Purpose: This rule explains under what circumstances a person is considered a successor to a person quitting business. It explains the successor's responsibility for payment of an outstanding tax liability owed by the person taxpayer quitting business, whether that liability is known at the time of purchase or not. The department has revised this rule to reflect legislative changes (EHB 2269) and to provide updated information to taxpayers.

     EHB 2269, chapter 13, Laws of 2003 1st sp.s., revised RCW 82.04.180 and 82.32.140 to change the conditions under which a person becomes a successor. The primary changes reflected in the rule are:

•     A successor can be a successor if obtaining from a taxpayer more than 50% of the fair market value of intangible assets;

•     A surviving corporation of a statutory merger is included in RCW 82.04.180 definition of "successor"; and

•     If the fair market value of assets acquired by a successor is less than $50,000, the successor's liability for payment of the taxpayer's unpaid tax is limited to the fair market value of the acquired assets.

     Citation of Existing Rules Affected by this Order: Amending WAC 458-20-216 Successors, quitting business.

     Statutory Authority for Adoption: RCW 82.32.300 and 82.01.060(2).

      Adopted under notice filed as WSR 05-09-032 on April 13, 2005.

     Changes Other than Editing from Proposed to Adopted Version:

•     The first sentence of subsection (2)(b)(i)(A) of the proposed rule is changed to, "Any person to whom a taxpayer quitting, selling out, exchanging, or disposing of a business sells or otherwise conveys, directly or indirectly, in bulk and not in the ordinary course of business, a major part of the taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment, whether he or she operates the business or not. RCW 82.04.180." This change is made in order to be consistent with the statutory language of RCW 82.04.180 prior to July 1, 2003.

•     Subsection (2)(b)(i)(B) of the proposed rule is deleted. This subsection had explained that a surviving corporation of a statutory merger was a successor even prior to the law change. Surviving corporations of a statutory merger did have a liability prior to the law change, but not because they were a successor as defined in RCW 82.04.180 (the subject of this rule). Prior to becoming successors under RCW 82.04.180 surviving corporations were liable for tax, interest, and penalties. This explanation is now provided in a new subsection (2)(c).

•     The last sentence of subsection (5)(a) of the proposed rule is revised to clarify that a successor "as defined in RCW 82.04.180" is not liable for interest or penalties associated with the taxpayer's tax liability.

•     A new sentence has been added to subsection (6)(b): "The written notice is available on the department's internet web site at www.dor.wa.gov under forms."

•     Editing changes as needed were also made.

     Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 0, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 0, Amended 1, Repealed 0.

     Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.

     Number of Sections Adopted on the Agency's Own Initiative: New 0, Amended 1, Repealed 0.

     Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.

     Number of Sections Adopted Using Negotiated Rule Making: New 0, Amended 0, Repealed 0;      Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 0, Amended 1, Repealed 0.

     Date Adopted: June 30, 2005.

Janis P. Bianchi, Manager

Interpretations and

Technical Advice Unit

     (2) (("Successor" defined. For purposes of this rule, the term "successor" means:)) Who is a "successor"?

     (a) "Successor" on or after July 1, 2003.

     (((a))) (i) RCW 82.04.180 provides that a "successor" is:

     (A) Any person to whom a taxpayer quitting, selling out, exchanging, or disposing of a business sells or otherwise conveys, directly or indirectly, in bulk and not in the ordinary course of the taxpayer's business, ((a major part of the materials, supplies, merchandise, inventory, fixtures, or equipment of the taxpayer. RCW 82.04.180. Persons acquiring only intangible assets such as copyrights and trademarks are not "successors."

     (i) A person is a successor if he or she acquires a major part of the taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment in bulk, whether he or she operates the business or not. A person acquires a "major part" of the materials, supplies, merchandise, inventory, fixtures, or equipment if he or she acquires more than fifty percent of the fair market value of any such property at the time of conveyance.

     (ii) However, persons who acquire a major part of a taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment through insolvency proceedings or regular legal proceedings to enforce a lien, security interest, or judgment, or by repossession under a security agreement are not successors.)) more than fifty percent of the fair market value of either the (I) tangible assets or (II) intangible assets of the taxpayer;

     (B) Any surviving corporation of a statutory merger; or

     (((c))) (C) Any person obligated to fulfill the terms of a contract as a surety or guarantor of a defaulting contractor, in which case the person is deemed a successor only to tax liability arising out of that contract. ((RCW 82.04.180.

