N.Y. Comp. Codes R. & Regs. tit. 20, § 526.6(d)(8)(ii). Therefore, proportional transfers to transferee corporations can be made at any time.

The Maryland Exemption. Maryland’s exemption for transfers of TPP to newly-formed transferee corporations is similar to the statutes in New York, New Jersey and Vermont. However, Maryland’s exemption does not have the same uncertainty regarding the acceptable time period within which the TPP must be transferred. See Md. Code Ann., Tax-Gen. § 11-209(c)(1)(ii). Under Maryland’s regulations, a qualifying transfer must occur within six months after the filing of the transferee’s articles of incorporation and within 30 days after the corporation starts business. See Md. Code Regs. 03.06.01.13(C)(1).

California a.

California has a blanket exemption for transfers of TPP to controlled transferee corporations that are newly-organized in start-up situations and a more limited exemption for later transfers.

b.

Transfers of TPP to Commencing Corporations and Partnerships. A transfer of TPP to a “commencing” corporation or partnership in exchange for an equity interest is exempt for California Sales Tax purposes. Cal. Code Regs. tit. 18, § 1595(b)(4).

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c.

C.

V.

Transfers of TPP to Existing Corporations. A later transfer of TPP is exempt only if it is of “substantially all” of the transferor’s property that requires a California seller’s permit and the real or ultimate owners of the property after the transfer are “substantially similar.” Id. § 1595(b)(2). “Substantially all” of the property means 80% or more of the TPP of the transferor. For purposes of this test, real property is not counted. Cal. State Bd. of Equalization Ruling No. 395.1500 (1/24/1955). The “substantially similar” requirement means 80% or more common ownership. Therefore, the ultimate owners of the TPP, including bond holders as well as equity owners, are only “substantially similar” if those ultimate owners retain 80% or more interest in the assets transferred. Cal. State Bd. of Equalization Ruling No. 395.1560 (12/23/1959. See also Cal Code Regs. tit. 18, § 1595(b)(2) (discussing qualifying bond holders for purposes of the ultimate owners test).

Some states exempt transfers of TPP only if the transferor has the same proportionate interest in the assets after the transfer 1.

The Georgia, Oklahoma, and Texas Exemptions. See Ga. Code Ann. § 48-8-3(21); Okla. Stat. tit. 68, § 1360(1)(c); Tex. Tax Code § 151.304(b)(3). The requirement that the transferor must retain a proportional interest in the transferred assets effectively limits the exemption to corporations with only one shareholder, or the incorporation of a partnership where the stock is not distributed to the partners but continues to be owned by the partnership.

2.

The Texas Exemption. Texas’s exemption is limited to transfers of “substantially all of the property used by a person in the course of an activity.” Tex. Tax Code § 151.304(b)(3). For purposes of the Texas exemption, “substantially all” means 80% or more. 34 Tex. Admin. Code § 3.316(e)(3). Presumably, the activity in which the transferred property is engaged must be continued by the transferee corporation.

TREATMENT OF CONSIDERATION OTHER THAN AN EQUITY INTEREST IN THE TRANSFEREE A.

Cash and Other Property (“Boot”) 1.

Some states exempt the entire transfer of TPP regardless of the consideration a transferee receives in the Corporate Transaction. a.

{N2450921.1}

Illinois, Georgia, Texas, and Oklahoma are examples of states that exempt the entire transfer regardless of the consideration received. See Ga. Code Ann. § 48-8-3(21); 35 Ill. Comp. Stat. 120/1; Ill.

Acquisitions, Mergers and Divestitures

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Admin Code tit. 86, § 130.110(a); Okla. Stat. tit. 68, § 1360(1)(3); Tex. Tax Code § 151.304(b)(3). b.

2.

VI.

Maryland exempts the entire transfer of TPP as long as the transferor principally receives stock in exchange for the transfer. Md. Code Ann., Tax-Gen. § 11-209(c)(1)(ii). For purposes of the Maryland exemption, the term “principally” means 50% or more of the consideration received in exchange for the TPP is stock in the transferee company. Md. Code Regs. 03.06.01.13(B)(3). Liabilities transferred to the transferee corporation as part of the transaction are considered to be “other property” received by the transferor corporation only if the transferor sells TPP or taxable services in the ordinary course of its business. Md. Code Ann., Tax-Gen. § 11-209(c)(2).

Some states impose a Sales Tax only on the portion of the transfer of TPP that is in exchange for cash or other property. a.

For example, New York, New Jersey, and Vermont statutorily impose Sales Tax on the proportion of the transfer of TPP that is in exchange for cash or other property. See N.Y. Tax Law § 1101(b)(4)(iv)(D); N.J. Rev. Stat. § 54:32B-2(e)(4)(E); 32 Vt. Stat. Ann. tit. 32, § 9742(5). New York does not impose Sales Tax if liabilities assumed by the transferee corporation are secured by the transferred assets. However, the assumption of liabilities by the transferee corporation will be treated as a payment of cash that will result in Sales Tax liability to the extent the transferee corporation assumes unsecured liabilities or liabilities secured by assets which have not been transferred to the transferee corporation. See N.Y. Comp. Codes R. & Regs. tit. 20, § 526.6(d)(5)(v), (iv).

b.

California also imposes Sales Tax on the part of the transfer in exchange for cash or other property. Cal. Code Regs. tit. 18, § 1595(b)(4). In fact, California's Supreme Court has held the complete assumption of liabilities of the transferor is treated as consideration that is subject to the Sales Tax even in transactions that take place entirely within a consolidated group. Beatrice Co. vs. State Bd. of Equalization, 6 Cal. 4th 767 (Cal. 1993).

TAX-FREE CORPORATE TRANSACTIONS UNDER SECTION 368 OF THE INTERNAL REVENUE CODE A.

{N2450921.1}

Types of Tax-free Reorganizations under I.R.C. Section 368(a): 1.

Statutory mergers 368(a)(1)(A).

or

consolidations

2.

Stock for stock reorganizations qualifying under Section 368(a)(1)(B). Acquisitions, Mergers and Divestitures

qualifying

under

Section

Page 15

B.

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3.

Voting stock for asset reorganizations qualifying under Section 368(a)(1)(C).

4.

Transfer of assets and divisive reorganizations qualifying under Section 368(a)(1)(D).

5.

Recapitalization reorganizations qualifying under Section 368(a)(1)(E).

6.

Reorganizations to change identify, form or place of business qualifying under Section 368(a)(1)(F).

7.

Forward triangular mergers qualifying under Section 368(a)(2)(D).

8.

Reverse triangular mergers qualifying under Section 368(a)(2)(E).

Statutory Mergers and Consolidations. Corporate transactions qualifying as tax-free reorganizations under I.R.C. Section 368(a)(1)(A) include merger and consolidation Corporate Transactions that qualify under the laws of the state of incorporation. 1.

Statutory Mergers. In a merger transaction, the acquiring company acquires the assets and assumes the liabilities of the target company, whose shareholders receive the stock of the acquiring company. In a merger transaction the target company is dissolved.

2.

