Knudsen Dairy Products Co. v. State Bd. of Equalization

• Court: California Court of Appeals
• Writing for the Court: COMPTON; ROTH, P.J., and HERNDON
• Citation: Knudsen Dairy Products Co. v. State Bd. of Equalization, 12 Cal.App.3d 47, 90 Cal.Rptr. 533 (Cal. App. 1970)
• Decision Date: 19 October 1970
• Parties: KNUDSEN DAIRY PRODUCTS CO. and Knudsen Creamery Co. of California, Plaintiffs and Appellants, v. The STATE BOARD OF EQUALIZATION, Defendant and Respondent. Civ. 35310.

Page 533

90 Cal.Rptr. 533

12 Cal.App.3d 47

KNUDSEN DAIRY PRODUCTS CO. and Knudsen Creamery Co. of California, Plaintiffs and Appellants, v. The STATE BOARD OF EQUALIZATION, Defendant and Respondent.

Civ. 35310.

Court of Appeal, Second District, Division 2, California.

Oct. 19, 1970.

Hearing Denied Dec. 17, 1970.

Roemer & Hamwi and Robert P. Schifferman, Los Angeles, for plaintiffs and appellants.

Thomas C. Lynch, Atty. Gen., Neal J. Gobar and Mario A. Roberti, Deputy Attys. Gen., for defendant and respondent.

COMPTON, Associate Justice.

Plaintiffs Knudsen Dairy Products Co. (hereinafter referred to as Dairy) sought a refund of $38,077.61 in sales and use tax assessed against plaintiff by defendant State Board of Equalization and paid by Dairy under protest.

Dairy at the time of the assessment and payment was a separate corporate entity, albeit a wholly owned subsidiary of Knudsen Creamery Co. (hereinafter referred to as 'Creamery'). Subsequent to the payment, Dairy was merged into Creamery which became the surviving corporation and successor to the interests of Dairy, and as such was joined as coplaintiff in this action.

The case was tried, without a jury, on the pleadings, a written stipulation of facts with attached exhibits and written briefs. The trial court found that plaintiffs were not entitled to the refund. Plaintiffs appeal.

The evidence to be found in the pleadings, the stipulation and exhibits was uncontroverted and revealed the following factual background:

Dearborn Stores, Inc., a Delaware corporation, doing business under the name of Pix Food Markets, Inc. was organized in November of 1958. By June of 1960, Pix had established a chain of 20 markets in Los Angeles, San Bernardino and Riverside counties. Pix made purchases from Creamery, a distributor of dairy products, and became substantially indebted to Creamery.

By November of 1960, Pix had sustained losses in its market operations which impaired its ability to remain current in its obligations to creditors, and one of its purveyors had sued Pix and placed a keeper on the premises.

In order to avoid a substantial loss and retain the market for its dairy products, Creamery acquired ownership of the outstanding stock of Pix. Creamery caused Pix to make certain managerial changes in an attempt to reverse operating losses. However, Pix's losses continued which resulted in a need for borrowed capital. Creamery then made loans to Pix evidenced by promissory notes. As of March 31, 1962, Pix's indebtedness to Creamery totaled $1,365,000. By December 24, 1962, Pix's indebtedness to Creamery had risen to $1,410,000. The number of stores it operated was, by this time, reduced to four.

As a result of an agreement between Pix and Creamery a plan was adopted which would allow Pix to make payments to its liquidated creditors. Under the plan, all of Pix's creditors holding liquidated claims, except Creamery, would receive cash payments for their claims.

Creamery, as a liquidated creditor, was to receive under the agreement such remaining assets of Pix which did not exceed in value the indebtedness of $1,410,000.

Reduced to its simplest terms the plan operated as follows: After the payment of cash to all of the liquidated creditors, Pix, at Creamery's direction, transferred all of its operating assets to Dairy. ¹ Some of its assets in terms of accounts receivable were transferred directly to Creamery. Dairy, in turn, issued to Creamery a promissory note equivalent to the value of the assets which it received. Creamery then credited Pix, in reduction of its indebtedness, in the amount of the value of the assets transferred. This left Pix indebted to Creamery for $68,250.14.

Dairy took possession of the stores and retained the same general offices as Pix, retained Pix's store and office employees, as well as certain of its managerial personnel. However, the name Pix was no longer used and as of December 31, 1962, when this plan was fully implemented, Pix ceased to exist as a corporation. Dairy continued to operate the stores under a new name.

