Was Brent's HVAC & Plumbing a successor to an owner's failed air-conditioning corporation, and did it owe the corporation's full tax assessment?
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Plain-English summary
Brent's HVAC & Plumbing was a successor to the owner's failed air-conditioning corporation because it received essentially all of the corporation's unrepossessed equipment. But the new plumbing operation was not a mere continuation of the old new-construction business, so it could discharge the $9,690.47 assessment by paying the equipment's $4,000 value.
Brent Heisch's former corporation installed air-conditioning units and ductwork for builders, with only a smaller maintenance practice. The corporation ceased operations after new construction declined. Its contracts were abandoned, telephone disconnected, property foreclosed, vehicles repossessed, and most remaining materials taken by the bank.
Three large pieces of sheet-metal and ductwork equipment survived the shutdown. Heisch could not sell them, moved them into storage, and later placed them in his new sole proprietorship's shop.
The new business primarily performed plumbing directly for homeowners and occasionally handled air-conditioning maintenance. It did not install new units or ductwork and never used the transferred equipment.
The equipment transfer created successor status
Regulation 3.1.10.16 listed eight successor factors and created a presumption when even one was present.
There was no formal sale, but moving the equipment to Brent's shop and making it available to the new business was a transfer. It occurred outside the old corporation's ordinary course and included essentially all of its tangible equipment not repossessed by the bank.
Those factors outweighed the absence of transferred contracts, goodwill, debts, customer lists, or a noncompetition agreement. Brent's therefore was a successor in business.
The plumbing operation was not a mere continuation
Full liability beyond transferred property value could apply if the transaction avoided tax, involved a merger, continued the same business, or included an agreement to assume liability. The dispute focused on mere continuation.
The owner was the same, and the businesses shared one employee, one personal-friend customer, and some air-conditioning maintenance. Brent's also used “HVAC” in its name.
But the substance of the work had changed. The former corporation primarily installed new systems and ductwork for builders; Brent's primarily provided plumbing to homeowners. It used none of the fabrication equipment, assumed no contracts or obligations, and did not preserve the old operation's goodwill.
The limited overlap did not satisfy the regulation's standard of the same employees doing the same jobs under the same supervision and process for the same customers.
Liability was capped by the transferred value
The only evidence valued the equipment at approximately $4,000. The AHO found no tax-avoidance transfer, merger, assumption agreement, or mere continuation that would justify the full assessment.
Result: protest GRANTED IN PART AND DENIED IN PART. Brent's was a successor, but it could discharge the assessment by paying $4,000, the full value of the transferred equipment.
What this means for you
Owners restarting after a business closure
Moving old business property into a new operation can create successor status even without a sale, purchase price, or formal transfer agreement.
Buyers or transferees of business assets
Document asset values at transfer. When full continuation rules do not apply, liability may be limited to the transferred tangible and intangible property's value.
Businesses changing service lines
Names and common ownership matter, but the actual work, customers, employees, contracts, processes, and use of transferred assets determine whether the new operation merely continues the old one.
Common questions
Q: Why was Brent's a successor if it did not buy the equipment?
A: A transfer did not require a formal sale. The old corporation's equipment was placed at the new business's disposal outside the transferor's ordinary course.
Q: Did bankruptcy discharge the corporation's gross receipts tax?
A: No. The decision found the corporate liability was not included in Heisch's personal discharge and would have been priority tax even in a corporate bankruptcy.
Q: Why was Brent's not a mere continuation?
A: It primarily performed plumbing for homeowners, while the old corporation primarily installed air-conditioning systems and ductwork for builders.
Q: Did sharing one employee and customer establish continuity?
A: No. The employee had a personal connection, the customer was Heisch's friend, and the overall business operations were substantially different.
Q: What happened to the original assessment?
A: Brent's could discharge it by paying $4,000, the established value of the transferred equipment.
