At Least in Texas

Successor liability? Not unless the successor expressly assumes the liability in the Lone Star State. So TFT Galveston Portfolio, Ltd., escapes liability for FICA, FUTA and ITW for its multifarious predecessors in 144 T. C. 7, filed 2/26/15.

The facts are a straightforward IC-EE jumpball, with the EE factors so overwhelming that I wonder why Judge Goeke discomposed so many electrons getting to that conclusion.

But what makes the case a full-dress T.C. is the question of how successor liability is determined: State law or Federal common law?

It matters here because tort-reforming Texas virtually slammed the door on any form of successor liability for anything absent actual fraud. So TFT Galveston, notwithstanding it has the same principal, manager and head honcho as its six (count ‘em, six) predecessors, and is running the same real estate in the identical way, bears none of the sins of its forebearers.

IRS wants to assert the Federal rule: who walks in the moccasins of the forebearer carries the sins thereof. And those sins encompass years of FICA, FUTA, ITW, and the penalties and interest in respect of all the foregoing, as my expensive colleagues would say.

But the Supremes aren’t happy with Federal law grabs. And neither is Tax Court.

“The application of Federal common law in a novel context requires ‘“a significant conflict between some federal policy or interest and the use of state law”’. The Supreme Court cautioned against the creation of Federal common law, noting that ‘“cases in which judicial creation of a special federal rule would be justified * * * are * * * “few and restricted’.’” The Court further directed that ‘“[w]hether latent federal power should be exercised to displace state law is primarily a decision for Congress,”’ not the Federal courts.” 144 T. C. 7, at p. 24. (Citations omitted).

Need for uniformity in tax collections doesn’t get it. And IRS’s whimper that this Texas reliance will encourage other states to sabotage FICA-FUTA-ITW with phony transfers gets even shorter shrift, because no one claims TFT Galveston is a phony or had a tax dodge as a principal purpose.

Finally, IRS gives the game away.

“On brief respondent concedes that he could have potentially applied transferee liability against petitioner under section 6901 by issuing Notices of Determination Concerning Worker Classification to the other six partnerships, assessing the resulting liabilities, and then issuing a Notice of Transferee Liability to TFT Galveston Portfolio. Additionally, respondent could have potentially attempted to collect directly from [Mr. Honcho] as a ‘responsible person’ under section 6672. Thus, our decision against applying Federal common law successor rules and holding that TFT Galveston Portfolio is not a successor in interest to the six partnerships listed on the notices does not by itself thwart respondent’s crucial function of collecting Federal employment taxes. Accordingly, we do not accept respondent’s suggestion that we adopt a Federal common law to override Texas law.” 144 T. C. 7, at pp. 26-27. (Name omitted).

So TFT Galveston gets nailed for a quarter, and the six walk away unscathed from years’ worth.

If IRS wanted a case to go for Federal supersession in successor liability cases, they sure picked a weak example.