Statutory Consolidations. A consolidation involves the transfer of the assets of two or more companies to a new corporation (the “Newco”) in exchange for stock of the Newco. In a consolidation, all transferor companies are dissolved.

3.

Sales Tax Treatment. Most states exempt from Sales Tax transfers of TPP made pursuant to statutory merger or consolidation Corporate Transactions. This exemption usually occurs by excluding transfers made pursuant to merger or consolidation transactions from the definition of “retail sale” for Sales Tax purposes. To qualify for exclusion from the definition of “retail sale,” a merger or consolidation transaction generally must qualify for state corporation law purposes. For example: a.

California provides that a transfer of TPP pursuant to a statutory merger is not a “sale” for Sales Tax purposes because it is a transfer by operation of law. Cal. Code Regs. tit. 18, § 1595(b)(3). Therefore, Sales Tax does not apply to transfers of TPP to a surviving corporation or a new corporation pursuant to a statutory merger or consolidation that qualifies under California’s corporation code or similar laws of other states.

b.

New York law provides that the term “sale at retail” does not include the transfer of property to a corporation solely in

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consideration for the issuance of its stock pursuant to a merger or consolidation transaction qualifying under the laws of New York or any other jurisdiction. N.Y. Tax Law § 1101(b)(4)(iv)(A).

C.

D.

Iowa provides that a transfer of property pursuant to a merger is not a “sale” if the merger is pursuant to the state corporation statutes, title passes to a surviving corporation without consideration and the merging corporation is extinguished and dissolved the moment the merger occurs. Iowa Admin Code 70115.20(422, 433).

d.

Some states exempt from Sales Tax any transactions that are income tax-free reorganizations under any of the subsections of I.R.C. Section 368. See, e.g., Wash. Admin. Code § 458-20106(4); Haw. Code R. § 18-237-1(a)(1)(C)(iv); Md. Code Ann., Tax-Gen. § 11-209(c)(1)(i).

Stock-for-stock Transactions Qualifying as Tax-free Reorganizations under I.R.C. Section 368(a)(1)(B) 1.

Stock-for-Stock Reorganizations. A stock-for-stock, tax-free reorganization under Section 368(a)(1)(B) includes the acquisition by one corporation, in exchange solely for all or part of its stock the stock of another corporation, if immediately after the acquisition the acquiring corporation has control of the other company.

2.

Sales Tax Treatment. Other than states that exempt all reorganizations described in Section 368, there are no specific statutory exemptions that cover stock-for-stock reorganizations. Because stock-for-stock reorganizations do not involve the transfer of any TPP for consideration, the transfers are not subject to Sales Tax in any jurisdiction.

3.

Other State Tax Considerations. Although the transfer of stock is not subject to Sales Tax, corporations involved in stock-for-stock reorganizations qualifying for tax-free treatment under Section 368(a)(1)(B) should consider whether the transaction has other state or local tax implications. For example, New York's Real Estate Transfer Tax will apply to the sale of a controlling interest of a corporation owning real property in New York State. Further, a change in control of a corporation in California may result in reassessment of the real property owned by the corporation for California property tax purposes.

Stock-for-Asset Acquisitions Qualifying as Tax-Free Reorganizations under I.R.C. Section 368(A)(1)(C) 1.

{N2450921.1}

c.

Voting-Stock-for-Asset Reorganizations. These transactions include the acquisition by one corporation in exchange solely for all or part of its voting stock of substantially all of the properties of another corporation, if Acquisitions, Mergers and Divestitures

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immediately after the acquisition the acquiring corporation has control of the other company. In a tax-free reorganization qualifying under Section 368(a)(1)(C), the acquired corporation generally must be liquidated. 2.

E.

{N2450921.1}

Sales Tax Treatment. For Sales Tax purposes, the form of a Section 368(a)(1)(C) reorganization is similar to a bulk sale of assets, which should be taxed similar to the sale of a business. See Section II, supra. Although a stock-for-asset acquisition may be tax-free for federal income tax purposes under Section 368(a)(1)(C), there is no blanket Sales Tax exemption for such transactions. The only exceptions include the few states that exempt all tax-free reorganizations under Section 368. In Simplicity Pattern Co. v. State Board of Equalization, 27 Cal. 3d 900 (1980), for example, the California Supreme Court held that a Corporate Transaction qualifying as a “C” reorganization is not tax-free for Sales Tax purposes even though the transaction could have been structured as a statutory merger qualifying under Section 368(a)(1)(A), which would have been exempt for Sales Tax purposes. This case illustrates the importance of form in Sales Tax planning.

Corporate Transactions Qualifying as Tax-Free Divisive Reorganizations under I.R.C. Section 368(a)(1)(D) 1.

Divisive Reorganizations. A tax-free divisive reorganization qualifying under Section 368(a)(1)(D) includes the transfer of all or part of a corporation’s assets to another corporation where immediately after the transfer the transferor and its stockholders are in control of the transferee corporation, as long as stock transferred to the transferred corporation is distributed in a transaction qualifying under I.R.C. Sections 354, 355, or 356.

2.

Sales Tax Treatment. Only states that exempt all Corporate Transactions that are income tax-free under any of the subsections of Section 368 specifically exempt divisive reorganizations qualifying for tax-free treatment under Section 368(a)(1)(D). However, if the transferee corporation is a newly-formed corporation, the transaction will likely be exempt for Sales Tax purposes as a transfer to a corporation solely in exchange for an equity interest in the transferee corporation. Further, the subsequent transfer of the newly-formed transferee corporation stock to the distributing corporation’s shareholders generally will not be subject to Sales Tax because it is a transfer of stock, which is an intangible asset.

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F.

G.

H.

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Recapitalizations Qualifying as a Tax-Free Reorganization under I.R.C. Section 368(a)(1)(E) 1.

Recapitalizations. Corporate transactions qualifying for tax-free treatment under Section 368(a)(1)(E) are simply recapitalizations of existing corporations.

2.

Sales Tax Treatment. There are no specific exemptions from the Sales Tax that are applicable to recapitalization Corporate Transactions. Because no TPP is transferred from one entity to another in connection with the recapitalization, there is no “sale” for Sales Tax purposes.

Changes in Form or Identity Qualifying as Tax-Free Reorganizations under I.R.C. Section 368(a)(1)(F) 1.

Change-in-Form Reorganizations. A change in identity, form or place or organization of one corporation generally qualifies as a tax-free reorganization under Section 368(a)(1)(F).

2.

Sales Tax Treatment. Generally, there are no specific statutory exemptions for changes in form, identity, or place or organization for Sales Tax purposes. However, in addition to states that exempt all Section 368 reorganizations, some states have specifically addressed “F” reorganizations. For example, Florida ruled that the conversion of a corporation to a limited liability company does not result in any sales for Sales Tax purposes because only the legal form of the company changed and there was no transfer of ownership of TPP. See Fla. Tech. Assistance Advis. No. 00A-049 (9/14/2000).

Triangular Mergers Qualifying for Tax-Free Treatment under I.R.C. Sections 368(a)(2)(D) and 368(a)(2)(E) 1.

