Asset Purchase Agreements: Successor Tax Liability in Tennessee
One benefit to structuring the purchase of a business in the form of an asset purchase agreement is that a buyer is able to avoid assuming certain liabilities of the seller. In Tennessee, however, BUYER BEWARE because one who purchases all the assets of a business will be liable for certain unpaid tax obligations of the business unless absolution is granted following compliance with statutory procedures.
The procedure for securing release of liability for certain unpaid Tennessee tax obligations of seller business is summarized follows:
- Secure an affidavit from the seller stating the amount, if any, of the unpaid taxes, interest and penalty due through the date of the purchase.
- Send the affidavit by certified mail (or personal service) to the enforcement section of the Tennessee Department of Revenue.
- Withhold sale proceeds sufficient to pay the tax stated to be due in the affidavit and make security arrangements for payment of any additional tax which the Tennessee Department of Revenue may assert by notice within 15 days after its receipt of the affidavit.
- If within 15 days of receipt, the Tennessee Department of Revenue confirms that no tax in excess of the amount stated in the affidavit is due, or if the Tennessee Department of Revenue fails to respond within 15 days there will be no liability for the vendor’s unpaid tax in excess of the amount stated in the affidavit. However, if the Tennessee Department of Revenue asserts that additional tax is due beyond the amount stated in the affidavit, the additional tax should be paid from any withheld sale proceeds or any other security arrangement.
This procedure is somewhat awkward. Theoretically the notice to the Tennessee Department of Revenue would be made 15 days before the closing in order to confirm by the closing date the amount of any unpaid tax. However, providing an affidavit 15 days in advance of the tax “unpaid” through the date of the purchase 15 days later presents a metaphysical conundrum.
Furthermore, the statute appears to render the buyer liable for the additional tax asserted by the Tennessee Department of Revenue if the affidavit/notice is made simultaneously with the closing and the only amount withheld at the closing is the tax stated to be due in the affidavit, but the Tennessee Department of Revenue within 15 days asserts an additional amount.
The statue is oftentimes ignored by the buyer. In that case the buyer will be liable for any final taxes owed by the seller (not to exceed the total purchase price).
In other cases the buyer secures the affidavit together with a warranty from the seller that the taxes have or will be paid.
A very cautious buyer will, as noted above, build in some form of security for the seller’s later payment of any additional tax timely asserted by the Tennessee Department of Revenue in excess of the affidavit amount.
Mark Westlake is a tax attorney with GSRM. Mark works with individuals and businesses to minimize their state and federal tax liabilities. In the area of business tax counseling, Mark advises clients to effectively organize and establish entities where tax burdens are a principal concern. He also represents these clients in structuring, negotiating, documenting and implementing transactions that are sensitive to tax ramifications.