Explore the complexities of unemployment tax liability in M&A transactions through a Palisade case study. Understand the legal implications for buyers and the importance of navigating successor issues. Stay informed on how operational changes post-acquisition may not exempt buyers from successor liability.
M&A Stories
September 25, 2018
In a recent M&A case in Palisade, Colorado, a buyer found themselves facing the higher unemployment tax rate of the seller, despite not retaining any of the seller’s employees. Here’s a concise breakdown of the situation:
Background: The buyer acquired nearly 90% of the assets of the seller, taking over a restaurant in Palisade. Notably, the buyer did not retain any of the seller’s employees, emphasizing a clean break in the transition.
Unemployment Tax Liability Determination: Following the acquisition, the buyer sought approval for an unemployment compensation insurance account. The Colorado Department of Labor and Employment, deeming the buyer a successor employer to the seller, attributed the higher unemployment tax rate liability to the buyer. This decision was based on the conclusion that the buyer acquired substantially all the seller’s assets, even though no employees were retained.
Legal Proceedings: The buyer appealed to the Colorado Court of Appeal, arguing that operational changes made post-acquisition should exempt them from successor liability. The court, however, maintained that the critical factor was the initial acquisition of “substantially all” of the seller’s assets, supporting Colorado’s unemployment tax statute.
Court’s Rationale: The court acknowledged the buyer’s alterations in operations and marketing but asserted that these changes didn’t alter the fact that the buyer acquired the majority of the seller’s assets. The court clarified that the absence of a requirement in the purchase agreement to retain employees was irrelevant to the successorship issue.
Implications for Buyers: While the outcome may seem unfair, it underscores the importance for buyers to be aware of “successor liability” unemployment tax laws. Buyers should carefully consider the state’s classification—whether as a new business or a successor—when projecting post-closing earnings. This distinction matters as it can impact the buyer’s tax rate liability.
Key Takeaway: Buyers need to navigate the complexities of successor liability in unemployment tax laws. Understanding the state’s treatment of the transaction—whether as a new business or a successor—is crucial in determining the potential impact on tax rate liability.
Case Reference:
Dos Almas LLC v. Industrial Claim Appeals Office, No. 17CA2147, Court of Appeals of Colorado, Division IV (Announced September 20, 2018).
By John McCauley: By John McCauley: I help people manage their tax risk when buying or selling a business.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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