Forward Triangular Mergers. A forward triangular merger is a merger with or into a subsidiary, with target shareholders receiving parent company stock in exchange for their target company stock. Forward triangular mergers are tax-free reorganizations qualifying under Section 368(a)(2)(D).

2.

Reverse Triangular Mergers. A reverse triangular merger is a merger of a subsidiary with or into a target corporation, whose shareholders receive parent company stock in exchange for their target company stock. Once a reverse triangle merger is completed, the target becomes a subsidiary of the parent company. Reverse triangular mergers qualify for tax-free treatment under Section 368(a)(2)(E).

3.

Sales Tax Treatment. For Sales Tax purposes, other than states that exempt all qualifying reorganizations under Section 368, there are no

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specific exemptions for triangular mergers. Further, even in states that provide an exemption for statutory mergers qualifying under Section 368(a)(1)(A), the exemption may not extend to triangular mergers where stock of the buyer’s parent is received as consideration rather than the stock of the acquiring corporation itself. See N.Y. Comp. Codes R. & Regs. tit. 20, § 526.6(d)(7). However, in the context of a reverse triangular merger, the target corporation survives the merger and becomes a wholly-owned subsidiary of the acquiring parent. Therefore, as a result of the merger, only the stock of the target has transferred to the purchasing corporation. There is no transfer of TPP. Thus, because stock is an intangible asset, there is no transfer of TPP for Sales Tax purposes. VII.

SURVEY OF AUTHORITIES REGARDING SALES/USE TAX ASPECTS OF BUSINESS RESTRUCTURINGS A.

Alabama 1.

Sales of excess sand, soil and fill dirt did not qualify for the casual sale exemption, since those products were used in conducting site preparation and asphalt paving. The judge coined a new term to describe these sales: “sub-business” of a primary business. D&J Enterprises, Inc. v. Dep’t of Revenue, Admin. Law Div., Dkt. No. 91-127 (Ala. Dep’t of Rev., ALJ Div. Nov. 2, 1995).

2.

Sale of entire ongoing business was exempt from tax as an occasional or casual sale because the regular course of the seller’s business was not the sale of its assets. Ala. Rev. Ruling No. 96-002 (4/1/1996).

3.

Transfer of furniture and fixtures, equipment and supplies from a corporation’s operating subsidiaries to a single intermediate holding company is a casual sale exempt from tax. Inventory and rental equipment would not be taxable as sales for resale. However, motor vehicles are taxable because they do not qualify as casual sales. Ala. Rev. Ruling No. 98-014 (12/14/1998).

B.

Arkansas. The isolated sale exemption that applied to furniture, fixtures and equipment did not apply to motor vehicles sold in an asset transaction even if the seller was not in the business of selling vehicles. Pledger v. Mid-State Constr. & Materials, Inc., 925 S.W.2d 412 (Ark. 1996).

C.

California. Sale of hospital equipment in conjunction with sale of hospital is exempt as occasional sale. Cal. Code Regs. tit. 18, § 1595(a)(3), authorizing “unitary” principles, was invalidated as abridgment of right to exemption. Ontario Cmty. Found. v. State Bd. of Equalization, 35 Cal. 3d 811 (1984).

D.

Connecticut. Contribution of assets and assignment of liabilities by a corporation to a new, wholly-owned subsidiary is exempt from tax as a casual sale. Assets included inventory, WIP, manufacturing equipment and miscellaneous personal

{N2450921.1}

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property. The subsidiary would carry on the same activities as the transferor division. Sale of property that is not in the ordinary course of the seller’s trade or business is a casual sale. Conn. Legal Ruling No. 94-11 (6/23/1994). E.

{N2450921.1}

Florida 1.

Sale by three subsidiary corporations of substantially all of their assets to one corporation was an occasional sale because, as to each selling corporation, less than three transactions occurred in the 12 previous months. Fla. Tech. Assistance Advis. No. 90A-011 (1/31/1990).

2.

Transfer of assets from a division was not taxable because it was an occasional or isolated sale of substantially all of the division’s activities at that location. The division did not engage in 2 or more transactions in the past 12 months. Fla. Tech. Assistance Advis. No. 95A-043 (9/21/1995).

3.

The sale of operating assets by a division of one legal entity to a separate legal entity was an exempt occasional or isolated sale exempt from sales tax. The fact that the division had made at least two salvage sales of maintenance equipment during the year did not hurt the exemption. The ruling is consistent with the department’s past policy, in that “occasional or isolated” sales have been interpreted to include sales which are not considered within the scope of a taxpayer’s ordinary course of business. To that end, the department considers the sale of assets pursuant to structural (corporate) reorganization, or sales which are so infrequent and/or removed from the taxpayer’s business, to be isolated or occasional sales, which should be exempt from tax. Fla. Tech. Assistance Advis. No. 95A-043R (10/25/1995) (revises No. 95A-043 for slight modification of facts).

4.

Transfer of TPP to a newly-formed subsidiary was not taxable because it was an isolated sale. The transfer was a contribution of capital. The transfer was not in the ordinary course of trade or business. Fla. Tech. Assistance Advis. No. 97A-050 (8/1/1997).

5.

Sale of substantially all of a division’s assets was an isolated sale not subject to tax. Including motor vehicles and inventory as part of sale, even though taxable, does not make entire transaction taxable. Fla. Tech. Assistance Advis. No. 99A-080 (12/30/1999).

6.

The taxpayer sold substantially all of the assets of its aerospace business; however, the taxpayer had made sales of obsolete, salvage assets on numerous occasions during the twelve months preceding the sale of the entire business. In its ruling, the Department of Revenue distinguished the taxpayer’s sale of substantially all of its business assets from its sale of obsolete and salvage property. As a result, the Department concluded that

Acquisitions, Mergers and Divestitures

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the sale of the business qualified as an occasional or casual sale. Fla. Tech. Assistance Advis. No. 94(A)-008 (1/14/1994). 7.

A sale of computer equipment to an unrelated third party as part of technology outsourcing arrangement qualified as an isolated or occasional sale. The Department concluded the isolated or occasional sale exemption applied notwithstanding the fact that no sales tax was paid on the original acquisition of the computer equipment, because the purchasers were tax exempt entities under I.R.C. § 501(c)(3). Fla. Tech. Assistance Advis. No. 06A-013 (6/2/2006).

F.

Indiana. Indiana Sales Tax applied to the contribution of a riverboat to an LLC by its parent corporation. Initially, the Indiana Tax Court treated the contribution as a transfer without consideration. However, the Indiana supreme court reversed, finding that the stock issued by the LLC to the parent corporation or the agreement by the LLC to operate the riverboat as a casino constituted consideration for the transfer. Belterra Resort Ind., LLC v. Ind. Dep’t of Revenue, Dkt. No. 49T10-0605-TA-49 (Ind. Tax. Ct. Feb. 4, 2009), rev’d, 935 N.E.2d 174 (Ind. 2010).

G.

Iowa. Seller of three motor vehicles and an aircraft in separate transactions, within 12 months, cannot claim casual sale exemption for third and fourth transactions. Casual sale is of nonrecurring nature and is outside the regular course of business. More than two events within 12 months are treated as recurring. In re Superiorgas, Ltd., Dkt. No. 89-30-L-0038 (Iowa Dep’t of Rev. & Fin. Nov. 27, 1991).