     (3) Responsibility)) (ii) A person, however, is not a "successor" if the person acquires more than fifty percent of the fair market value of the tangible or intangible assets of the taxpayer through insolvency proceedings, regular legal proceedings to enforce a lien, security interest, or judgment, or by repossession under a security agreement.

     (b) "Successor" prior to July 1, 2003.

     (i) For the periods prior to July 1, 2003, a "successor" is:

     (A) Any person to whom a taxpayer quitting, selling out, exchanging, or disposing of a business sells or otherwise conveys, directly or indirectly, in bulk and not in the ordinary course of business, a major part of the taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment, whether he or she operates the business or not. RCW 82.04.180. A person acquires a "major part" of the taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment if he or she acquired more than fifty percent of the fair market value of such property at the time of the sale or conveyance;

     (B) Any person obligated to fulfill the terms of a contract as a surety or guarantor of a defaulting contractor, in which case the person is deemed a successor only to tax liability arising out of that contract.

     (ii) A person, however, is not a "successor" if the person acquires a major part of a taxpayer's materials, supplies, merchandise, inventory, fixtures, or equipment through insolvency proceedings, regular legal proceedings to enforce a lien, security interest, or judgment, or by repossession under a security agreement.

     (c) Surviving corporation of statutory merger taken effect prior to July 1, 2003. A surviving corporation of a statutory merger that takes effect prior to July 1, 2003, is liable for the full tax liability of the non-surviving corporation, plus any interest or penalties due, under RCW 23B.11.060 or similar laws in other jurisdictions.

     (3) What are tangible and intangible assets for purposes of this rule?

     (a) Tangible assets. "Tangible assets" include, but are not limited to, materials, supplies, merchandise, inventory, equipment, or other tangible personal property.

     (b) Intangible assets. "Intangible assets" include, but are not limited to, all moneys and credits including mortgages, notes, accounts, certificates of deposit; tax certificates; judgments; state, county and municipal bonds; bonds of the United States and of foreign countries; bonds, stocks, or shares of private corporations; personal service contracts; trademarks; trade names; brand names; patents; copyrights; trade secrets; franchise agreements; licenses; permits; core deposits of financial institutions; non-compete agreements; business name; telephone numbers and internet addresses; customer or patient lists; favorable contracts and financing agreements; reputation; exceptional management; prestige; good name; integrity of a business; or other intangible personal property.

     (4) What are taxpayer's responsibilities for outstanding tax liability((.))? Whenever a taxpayer quits business, or sells out, exchanges, or otherwise disposes of ((his or her)) more than fifty percent of the tangible or intangible assets of the business, any tax administered by the department and for which the taxpayer is liable ((for shall become)) is immediately due and payable. The taxpayer ((shall)) must, within ten days ((of quitting, selling out, exchanging, or otherwise disposing of the business)), complete a tax return and pay the tax due. RCW 82.32.140.

     (((a))) (5) What are successor's responsibilities for taxpayer's outstanding tax liability?

     (a) Withholding tax or obtaining documentation that no tax is due from taxpayer. A successor ((shall)) must withhold from the purchase price a sum sufficient to pay any tax due from the taxpayer until the taxpayer produces either a statement of tax status from the department showing ((either no tax is due or)) payment in full of any tax due or a certificate from the department that no tax is due. If the tax is not paid by the taxpayer within ten days from the date of sale, exchange, or disposal of the business, the successor ((shall)) will become liable for the payment of the full amount of tax. A successor as defined in RCW 82.04.180 is not liable for interest or penalties associated with the taxpayer's tax liability. RCW 82.32.140.

     (b) Payment of successor liability is payment against purchase price. The payment of the ((seller's)) taxpayer's tax liability by the successor ((shall be)) is deemed a payment upon the purchase price. If the sum of the payment to the department plus any payments made, directly or indirectly, to the ((seller)) taxpayer is greater in amount than the purchase price, the amount of the difference ((shall)) becomes a debt due the successor from the taxpayer. RCW 82.32.140.

     (c) Limitation on successor's responsibility for taxpayer's outstanding tax liability. Effective July 1, 2003, if the fair market value of the assets acquired by a successor is less than fifty thousand dollars, the successor's liability for payment of the unpaid tax is limited to the fair market value of the assets acquired from the taxpayer. The burden of establishing the fair market value of the assets acquired is on the successor.

     (6) Can a successor avoid responsibility for taxpayer's outstanding tax liability?

