The sale of a majority of the assets of a business
Real estate lawyers despise unrecorded liens. I like to refer to them as secret liens. One such trap for the unwary dirt lawyer in South Carolina is the state tax lien imposed by Code §12-54-124. This statute was effective June 18, 2003, and I can vividly remember the day we first read it and scratched our heads about what it meant.
The statute reads:
“In the case of the transfer of a majority of the assets of a business, other than cash, whether through a sale, gift, devise, inheritance, liquidation, distribution, merger, consolidation, corporate reorganization, lease or otherwise, any tax generated by the business which was due on or before the date of any part of the transfer constitutes a lien against the assets in the hands of a purchaser, or any other transferee, until the taxes are paid. Whether a majority of the assets have been transferred is determined by the fair market value of the assets transferred, and not by the number of assets transferred. The department may not issue a license to continue the business to the transferee until all taxes due the State have been settled and paid and may revoke a license issued to the business in violation of this section.” (Emphasis added.)
That’s it! Very simple, but how are those terms defined? What’s a business? Is a rental house in Pawleys Island a business? How can a purchaser’s lawyer know whether taxes are due to South Carolina by the seller? How can a purchaser’s lawyer know whether the sale of one Subway store is a sale of the majority of the assets of a franchisee’s business?
I had a friend and former law school professor who worked at the Department of Revenue at the time, so I called him and told him we were struggling with the meaning of the statute. He gave me two very valuable pieces of information: (1) the terms in the statute are defined as the Internal Revenue Code defines them; and (2) the Department of Revenue (DOR) was likely to give us some guidance at some future date.
We struggled with the definitions in the Internal Revenue Code and finally decided that unless a property is an owner-occupied single family residence, the closing attorney should consider that it might be a business asset.
Thankfully, in 2004, the DOR did provide guidance in the form of Revenue Ruling 04-2. The Revenue Ruling stated that the code section does not apply if the purchaser receives a certificate of compliance from the DOR stating that all tax returns have been filed and all taxes generated by the business have been paid. The certificate of compliance is valid, according to the Revenue Ruling, if it is obtained no more than thirty days before the sale.
This Revenue Ruling also authorized attorneys to accept Transferor Affidavits, in the form promulgated by the DOR, when the transferor can state that the assets subject to the transfer are not business assets or are less than a majority of the transferor’s business assets, based on fair market value, in the current and other planned transfers.
The Revenue Ruling addressed whether a vacation home is a “business” by stating that it is not a business if IRC §280A limits the deduction of vacation home rental expenses. That’s a little deep for dirt lawyers, so the safe approach is to always obtain a certificate of compliance or Transferor Affidavit when you close on that rental home in Pawleys Island.
I like to remind dirt lawyers that they are not tax lawyers (unless they ARE tax lawyers). Generally, when you represent a purchaser in a real estate transaction, do not give the seller tax advice on how to complete a Transferor Affidavit.