Did a trust or its downstream hotel buyers inherit prior owners' sales tax after the trust foreclosed on the hotel property?

Plain-English summary

A trust held a note secured by a hotel. After the limited-partnership owner defaulted, the trust acquired the real property, improvements, furniture, fixtures, equipment, and inventory as bidding beneficiary at a trustee's sale. It then planned separate sales of the operating personal property and the real estate to new parties.

California said the trust's foreclosure did not make it successor to the defaulting hotel owner or earlier predecessors. Because the trust had no tax or successor liability for those parties when it sold the property, downstream purchasers had no section 6811 duty to withhold for that old liability.

That did not eliminate every tax risk. If the trust was a retailer, its own sale of tangible personal property could be taxable. Failure to pay that new sales tax could expose the trust's buyers to successor liability for the trust's debt. The buyers also could take title subject to existing state tax liens under section 6757.

What this means for you

Foreclosing lenders, hotel investors, operators, and tax advisers

Separate three layers: predecessor operating tax, tax on the foreclosing owner's own resale, and liens attached to the property. The foreclosure exception resolves only the first layer here.

Common questions

Q: Did the trust inherit the former hotel's tax debt?

A: No, under the foreclosure exception.

Q: Did downstream buyers have to withhold for that old debt?

A: No, because the trust itself had no liability for it.

Q: Could the trust's own sale create tax?

A: Yes, and unpaid tax on that sale could create new successor exposure.

Q: Could tax liens remain?

A: Yes.

Citations and references

• California Revenue and Taxation Code §§ 6757 and 6811–6815
• California Sales and Use Tax Regulation 1702(a) and (b)
• Former California Commercial Code § 9501(4)(a)(ii)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 535.0025
• Original supporting opinion: 535.0025 PDF

Original ruling text

535.0025
STATE OF CALIFORNIA
MEMBER
First District

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916)920-6563

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

January 27, 1994

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

This is in reply to your September 14, 1994 letter regarding the application of successor's liability for sales and use tax owed by __ given the following facts you described: “Pursuant to a Hotel Purchase Agreement dated August 15, 1994, and subsequent assignments of the purchaser's rights and obligations, _ and , Co-Trustees of the Trust (the 'Seller'), will sell to the furniture, fixtures, equipment and inventory, and to the real property and improvements, which together constitute the in , California (the 'Property'). will, in turn, lease property and improvements to , which will assume an existing 'Hotel Operating Agreement' with Hotel Company. “Prior to its acquisition of the Property, the Seller was the holder of a note from , a California limited partnership ('') secured by the Property. defaulted on the note and the Seller foreclosed on the security. The real property and improvements were acquired by the Seller as the bidding beneficiary at a trustee's sale held on May 2, 1994 (the ‘Trustee's Sale’).” A copy of the Trustee's Deed Upon Sale is attached. The personal property, including the furniture, fixtures, equipment and inventory were also acquired by the Seller at the Trustee's Sale pursuant to Section 9501(4) (a) (ii) of the California Uniform Commercial Code. “In the process of the due diligence review being conducted by and , it was discovered that the State Board of Equalization has issued to a Demand for Immediate Payment dated June 7, 1993 for a total amount of tax, interest and penalties in the amount of $911,214 (the 'Tax Liability').” You asked for our opinion that neither nor , nor any of their successors will incur successor's liability for ___’ tax liability, or for any other sales or use tax liability, penalties or interest of any predecessor owner of the property incurred prior to the trustee's sale under Sections 6811 through 6815 of the Revenue and Taxation Code or Sales and Use Tax Regulation 1702, Successor's Liability. As you noted, subdivision (a) of Regulation 1702 provides that successor's liability does not arise in connection with the transfer of a business pursuant to the foreclosure of a mortgage. On the other hand, subdivision (b) of Regulation 1702 provides that the liability of a successor or purchaser of a

535.0025
business or stock of goods extends to amounts incurred with reference to the operation of the business by the predecessor or any former owner. We believe that __ Trust's foreclosing on the mortgage does not result in the Trust's incurring successor's liability for sales and use tax liability owed by _ or a prior predecessor. (Sales and Use Tax Reg. 1702, subd. (a).) We also believe that, under the facts you provide, neither
nor incur successor's liability for the liability of or any of its predecessors. We agree with your conclusion that the Board would defeat the policy of subdivision (a) of Regulation 1702, expressed above, if the Board were to impose successor's liability against and for that liability, because the burden of the liability would fall on the Trust. If the Trust had no tax liability nor successor's liability at the time of the sale, then the purchaser from the Trust has no duty under Revenue and Taxation Code section 6811 to withhold any of the purchase price. On the other hand, if Trust is a retailer, the sale of tangible personal property by the Trust is subject to sales tax. In such case, if the Trust's sale were subject to sales tax, and the Trust does not pay sales tax on that sale, or would incur successor's liability for any such liability owed by the Trust. Also, and ___ may take title to the real property and tangible personal property subject to state tax liens imposed pursuant to Revenue and Taxation Code section 6757. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel