Did buying a seller's real property and equipment alone make a buyer a successor when it began a different business?

Plain-English summary

A buyer acquired a seller's real property and equipment, then began a different type of business at the site. It did not purchase the trade name, customer list, receivables, or a covenant not to compete.

California concluded that the buyer was not a successor. Purchasing operating assets alone did not establish acquisition of the business; the seller theoretically could have resumed its activity at a nearby location because the buyer had not acquired the assets normally associated with a going concern.

The buyer also did not acquire a stock of goods. Although it held an option to buy inventory, materials, and supplies, the escrow documents showed the option was never exercised.

What this means for you

Property buyers, equipment purchasers, and transaction advisers

Document which going-concern assets are excluded and whether the buyer continues the same activity. Realty and equipment alone may be different from acquiring the seller's business or inventory.

Common questions

Q: Did the buyer acquire the seller's going business?

A: No.

Q: Did it buy inventory?

A: No; the inventory option was not exercised.

Q: Did it operate the same kind of business?

A: No. The memorandum described the new activity as dissimilar.

Citations and references

• California Sales and Use Tax Regulation 1702
• People v. Gobriel, 57 Cal. App. 2d 738 (citation as printed in the source)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 535.0090
• Original supporting opinion: 535.0090 PDF

Original ruling text

State of California

Memorandum

To:

Collections Unit (PKT)

From:

W. E. Burkett

Subject:

D. G. S--- P--- Company
V--- Enterprise

Board of Equalization

535.0090
June 26, 1978

SY -- XX-XXXXXX
SY -- XX-XXXXXX

We have reviewed the file and the various documents summarizing the investigation of the successorship liability issue. It is our considered conclusion that D. G. S--- P--- Company, dba L--- P--- L--- Company (L--- P---), was not the successor to V--- E---, Inc. (V---) and therefore may not be held liable for this entity’s sales and use tax liability. As you are aware, a person may be held to be a successor where he acquires the predecessor’s business or a stock of goods. What constitutes a business activity for purposes of this section is not defined by statute and is difficult to state with any precision. As a general rule, a purchaser may be held to have purchased the business where for a consideration he acquired all seller’s rights to engage in the business at a given location. It is requisite that there be more than a purchase of operating assets in order to constitute a purchaser as successor under the statute (People v. Gobriel, 57 Cal. App. 2d 738). In the instant case, L--- P--- merely purchased the real property and equipment of the seller and embarked upon a dissimilar type of business activity. It did not acquire the seller’s trade name, customer listing, accounts receivable, or other assets normally associated with the purchase of a going business. Nor did it sell a covenant not to compete with the purchaser. Thus in theory the seller could have immediately resumed its business activity at an adjacent location. In summary, there is no evidence to support a finding that the purchaser acquired the business of the seller. While L--- P--- held an option to purchase, the inventory material and supplies of the vendor, our review of the escrow agreement confirms that it did not exercise this contract right.

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San Bernardino – District Administrator (JAC)