New York Tax Court Rules that Business is Liable for Full Sales Tax Bill after Transfer of Business Assets

369109_6448.jpgA decision from the New York Tax Appeals Tribunal illustrates the importance of clearly and carefully documenting business transactions, even when those transactions are between family members. The case, Matter of Ultimat Security, Inc., involved an attempt by the New York Division of Taxation (DOT) to hold a company liable for sales tax owed by the company whose assets it acquired. The original business and its successor were owned by a son and his mother, respectively, and they contended that the asset transfer was not a “bulk sale” subject to tax liability. The courts disagreed and held the successor business liable for the full tax bill.

From November 2000 to May 2007, Tim Butler owned and operated Ultimate Security, Inc., a Hempstead-based provider of residential and commercial security guard services. The company employed Butler’s mother, Vera Drayton, as an office administrator. Drayton reportedly wanted to start her own business, and Butler approached her about taking over his company. Drayton created a new business entity, Ultimat Security, Inc. During May 2007, Ultimate Security transferred its business assets, which consisted of a customer list, office equipment, equipment for security guards, and other personal property, to Ultimat Security. Neither the two companies nor Butler and Drayton signed a sales contract, nor did any consideration change hands.

New York state law requires the purchaser in a “bulk sale” of assets to file a notification with the DOT, which Ultimat did not do. The DOT requested information about the bulk sale from Ultimat in December 2007, and received a reply denying that the transfer of asset constituted a bulk sale. In January 2008, the DOT notified Ultimat of a possible claim for sales taxes owed by Ultimate. The DOT concluded that the transfer was a bulk sale because of, among other factors, the relationship between Butler and Drayton, the commonality of the companies’ customer and employee lists, the similarity of the company names, and the lack of documentation filed by Ultimat upon the commencement of its business operations. The agency issued a Notice of Determination that February holding Ultimat liable for tax assessments against Ultimate, totaling almost $350,000.

An ALJ ruled that a bulk sale had occurred and upheld the Notice of Determination’s amount of tax liability, after finding that Ultimat did not meet its burden of proof to establish a fair market value for the assets in the sale. Under state law, a purchaser’s tax liability is limited to the purchase price or the fair market value of the assets of the sale, whichever is greater. The sales price was essentially zero, and the ALJ rejected the argument that the assets’ fair market value was de minimis.

The Appeals Tribunal considered Ultimat’s claim that the fair market value of the assets was far less than the total amount of tax liability, and that its liability should be limited to that fair market value amount. The tribunal held that, because Ultimat initially denied that a bulk sale had taken place and failed to establish any fair market value, it failed to meet its burden to challenge, by clear and convincing evidence, the DOT’s methodology or its assessment of tax liability.

The business attorneys of Samuel C. Berger, PC offer fixed-fee packages of legal services to businesses and entrepreneurs who want to do business in New York and northern New Jersey. To speak to a member of our skilled legal team, contact us today online or at (212) 380-8117.

Web Resources:

Decision (PDF), In the Matter of the Petition of Ultimat Security, Inc., State of New York Tax Appeals Tribunal, May 31, 2012 (source)

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Photo credit: ‘Taxpapers’ by tijmen on stock.xchng.