Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013

Sales and Use Tax Annotations

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535.0000 SUCCESSOR'S LIABILITY—Regulation 1702

Annotation 535.0074.500

535.0074.500 Successor's Liability. Mr. and Mrs. A entered into an agreement to purchase the stock of a corporation from the owners, Mr. and Mrs. B. The collateral for the promissory notes given by Mr. and Mrs. A to the sellers consisted of corporate assets, i.e., furniture, fixtures, and equipment. Mr. and Mrs. B assigned the notes to their Revocable Trust. After operating the business for several years, Mr. and Mrs. A defaulted on payments due under the promissory notes and the trust "foreclosed" on the security interest retained for the sale of the stock. Mr. and Mrs. A and the trust entered into an "Agreement for Repossession of Collateral in Satisfaction of Debt" whereby Mr. and Mrs. A would turn over all of the corporation's tangible personal property to the original sellers, Mr. and Mrs. B, in satisfaction of the promissory notes. Mr. and Mrs. B then took out a seller's permit under their name and continued to operate the business.

Mr. and Mrs. A owed the Board taxes for their period of operating the business, and the Board issued a successor's liability against Mr. and Mrs. B.

When the trust "foreclosed" on the security interest retained for the sale of the corporation's stock, the agreement entered into at that time transferred the corporation's tangible personal property to the trust for a consideration. Under Knudsen Dairy Products Co. v. State Bd. of Equalization (1970) 12 Cal.App.3d 47, the purchase price need not necessarily flow directly to the seller. The trust, therefore, purchased the corporation's property. Mr. and Mrs. A turned over the corporation's property to the Mr. and Mrs. B trust in exchange for satisfaction of their personal debt to Mr. and Mrs. B. Mr. and Mrs. B obtained the property from the trust and continued the business. Furthermore, since the sale by Mr. and Mrs. B was a sale of stock and not a sale of tangible personal property, they may not utilize California Commercial Code section 9505 to dispose of the collateral in lieu of foreclosing under a security agreement. Accordingly, Mr. and Mrs. B as purchasers of the tangible personal property were also "successors," and the successor liability was properly imposed. 5/28/97; 3/18/97.