Citations and references
Statutes and regulations:
- NMSA 1978, §§ 7-1-61 through 7-1-63 — transferred business property, successor duties, assessment, and discharge by paying asset value
- NMSA 1978, §§ 7-1-17 and 7-1-3 — assessment presumption and inclusion of penalty and interest in “tax”
- Regulation 3.1.10.16 NMAC — successor factors and mere-continuation standard
Cases cited:
- Sterling Title Co. of Taos v. Commissioner of Revenue, 1973-NMCA-086 — successor status may arise from transferred assets even when the prior business is defunct
- Garcia v. Coe Manufacturing Co., 1997-NMSC-013 — ownership identity and substantial continuity in the continuation analysis
- Pankey v. Hot Springs National Bank, 1941-NMSC-060 — continuation principles cited by the AHO
Source
- Listing: New Mexico Decisions & Orders
- Decision post: Brent’s HVAC & Plumbing
- Decision PDF: D&O 15-33
Original ruling text
STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT
IN THE MATTER OF THE PROTEST OF
BRENT’S HVAC & PLUMBING, No. 15-33
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L0824453440
DECISION AND ORDER
A formal hearing on the above-referenced protest was held on September 18, 2015,
before Hearing Officer Dee Dee Hoxie. The Taxation and Revenue Department (Department)
was represented by Ms. Elena Morgan, Staff Attorney. Mr. Tom Dillon, Auditor, and Mr. Charles
Ritz, Bankruptcy Unit, also appeared on behalf of the Department. Mr. Brent Heisch, owner of
Brent’s HVAC & Plumbing (Taxpayer), appeared for the hearing with his attorney, Mr. Walter
Reardon. The Hearing Officer took notice of all documents in the administrative file. Based on
the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT
- On March 23, 2012, the Department assessed the Taxpayer as a successor in business for
gross receipts tax, penalty, and interest for the tax periods from February 28, 2010
through March 31, 2011. The assessment was for $7,672.91 tax, $1,541.41 penalty, and
$476.15 interest.
-
On April 20, 2012, the Taxpayer filed a formal protest letter.
-
On March 31, 2015, the Department filed a Request for Hearing asking that the
Taxpayer’s protest be scheduled for a formal administrative hearing.
-
On May 6, 2015, the Hearings Office issued a notice of hearing.
-
On June 8, 2015, the Hearings Office sent amended notices of hearing.
- Mr. Heisch started doing business as a corporation in 1998. The business was focused on
installing air conditioning units and ductwork in new construction projects (the A/C
Business). The A/C Business also did some air conditioning maintenance work.
- The corporation for the A/C Business was initially owned and operated by Mr. Heisch
and a partner.
- After the partner left the A/C Business, Mr. Heisch ran the A/C Business on his own for a
short time. Mr. Heisch’s wife then became president of the A/C Business and helped run
its operations.
- The A/C Business typically did its work and acquired its materials using various lines of
credit. Mr. Heisch personally guaranteed those lines of credit.
- The A/C Business was run out Mr. Heisch’s home and shop. The A/C Business had an
advertisement in the yellow pages and a phone number for customers to call. The A/C
Business at its peak had approximately 12 employees.
- The employees provided their own tools, and the Heisches lent their personal vans to the
A/C Business for use on jobs.
- The A/C Business acquired three large pieces of equipment (collectively, “the
equipment”). One piece was used to bend sheet metal, one was used to cut sheet metal,
and one was used to make a special bend to allow for connections of ductwork. All three
pieces were used for fabricating and installing ductwork.
- The A/C Business had contracts with various builders and construction companies for
installation of new units and ductwork. The A/C Business had no direct dealings with
any of the ultimate owners or custodians of the individual buildings.
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Letter ID No. L0824453440
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- One of the builders also contracted with the A/C Business to provide air conditioning
maintenance on one of his buildings. This accounted for about 25% or less of the work
done by the A/C Business.
- As new construction began to slow, the A/C Business began to suffer and eventually
became impossible to sustain.
- The A/C Business ceased operations in late 2010. The official close of business date was
March 31, 2011. At that time, the equipment was worth approximately $4,000.00.
- Around the time that the A/C Business closed, Mr. Heisch filed for bankruptcy. Mr.
