Corrosive Services Corporation

07-16

Corrosion Services, Inc. (“CSI”) was incorporated in 1976 and initially engaged in the business of corrosion control services.  Later, CSI expanded into the area of pipeline construction, which came to represent 70% of its business.  In the late 1990s, CSI suffered financial problems and ceased doing business in 2001.  Three of CSI’s employees decided to go into business for themselves and formed Corrosion Services Corporation (“Taxpayer”).  None of the employees had been a shareholder, director, officer or manager of CSI.  They acquired about $5,000 of corrosion control equipment from CSI, but did not acquire any of CSI’s construction equipment and never engaged in the construction work that made up 70 percent of CSI’s business.  In 2003, the Department assessed the Taxpayer, as a successor in business, for $165,627.70 of CSI’s delinquent taxes.  The Department originally demanded payment for the value of property the Taxpayer acquired from CSC, but then expanded its demand to the full amount of CSI’s liability on the theory that the Taxpayer was a “mere continuation” of the old business.  The Department relied on the definition of “mere continuation” contained in a regulation which was based on a federal case that is no longer good law.  The regulation was also in conflict with New Mexico case law, which holds that the mere continuation exception to successor liability has no application without proof of continuity of management and ownership between the predecessor and successor corporations.  The Hearing Officer held that the Department’s position was unreasonable, that the Taxpayer’s liability was limited to the $5,000 of property acquired from CSI; and that the Taxpayer was entitled to an award of administrative costs pursuant to NMSA 1978, § 7-1-29.1.