Did shareholders' self-help division of corporate equipment create a purchase supporting California successor liability?

Plain-English summary

Two principal shareholders ended their business relationship, divided the corporation's printing equipment, and used their respective portions in separate similar ventures. An earlier proposed asset-sale agreement was never completed, and related litigation had not reached judgment.

The hearing officer said the available evidence did not establish a purchase under sections 6811 and 6812. A purchase required an agreed exchange for valuable consideration; shareholder self-help, without a proven sale, supplied no purchase price to withhold under Regulation 1702.

That did not eliminate collection options. The assets remained recoverable by the corporation or a receiver if distributed without protecting creditors, and filed tax liens could attach because the transferee had not shown a purchase for value without notice. The recommendation held the billing in abeyance and sought Attorney General review of receivership or lien foreclosure.

What this means for you

Shareholders separating businesses, corporate creditors, and tax advisers

Document whether an asset division is a real sale and what consideration is exchanged. If no sale exists, successor liability may not fit, but corporate ownership, unlawful-distribution rules, liens, and receivership can still reach the property.

Common questions

Q: Did self-help establish a purchase?

A: No, not on the available evidence.

Q: Was the successorship billing immediately canceled?

A: No. The recommendation held it in abeyance pending clarification of the transfer.

Q: Could California still pursue the assets?

A: Yes, through the alternative remedies discussed.

Citations and references

• California Revenue and Taxation Code §§ 6010(a), 6736, 6737, 6757, 6757.5, 6811, and 6812
• California Sales and Use Tax Regulation 1702
• Former California Corporations Code § 5012

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 535.0073
• Original supporting opinion: 535.0073 PDF

Original ruling text

535.0073
STATE OF CALIFORNIA
BOARD OF EQUALIZATION
In the Matter of the Petition for
Redetermination Under the Sales
and Use Tax Law

Petitioner

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DECISION AND RECOMMENDATION

This matter came on regularly for hearing in Van Nuys, California, on January 4, 1977, before W. E. Burkett, Hearing Officer. Appearances For the Petitioner: For the Board:

Mr. Aram Boyajian, Supervising Auditor
Protested Item
(Period 1-6-67 to 10-31-74)

Successorship billing for tax deficiency of ______

$24,207.67

Contention of Petitioner
The firm is not the successor to the corporation, __
Summary of Petition
This protest involves a petition for review of a staff determination that the petitioner was the business successor to _ account No. , and therefore liable for the sales tax deficiency of this entity. It appears from the information accumulated to this date that the two principal stockholders of the above-named corporation had business differences and made a decision to discontinue their business association. One individual, ___, allegedly obtained certain of the printing equipment, and set up a new business venture in an individual capacity. The other principal stockholder and his business associates secured the balance of the assets and used them in the business activities of a new corporation (petitioner). Initially, an attempt was made by the parties to resolve their difference by a letter agreement for sale of certain of the assets (see photocopy at A-2 of the petition file). However, petitioner’s representative advised that this proposal was not consummated. Thereafter, actions and counter actions were filed by the various individuals and the above-named corporation. We are advised

535.0073
that none of these actions have been pursued to judgment. The predecessor corporation has been suspended for failure to file its franchise tax returns. The new corporation continued in business at the same address utilizing a similar name and method of conducting business. The petitioner’s representative would not take a position on the nature of the transfer of assets to the petitioner, except to argue that the transfer was not a sale. Analysis and Conclusions The available evidence does not support a finding that the petitioner was the successor liable for the tax deficiency of __, under the provisions of Revenue and Taxation Code section 6811 and 6812 and Sales and Use Taxes Regulation 1702. The provisions of sections 6811 and 6812 and regulation 1702 are limited to a transferee who is a purchaser of a stock of goods or business of the retailer, including a portion thereof. The information obtained to this date indicates that the major stockholders merely used “self-help” to obtain the assets and to utilize them in furtherance of their respective business ventures. A purchase requires that there be an agreed exchange for a valuable consideration (Revenue and Taxation Code section 6010(a)). In absence of a sale (and purchase) there is no sales price to withhold (see regulation 1702). We observe, however, that a distribution of assets to a shareholder may be recovered by the corporation or by its receiver, liquidator or trustee in bankruptcy if, as appears here, the distribution was received without a court order and without adequate provision being made for the payment of the debts of the corporation (see California Corporation Code Section 5012). A creditor, such as the State of California, may be appointed a receiver for an insolvent corporation if the claim has been reduced to judgment and legal collection remedies exhausted (Delaney Producing & Refining Co. v. Crystal Petroleum Products Co., 88 Cal.App.784). The reduction of the claim to judgment involves only a request and a filing in the manner prescribed by Revenue and Taxation Code Section 6736 and 6737. The files of the predecessor indicate that the board has already exhausted all of its remedies to collect the tax from the suspended corporation. It also appears that the board has perfect liens on the assets of the corporation by the filing of certificates of delinquency pursuant to the provisions of Revenue and Taxation Code section 6757 and 6757.5. These liens would appear to attach to the assets in the hands of the petitioner since it has not shown that the assets were obtained by a purchase made for a valuable consideration without notice. Recommendation The successorship billing made against this petitioner should be held in abeyance until such time as the nature of the transfer to the petitioner is finally determined. This petitioner’s file and the entire file of _ Account No. ___, should be transferred to the office of the California Attorney General with a request to consider the appointment of a receiver to collect the corporate

535.0073
assets held by this petitioner, and apply them to the corporations’ tax debts or alternatively to foreclose the liens created on the subject property.

W. E. BURKETT, HEARING OFFICER

2-25-77
Date