     (a) What must a successor do to avoid responsibility for tax due by a taxpayer? A successor is not liable for any tax due from the taxpayer if((: (i))) the successor provides written notice of the acquisition to the department((;)) and (((ii))) within six months of receiving the written notice, the department has not issued a tax assessment against the taxpayer and mailed a copy of a notice of tax due to the successor. RCW 82.32.140. The six-month period begins upon the department's receipt of the written notice, or the date the person becomes a successor, whichever is later.

     If there are circumstances that prohibit an audit from being completed within six months of the department receiving a proper written notice, the successor and the department may execute a Liability of Successor Waiver Agreement (Form Rev 31 0068) to extend the time in which the department may issue a tax assessment, and the successor will remain liable for the taxes. In lieu of executing such agreement, the department may issue a protective assessment under RCW 82.32.100 if the records cannot be made available for examination in a timely manner.

     (((d))) (b) How does a successor notify to the department of the acquisition of a taxpayer? Written notice of the acquisition must be ((sent either to)) made on a form prescribed by the department, or it must contain substantially the same information. The written notice must be provided by mailing to the Department of Revenue, ((Taxpayer Account Administration)) Attn: Successorship Notices, P.O. Box 47476, Olympia, Washington 98504-7476 ((or to one of the department's field offices. The six-month period begins upon the department's receipt of the written notice)). The written notice is available on the department's internet web site at www.dor.wa.gov under forms. The written notice must contain the following information:

     (i) The (predecessor) taxpayer's name, business name, address, and UBI number ((if known));

     (ii) The successor's name, business name, address, and UBI number;

     (iii) The date of the acquisition;

     (((iii) A statement that)) (iv) Whether or not the successor acquired more than fifty percent of the tangible or intangible assets of the (predecessor) taxpayer ((who was quitting business; and

     (iv)));

     (v) A description of the assets acquired((.

     (4))) and their estimated fair market value;

     (vi) The total costs of acquisition; and

     (vii) How the person became a successor (i.e., asset purchase, merger, guarantor of a defaulting contractor, etc.).

     (7) Disclosure. The department is not prohibited from disclosing to a person against whom the department has asserted liability as a successor under RCW 82.32.140 return or tax information pertaining to the specific business of the taxpayer to which the person has succeeded. RCW 82.32.330. For example, a successor is liable under RCW 82.32.140 for payment of an outstanding tax liability of the predecessor taxpayer. The department is only authorized to provide the successor return or tax information related to that outstanding tax liability.

     (8) Tax deferrals not terminated. A tax deferral granted to a (predecessor) taxpayer may be transferred to the successor if the successor meets the eligibility requirements for the remaining periods of the deferral and the parties agree in writing that the successor will assume liability for the tax deferral. RCW 82.60.060, 82.63.045, 82.68.050 and 82.69.050. If the deferral is transferred, the successor of the investment project is liable for the full amount of any unpaid, deferred taxes under the same terms and conditions as the original recipient of the deferral. If the deferral is not transferred, the successor's liability for deferred tax is limited to the deferred taxes due at the time of the transfer. Refer to WAC 458-20-24001 and 458-20-24001A (Sales and use tax deferral -- Manufacturing and research/development activities in distressed areas), 458-20-24002 (Sales and use tax deferral -- New manufacturing and research/development facilities), and 458-20-24003 (Tax incentives for high technology businesses) for further reference regarding successors of deferral investment projects.

     (9) Examples. The following factual situations illustrate the application of successorship. These factual situations should be used only as a general guide. The successorship status of each situation depends on all the facts and circumstances. Assume all the examples below occur on or after July 1, 2003.

     (a) Example 1. Taxpayer quits business and sells all equipment((, fixtures,)) and inventory to one purchaser. The taxpayer may be either solvent or insolvent at the time of sale. The purchaser is a successor.

     (b) Example 2. Taxpayer quits business, selling ((only)) all of its intangible assets consisting of customer lists and a covenant not to compete. The purchaser is ((not)) a successor.

     (c) Example 3. Taxpayer sells its entire business, including all ((fixtures and)) equipment (60% of its tangible assets) to Purchaser A, and all inventory (40% of its tangible assets) to Purchaser B. ((Both purchasers are successors.)) Purchaser A is a successor. Purchaser B is not a successor.