Heisch listed all of the A/C Business’s debts in his bankruptcy and included the
Department as a potential creditor.
- Mr. Heisch’s bankruptcy was discharged on September 12, 2011, but did not include the
A/C Business’s gross receipts tax liability. Even if the A/C Business had filed
bankruptcy, the state tax liability in question would have been in the three-year priority
period and would not have been discharged by the bankruptcy.
- Mr. Heisch paid for the A/C Business’s state withholding tax liability prior to the
completion of the bankruptcy.
- During the course of the bankruptcy, Mr. Heisch attempted to sell the equipment. No one
was interested in purchasing the equipment because it was used and because there were
few new construction projects.
- Mr. Heisch’s home and shop, where the A/C Business had been conducted, were
foreclosed upon by the bank. Several vehicles were also repossessed. All of the A/C
Business’s materials that were not sold were left on the premises and were taken by the
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Letter ID No. L0824453440
page 3 of 10
bank, with the exception of the equipment and a computer that crashed. The equipment
was moved into storage.
- The Taxpayer acknowledged that the Department was entitled to the value of the
equipment and expressed its willingness to turn the equipment over to the Department.
- When the A/C Business shut down, its outstanding contracts were abandoned, the
telephone number was disconnected, and there were no attempts to maintain goodwill or
client lists. Mr. Heisch’s wife took a job in a different business, and Mr. Heisch began
looking for employment.
- A friend knew Mr. Heisch was trained as a plumber and asked Mr. Heisch to take a look
at a plumbing problem for him. The friend recommended Mr. Heisch as a plumber to
others, and Mr. Heisch decided to begin a new business.
- Mr. Heisch became the sole proprietor of the Taxpayer. The Taxpayer deals directly with
individual homeowners and provides primarily plumbing services. The Taxpayer also
occasionally does air conditioning maintenance when a homeowner requests it.
- The equipment was moved to the Taxpayer’s shop, but has not been used since the
Taxpayer is not installing new units or doing any ductwork.
- The Taxpayer’s business is approximately 75-80% plumbing services and 10-15% air
conditioning maintenance.
- The Taxpayer has one customer in common with the A/C Business, but that customer is a
personal friend of Mr. Heisch and would do business with him regardless of what
company he worked for or what business he did.
- The Taxpayer is owned by Mr. Heisch, as was the A/C Business. The Taxpayer has one
employee. That employee was also employed by the A/C Business at one time. That
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Letter ID No. L0824453440
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employee is the son of a friend of Mr. Heisch. Mr. Heisch was also aware that the
employee was a convicted felon and had trouble finding work, so he gave the employee a
job when asked to do so.
DISCUSSION
The issue to be decided is whether the Taxpayer is liable as a successor in business for
gross receipts tax, penalty, and interest under the assessment.
Burden of Proof.
Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.
Tax includes, by definition, the amount of tax principal imposed and, unless the context
otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §
7-1-3. See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-
070, 108 N.M. 795. Therefore, the assessment issued to the Taxpayer is presumed to be correct,
and it is the Taxpayer’s burden to present evidence and legal argument to show that it is entitled
to an abatement.
Successor in Business Liability.
A successor in business is required to pay the tax for which the acquired business was
liable. See NMSA 1978, § 7-1-61 (C) (1997). See also NMSA 1978, § 7-1-63 (1997).
Moreover, “tangible and intangible property used in any business remains subject to liability for
payment of the tax due” even when the business is transferred to a new owner. NMSA 1978, §
7-1-61 (B). A successor in business is charged with certain responsibilities in discerning what
tax is owed when the business or its assets are acquired. See NMSA 1978, § 7-1-61 (requiring
the successor to set aside an amount in trust for payment of tax) and § 7-1-62 (1997) (allowing
the successor to apply for a certificate from the Department).
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Determination of a successor.
A successor in business is “any transferee of a business or property of a business, except
to the extent it would be materially inconsistent with the rights of secured creditors”. 3.1.10.16
(F) (2) NMAC (2001) (emphasis added). There are also several factors to be used in determining
a successor in business. See 3.1.10.16 (A) NMAC. If a single one of these factors are present,
there is a presumption that there is a successor in business. See 3.1.10.16 (B) NMAC.
