A new Texas Comptroller hearing decision spotlights the importance of terminating business entities after they conclude their business. Doing so helps limit the entity’s exposure to potential tax assessments. This is because it, in many cases, may effective reduce the amount of time the Comptroller has to make an assessment against the entity. I’ll discuss why below.
Time for Tax Assessments and Claims against Limited Liability Entities
In general, the Texas Comptroller has four years to assess a tax against a taxpayer after the tax has become due and payable.
Under Texas law, once a limited liability entity (corporation, LLC, LP, etc.) terminates, it is only liable for claims against it that exist at the time of the termination. Anyone with a claim against the entity has until three years after the entity’s termination date to take action on the claim. The statute provides that the entity continues to exist for this purpose for three years after its termination date. After that, the entity truly ceases to exist.
An LLC purchased an aircraft that it leased to another company. The LLC paid no sales or use tax on the purchase, claiming the sale-for-resale exemption because it purchased the aircraft to lease. The LLC held no assets other than the aircraft. One year later, the LLC sold the aircraft to the company to which it leased the aircraft. The second company paid no sales or use tax on the purchase of the aircraft, claiming the occasional sale exemption because it purchased all of the operating assets of the LLC. The LLC subsequently terminated.
The Comptroller determined that the LLC and second company qualified for these tax exemptions. Nevertheless, it assessed tax against the LLC under a statute that provides when tangible personal property is purchased for resale for the purpose of renting or leasing the property, but subsequently the property is sold in an occasional sale, tax is due based on the difference between the original purchase price and the amount of sales tax remitted on the lease or rental payments.
The Comptroller assessed the additional tax against the LLC more than three years but less than four years after the LLC terminated. The Comptroller argued that the longer statute of limitations for tax assessments trumped the shorter period for taking action on claims against a terminated entity. The taxpayer disagreed.
The Administrative Law Judge held that the Comptroller made the assessment against the taxpayer too late. The ALJ reasoned that the shorter period for taking action on claims against a terminated entity controlled because it was not a statute of limitations. Instead, it provided that the terminated entity completely ceased to exist after the expiration of the three year period. The ALJ cited Texas case law for the proposition that a statute of limitations cannot bring an entity back into existence that has completely ceased to exist.
This hearing decision highlights the importance of terminating an entity after it concludes it business. Often, taxpayers leave entities in existence long after they have ceased doing business. As long as the entity exists, it may be liable for claims against it, including tax assessments (if made within the proper statute of limitations). However, terminating an entity may help ensure that the entities exposure to claims like tax assessments is minimal.
Please note, however, that the factors involved in deciding whether and when to terminate an entity are complicated. Readers should seek professional advice, such as that of a Texas tax attorney, before making these business decisions.