If I start a new company and take over a tax-delinquent business's location, staff, and customers without any formal sale, can the state make me pay its back taxes?

Plain-English summary

Salvo Beachwear, Inc. — which for years did business as New Mexico Carpets out of a showroom on Carlisle NE in Albuquerque — owed the Department roughly $1.1 million in unpaid taxes. In May 1996 the Department was actively collecting: it had seized a company van and obtained a restraining order aimed at shutting the business down until it caught up on its taxes (authority it has under § 7-1-53).

At that same moment, Salvo's president, Ben Rodriguez, formed a brand-new corporation — B R Interiors, Inc., doing business as New Mexico Carpet Sales — and simply moved the carpet business into it. The new company operated out of the same showroom, kept the same phone number, employees, salespeople, office equipment, computer software, and customer lists, dealt with the same carpet suppliers, and sold from Salvo's inventory. The only visible change was the sign on the building ("Carpets" became "Carpet Sales"). No sales contract was signed and no purchase money changed hands; B R Interiors just took over Salvo's leases and paid Salvo its cost for carpet it sold, keeping all the markup. Salvo then filed for Chapter 11 bankruptcy.

On July 3, 1996, the Department declared B R Interiors the successor in business to Salvo and demanded $1,184,425.52. B R Interiors protested, essentially arguing there was no "sale" so the successor statutes couldn't reach it. Hearing Officer Gerald B. Richardson denied the protest:

• New Mexico's successor statutes exist to stop exactly this. Under §§ 7-1-61 to 7-1-64, a business's tax debt follows its tangible and intangible property when the business "changes hands," and a buyer who doesn't withhold enough of the price to cover the tax becomes liable for it. The Legislature's purpose is to keep taxes from being avoided by shifting a business into a new entity.
• There was a "sale" even without the formalities. No contract and no cash changed hands, but value and consideration flowed both ways: B R Interiors acquired substantial business goodwill (a 13-year-old carpet business with established apartment-manager clients who knew where to go), and it assumed Salvo's lease obligations. That two-way transfer was "more than sufficient" to be a sale for the successor statutes.
• The statutes don't even require a formal sale. Section 7-1-61(B) speaks of a business that "changes hands" — a deliberately broad phrase. Citing Sterling Title Co. of Taos (and out-of-state cases like Knudsen Dairy and Tri-Financial), the Hearing Officer read it to cover a person who simply takes over the assets of an insolvent or defunct business, so as to defeat "by any means" schemes to evade the tax.
• This was a scheme. The Hearing Officer expressly found the whole arrangement "was nothing more than a scheme by Mr. Rodriguez to attempt to avoid Salvo's tax liabilities." B R Interiors, which submitted no legal argument, was held liable as successor.

What this means for you

Buying (or taking over) a business can make you liable for its unpaid taxes

New Mexico's successor-in-business statutes attach the seller's tax debt to the business's property when it changes hands, and put the burden on the buyer to withhold enough of the purchase price to cover it. If you acquire a business — its assets, location, customers, or goodwill — you can inherit its tax liability. This is one of the biggest hidden risks in buying a going concern.

Get a tax-clearance certificate before you take over a business

Sections 7-1-62 and 7-1-63 let a buyer ask the Department for a certificate stating how much tax the business owes, so you know how much of the price to hold back in trust until the debt is cleared. Requesting that certificate — and withholding accordingly — is the protection the statute gives you. Skipping it is how buyers end up personally on the hook.

Skipping the paperwork does not avoid successor liability

B R Interiors signed no contract and paid no purchase money, yet was still a successor. The statute reaches a business that "changes hands" by any means — assuming leases, keeping the staff, phone, software, customers, and inventory, and pocketing the goodwill all count as consideration. You cannot dodge successor liability by leaving the transfer informal.

Re-incorporating to shed tax debt is a recognizable scheme

Forming a new company to continue the same business while stranding the old entity's tax bill in bankruptcy is precisely what these statutes are built to defeat. Common ownership, the same location and customers, and a merely cosmetic name change make the continuity obvious. If your goal in restructuring is genuine business change rather than tax avoidance, document real, arm's-length terms — and address the outstanding tax head-on.

