Q&A with the Pennsylvania Department of Revenue

Scenario: A DE corp. based in FL ceased doing business in PA and filed a final corporate tax report and an REV-238.

Jun 23, 2010
Scenario:

In 2004, ABC Corp., a DE corp. based in FL, ceased doing business in PA and filed a final corporate tax report and an REV-238 (the corporation closed its PA office). On settlement, the Department of Revenue assessed an additional $1,000 in CNI Tax that remained unpaid in 2010. From 2005 through 2008, ABC Corp. did not (1) own or lease any property in PA, or (2) engage in any business activities in PA. As ABC Corp. never paid the $1,000 assessment, the corporation was unable to terminate its authority to do business in the Commonwealth with the Dept. of State.

In 2009, ABC Corp. acquired all the assets of DEF Corp., a DE corp., including PA assets, in a bulk sale transaction. As ABC Corp. did not discover that DEF Corp. had PA tax exposure until after months after the asset sale, ABC Corp. never required DEF Corp. to obtain a clearance certificate from the Department of Revenue.

Since 2006, DEF Corp. had employed an individual who worked out of her home in PA and solicited sales of tangible personal property in PA. DEF Corp. provided the individual with a car, laptop computer, equipment for her home office, display racks to be provided to customers and inventory used as samples. DEF Corp. never (1) filed Foreign Franchise Tax returns, (2) collected and remitted PA SUT, (3) withheld PIT on wages of the PA employee. In addition, DEF Corp. never provided ABC Corp. with a Corporate Clearance. After the asset sale, DEF Corp. was liquidated into its parent GHI Corp., under DE law. (DEF Corp. never qualified to do business in PA with the Dept. of State.)

After the asset acquisition, ABC Corp. began (1) to file Foreign Franchise Tax reports,
(2) to collect and remit PA SUT and (3) withhold and remit PIT.
In 2010, the Department of Revenue ascertained that DEF Corp. was (1) subject to PIT withholding on the wages of the individual, (2) required to collect and remit PA SUT,
and (3) subject for the Franchise Tax and issued three assessments. After the asset sale, DEF Corp. was liquidated into its parent GHI Corp. GHI Corp. received cash from the asset sale.

Q:

Under what circumstances, if any, would the the former officers of DEF Corp. be liable for DEF Corp.’s tax liabilities and the extent of any personal liability?

A:


Based on the question as presented, it is not known whether the liquidation was made pursuant to a formal dissolution under the Associations Code or just a desire of the shareholders to dispose of DEF Corporation’s assets. The latter can be done in conjunction with filing for an Out-of-Existence/Withdrawal Affidavit or a total disregard of all legal requirements.

If there is a formal dissolution under the Associations Code, then all of DEF Corporation’s tax liabilities and tax filings will have to be completed prior to the issuance of the dissolution clearance by the Department. If the tax returns are not filed and the tax liabilities are not paid, then a dissolution clearance will not be issued. In this case, the shareholders would also be liable for DEF Corporation’s tax liabilities to the extent of the assets received.

If the liquidation is done in conjunction with filing for an Out-of-Existence/Withdrawal Affidavit, then all of DEF Corporation’s tax liabilities and tax filings will have to be completed prior to the issuance of the Affidavit.

If the liquidation is being done in total disregard of DEC Corporation’s obligations to file its tax returns and pay its tax obligations, then any distribution of DEF Corporation’s remaining assets will result in a bulk transfer liability whereby all the parties receiving distributions would be liable for DEF Corporation’s liabilities. It can be argued the Associations Code could still apply and the shareholders would also be liable to the extent of the assets received.

If there are unpaid trust fund taxes, the Department can issue responsible party assessments against those persons (officers, etc.) for the payment of these taxes. Also, if there are unpaid trust fund taxes, the Department can pursue all persons (officers, shareholders, third parties) receiving these funds.

Depending on the facts and circumstances, there could be some common law actions which the Department could pursue against the officers and shareholders.

Q:

Under what circumstances, if any, would ABC Corp. be liable for DEF Corp.’s tax liabilities and the extent of ABC Corp.’s liability?

A:

DEF Corporation is required to file all tax returns and pay all taxes up to the date of the sale of its assets to ABC Corporation. The failure of doing the above results in ABC Corporation being liable for all DEF Corporation’s tax liabilities. This bulk sale liability is an in personam and in rem liability. That is, ABC Corporation is liable personally andthe liability extends to ABC Corporation’s assets. This bulk sale liability will follow ABC Corporation and its assets until paid. The bulk sale liability does not have to be determined at the time of the transfer of the assets. Therefore, there is an ongoing cloud over the purchaser and all the transferred assets.

Q:

Would the answer to (a) and/or (b) be different if DEF Corp. had obtained a corporate clearance certificate?

A:

This issue is a nonfactor regarding DEF Corporation’s liabilities, the liabilities of DEF Corporation’s shareholders, and ABC Corporation’s bulk transfer liability.

Because ABC Corporation failed to obtain its clearance in 2004, it will be required to file corporation tax returns for the 2005 through 2008 tax years.

In order for DEF Corporation to have obtained a corporate clearance certificate, it would have had to file all un-filed tax returns and satisfied tax liabilities up to the date of its liquidation. To the extent those requirements would have been completed, the answer would be different.

Q:

Assume that ABC Corp. ceased business operations everywhere in 2004 and liquidated under DE law. From whom would the Department seek to collect the $1,000 in corporate tax assessment?

A:

Generally, the dissolution provisions are identical in almost all the states. Therefore, the State of Delaware should not be allowing the taxpayer to dissolve when it has tax liabilities in PA or any other state. The taxpayer is legally required to resolve the unpaid tax liabilities before it is allowed to dissolve. The Department could pursue the shareholders for any distribution they may have received and the directors for their breach of their fiduciary obligations. The Department could also pursue third parties for any assets they received under the bulk sale provision.

As part of ceasing its business activities (including the ownership and rental of property), the taxpayer is required to file an Out-of-Existence/Withdrawal Affidavit and have it approved by the Department. A taxpayer in PA would not be allowed to withdraw its certificate of authority to do business in PA if it has unfiled tax returns and unpaid tax liabilities. That is, the Department would not approve the Out-of-Existence/ Withdrawal Affidavit until the taxpayer has filed all its tax returns and paid all its tax liabilities.

If the tax liabilities arise after the taxpayer dissolves, the shareholders are personally liable by operation of law for all the tax liabilities to the extent of their distribution from the dissolving corporation.

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.