H.

Kentucky

{N2450921.1}

1.

Transfer of substantially all equipment to related corporation to be leased back to original corporation is isolated transaction. Mountain Enterprises, Inc. v. Revenue Cabinet, Dkt. No. K83-R-41 (Ky. Bd. Tax. App. Sept. 25, 1984).

2.

Transfer of tangible personal property included in the purchase of ongoing motel operation. All assets held to be used in operation of motel. Kentucky law provides rental of room, lodging, etc., by motel is retail sale. Sale of property is in the course of business and not an isolated sale. Therefore, shouldn’t sale for resale exemption apply? WRP Corp. v. Revenue Cabinet, Dkt. No. K83-R-54 (Ky. Bd. Tax. App. Oct. 19, 1984).

3.

Sale of equipment by coal company “going out of business” subject to tax. Sales did not qualify as “occasional sale” since number of sales made exceeded two for which exemption permitted. Corum & Co. v. Commonwealth, Dkt. No. K82-R-73 (Ky. Bd. Tax. App. Oct. 12, 1983), aff’d, 700 S.W.2d 417 (Ky. Ct. App. 1985).

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4.

Occasional sale exempt from tax if seller does not make more than two such sales during a 12-month period. Sale of business assets held or used by the seller in the ordinary course of its business, for which a seller’s permit is required is taxable. In sale of entire business, receipts from fair retail value of business assets held or used in the course of seller’s activities which require seller to have seller’s permit and which is acquired by purchaser for use is not for resale and is taxable. Ky. Rev. Cabinet, Ky. Tax Alert, 9/86.

5.

Asphalt manufacturer was denied occasional sale exemption because more than 33 transactions occurred during efforts to sell assets, thereby exceeding the statutory limit of two. Ken-Tenn Constr. Co. v. Revenue Cabinet, Dkt. No. K87-34-R (Ky. Bd. Tax App. Apr. 7, 1989).

6.

The sale of the assets of a debtor that were used in debtor’s business of manufacturing and storing prepared food in connection with a sale under §363 of the Bankruptcy Code was exempt as an occasional sale. In Re Jay’s Cafeteria, Dkt. No. 04-30170(2) (Bankr. W.D. Ky. June 30, 2005).

I.

Louisiana. Sale of old unusable barges by company that is engaged in the business of leasing or servicing barges and not in the business of selling barges was exempt as an isolated sale. Marmac Corp. v. McNamara, 546 So. 2d 585 (La. Ct. App. 1989).

J.

Minnesota

{N2450921.1}

1.

Isolated sale of services is not taxable (i.e., sale by a person providing a service who is not regularly engaged in the business of providing that service). To be in the business of providing a service, provider must engage in activities, such as soliciting sales, advertising and entering into written contracts to provide services. Minn. Rev. Notice No. 91-5 (7/29/1991).

2.

Acquiring corporation was not entitled to the isolated occasional sale exemption because the equipment was considered inventory assets. Inventory was used in business rather than leasing or selling it to others. Corporation installs underground gas pipelines for utility companies. Acquisition purchased substantially all the assets of an affiliate. This included construction equipment which had been previously leased by the corporation and upon which the corporation paid sales tax. The Commissioner of Revenue imposed sales tax on the construction equipment, stating that it was inventory used in the business rather than inventory held for lease or sale to others. Since the seller had not paid tax upon the purchase of the equipment, the corporation was not entitled to an exemption under the isolated or occasional sale provision. Aconite Corp. v. Comm'r of Revenue, Dkt. No. 6465 (Minn. Tax Ct. Sept. 8, 1995).

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K.

Missouri. Taxpayer’s transfer of TPP from an operating division to a buyer was exempt as not made in the ordinary course of the taxpayer’s business. Taxpayer had three separate operating divisions, each manufacturing and selling a discrete product line. The revenue department ruled that the transfer of TPP from one of the divisions to an unrelated buyer was incident to the liquidation or cessation of that division’s business. The fact that the taxpayer divested itself of the manufacturing facilities of all three divisions in Missouri did not seem to be a factor in the department’s decision. The transfer qualified for exemption as “transfer of tangible personal property incident to the liquidation or cessation of taxpayer’s trade or business,” and not “made in the ordinary course of the taxpayer’s trade or business.” Mo. Private Letter Ruling No. L8682 (1/25/1996).

L.

New Jersey

M.

{N2450921.1}

1.

Casual sale is one which occurs four or fewer times in a calendar year and involves the sale of TPP not normally sold by seller that was purchased for the seller’s own use. An agent can be employed to aid in sale so long as property is not removed from the seller’s premises. N.J. Div. of Taxation, State Tax News, July/August, 1989.

2.

The sale, transfer, or assignment in bulk of any part of the whole of a transferee’s business assets, other than in the ordinary course of business, is deemed a casual sale and is exempt from New Jersey sales and use tax. A casual sale is an isolated or occasional sale of tangible personal property by a person who is not regularly engaged in making such sales at retail where such property was obtained by the person making the sale for his or her own use in the state. The purchaser must notify the Director of the N.J. Division of Taxation of the proposed transfer at least 10 days prior to taking possession. Letter Regarding Exempt Casual Sales, N.J. Dep’t of the Treasury, Div. of Taxation, 4/14/2004.

New York 1.

Corporate restructuring of multistate operations involving the transfer of tangible personal property from a subsidiary to another subsidiary in exchange for the new subsidiary’s stock is not a retail sale and is not taxable. Similarly, a transfer to a partnership or single member LLC in exchange for an interest therein is not taxable. N.Y. Advis. Op. No. TSBA-98(2)S (1/30/1998) (Deloitte & Touch LLP).

2.

Equipment transferred to a joint venture by two corporations as consideration for an interest in the joint venture, where profits would be divided equally, was not taxable because it was not a retail sale. N.Y. Advis. Op. No. TSB-A-98(4)S (2/2/1998) (King).

3.

A sole proprietor contributed his business assets and liabilities to a partnership in exchange for a 94% interest in the partnership. The

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administrative law judge (ALJ) rules that the contribution was not subject to New York sales tax even when liabilities were assumed in the transfer. With respect to corporate transfers, the regulations provide that an assumption of liabilities by a corporation is taxable consideration. The regulations are silent with respect to liabilities transferred to a partnership. The ALJ stated that the reason for the difference in the regulations was obvious because a partner is liable for a partnership’s debt while a stockholder is not liable for the debts of a corporation. A person who transfers property, including liabilities, to a partnership in exchange for a partnership interest is not relieved of obligations when liabilities are assumed by the partnership. Accordingly, the ALJ rules that no consideration supported the transaction, and therefore, no sales tax was due. In re Petition of Beautiful Visions Co., Dkt. No. 810495 (N.Y. Div. Tax App. Jan. 6, 1994). N.