Common questions

Q: I'm buying a business. Could I be stuck with its unpaid New Mexico taxes?
A: Yes. Under §§ 7-1-61 to 7-1-64, a business's tax debt follows its property when the business changes hands, and a buyer who fails to withhold enough of the price to cover the tax can become liable for it. Protect yourself by requesting a tax-clearance certificate and withholding accordingly.

Q: There was no contract and no money changed hands. Doesn't that mean there was no sale?
A: Not for these statutes. The Hearing Officer found a "sale" because value and consideration flowed both ways — acquired goodwill and assumed leases — and held that the successor statutes apply whenever a business "changes hands," even without the formalities of a sale.

Q: How can I find out what a business owes before I take it over?
A: Use the certificate procedure in §§ 7-1-62 and 7-1-63: ask the Department for a certificate stating the tax due from the business, then hold that amount of the purchase price in trust until the Department confirms the debt is satisfied.

Q: Can I avoid the old company's tax by starting a fresh corporation to run the same business?
A: No — that is the classic scheme the successor statutes are designed to stop. Keeping the same location, employees, customers, phone number, and inventory under new ownership makes the new entity a successor liable for the predecessor's tax, as happened here.

Citations and references

Statutes and regulations:

• § 7-1-61 NMSA 1978 — a business's tangible and intangible property remains liable for its tax even when the business changes hands; a purchaser must withhold and hold in trust enough of the purchase price to cover the tax
• §§ 7-1-62 to 7-1-64 NMSA 1978 — buyer may request a certificate of tax due; procedure for Department demand on the buyer; a buyer who fails to withhold and pay over becomes a delinquent taxpayer (and may discharge the duty by surrendering the acquired property)
• § 7-1-53 NMSA 1978 — the Department's authority to obtain a court injunction closing a business that remains tax-delinquent
• § 7-1-24 NMSA 1978 — protest procedure and jurisdiction

Cases cited:

• Sterling Title Co. of Taos v. Commissioner of Revenue, 85 N.M. 279, 511 P.2d 765 (Ct. App. 1973) — New Mexico's successor statutes are construed broadly; "the business changes hands" is an all-inclusive phrase meant to defeat schemes to evade the tax by any means
• Knudsen Dairy Products Co. v. State Board of Equalization, 12 Cal. App. 3d 47, 90 Cal. Rptr. 533 (1970) — a person who takes over the assets of an insolvent or defunct business is a successor liable for its taxes
• Tri-Financial Corp. v. Department of Revenue, 6 Wash. App. 637, 495 P.2d 690 (1972) — same principle under a comparable successor-in-business statute

Source

• Listing: New Mexico Decisions & Orders
• Decision post: B R Interiors, Inc. dba New Mexico Carpet Sales
• Decision PDF: D&O 97-06

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
B R INTERIORS, INC. D/B/A NEW
MEXICO CARPET SALES, PROTEST TO No. 97-06
DETERMINATION OF SUCCESSOR IN
BUSINESS TO SALVO BEACHWEAR, INC.
D/B/A NEW MEXICO CARPETS, INC.

DECISION AND ORDER

This matter came on for determination before Gerald B. Richardson, Hearing Officer. B

R Interiors, Inc. d/b/a New Mexico Carpet Sales, hereinafter, "B R Interiors," was represented by

Kathryn Levy, Esq. The Taxation and Revenue Department, hereinafter, "Department," was

represented by Donald F. Harris, Special Assistant Attorney General. The parties agreed that the

matter would be submitted for determination based upon the facts as established in the deposition

of Mr. Ben Rodriguez, President of B R Interiors, Inc. and Salvo Beachwear, Inc. and that written

legal argument would be submitted by the parties. Ms. Levy submitted no argument and has

waived the right to submit any written exposition of her case. Mr. Harris did submit written legal

argument. Based upon the submissions outlined above, IT IS DECIDED AND ORDERED AS
FOLLOWS:

FINDINGS OF FACT

1. In 1983 Ben Rodriguez registered the trade name, "New Mexico Carpets" in his

name with the Secretary of State. This trade name registration was renewed by Mr. Rodriguez in

1993.

2. At some point, New Mexico Carpets, Inc. changed its corporate name to Salvo

Beachwear, Inc., (hereinafter, "Salvo") but it continued to do business as New Mexico Carpets, Inc.

until May 31, 1996.

