West Rock Inc., a towing company in the repossession business, got a bit behind in its gross receipts and withholding taxes.
Well, more than a bit. In 2008, the state Taxation and Revenue Department assessed the company for unpaid taxes plus interest totaling $271,359.77.
From that moment, events began moving very, very slowly.
A timeline provided by the state Court of Appeals in a recent opinion reveals that West Rock protested the assessment, but its protest was denied in April 2013.
The following month, Daniel Brown, West Rock’s president and manager of daily operations, and incidentally also its landlord, formed a new limited liability corporation, High Desert Recovery. High Desert was a “single member LLC,” in the court’s phrasing, with Brown the sole member.
The new company engaged in exactly the same line of business as the old company. It contracted with “many of” the same clients, according to the Court of Appeals.
West Rock sold a tow truck to High Desert for $700. The Department of Motor Vehicles said the truck was actually worth $14,720. The new company also bought two new trucks, which it insured under West Rock’s policy.
The new company’s only employees were Brown and a driver. The driver was simultaneously employed at West Rock. The two companies shared premises for several months, until West Rock’s three-member board (Brown was a member) dissolved the corporation and abandoned its assets.
High Desert, the new company, took possession of the abandoned assets.
The Taxation and Revenue Department’s lawyer summarized the situation in a legal brief: High Desert “took office equipment, liability insurance policy and tow truck to provide the same services using the same equipment with the same employees to the same customers at the same business location.”
But, High Desert contended, because it was a new company, with a separate and distinct legal existence, therefore it wasn’t responsible for the defunct company’s back taxes.
On the one hand, it was a laughable contention. It’s as if the cops knock on the door with a warrant for Joe Blow, whereupon Joe puts on some Groucho glasses and says, “I’m not home.”
On the other hand, the legal system can make it surprisingly difficult to prove the most obvious things. Which is, perhaps, as it should be. Tax liability shouldn’t turn on what “everybody knows” but only on what can be proven with hard evidence.
So Tax and Rev issued a new assessment against the new company, alleging it to be a mere continuation of the old one, which predictably prompted a new protest.
How do you prove a new company is a mere continuation of an old, defunct one? Tax and Rev, it turns out, has issued a regulation answering that very question.
A new company is presumed a successor of a previous company if any one of eight factors is satisfied. The first factor asks if there has been a “sale and purchase” of a major part of the old company’s assets. When a loophole that large is written into a regulation or statute, you have to figure it was put there on purpose, although in this instance the purpose is hard to guess. West Rock didn’t sell its assets to High Desert. It basically gave them away. By that oddly specific criterion, High Desert wasn’t a successor business.
But other factors ask only if there has been a substantial transfer of assets and a continuation of business practices, and those factors were easily met. On Dec. 4, 2018, a hearing officer denied High Desert’s protest, deeming it a successor in business to West Rock and liable for its back taxes.
Three years later, almost to the day, the Court of Appeals affirmed that decision. Now, whenever I hear the phrase “the long arm of the law,” I picture the elongated forelimbs of a three-toed sloth.
But there’s an important wrinkle. I mentioned that High Desert was initially assessed $271,359.77, including interest.
But during the intervening years, the Court of Appeals issued another opinion holding that a successor in business isn’t liable for interest on unpaid back taxes. That 2015 decision was based on the wording of the tax laws — another glaring loophole, although this one was patched by a 2017 amendment.
The company’s tax liability was determined in accordance to the law in effect in 2008, before the loophole was closed. Its assessment was reduced to $127,764.92, representing 2008’s back taxes only.
For 13 years (and counting), West Rock/High Desert had use of that money, interest-free. It was a form of financing unavailable to its competitors who paid their taxes on time.
Joel Jacobsen is an author who in 2015 retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at [email protected].<br”>href=”http://legal.column.tip”>[email protected].<br>
Source: https://www.abqjournal.com/2457790/a-tax-loophole-to-drive-a-truck-through.html