Tennessee. Transfer of tangible personal property by mergers and liquidation pursuant to a plan of reorganization is not taxable because it is a casual sale; transfer of inventory is not taxable because it is a sale for resale; and transfer of motor vehicles is taxable because the statute says so. Tenn. Letter Ruling No. 9906 (3/17/1999). See also Tenn. Letter Ruling No. 99-27 (8/20/1999).

O.

Texas

{N2450921.1}

1.

Sale of boat and motor was not an exempt “occasional sale” because seller held sales tax permit. Occasional sale is statutorily limited to two or less transactions a year of taxable items or the sale of all business assets, or a branch or a division. Sellers not only held sales permit but continued to do business with merchants with whom they had dealt when they operated in marina. Tex. Comptroller’s Dec. No. 24642 (5/15/1989).

2.

Transfer by subsidiary to parent was not an occasional sale by acquiring company because all or substantially all (greater than 80%) of the property was used by the parent in its activity. Parent did not prove that the property received was 80% or more of the property used by the parent in any particular activity. Is focus on parent correct? Tex. Comptroller’s Dec. No. 24557 (4/6/1989).

3.

Occasional sale means sale of operating assets of a business, a separate division, or an identifiable segment of a business. The income and expenses of the separate business, division, etc., must be separately ascertainable. Since seller had no books and records from which expenses attributable to the sale could be extrapolated, the sale of a cooling bed was not exempt from tax as an occasional sale. Tex. Comptroller’s Dec. No. 25090 (5/17/1990).

4.

Single sale made during twelve-month period before tax permit was obtained was still exempt. At time of sale, seller had not held assets as if

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being engaged in business and had not engaged in business. Comptroller’s Dec. No. 26896 (6/29/1990). 5.

P.

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Tex.

Purchase of aircraft by Texas resident from fabric manufacturer did not qualify for the Texas occasional sale exemption, because fabric manufacturer was engaged in business of sell, leasing or renting taxable items (fabric). Decision not effected by fact that aircraft was not the type of taxable item the manufacturer usually sold. Tex. Comptroller’s Dec. No. 103,801 (12/20/2010).

Virginia 1.

Sale of business assets by corporation to LLC was exempt from tax because substantially all of the business assets were sold. Va. Pub. Doc. Ruling No. 96-39 (4/5/1996).

2.

Sale of portrait segment of business was exempt as a casual sale because it represented substantially all of the seller’s business (about 80%). The remaining assets retained by the seller were minimal. Va. Pub. Doc. Ruling No. 96-147 (6/19/1996).

3.

Transfer of tangible assets held by parent corporation to a wholly-owned subsidiary in exchange for stock of subsidiary was not taxable because the transfer was part of a reorganization under the occasional sale exemption. Even though the transfer was a small portion of the parent’s assets and the parent continued business, it was still an occasional sale - a federally tax free-reorganization under I.R.C. § 351. Va. Pub. Doc. Ruling No. 97-332 (8/27/1997).

4.

Sale of one out of two hotels is not an occasional sale because the sale was not of all or substantially all of the assets. Va. Pub. Doc. Ruling No. 97313 (7/29/1997).

5.

Purchase of a construction tractor was taxable and not an occasional sale because the seller sold tangible personal property that required it to hold a registration certificate and seller had more than three such sales during calendar year. Va. Pub. Doc. Ruling No. 98-64 (3/27/1998).

6.

Sale of 8 hotels in seven months is taxable. Occasional sale exemption did not apply. Taxpayer was created to acquire and sell the hotels from a bankruptcy proceeding. Since the normal business was the sale of hotels, occasional sale exemption did not apply. Va. Pub. Doc. Ruling No. 98-53 (4/7/1999).

7.

Sale of a corporate division was an occasional sale not subject to tax. Va. Pub. Doc. Ruling No. 99-69 (9/16/1999).

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Q.

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8.

Physician’s sale of medical equipment was taxable. Occasional sale exemption did not apply because after the sale the physician continued to operate a chiropractic business and no documentation was provided that a substantial portion of the assets of the medical practice had been sold. Physician was not permitted to treat the medical practice as a separate division because separate books or bank accounts were not maintained for the medical and chiropractic practices and the two practices had been operated at the same location. Va. Pub. Doc. Ruling No. 08-118 (6/26/2008).

9.

Purchase of seller’s North American public services consulting practice out of bankruptcy constituted an occasional sale. As part of seller’s plan of liquidation and reorganization, seller’s assets were sold over a period of five months, during which portions of the Seller’s business were sold to five separate entities. Va. Pub. Doc. Ruling No. 09-186 (12/18/2009).

10.

Sales of surplus equipment, materials and supplies by public school division will qualify for occasional sale exemption only if school division makes three or fewer sales within the calendar year. Va. Pub. Doc. Ruling No. 11-166 (9/27/2011).

11.

Purchase of all equipment, inventory, customer lists and other personal property located at retail stores owned by related entities will qualify for the occasional sale exemption, because the purchased assets constituted all, or substantially all, of the assets of the related entities. Va. Pub. Doc. Ruling, No. 13-22 (2/20/2013).

12.

Purchase of car dealership assets exempt from sales tax as an occasional sale, not withstanding seller’s retention of distinct and separate used motor vehicle-sales business. Va. Pub. Doc. Ruling No. 13-107 (6/19/2013).

Wisconsin 1.

Sale of furniture and equipment in operation of motel business exempt as occasional sale. Seller must not hold or be required to hold seller’s permit, or business must have ceased and permit delivered to department. Although motel operated continuously during change of ownership, seller not required to shut down motel to qualify for exemption. Hillmark Corp. Watson & Welch v. Wis. Dep’t of Revenue, Dkt. No. 5-11047 (Wis. Tax App. Comm’n Apr. 29, 1986).

2.

Sale of assets prior to surrendering seller’s permit voids occasional sale exemption. Surrender of permit effective 12:01 AM on postmark date. Surrender mailed 11:00 PM Saturday (3/3), postmarked Monday (3/5), received Tuesday (3/6). Closing on asset sale occurred after 11:00 PM on Saturday (3/3) and buyer took possession. Seller still holding seller’s permit at time of sale. Exemption does not apply. Fiedler Foods, Inc. v.

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Wis. Dep’t of Revenue, 419 N.W.2d 311 (Wis. Ct. App. 1988). In 1988, the statute was amended (apparently in response to this decision) to permit the seller 10 days to turn in seller’s permit. 3.

Sale of assets was not an occasional sale because seller held seller’s permit at time of sale. Even though seller tried to give up permit, seller continued to make taxable sales after sale of assets so it was required to continue to hold seller’s permit after the sale. Carrion Corp. v. Wis. Dep’t of Revenue, 507 N.W.2d 356 (Wis. Ct. App. 1993).

VIII. BULK SALE AND SUCCESSOR LIABILITY PROVISIONS A.

Bulk Sale Notification Requirements. When analyzing the Sales Tax implications of Corporate Transactions, tax planners must pay careful attention to bulk sale certification requirements, if any, of the relevant jurisdictions. When a company enters into a transaction where it purchases a major portion of another company’s assets, the purchasing corporation is frequently required under most state and local Sales Tax statutes to file a notice with the state’s department of revenue or equivalent agency within a specified period of time. Failure to file notification of the bulk sale typically will result in the purchaser being liable for the amount of tax, interest and penalties owed by the seller. Also, many states have “trust tax” provisions providing that persons responsible for collecting and remitting Sales Taxes, such as corporate officers and directors, are liable for any deficiency.