An auditor of the defendant began a regular three year audito of Pix in October of 1962. The audit covered the period July 1, 1959 to December 31, 1962. This audit was completd on April 10, 1963. However, as a result of the discovery by the auditor after December 31, 1962 of the transaction between Pix and Creamery, the audit was transformed into a close-out audit of Pix. This audit disclosed additional taxable sales of Pix in the sum of $825,553 leading to an additional tax liability on Pix in the sum of $38,001.30, which when interest is added made the total assessment $38,077.61. Dairy paid this amount under protest.

Section 6811 of the Revenue and Taxation Code provides in relevant part: 'If any Person liable for any amount under this part (division 2, part 1) sells out his business or stock of goods or quits the business, his Successors or assigns shall withhold sufficient of the Purchase price to cover such amount until the former owner * * * (proves that he has paid or that no amount is due).' (Emphasis added.)

Section 6812 of the same code provides:

'If the Purchaser of a business or stock of goods fails to withhold Purchase price as required, he becomes Personally liable for the payment of the amount required to be withheld by him to the extent of the purchase price, valued in money.' (Emphasis added.)

In passing it is significant to note that while section 6811 uses the term 'successors or assigns,' section 6812 which imposes the sanction of personal liability uses the term 'purchaser.'

Title 18 of the California Administrative Code, section 2102, seeks to clarify and construe sections 6811 and 6812. That regulation states in part: 'The requirement that a successor or purchaser of a business or stock of goods withhold sufficient of the purchase price to cover the tax liability of the seller, arises only in the case of the Purchase and Sale of a Business or Stock of goods under a Contract, providing for the payment to the seller or person designated by him of a purchase price in Money or Property or providing for the Assumption of liabilities and only to the extent thereof, and does not arise in connection with other transfers of a business such as assignments for the benefit of creditors, foreclosures of mortgages, or sales by trustees in bankruptcy.' (Emphasis added.)

The evidence conclusively showed that there was no Contract for the Assumption of liabilities.

In People v. Buckles, 57 Cal.App.2d 76, at p. 79, 134 P.2d 8, at p. 10, the court said: 'It is quite clear to us that it was the intention of the Legislature in enacting said section 26, ² to prevent a retailer who has failed to pay the state all of the tax due under the act from selling his business and departing with the purchase price, * * *'

Under the authority of sections 6811 and 6812 of the Revenue and Taxation Code, and Title 18 of the California Administrative Code, section 2102, and to carry out the purpose of the law as enunciated in People v. Buckles, Supra, the board assessed Dairy as a 'successor' to Pix.

Plaintiffs make the following contentions on appeal:

(1) That sections 6811 and 6812 of the Revenue and Taxation Code, as interpreted in Regulation 2102, were not applicable to the transaction in question.

(2) That because there was no purchase price paid from which a withholding could have been made, the assessment and collection violate Dairy's constitutional rights.

(3) The findings and conclusions are not supported by the evidence and the law.

We are not here dealing with a tax liability originally imposed on either Dairy or Creamery as a result of their business activities. The statutes in question are a device for the collection of a tax by the imposition of a secondary liability. The secondary liability for the tax which is imposed by section 6812 arises from a definite act or omission, that is, the failure to withhold the amount of the tax from the purchase price as required by section 6811.

Tax laws are to be strictly construed in favor of the taxpayer. (Barker Bros., Inc. v. Los Angeles, 10 Cal.2d 603, 76 P.2d 97.) This is especially true where the statute seeks to impose the tax liability of one person on another in order to facilitate its collection.

This case then presents a question of interpretation of sections 6811 and 6812 of the Revenue and Taxation Code. That question turns on the definition of the terms 'purchaser,' 'purchase price,' 'successor' and 'withhold.'

It is clear that Dairy was the successor to Pix in that Dairy acquired the major operating assets of Pix, and continued to operate the business. It is hard to imagine a more complete take-over of a going business than what occurred here.

The trial judge found that Dairy was also the 'purchaser' of Pix, and that by failing to withhold a sufficient amount of the purchase price to satisfy Pix's tax liability, became personally liable therefor under the provisions of sections 6811 and 6812 of the Revenue and Taxation Code.

The starting point, of course, is that admittedly Pix owes the State of California $38,001.30 in sales tax. Presumably, this money had been collected from customers and until paid over to the state served to augment the total value of Pix's assets. As a result of the liquidation agreement there is now no money or assets held by Pix from which the tax can be paid.

In People v. Buckles, Supra, the court indicated that the legislative intent in these 'successor' liability statutes was to prevent the taxpayer from evading his liability, by requiring the purchaser to take the precaution of demanding either a receipt of the State Board of Equalization that the tax had been paid or a certificate that no tax was due before paying over the purchase price to the seller. It was held not to be unreasonable to impose upon a purchaser who failed to protect himself and the state in this manner the statutory...