Did a surviving corporation's Chapter 11 stay also protect the liabilities of a corporation that had merged into it?

Plain-English summary

California legal staff concluded that a surviving corporation's Chapter 11 automatic stay covered tax liabilities inherited from a corporation that had merged into it.

The surviving corporation acquired all assets and liabilities in a statutory merger, continued operating under the former corporation's permit number, and later filed Chapter 11. California then issued a jeopardy determination in the former corporation's name and another determination in the survivor's name for pre-petition liabilities.

Because the merged corporation's liabilities had become the survivor's liabilities before bankruptcy, staff said both post-petition determinations violated the stay. The Board could still audit during bankruptcy and pursue the liabilities through valid proofs of claim. Staff recommended canceling the jeopardy determination, continuing collection through the bankruptcy claims, and suspending other administrative action while the stay remained effective.

Common questions

Did using the former corporation's permit number keep its liabilities outside the stay?

No. Staff focused on the statutory merger, under which the survivor had succeeded to the former corporation's assets and liabilities.

Could California continue the audit?

Yes, according to the memorandum.

How could California pursue the liabilities?

Through its proofs of claim in the bankruptcy, while suspending other administrative action covered by the stay.

Citations and references

• Statutory-merger documents — basis for treating the former corporation's liabilities as liabilities of the survivor
• Bankruptcy proofs of claim — collection route the memorandum said remained valid
• November 28, 1994 E. L. Sorensen memorandum — earlier stay guidance referenced in the source

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/170-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/170-0295.pdf

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

170.0295

Memorandum
To:

Mr. Vic Anderson, Supervisor
Petitions Section – MIC: 38

From:

Thomas J. Cooke
Staff Counsel

Subject:

REDACTED TEXT
REDACTED TEXT

Date:

January 10, 1996

Gary Jugum has requested that I respond to your memorandum to him dated December 29, 1995 concerning the above taxpayers. In your memorandum, you state that, on or about June 1, 1992, the assets and liabilities of REDACTED TEXT, an Arizona corporation (REDACTED TEXT) were transferred by statutory merger to REDACTED TEXT, a Nevada corporation (REDACTED TEXT). REDACTED TEXT failed to notify the Board of the change in ownership, and REDACTED TEXT operated using the REDACTED TEXT permit number of REDACTED TEXT. On August 17, 1994, REDACTED TEXT filed Chapter 11 bankruptcy. A jeopardy determination was issued to REDACTED TEXT on December 22, 1994, and a non-jeopardy determination was issued to REDACTED TEXT on December 23, 1994. Both determinations were for pre-petition tax liabilities. Pursuant to Mr. E. L. Sorensen’s memorandum of November 28, 1994, the determination issued to REDACTED TEXT was canceled as it was issued in violation of the bankruptcy automatic stay. You state that you are unsure whether the jeopardy determination issued to REDACTED TEXT also violated the automatic stay. The representative for REDACTED TEXT filed a request for an administrative hearing on the jeopardy determination issued to REDACTED TEXT, along with a protective claim for refund for REDACTED TEXT’s $10,000 cash security deposit that was applied to the liability. You request an opinion as to the action to be taken with respect to the jeopardy determination, the cash security deposit, and the request for an administrative hearing. In a statutory merger, the surviving corporation succeeds to all of the assets and outstanding liabilities of the defunct corporation. At the time that REDACTED TEXT filed for bankruptcy protection, all of the assets and liabilities of the former corporation referred to as REDACTED TEXT were then the assets and liabilities of REDACTED TEXT. The bankruptcy automatic stay therefore encompassed the business operations and liabilities of the former corporation known as REDACTED TEXT. Since the surviving corporation filed bankruptcy

Mr. Vic Anderson

-2-

January 10, 1996
170.0295

prior to October 22, 1994, the Board violated the automatic stay when it issued the jeopardy determination against REDACTED TEXT on December 22, 1994, and when it issued the determination against REDACTED TEXT on December 23, 1994. The Board may conduct an audit of a taxpayer’s business during the taxpayer’s bankruptcy proceeding without violation of the automatic stay (even for pre-October 22, 1994 bankruptcies). The Board’s proofs of claim filed in REDACTED TEXT’s bankruptcy are valid even if determinations were issued which violated the automatic stay. It is our recommendation that the jeopardy determination be canceled, as it was issued in violation of the bankruptcy automatic stay, that the Board continue to collect the audit liabilities through its proofs of claims filed in the bankruptcy action, and that the Board suspend any other administrative action on the taxpayer’s accounts while the automatic stay is in effect. TJC:sr