Purchasing tangible assets, assuming a lease, keeping one part-time employee, and assuming a
note are sufficient to establish one as a successor in business, even when the prior business was
defunct. See Sterling Title Co. of Taos v. Comm’r of Revenue, 1973-NMCA-086, ¶ 9-11, 85
N.M. 279.
The first factor in determining whether there is a successor in business is whether there
was “a sale and purchase of a major part of the materials, supplies, equipment, merchandise or
inventory…in a single or limited number of transactions”. 3.1.10.16 (A) (1) NMAC. There was
no sale and purchase between the A/C Business and the Taxpayer. Rather, the A/C Business’s
owner retained the equipment and transferred it without sale or purchase to the Taxpayer.
The second factor is whether the transfer was not in the ordinary course of the
transferor’s business. See 3.1.10.16 (A) (2) NMAC. The A/C Business was not in the business
of transferring equipment, so the transfer was not done in the ordinary course of its business.
The third factor is whether “a substantial part of both equipment and inventories” was
transferred. 3.1.10.16 (A) (3) NMAC. The equipment was essentially all of the equipment
owned by the A/C Business that was not repossessed by the bank. The A/C Business had
basically no inventory, except some scrap metal that was also taken by the bank. The
Department argued that the vehicles were also property transferred from the A/C Business to the
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Letter ID No. L0824453440
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Taxpayer. However, Mr. Heisch testified that the vehicles were his and his wife’s personal
vehicles, which they loaned to the businesses for use. There was no evidence that the vehicles
were not titled to Mr. and Mrs. Heisch or were not their personal vehicles.
The fourth factor is whether a substantial portion of the business conducted by the
transferor continued to be conducted by the transferee. See 3.1.10.16 (A) (4) NMAC. The A/C
Business conducted primarily installation of new air conditioning systems in new construction.
The Taxpayer conducts primarily plumbing services. However, both businesses include a small
portion of air conditioning maintenance.
The fifth factor is whether “the transferor’s goodwill follow[ed] the transfer of the
business properties”. 3.1.10.16 (A) (5) NMAC. The equipment was the only business property
that was transferred. The equipment has not been used by the Taxpayer because there have been
no jobs that would require its use. The Department argued that the Taxpayer retained the A/C
Business’s goodwill because they have one customer in common. That customer is a personal
friend of Mr. Heisch. Any goodwill that the Taxpayer enjoys seems to have come from Mr.
Heisch, not from the A/C Business.
The sixth factor is whether the business obligations of the transferor were honored by the
transferee. See 3.1.10.16 (A) (6) NMAC. The Taxpayer did not assume or honor any
obligations of the A/C Business. Any outstanding contract or work taken by the A/C Business
was abandoned when it ceased to operate.
The seventh factor is whether unpaid debts of the transferor were paid by the transferee.
See 3.1.10.16 (A) (7) NMAC. The Taxpayer did not assume or pay any unpaid debts of the A/C
Business. Most of the A/C Business’s debts were personally secured by Mr. Heisch and had
been discharged in his bankruptcy action.
Brent’s HVAC & Plumbing
Letter ID No. L0824453440
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The final factor is whether there was an agreement precluding competition. See 3.1.10.16
(A) (8) NMAC. There was no such agreement between the Taxpayer and the A/C Business.
The first three factors weigh in favor of finding that the Taxpayer is a successor in
business to the A/C Business. Although there was not a formal sale and purchase, there was
clearly a transfer of assets when the equipment was placed in the Taxpayer’s shop and put at the
Taxpayer’s disposal. See Black’s Law Dictionary, page1636 (9th ed. 2009) (defining a transfer as
any method, direct or indirect, of disposing of or parting with property or parting with an interest
in property). The equipment was essentially all of the A/C Business’s tangible property that was
not repossessed by the bank. The transfer of the equipment was not conducted as an ordinary
part of the A/C Business. The remaining five factors weigh in favor of finding that the Taxpayer
was not a successor in business. However, if a single one of these factors are present, there is a
presumption that there is a successor in business. See 3.1.10.16 (B) NMAC. Therefore, the
Taxpayer is a successor in business to the A/C Business.