3. Ben Rodriguez was President of Salvo Beachwear, Inc.

4. In May of 1996, Salvo Beachwear, Inc. owed the Department approximately $1.1

million in unpaid taxes. Collectors at the Department were attempting to collect these unpaid

taxes. As part of their collection activities, they had seized a van owned by Salvo.

5. Pursuant to the authority granted the Department in NMSA 1978, § 7-1-53 (1995

Repl. Pamp.), in May of 1996 the Department had obtained a Temporary Restraining Order and

had sought a permanent injunction, from the District Court, enjoining Salvo from continuing to

engage in business until Salvo could demonstrate that it was no longer delinquent in paying its tax

liabilities.

6. Although the Temporary Restraining Order was never served upon Mr. Rodriguez,

he was aware that it had been issued and of the Department's efforts to close Salvo. 7. At the

same time that the Department was seeking to close Salvo, in May of 1996, Mr. Rodriguez formed a

new corporation, named B R Interiors, Inc. d/b/a New Mexico Carpet Sales. Mr. Rodriguez is the

President of B R Interiors.

8. Since the time that B R Interiors was formed, Salvo has filed for bankruptcy

protection under Chapter 11 of the Bankruptcy Code.

9. During all of its years of operation, Salvo, d\b\a New Mexico Carpets, Inc. had its

sales room at 4011 Carlisle, NE, in Albuquerque, New Mexico. This business location was leased

from New Mexico Recycling, Inc., a corporation whose president was the son of Ben Rodriguez.

No written lease exists.

10. Salvo also leased a warehouse space on Edith, NE from New West Property

Management Company.

11. Approximately 80% of Salvo's business came from established business clients, such

as apartment building managers. The remaining 20% was from walk-in customers who visited the

New Mexico Carpets, Inc. sales room.

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12. B R Interiors operated New Mexico Carpet Sales out of the same sales room at

4011 Carlisle, NE as had been used by New Mexico Carpets, Inc. The only change was that B R

Interiors now paid the rent and the sign on the building was changed from New Mexico Carpets to

New Mexico Carpet Sales.

13. During the month of May, 1996, Salvo or New Mexico Carpets Inc. paid the rent

for the entire month on the carpet showroom although during the second half of the month, B R

Interiors was doing business out of the showroom.

14. During the month of June, 1996, Salvo or New Mexico Carpets, Inc. paid one half

of the rent for the carpet showroom facility even though B R Interiors was now using the space and

carpet sales were being run through B R Interiors. Thereafter, B R Interiors assumed the payment

of rent on the carpet showroom and otherwise assumed the lease on the property.

15. B R Interiors also took over the lease payments for the warehouse space.

16. The telephone number for New Mexico Carpet Sales remained the same as the

telephone number for New Mexico Carpets, Inc.

17. New Mexico Carpet Sales retained the same employees and salespeople as had

been employed by New Mexico Carpets, Inc.

18. After the formation of B R Interiors, the lease payments for the office equipment

which had been leased by Salvo, such as the copy machine, the postage meter and computer

equipment, were assumed by B R Interiors.

19. The office equipment which was used by Salvo continues to be used by B R

Interiors. Other than the leased equipment referenced in paragraph 18, above, the office

equipment is owned by Salvo.

20. Salvo had an agreement with a computer software servicing company to lease and

service the computer software which Salvo used to conduct its business. B R Interiors maintained

the same agreement with the software servicing company to use the same software. B R Interiors

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also had available to it all of the information in Salvo's information system, such as customer lists,

information about accounts and account balances, etc.

21. After commencing its carpet sales business, B R Interiors made carpet sales from

the inventory of carpet owned by Salvo. Although B R Interiors purchased the carpet from Salvo,

it purchased the carpet at Salvo's cost, with no markup for Salvo's expenses in handling the carpet or

for profit to Salvo. All markup and profit from carpet sales was retained by B R Interiors. Also, B

R only purchased the amount of carpet it needed for a specific job from Salvo, leaving remnants

which may be unusable by Salvo. There exists no written agreement between Salvo and B R

Interiors to govern the terms and conditions upon which B R Interiors may sell Salvo's inventory.

