Buyers Beware: Tax Liens
By: MARY S. RANUM
Spring 1995
If you are buying all or part of the assets of a business, a new Minnesota law requires you to check for tax liens filed against the seller by the Minnesota Department of Revenue. If you do not, you may be liable for all of the seller's unpaid sales and withholding taxes.
Buyers need to check for tax liens at least 20 days before the transfer. If any exist, the buyer must give written notice of the terms of the sale to the Department of Revenue. The Department of Revenue will then provide notice of all unpaid taxes. The buyer must withhold the unpaid taxes from the purchase price, and direct that money to the Department of Revenue.
The new law, effective January 1, 1995, applies to most transfer, acquisitions, exchanges and liquidations of business assets. This includes instances where no money changes hands, as in the case of merges, like-kind exchanges of real estate and certain other tax-free transactions.
The new law is broadly written, making it difficult to determine which transactions are not included in its scope. It is not yet clear, for example, whether a transfer of real estate only (without other business assets) is covered. The conservative view is that buyers of real estate owned by a business should comply with the law.
Limited exceptions to the new law permit certain assignments for the benefit of creditors and foreclosures of mortgages and security interests. Although these exceptions make it seem as if the law were intended to exempt lenders and other creditors altogether, it does not explicitly exempt all transactions involving lenders (e.g., granting of mortgages, deeds in lieu of foreclosure, or cancellation of contracts for deed).
If a buyer does not comply with this law, potential liability for the seller's unpaid sales and withholding taxes, plus interest and penalties, is limited to the purchase price for the assets. This figure includes not only cash but also the amount of assumed or forgiven debt and the value of stock or assets paid to the seller. For transfers that are not at arm's length, liability is limited to the value of the assets received by the buyer.