Extent of liability.
“A successor may discharge an assessment made pursuant to this section by paying to the
department the full value of the transferred tangible and intangible property.” NMSA 1978, § 7-
1-63 (C). The successor may be liable for the full amount of the assessment if the transfer was
done to avoid tax, if the transfer amounted “to a de facto merger, consolidation, or mere
continuation of the transferor’s business”, or if the successor agreed to assume the liability. Id.
There was no evidence in this case that the transfer occurred to avoid tax, as part of a merger or
consolidation, or that the Taxpayer agreed to assume the liability. The arguments in the case
focused on whether the Taxpayer’s business was a “mere continuation” of the A/C Business.
Brent’s HVAC & Plumbing
Letter ID No. L0824453440
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A successor in business is a “mere continuation” of the previous business if “the
successor maintains the same business with the same employees doing the same jobs under the
same supervisors, work conditions and production process and produces the same product for the
same customers.” 3.1.10.16 (F) NMAC. See also Garcia v. Coe Mfg.Co., 1997-NMSC-013, ¶
12-14, 123 N.M. 34 (indicating that a common identity of directors and shareholders as well as a
substantial continuity in the business done before and after the assets were acquired is a
continuation of the original business). See also Pankey v. Hot Springs Nat’l Bank, 1941-NMSC-
060, ¶ 13, 46 N.M. 10.
The Department argued that the Taxpayer was a mere continuation of the A/C Business
because the owner is the same, they share a common customer, they share a common employee,
and they both engage in some air conditioning maintenance work. The Department also argued
that the Taxpayer clearly intended to be engaged in the air conditioning business since the
Taxpayer included “HVAC” as part of its name. The Taxpayer argued that a sole customer and a
sole employee are not sufficient to establish continuity. The Taxpayer also argued that the use of
“HVAC” in its name is not dispositive. The Taxpayer argued that the key factor should be in the
substance of its work. The Taxpayer’s business is primarily plumbing and the majority of the
A/C Business was installing new units in new construction. The Taxpayer argued that a slight
overlap in a small portion of each business was not sufficient to establish that the Taxpayer was a
“mere continuation” of the A/C Business. The Taxpayer’s argument is persuasive.
Given the substantial change in the business service provided, the Taxpayer is not a
“mere continuation” of the A/C Business. The Taxpayer is a business that provides plumbing
services. The A/C Business was a business that installed new units and ductworks in newly
constructed buildings. A small portion of similar work, air conditioning maintenance, between
Brent’s HVAC & Plumbing
Letter ID No. L0824453440
page 9 of 10
the two businesses is not sufficient to establish a “mere continuation”. Therefore, the Taxpayer
may discharge the assessment by paying the Department the full value of the equipment. The
only evidence presented was that the equipment was worth approximately $4,000.00. The value
will be deemed to be $4,000.00 for purposes of this decision.
CONCLUSIONS OF LAW
A. The Taxpayer filed a timely written protest to the Notice of Assessment as a
successor in business for gross receipts taxes, penalty, and interest on the tax periods from February
28, 2010 through March 31, 2011 issued under Letter ID number L0824453440, and jurisdiction
lies over the parties and the subject matter of this protest.
B. The Taxpayer was a successor in business and is liable under the assessment. See
3.1.10.16 NMAC and NMSA 1978, § 7-1-61.
C. The Taxpayer is not a “mere continuation” of the prior business, so the Taxpayer
may discharge the assessment by paying to the Department the full value of the equipment
transferred, which is $4,000.00. See NMSA 1978, § 7-1-63.
For the foregoing reasons, the Taxpayer's protest is DENIED IN PART AND GRANTED
IN PART.
DATED: October 9, 2015.
Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502
Brent’s HVAC & Plumbing
Letter ID No. L0824453440
page 10 of 10
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