B.

Successor Liability Laws. In addition to the bulk sale provisions, most states impose some type of successor liability in connection with Corporate Transactions, including asset transactions.2 Many states also provide procedures for successors to avoid successor liability by notifying tax authorities of the pending Corporate Transaction and getting clearance from the tax authority or withholding sufficient funds from the Corporate Transaction to cover any unpaid taxes and related amounts. State laws regarding successor liability and enforcement of those laws vary from state to state. Tax planners must be aware of the successor liability laws in relevant states and consider the benefits and burdens of compliance with the applicable procedures. There are advantages and disadvantages to compliance with these procedures as reflected in the chart below:

2

For an excellent guide to state successor liability laws, see Janette M. Lohman et al., A Business Planning Guide to Successor Liability Laws, Part 1, STATE TAX NOTES, Oct. 13, 2008, at 87; Janette M. Lohman et al., A Business Planning Guide to Successor Liability Laws, Part 2, STATE TAX NOTES, Oct. 20, 2008, at 143.

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Advantages

C.

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Disadvantages

Avoidance of liability

Exposure

Adjustment to purchase price

Audit

Information (outstanding liability, future exposure, posttransaction planning)

Time constraints

Selected Examples of Bulk Sale Notification Requirements 1.

Illinois. The Illinois bulk sale notification provisions require any taxpayer that sells outside of the usual course of its business the major part of the stock of goods that the taxpayer is engaged in selling or its furniture and fixtures, or machinery and equipment, or real property of any business, is subject to file no later than 10 days after the sale or transfer a notice of sale or transfer of business assets with the Chicago office of the Department of Revenue. The notice must disclose the name and address of the seller or transferor, the name and address of the purchaser or transferee, the date of the sale or transfer, a copy of the sales contract and financing agreements, which sale includes a description of the property sold, the amount of the purchase price or a statement of other consideration for the sale at transfer, the terms for payment of the purchase price and such other information as the Department may reasonably require. If the purchaser or transferee fails to file the abovedescribed notice with the Department within the time allowed, the purchaser or transferee will be personally liable for the amount of Sales Tax owed to the Department up to the amount of the reasonable value of the property acquired by the purchaser. Ill. Admin. Code tit. 86, § 130.1701(a).

2.

New York. In New York, notification of a bulk sale is required at least 10 days prior to the Corporate Transaction. If proper notice is not provided to the Tax Commission, the purchaser becomes personally liable for the payment of any Sales Tax owed as a result of the Corporate Transaction. Further, any money or other consideration given to the seller in the corporate transaction is subject to a first priority lien in favor of any Sales Tax owed. N.Y. Comp. Codes R. & Regs. tit. 20, § 537.2.

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3.

D.

New Jersey. New Jersey requires a transferee or assignee of a corporation’s assets to notify the Director by registered mail of the proposed sale at least 10 days prior to taking possession of the TPP sold. N.J. Stat. Ann. § 54:32B-22. The Division’s Bulk Sale Section then sends the buyer notification by the transaction date that (a) the seller has no outstanding or potential tax liabilities (and that the buyer need not withhold any amounts) or (b) the buyer should withhold a stated amount in an escrow account until the seller demonstrates that it has satisfied such tax liabilities and received a tax clearance certificate from the state.

Withholding Requirement. Some states require purchases in Corporate Transactions to withhold from the consideration paid a sufficient portion of the purchase price to cover the seller’s outstanding Sales Tax liability. 1.

For example, Nebraska requires any successor purchasing the business or stock of goods of a selling corporation subject to the Sales Tax to withhold a sufficient portion of the purchase price to cover the selling corporation’s outstanding Sales Tax obligations until the seller produces a receipt from the Nebraska Tax Commissioner showing that all taxes have been paid or a certificate stating no amount is due. Failure to do so subjects the successor to liability to the extent of the purchase price. Neb. Rev. Stat. § 77-2707.

2.

In Louisiana, successors or assigns of a business or stock of goods of a Louisiana dealer, as defined for Sales Tax purposes, must withhold from the purchase price an amount sufficient to pay any Sales Taxes, interest, and penalties due and unpaid until the seller produces a receipt from the Secretary of the Louisiana Department of Revenue that all Sales Taxes have been paid or a certificate that no taxes, interest, or penalties are due. Any purchaser failing to withhold sufficient purchase money shall be personally liable for seller’s unpaid Sales Taxes, interest and penalties. La. Rev. Stat. Ann. § 47:308(A).

E.

Bulk Sale Notification in Voting Stock-for-Asset Mergers. Purchasers involved in a Corporate Transaction qualifying as a tax-free reorganization under I.R.C. Section 368(a)(1)(C), which is a voting stock-for-assets acquisition, must also comply with bulk sale notification provisions, if any, of the affected jurisdictions.

F.

Selected State Survey of Bulk Sale Provisions 1.

California a.

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If buyer does not withhold from purchase price of a business an amount sufficient to cover taxes, interest and penalties of the predecessor, it can be liable for that amount up to purchase price of business. Avoid liability by requesting clearance certificate.

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Buyer will be given either certificate or balance due statement. Cal. Rev. & Tax. Code §§ 6811-6813. b.

2.

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Transfer of assets by parent corporation to its subsidiary corporation in exchange for the subsidiary corporation’s stock and the subsidiary corporation’s assumption of the parent corporation’s liabilities is taxable. Parent corporation’s remaining primarily liable for debts assumed was irrelevant. Beatrice Co. v. State Bd. of Equalization, 6 Cal. 4th 767 (1993).

Connecticut. a.

The taxpayer purchased the assets of a business while taking several precautions to avoid successor liability, yet remained liable for the seller’s unpaid sale sand use tax assessments. Prior to consummation of the sale, the taxpayer requested that the Department of Revenue foreclose on its tax liens against the seller so that the taxpayer could purchase the assets at auction. The taxpayer also contacted the department twice regarding the taxpayer’s intentions to pay the sales price into an escrow account that would be divided among the seller’s creditors. Nevertheless, the superior court held that the taxpayer was subject to the successor liability rules because it did not obtain the necessary tax clearance, and it did not withhold from the sales price the amount specified. Red, White & Blue Transmission, Inc. v. Dep’t of Revenue Servs., 690 A.2d 437 (Conn. Super. Ct. 1994).

b.

Requirements and procedures for a purchaser of a business or stock of goods to request a tax clearance certificate are set forth in Connecticut Informational Publication 2011(16) (8/18/2011)..

3.

Georgia. The purchaser was liable for the sales tax liability of the seller as a successor even where it purchased only some of the assets, because it didn’t protect itself pursuant to Georgia Code section 48-8-46 by obtaining a tax clearance letter or withholding a portion of the sales proceeds to cover unpaid taxes. J.D. Design Group, Inc. v. Graham, 646 S.E.2d 227, (Ga. 2007).

