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Business Taxes Law Guide—Revision 2024
Sales and Use Tax Annotations
A B C D E F G H I J L M N O P R S T U V W X
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535.0000 Successor's Liability—Regulation 1702
Annotation 535.0016
535.0016 Debtor-in-Possession Is Not a Bankruptcy Trustee. Buyer acquired substantially all of the business assets, including tangible personal property located in California, from four entities each of whom is a debtor-in-possession under a jointly administered Chapter 11 bankruptcy case. The acquisition was approved by an order of the Bankruptcy Court.
Step one of the plan was to merge the four entities into four successor limited liability companies (LLC). The LLC's then became debtors-in-possession with respect to the assets transferred to each successor LLC. The second step was the transfer of the assets from the successor LLC's to the buyer pursuant to approval by the court. The buyer is concerned with being billed for successor's liability for sales and use tax on a sale by debtors-in-possession. Buyer contends that no successor's liability should apply since, as debtors-in-possession under Chapter 11 of the Federal Bankruptcy Act, the LLC's were acting in the capacity, with all the rights, powers and duties, of a trustee in bankruptcy.
Regulation 1702(a) provides that successor's liability does not arise in connection with " … other transfers of a business such as assignments for the benefit of creditors, foreclosures of mortgages, or sales by trustees in bankruptcy." If the regulation had intended to include debtors-in-possession, it could easily have so stated but it did not. While it is true that debtors-in-possession have many of the rights, powers, and duties of trustees in bankruptcy pursuant to 11 U.S.C. section 1107(a), these rights, powers and duties do not make a debtor-in-possession a trustee in bankruptcy. Therefore, successor's liability will apply to the above type of business transfer unless the language of the Order approved by the Bankruptcy Court exonerates the buyer of its successor liability to the Board. 2/10/03. (2004–1).