Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Knudsen Dairy Products Co. v. State Board of Equalization . . . (1970)

Related Corporation Subject to Liability as Successor

Taxpayer had made substantial sales on credit to a debtor corporation which subsequently became unable to remain current in its obligations. To avoid a loss, taxpayer acquired ownership of the outstanding stock of the debtor corporation and then directed the debtor corporation to transfer its operation assets to a wholly-owned subsidiary of taxpayer. The subsidiary issued a promissory note to taxpayer equivalent to the value of the assets which it received. Taxpayer then credited the debtor corporation, as reduction of its indebtedness, in the amount of the note.

An audit of the debtor corporation disclosed additional taxes due on sales made prior to its liquidation into the subsidiary. The amount was assessed against the subsidiary, as successor, by authority of Section 6812 of the Revenue and Taxation Code which imposes a liability upon any "purchaser of a business [who] fails to withhold purchase price" sufficient to cover any amount owed by the seller of the business under the Sales and Use Tax Law. The court, in holding that the subsidiary was properly liable for tax liabilities of the debtor corporation arising prior to the transfer of the assets, concluded that the fact that the purchase price did not flow directly to the seller was immaterial, noting that to hold otherwise would permit a taxpayer to avoid liability by the simple device of having the purchase price paid through an intermediary. Further, in the circumstances of present day business practice, it would be illogical to hold that a "purchase price" must take the form of cash or tangible personal property. Knudsen Dairy Products Co. v. State Board of Equalization (1970) 12 Cal.App.3d 47.