4.

Illinois. Funds held in escrow pursuant to an agreement of sale for payment of taxes belonged to Illinois, not to the United States. An IRS lien only attaches to property or rights to which lien can attach. Escrow was for payment of Illinois taxes. Seller could not acquire interest in escrow funds until state release received. IRS had no claim to the escrow funds. Hoornster v. United States, 969 F.2d 530 (7th Cir. 1992).

5.

Iowa. Purchaser of business could be liable for seller’s unpaid taxes if sufficient money is not withheld at closing to satisfy unpaid tax, interest

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and penalty. Iowa Code § 423.33(2); Iowa Admin. Code 701-12.14 (422, 423). 6.

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Kentucky a.

Purchaser of retail grocery store was liable for tax on sales occurring prior to becoming the owner of the business. Purchaser assumes liability for taxes due and owing from the sales thereof or from the business activities themselves. Successor liability can be avoided by withholding sufficient proceeds from the sale to pay the tax or by having the seller produce a certificate evidencing the fact that all taxes are paid. Revenue Cabinet v. Triple R Food A Rama, 890 S.W.2d 638 (Ky. Ct. App. 1995).

b.

Purchaser was liable for seller’s delinquent taxes even though the statute of limitations barred an assessment against the seller. Failure to obtain a clearance certificate or to withhold the tax from the purchase price was sufficient to create liability. Statute does not tie liability of buyer to liability of seller. Successor liability extends to taxes incurred by predecessor’s operations even though liability for the tax was not determined against the seller. Columbia Steak House Sys., Inc. v. Revenue Cabinet, Dkt. No. 93CA-002875-MR (Ky. Ct. App. May 5, 1995).

c.

Seller who does not collect tax on sale of assets transfers liability to the buyer. Successor liability cannot be contractually avoided between buyer and seller. Ky. Revenue Cabinet, Sales Tax Facts, Vol. 3, No. 1, Spring 1998.

7.

Michigan. After a sale of assets and lease of a building to buyer, the buyer continued to operate on the seller’s tax account number and stopped filing after a period of time. Michigan was not notified of the sale. The court held that the seller was not liable for the tax incurred by the buyer even though the state was not notified. Detroit Hilton Ltd. Partnership v. Dep’t of Treasury, Revenue Div., 373 N.W.2d 556 (Mich. 1985).

8.

Missouri a.

Taxpayer purchased a motel complex without paying delinquent sales tax assessment from operation of business by former owner. The court held that the taxpayer was liable for unpaid taxes. The taxpayer, as a purchaser, was required to withhold from the purchase price enough to cover taxes, interest and penalties until seller established that all taxes were paid. Bates v. Dir. of Revenue, 691 S.W.2d 273 (Mo. 1985).

b.

A corporation which acquired a restaurant from a couple, who in turn had acquired it from a corporation, was the successor to a Acquisitions, Mergers and Divestitures

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sales tax assessment imposed on the prior owners. The commission rejected the argument that the purchaser was not the successor of the original owner and therefore, not liable for the tax. The law requires all successors to withhold a portion of the purchase price to cover unpaid taxes. Casa Verde Foods, Inc. v. Dir. of Revenue, Dkt. No. RS86-2355 (Mo. Admin. Hearing Comm’n Jan. 25, 1989).

9.

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c.

A corporation which paid $3,000 for a business was liable for 100% of business’ unpaid tax liability of more than $21,000 because it was the successor-in-interest. The statute does not limit buyer’s liability for seller’s obligation to amount paid for assets. Buyer was obligated to withhold tax and did not. Stuffin's Corp. v. Dir. of Revenue, Dkt. No. 92-000598 RV (Mo. Admin. Hearing Comm’n Feb. 9, 1993).

d.

Buyer of business is not liable for seller’s unpaid taxes because the state did not prove successor liability. The state must, and failed to, prove successor status and failure of buyer to withhold. Sliter v. Dir. of Revenue, Dkt. No. 93-000684RV (State Tax Comm’n Mo. Oct. 29, 1993).

e.

Where purchase price was delivered to an attorney to be held in escrow until seller’s tax obligations were resolved, purchaser was not liable for seller’s tax obligations because tax was withheld. DeShan, Inc. v. Dir. of Revenue, Dkt. No. 91-000253RZ (Mo. Admin. Hearing Comm’n Dec. 19, 1994).

f.

Nebraska corporation was not liable for Missouri tax as a successor corporation because it did not purchase all or substantially all of the seller’s business property. The corporation purchased only certain items directly from seller. Title to inventory held by third party pursuant to bonded warehouse agreement. Inventory acquired from third party when it came out of bond. Fixtures and Mgmt. Supply, Inc. v. Dir. of Revenue, Dkt. No. 97-000771RV (Mo. Admin. Hearing Comm’n Apr. 23, 1998).

New Jersey a.

A transferee receiving property under a deed in lieu of foreclosure that did not notify Division of Taxation within the required time was liable for transferor's delinquent tax liabilities. N.J. Hotel Holdings, Inc. v. Dir., Div. of Taxation, 15 N.J. Tax 428 (1996).

b.

Purchaser of assets and liquor license of a restaurant was liable for taxes of the seller, because letter from registered agent of seller informing the Division of Taxation of a potential sale of the

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business did not satisfy the requirements for a bulk sale notice. The letter from the registered agent of the seller did not identify the prospective buyer, the sale price, the closing date, or whether the purchaser would assume liability for any taxes owed by the seller. Gabgeo, Inc. v. Dir., Div. of Taxation, 23 N.J. Tax 38 (2006).

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10.

New Mexico. Bank purchase of liquor license at foreclosure of debtor’s business is not subject to tax owed by lessee of license from the debtor because lessee was not a delinquent taxpayer for purposes of transfer of liquor license. Bank of Commerce v. State, 958 P.2d 753 (N.M. Ct. App. 1998).

11.

New York a.

Purchaser was derivatively liable for seller’s unpaid tax, interest and penalty. Failure to comply with statutory requirement of 10day notice to state of bulk sale before taking possession allows Division to impose liability on the purchaser. In re Petition of Giovanni Velez, Dkt. No. 802908 (N.Y. Tax App. Trib. May 26, 1988). The trial court reversed, holding that a bulk sale purchaser is not subject to interest and penalty for failure to timely notify state. Regulation imposing interest and penalty on purchaser for late notice was beyond the scope of the statute. In re Giovanni Velez v. Div. of Taxation, 152 A.D.2d 87 (N.Y. Sup. Ct. App. Div. 1989).

b.

Purchaser in a bulk sale was improperly relieved of the seller’s sales tax liability. In response to a notice of intent to purchase, the state informed the purchaser that a possible claim for taxes existed and that the state had the first claim of right on a portion of the purchase price. A portion of the purchase price was put in escrow and the lower court discharged the liability and relieved the escrow account. The N.Y. court of appeals held that liability was mistakenly discharged as the lower court failed to include in the consideration the purchaser’s assumption of the seller’s liabilities. Assumption of liabilities constitutes consideration and is subject to the first lien. Spandau v. United States, 73 N.Y.2d 832 (1988).

c.

