If I buy only generic office assets (furniture, computers, office equipment) from a business that has an IRS tax lien against it, paying by a check made out to the IRS, do I become liable for the seller's unpaid Texas sales tax as a 'successor'?

Plain-English summary

A tax professional wrote to the Comptroller's office asking about a planned transaction: a client wanted to buy certain assets of a business, but instead of paying the seller directly, would make the check payable to the Internal Revenue Service. The IRS had already filed a tax lien against the selling business, and this payment method was meant to short-circuit an IRS foreclosure on that lien. The purchase price was lower than the amount of the IRS lien. The assets being bought were generic in nature -- furniture, computers, and office equipment.

The question was whether Texas "successor liability" would attach to the purchaser, making the purchaser responsible for the seller's unpaid sales tax.

The Comptroller's office said no. Because the letter didn't say whether the purchaser planned to open the same kind of business at the same location, or whether the purchaser would inherit any customer lists or goodwill from the seller, the Comptroller assumed neither would happen. Under that assumption, successor liability would not attach under Tax Code Section 111.020, because the purchaser had not acquired a "whole business" or, as far as could be told, an "identifiable segment" of the business -- just miscellaneous items typical of any office.

The letter also addressed a follow-up question: could the Comptroller still collect tax from the purchaser if the purchase price paid was less than a lien of higher priority (i.e., the IRS lien)? The Comptroller's office answered that a pre-existing lien would have no impact on its ability to pursue the purchaser (in a case where successor liability did apply), because the statute is silent on any mitigating effect of pre-existing liens or mortgages. The office also noted that it interprets "purchase price" liberally -- it doesn't have to be cash that physically changes hands. Paying off debts the seller owes to third parties can itself count as the equivalent of a purchase price, citing Comptroller's Decision Nos. 22,538, 19,634, and 5618.

What this means for you

Business buyers and purchasers of distressed-business assets

If you're only buying generic, fungible assets -- office furniture, computers, equipment -- from a business in financial distress (including one facing an IRS lien), that alone doesn't make you a "successor" liable for the seller's Texas sales tax debts under Section 111.020. What matters is whether you're acquiring a whole business or an identifiable segment of it, such as by continuing the same type of business at the same location or inheriting customer lists and goodwill. The way you structure payment (for example, paying a third party like the IRS instead of the seller directly) does not by itself change this analysis.

Be aware, however, that if the facts are different from what was assumed here -- if you do continue the same business at the same location, or do pick up customer relationships and goodwill -- successor liability could attach even though the physical assets purchased look similarly generic.

Accountants and tax professionals advising on asset purchases

When evaluating successor-liability exposure for a client buying assets out of a distressed or lien-encumbered business, focus on two questions the Comptroller flagged as central: (1) is the purchaser acquiring a whole business or an identifiable segment, and (2) is the purchaser continuing the same business at the same location or inheriting customer lists/goodwill? Also note that a pre-existing lien of higher priority than the sale price does not protect the purchaser if successor liability applies -- the Comptroller will look at the total consideration given or exchanged, not merely the cash that changed hands, and payment of the seller's debts to third parties can itself count as part of the "purchase price."

Common questions

Q: Does routing the purchase price to the IRS instead of the seller change the successor-liability analysis?
A: Not on its own. The Comptroller's analysis in this letter turned on what was purchased (generic office items, not a business or business segment) and on the assumed facts (no continuation of the business, no inherited goodwill or customer lists) -- not on how the payment was routed.

Q: What made this purchase "not a business" for successor-liability purposes?
A: The purchaser only acquired miscellaneous items typically used in any office (furniture, computers, office equipment). There was no indication the purchaser would operate the same kind of business at the same location, or that the purchaser would inherit customer lists, goodwill, or similar business-specific assets from the seller.

Q: If successor liability did apply, would a pre-existing IRS lien reduce or eliminate what the Comptroller could collect from the purchaser?
A: No. The Comptroller's office said the statute is silent on any mitigating effect of pre-existing liens or mortgages, and a pre-existing lien would not impact its ability to pursue the purchaser.

Q: How does the Comptroller define "purchase price" for successor-liability purposes?
A: Liberally. It is not necessarily limited to cash that physically changes hands between purchaser and seller. Paying debts owed by the seller to third parties has been treated as equivalent to a purchase price, even when no money passes directly between purchaser and seller (citing Comptroller's Decision Nos. 22,538, 19,634, and 5618).

Q: Can I rely on this letter for my own transaction?
A: Only if you're the taxpayer to whom it was issued. This is a STAR letter ruling, and under 34 Tex. Admin. Code Rules 3.1 and 3.10, it can be the basis of a detrimental-reliance claim only for that original taxpayer. It's also based on assumed facts (no business continuation, no inherited goodwill) because the requester's letter didn't specify -- a transaction with different facts could come out differently.

Citations and references

Statutes:

• Tax Code Section 111.020 (successor liability)

Other authority discussed:

• Comptroller's Decision Nos. 22,538, 19,634, and 5618 (payment of seller's third-party debts can be treated as part of the "purchase price")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9302069L

Original ruling text

February 17, 1993

Re: Successor Liability

Dear **:

Your letter of February 9, 1993 has been referred to me for response. I regret
the delay in getting an answer to you.

You indicated that you represent a client who plans to purchase certain assets
of a business from a seller but, make the check payable to the Internal Revenue
Service. The Internal Revenue Service has filed a tax lien against the selling
entity and this method of acquisition is being used to short-circuit an IRS
foreclosure on that lien. The purchase price being paid is lower than the
amount of the IRS lien on the business. You further stated that the property
being acquired is of a generic nature, such as furniture, computers and office
equipment. Under all of these circumstances, you wanted to know if successor
liability would apply.

The information that you have given us is somewhat limited. For instance, you
have not stated whether or not the purchaser intends to open a business of the
same kind in the same location as the predecessor or whether the purchaser will
inherit any customer lists, goodwill or the like from the seller as a result of
the transaction. However, I will assume in my answer that the purchaser is not
going to go into the same type of business at the same location and that no
goodwill or customer lists are going to change hands.

Under the circumstances you outlined and the assumptions that I made above,
successor liability would not attach to the purchaser under Section 111.020 of
the Texas Tax Code. The purchaser has not acquired a whole business or from
what one can tell, an identifiable segment of that business. He has just
purchased miscellaneous items, typically used in any office.

You next ask whether the Comptroller could collect the tax from the purchaser
under circumstances in which the purchase price paid was less than a lien of
higher priority. This question assumes that the tax would, in fact, be due. The
statute in question is silent as to any possible mitigating effect of
pre-existing liens or mortgages on this situation.

The pre-existing lien would have no impact on our ability to pursue the
purchaser. We would look at the total consideration given or exchanged in
determining what the "purchase price" was.

In fact, the Comptroller's office has interpreted the phrase purchase price
fairly liberally, so that it is not necessarily congruent with the amount of
cash that physically changes hands between the purchaser and the seller. The
payment of debts owed by the seller to third parties has been held to be the
equivalent of a purchase price, even where no money is exchanged between the
purchaser and the seller. See comptroller's Decision Nos. 22,538, 19,634 and
5618.

I hope that this letter is of assistance to you. Please let me know if you have
any further questions. I can be reached at (512) 475-0333.

Sincerely,

Richard Craig
Legal Counsel