Successor Liability for Income Tax-Buyer Beware!!

By September 4, 2012 Uncategorized

In the September edition of the Journal of Accountancy, the section entitled “From the Tax Adviser” ventures into the world of sales tax and the concept of successor liability for income and franchise tax.  I’ll confess that this was new to me.

In his article, the Editor notes that Illinois and Pennsylvania have provisions that the buyer of assets can succeed to the income tax liabilities of the seller when a “major part” of the business is purchased.  To avoid this liability, the buyer must notify the state that the bulk-sale is occurring. 

These provisions sound similar to the sales tax bulk-sale notifications which are mostly ignored in every M&A deal I’ve ever been involved with.  Rather than go through the pain of getting tax clearances from the states, most sellers and buyers just work out a hold-back or escrow of the taxes due.  Speaking of sales tax, the purchase of assets will make the buyer the successor to the seller’s known and unknown sales tax liability.  If due diligence is not conducted, these issues can be significant.

Ned Lenhart, CPA