22. B R Interiors, d/b/a New Mexico Carpet Sales stood in the shoes of Salvo, d/b/a

New Mexico Carpets, Inc. with respect to its relationship to the suppliers of carpet who had

previously sold carpet to Salvo.

23. B R Interiors deposited payments and receipts of Salvo into B R Interiors' bank

accounts.

24. B R Interiors acquired considerable value from Salvo in the form of business

goodwill.

25. On July 3, 1996 the Department mailed a notice to B R Interiors that the

Department considered B R Interiors to be the successor in business to Salvo Beachwear, Inc., and

made demand for payment of $1,184,425.52 from B R Interiors.

26. On July 16, 1996 B R Interiors filed a written protest with the Department to the

Department's determination that B R Interiors is successor in business to Salvo Beachwear, Inc. and

further disputing that B R Interiors is liable for the payment of any tax liability of Salvo Beachwear,

Inc.

27. The process whereby Salvo ceased doing business and B R Interiors took over the

business location, employees, business goodwill, leases and other aspects of Salvo's business

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operations was nothing more than a scheme by Mr. Rodriguez to attempt to avoid Salvo's tax

liabilities.

28. There was a transfer of value and consideration between Salvo and B R Interiors

sufficient to constitute a sale and to make B R Interiors a successor in business to Salvo.

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DISCUSSION
The issue to be determined herein is whether B R Interiors is properly classified as a

successor in business to Salvo. The successor in business provisions of the Tax Administration Act

are found at NMSA 1978, §§ 7-1-61 to 7-1-64 (1995 Repl. Pamp.). There has been no issue raised

that the taxes the Department seeks to collect from B R Interiors are not among those listed in

Subsection A of § 7-1-61, so it is assumed that they are. The remainder of § 7-1-61 provides as

follows:
B. The tangible and intangible property used in any business remains subject to
liability for payment of the tax due on account of that business to the extent stated
herein, even though the business changes hands.
C. If any person liable for any amount of tax sells out his business, the
purchaser shall withhold and place in a trust account sufficient of the purchase price
to cover such amount until the secretary issues a certificate stating that no amount is
due, or he shall pay over the amount due to the department upon proper demand
therefor by the secretary.

Section 7-1-62 sets out a procedure whereby a purchaser of a business may request a certificate

from the department as to the amount of tax due from the business so that the purchaser knows

how much of the purchase price needs to be placed in trust to comply with § 7-1-61(C). Section

7-1-63 sets out the procedure for the Department to make demand upon the purchaser of a

business for payment of the tax due from the business sold. Finally, Section 7-1-64 sets out the

consequences when a purchaser fails to withhold and pay over any tax owed by the business he

purchased. It provides as follows:
A. If the purchaser has wrongfully failed to withhold and pay over as provided
by Subsection C of Section 7-1-61 NMSA 1978, or has not made payment after
demand by the director or his delegate as provided in Section 7-1-63 NMSA 1978,
he becomes a delinquent taxpayer.
B. The purchaser hereunder may completely discharge his responsibility under
the provisions of this section by surrendering and assigning all his interest in the
tangible and intangible property acquired, or the proceeds thereof, to the director or
his delegate for disposition by him in the manner provided for disposition of
property levied upon by Section 7-1-31 NMSA 1978.

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Reading these statutes together, it is clear that the Legislature has sought to establish a means

to protect the fiscal interests of the state so that taxes which are owed are not avoided by simply

selling an existing business and its assets to a new or different business entity.

B R Interiors presented no legal argument in support of its protest. I will assume that B R

Interiors bases its position that it is not a successor in business upon an argument that there was no

sale of Salvo or New Mexico Carpets, Inc. and therefore it cannot be held liable under the

successor in business statutes as a purchaser who failed to withhold and pay over taxes.

The limited facts presented do not reveal that the normal formalities of a sale took place.

There was no contract or sales agreement entered into and no purchase money changed hands. It

does appear, however, that there was a transfer of Salvo's carpet business to B R Interiors. Since

Mr. Ben Rodriguez was the President of both New Mexico Carpets, Inc. and New Mexico Carpet

Sales, he didn't observe the normal business formalities to transfer the carpet business. He simply

did it by incorporating a new business and running all of his new and his old business through his

new corporation. B R Interiors simply took over the lease payments for Salvo's business locations.

