Successor Liability for Unpaid Taxes

Successor Liability

Generally, the purchaser of assets does not assume the liabilities of the seller. Successor liability, however, is an exception to the general rule. Under the successor-liability doctrine, the IRS may seek to recover unpaid taxes from a “successor”—often a purchaser of corporate assets.

Successor liability is generally determined under state law, although some courts have bolstered state law with a purported federal common law of successor liability.

When does Successor Liability Apply?

In most jurisdictions, successor liability imposes liability in the following circumstances:

when the buyer or successor expressly assumes the liabilities;
when the transaction amounts to a de facto merger;
when the successor is a mere continuation of the seller corporation (e.g., the buyer continues essentially the same operations or product line of the seller); and
when the transaction is entered into fraudulently to escape liability.

Express Assumption of Liabilities

Where a buyer expressly assumes the seller’s liabilities, the buyer succeeds to those liabilities and is liable for their payment under the successor-liability doctrine. Unless the scope of an express assumption provision is at issue, most successor liability cases do not involve disputes under the express-assumption prong because liability is typically clear.

De Facto Merger and Mere Continuation

Where a taxpayer ceases to do business, a second or successor corporation may become liable for the taxes if the second corporation is the mere continuation of the taxpayer or the predecessor and successor underwent a def factor merger.

The interrelated concepts of de facto merger and mere continuation consider such factors as continuity of management, personnel, location, assets, and operations.

Where a taxpayer ceases to do business, a second or successor corporation may become liable for the taxes of the taxpayer if the second corporation is the mere continuation of the taxpayer.

To determine whether a de facto merger or mere continuation exists, courts have generally looked to whether:

the second corporation continues the business or performs the same functions as the taxpayer;
the taxpayer’s employees become the employees of the second corporation;
the taxpayer and the second corporation are owned or controlled by the same individual or individuals;
the successor’s business activities are carried out in the same location;
less than full consideration is paid for the transferred assets; and
the business relationships remain relatively static.

Fraudulent Transfers to Escape Liability

Successor liability may also apply where a taxpayer engages in a transaction fraudulently with the purpose of escaping liability. Courts have looked to a number of factors to determine whether a taxpayer has engaged in a fraudulent transfer intending to escape liability, including the following factors:

the transfer or obligation was to an insider;
the debtor retained possession or control of the property transferred after the transfer;
the transfer or obligation was disclosed or concealed;
before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
the transfer was of substantially all the debtor’s assets;
the debtor absconded;
the debtor removed or concealed assets;
the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
the transfer occurred shortly before or shortly after a substantial debt was incurred; and
the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.