     (d) Example 4. Taxpayer sells its entire business, including all ((fixtures, equipment, and inventory in the following percentages of fair market value)) assets as follows to three purchasers on January 1, 2004:

PURCHASER A	PURCHASER B	PURCHASER C
((55% of fixtures)) Inventory of $200,000	((25% of fixtures)) Equipment of $100,000	((20% of fixtures)) Receivable of $45,000
((30% of equipment	30% of equipment	40% of equipment))
((30% of inventory	55% of inventory	15% of inventory))

     Purchaser A is a successor because it has acquired ((a major part, 55%)) more than 50% of the fair market value, of the ((fixtures)) tangible assets of the taxpayer. Purchaser B is not a successor because it has acquired ((a major part, 55%)) less than 50% of the fair market value((,)) of the ((inventory)) tangible assets of the taxpayer. Purchaser C is ((not)) a successor because it has ((not)) acquired ((a major part of any of the categories of)) more than 50% of the intangible assets ((sold by)) of the taxpayer. Purchaser C's tax liability is limited to $45,000 because the fair market value of the assets acquired is less than $50,000.

     (i) On February 1, 2004, Purchaser C provides a proper written notice to the department regarding its purchase from the taxpayer. Purchaser A does not provide any written notice to the department regarding its purchase from the taxpayer. On September 30, 2004, the department issues a tax assessment to the taxpayer for $100,000 in taxes owed, plus penalties and interest. A copy of the tax assessment is also mailed to Purchaser A as a successor to the taxpayer. Purchaser A is liable for the $100,000 in taxes owed by the taxpayer since it did not provide a proper written notice to the department. Purchaser C is not liable for the $100,000 in taxes because it provided a proper written notice, and the department did not issue an assessment within six months of receiving the notice.

     (ii) Same facts as in the previous example except the department issues its tax assessment on July 15, 2004, and mails a copy of the tax assessment to both Purchasers A and C as successors. Both Purchasers A and C are liable as successors for the taxes owed by the taxpayer. However, Purchaser C's liability is limited to $45,000 in taxes since the fair market value of the assets it acquired was less than $50,000.

     (e) Example 5. Taxpayer obtains a loan from a financial institution to purchase equipment((, fixtures,)) and inventory. The financial institution secures the loan by taking a security interest in the equipment((, fixtures,)) and inventory. Taxpayer quits business, leaving the equipment((, fixtures,)) and inventory behind. The financial institution repossesses these items. The financial institution is not a successor.

     (f) Example 6. Taxpayer purchases all equipment and inventory under a line of credit extended by a bank and guaranteed by a third party. The third party perfects a security interest in the equipment and inventory. Taxpayer quits business, surrendering the equipment and inventory to the third party guarantor. The third party guarantor is not a successor.

     (g) Example 7. Taxpayer leaves business, including ((fixtures)) equipment, materials, and inventory, which the landlord holds for unpaid rent. The landlord forecloses the landlord's lien using the summary foreclosure provisions of RCW 60.10.030, or holds a foreclosure sale by the sheriff, or accepts a bill of sale in satisfaction of the landlord's lien for rent created by RCW 60.72.010. The landlord is not a successor.

     (h) Example 8. Taxpayer purchases all equipment and inventory under a security agreement.

     (i) If the property is repossessed by the vendor, the vendor is not a successor.

     (ii) If the taxpayer sells his or her equity under the security agreement to a third person, the third person is a successor.

     (iii) If the equipment and inventory is not repossessed and the vendor buys back the interest of the taxpayer without following the summary foreclosure provisions of RCW 60.10.030, the vendor is a successor.

     (i) Example 9. Taxpayer dies or becomes bankrupt, goes into receivership, or makes an assignment for the benefit of creditors. The executor, administrator, trustee, receiver, or assignee is not a successor but stands in the place of the taxpayer and is responsible for payment of tax out of the proceeds derived upon disposition of the assets. A purchaser from the executor, administrator, trustee, receiver, or assignee is not a successor, unless under the terms of the purchase agreement the purchaser assumes and agrees to pay taxes and/or lien claims.

     (j) Example 10. Taxpayer is a contractor and is required to post a bond to insure completion of the contract. Taxpayer defaults on the contract and the bonding company completes it. The bonding company is a successor to the contractor to the extent of the contractor's liability for that particular contract and is also liable for taxes incurred in the completion of the contract.

[Statutory Authority: RCW 82.32.300. 99-08-034, § 458-20-216, filed 3/31/99, effective 5/1/99; Order ET 70-3, § 458-20-216 (Rule 216), filed 5/29/70, effective 7/1/70.]

     Reviser's note: RCW 34.05.395 requires the use of underlining and deletion marks to indicate amendments to existing rules. The rule published above varies from its predecessor in certain respects not indicated by the use of these markings.

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