Did a buyer's successor liability include the price of trucks used as capital assets in a trucking service business?

Plain-English summary

A company primarily operated a trucking service but also held a seller's permit and DMV license for an incidental truck-selling business. It transferred substantially all enterprise assets for stock, assumed liabilities, and a note. California initially measured successor liability using the roughly $6 million enterprise price.

The memorandum recommended a reduction. Trucks and tractors used in the trucking operation were capital assets of the service business, not inventory of the truck-selling business. Sections 6811 and 6812 historically had not been applied to purchases of service-business assets in these circumstances.

The purchaser remained successor for the truck-selling business, which generated $250,755.74 of tax. But the price allocated to that business's leasehold improvements, furniture, office and shop equipment totaled $50,000, so the recommended maximum successor billing was $50,000.

What this means for you

Service-business buyers, fleet operators, and transaction advisers

Separate service-operation capital assets from retail inventory and document purchase-price allocations by business. The character and price of the acquired selling-business assets controlled the exposure here.

Common questions

Q: Were the operating trucks inventory of the truck-selling business?

A: No. They were capital assets of the trucking service business.

Q: Did all of the enterprise price count toward successor exposure?

A: No.

Q: What reduction did staff recommend?

A: A successor billing of $50,000, the price attributed to the truck-selling business assets.

Citations and references

• California Revenue and Taxation Code §§ 6811 and 6812

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 535.0073.090
• Original supporting opinion: 535.0073.090 PDF

Original ruling text

State of California

Memorandum

To:

Petition Unit

From:

Gary J. Jugum

Subject:

R---, Inc.
Account No. SN OH XX-XXXXXX-010

Board of Equalization

535.0073.090

March 16, 1990

The petition for reconsideration of successor liability of R---, Inc., was scheduled to be heard by the Board in Torrance on February 21, 1990. The matter was postponed and has been rescheduled for the week of May 20, 1990. The staff is prepared to recommend to the Board that the tax be reduced. A--- and C---, Inc., was primarily engaged in a trucking business. On December 30, 1986, A--- transferred substantially all of its assets to R---, Inc., in exchange for first issue stocks, an assumption of liability, and a note. A--- had incurred a large tax liability arising primarily from ex-tax out-of-state truck purchases. The trucks purchased were used in the nontaxable trucking business. A--- also had a truck selling business. A--- had a seller’s permit issued by us and a DMV license to sell vehicles. Some truck leasing transactions were taxes as sales at their inception. A--- also disposed of used vehicles from its trucking business fleet. A notice of successor liability was issued to R---, based upon the purchase price for the entire enterprise. It has been apparent to us since at least April 1988 that there is something wrong with our assessment. What is wrong is this: Revenue and Taxation Code sections 6811 and 6812 have not historically been applied by the Board in circumstances where someone purchased the assets of a service business. Here A---’ business was primarily a trucking business and only incidentally and secondarily a truck selling business. R---, Inc., purchased the trucks and tractors used in the trucking business, but this property cannot be characterized as assets of the truck selling business. If these were assets of the truck selling business, they would be inventory. They were not inventory; they were the capital assets of the trucking business. At best, here

Petition Unit

-2-

March 16, 1990
535.0073.090

R---, Inc., purchased a truck selling business and a trucking business. Its liability under Revenue and Taxation Code sections 6811 and 6812 would be limited to the purchase price paid for the truck selling business assets. The original contract price was $6,323,800. As a result of adjustments for a discount and for two individual tractors, the price was reduced to $6,032,249. Of this purchase price, the price for the revenue equipment was $5,922.249. R---, Inc., paid $10,000 to acquire the operating authority and $50,000 to purchase materials and supplies used in the trucking business. Thus the purchase price for the truck selling business was as follows:
$
$
$
$

24,000.
7,500.
10,000.
8,500.

$

50,000. Total

Leasehold improvements
Furniture/office equipment
Shop/garage equipment
Furniture/office equipment

Thus, R---’s maximum liability under sections 6811 and 6812 is $50,000. The tax liability generated by the truck selling business (as opposed to the trucking business) was $250,755.74. R--- is the successor with respect to this liability, but the purchase price paid with respect to the business which generated this liability was $50,000. Accordingly, it is our recommendation that the successor billing should be reduced to $50,000. This matter should be taken off the hearing agenda. We understand that taxpayer concurs in our recommendation. This matter can be disposed of on the nonappearance calendar. We recommend that the Petition Unit write to the taxpayer and to the Appeals Unit, advising each that the Business Taxes Department has changed its position. We have discussed this matter with Mr. Charles Cordell, and he is in agreement with our analysis. GJJ:ar

cc:

Mr. Charles Cordell
Mr. Lawrence A. Augusta
Ms. Janice Masterton