B R Interiors continued to operate out of Salvo's longstanding business location, with only a

cosmetic change to the sign on the building. The same employees and sales people were

employed by B R Interiors as had worked for Salvo. The business continued to use Salvo's

telephone number, Salvo's computer software, Salvo's office equipment, Salvo's customer lists, and

to deal with the same carpet wholesalers and manufacturers with whom Salvo had established

business relationships. B R Interiors also simply assumed the inventory of Salvo, making sales

therefrom and essentially treating the inventory as its own, except it reimbursed Salvo for the carpet

sold at acquisition cost. This cost would not cover Salvo's ordinary business overhead costs of

maintaining this inventory, nor does it account for the carpet remnants which are left when B R

Interiors has sold what it can. Although no money transferred from B R Interiors, I have no doubt

that B R Interiors acquired significant value when it simply took over the business of Salvo. The

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value which was acquired is commonly called "business goodwill" and it is an intangible asset which

is considered to be part of the value acquired when purchasing an ongoing business. In this case,

New Mexico Carpets, Inc. had been operating out of the business location for 13 years. People

who had purchased carpet from New Mexico Carpets and been happy with the transaction knew

where to go when they needed carpet again. The majority of New Mexico Carpet, Inc.'s business

was conducted with established business clients, such as apartment building managers. B R

Interiors acquired these clients through Salvo's customer lists and through continuing to operate

essentially the same business, in the same business location, with the same sales representatives and

even the same telephone number.

There was also consideration that flowed from B R Interiors to Salvo in the form of

liabilities of Salvo which B R assumed. B R assumed Salvo's obligations under the lease

agreements for its sales room and its warehouse facilities. Thus, we have both a transfer of value

and consideration between Salvo and B R Interiors. This is more than sufficient to establish that a

sale has taken place for purposes of the successor in business statutes.

Additionally, I do not read New Mexico's successor in interest statutes so narrowly as to

require that the formalities of a "sale" even be established. Section 7-1-61(B) speaks in terms of a

"business" which "changes hands". This broad construction received the approval of the Court of

Appeals in Sterling Title Co. of Taos v. Commissioner of Revenue, 85 N.M. 279, 511 P.2d 765,

where the court cited with approval two decisions from other jurisdictions with successor in business

statutes which found that where a person had simply taken over the assets of an insolvent or defunct

business, that the person was a successor liable for the taxes of the business which was taken over.

See, Knudsen Dairy Products Co. v. State Board of Equalization, 12 Cal. App. 3d 47, 90 Cal.
Rptr. 533 (1970), and Tri-Financial Corp. v. Department of Revenue, 6 Wash. App. 637, 495 P.2d

690 (1972).

This construction of New Mexico's successor in business statutes is also wholly consistent

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with the legislative intent in enacting these provisions. As noted by Judge Sutin in his concurring

opinion in Sterling Title, supra.:
...the primary purpose of the statute was to make tangible and intangible property security
for payment of the tax. The legislature intended this to protect the Bureau and the
public against successors who did not withhold an amount sufficient to pay the tax
owed by delinquent taxpayers.

• • *

...the phrase "the business changes hands" is a broad, all inclusive expression for maintaining
the personalty as security. Its purpose is to avoid, by any means, schemes for
evasion of payment of the tax. It is broad enough to include the personalty as
security even though a taxpayer quits business, sells out, exchanges or otherwise
disposes of his business or his stock of goods. (Emphasis added.)

For the foregoing reasons, it is determined that B R Interiors is a successor in business

under the provisions of NMSA 1978, §§ 7-1-61 through 7-1-64.

CONCLUSIONS OF LAW

1. B R Interiors filed a timely, written protest, pursuant to NMSA 1978, § 7-1-24 to the

Department's determination that it was a successor in business and therefore jurisdiction lies over

both the subject matter and the parties to this protest.

2. The manner by which B R Interiors took over the existing business of Salvo

amounted to a sale of Salvo for purposes of NMSA 1978, §§ 7-1-61 through 7-1-64.

3. NMSA 1978, §§ 7-1-61 through 7-1-64 apply whenever a business changes hands,

even though the formalities of a sale may not have been observed.

For the foregoing reasons, B R Interiors protest IS HEREBY DENIED.

DONE, this 11th day of February, 1997.

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