Sale of assets in exchange for assumption of debt is a bulk sale. A security interest was given in seller’s assets, which were sold to the taxpayer subject to the seller’s obligation. The assumption of the seller’s debt is consideration for the sale of the assets. In re Petition of Peconic Bay Motors, Inc., Dkt. No. 805883 (N.Y. Div. Tax App. Jan. 10, 1991).

d.

Purchaser was held liable for seller’s unpaid taxes when purchaser failed to give timely notice of bulk sale to state. Purchaser’s

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liability was not limited to the amount the state could have collected directly from the consideration given to the seller. In re Petition of O’Brien, Dkt. No. 807505 (N.Y. Div. Tax App. July 3, 1991). e.

Purchaser in a bulk sale transaction was liable for seller’s tax up to the amount of the purchase price. The purchaser was liable for tax because it was not withheld from funds paid to the seller. The purchaser paid $6,000 to seller, a substantial portion of which was paid to the Division of Taxation. However, the purchaser received no credit against its liability because payment was made prior to the bulk sale notification. Why? Isn’t this double collection? In re Petition of Hermies' Music Store, Inc., Dkt. No. 813242 (N.Y. Tax App. Trib. Dec. 26, 1996).

f.

Buyer of a restaurant business was responsible for seller’s delinquent taxes because seller failed to comply with bulk sale notice. Liability transferred to buyer even though seller may have fraudulently misrepresented that all taxes were paid. B&D Corp. of Lake George, Dkt. No. 816349 (N.Y. Div. Tax App. Jan. 20, 2000).

g.

Buyer of a restaurant business was responsible for seller’s delinquent taxes because seller failed to comply with bulk sale notice. Liability transferred to buyer even though seller may have conducted a UCC search that showed no outstanding sales tax liens against the seller. In re Petition of New Ashiya Japanese Cuisine (NY), Inc., Dkt. No. 822030 (N.Y. Div. Tax App. Mar. 5, 2009).

h.

Purchaser of a retail liquor store business held liable for seller’s unpaid sales tax liability where purchaser failed to file its bulk sale notice at least ten days prior to the purchase. In the Matter of the Petition of Sky Liquor, Inc., Dkt. No. 823935 (N.Y. Div. Tax App. Mar. 14, 2013.

12.

South Carolina. A corporation’s transfer of all its assts to a newly-formed single member LLC was not subject to tax. The single member LLC was a disregarded entity for federal tax purposes and is disregarded for all state tax purposes. S.C. Private Revenue Op. No. 00-4 (7/10/2000).

13.

Tennessee a.

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Purchaser that paid no money for purchase of assets liable for seller’s unpaid tax as successor in business. Business transferred to buyer in consideration of cancellation of seller’s debt to buyer. Buyer agreed that since it received no money it could not withhold

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tax. Argument rejected, sales tax debt followed business assets. A Copeland Enter., Inc., 703 S.W.2d 624 (Tenn. 1986). b.

14.

15.

Texas a.

Purchaser was liable for seller’s unpaid tax even though it complied with U.C.C. bulk sale provisions. Purchaser failed to either withhold tax or obtain documentation required by tax statute. Compliance with U.C.C. does not supersede tax statutory requirement. Tex. Comptroller’s Dec. No. 24597 (9/1/1989).

b.

Purchaser was liable for the unpaid Texas sales and use tax liability of predecessor, even though the sales and use tax liability of the predecessor was assessed after the sale of the business to purchaser. Purchaser failed to request certificate of no tax due from Comptroller. Comptroller had no affirmative duty to inform purchaser of the audit or the assessment if purchaser did not request a certificate of no tax due. Tex. Comptroller’s Dec. No. 105,502 (12/7/2011)

c.

Attorney general can bring suit in state court against an alleged successor to recover tax, penalties and interest owed by a predecessor, without the Comptroller first issuing a determination of successor liability against alleged successor, and without first affording an alleged successor the opportunity for an administrative hearing. The State of Texas v. BFI Waste Services of Texas, LP, Docket No. 03-10-00504-CV (Texas Ct. of Appls. 3/23/2011).

Virginia a.

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A taxpayer who purchased the assets, but not the capital stock, of a bankrupt health club was not entitled to take Tennessee sales and use tax credits for bad debts resulting from the default membership contracts between the health club and its members because the taxpayer was not the dealer who had paid the tax. The taxpayer’s purchase of the health club’s capital stock, assumption of the liabilities associated with ownership of the stock, and merger with the health club eight years after the original purchase of the health club’s assets did not allow the taxpayer to claim the credits because the credits were no longer available at the time of the merger. Hollingsworth, Inc. v. Johnson, 138 S.W.2d 863 (Tenn. Ct. App. 2003).

If either stock in seller corporation or assets of seller corporation are sold to a new corporation formed by buyer, buyer is liable for taxes accrued during seller’s period of operation unless buyer

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withholds the tax or until a clearance certificate is presented. Va. Pub. Doc. Ruling No. 96-161 (6/28/1996). b.

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The sale of 99% of a North Carolina corporation’s Virginia assets to a limited liability company in exchange for the sole ownership interest in the limited liability company qualified as an occasional sale, even though the remaining one percent would be transferred on a state-by-state basis over a 12 to 13 month period. Va. Pub. Doc. Ruling No. 00-1 (1/17/2000).

16.

Washington. A guarantor who repossessed inventory following the debtor’s default was not a successor and was not liable for the debtor's taxes. There was no consideration upon repossession (what about satisfaction of debt?) and as the holder of a security interest, no title change occurred (is the holding of a security interest holding title?). Palmer v. Dep’t of Revenue, 917 P.2d 1120 (Wash. Ct. App. 1996).

17.

Wisconsin a.

Buyer of inventory from dealer going out of business was liable for seller’s unpaid tax when he opened similar business, in same place. It was irrelevant that buyer operated under different name, with own unique phone number, negotiated own lease, obtained own occupancy permit, had no claim against seller’s receivables or customer list and did not honor seller’s warranties. Reichard Yamaha, Inc., Dkt. No. S-10959 (Wis. Tax App. Comm’n Aug. 6, 1985).

b.

Purchaser of equipment from a corporation owing the tax was a successor to the selling corporation's debt, because purchaser did not withhold tax owed from the purchase price and no clearance certificate was obtained. Payment of the entire purchase price to a secured creditor did not relieve purchaser of obligation to withhold. However, the case was remanded to the revenue department because remedies against seller must first be exhausted and were not. Before proceeding against a purchaser, the department is required to pursue the predecessor and to seek imposition of personal liability against the responsible corporate officer. Kastengren v. Wis. Dep’t of Revenue, 508 N.W.2d 431 (Wis. Ct. App. 1993).

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IX.

CORPORATE TRANSACTIONS MODEL

Corporate Transactions Model Asset

Nontaxable

Taxable

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Type A Type C Forward Triangular Merger Type D §351

Contractual Forward Cash Merger §1060 §338

Stock Type B Reverse Triangular Merger §351

Direct Stock Purchase Reverse Cash Merger §338

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