A buyer who takes over an Albuquerque restaurant’s kitchen equipment and liquor license can end up owing the seller’s unpaid gross receipts tax under NMSA 1978, §§ 7-1-61 through 7-1-63. Sale fights like the BowFlex dumbbell case in New Jersey make news over product claims, but in New Mexico the liability that chases the assets is usually tax.
Does a “free and clear” order in a District of New Mexico bankruptcy sale hold off the Taxation and Revenue Department and the IRS? It can, if the order is written for tax and both agencies are properly served. (The firm’s post on successor liability for New Mexico asset buyers covers the common-law theories.)
What does New Mexico’s successor tax liability statute require of a buyer?
Section 7-1-61(B) says business property “remains subject to liability for payment of the tax due” after it changes hands. The successor must either hold enough of the price in trust until the Department certifies nothing is due, or pay the seller’s tax on demand or assessment. “Tax” includes penalties and interest under every program in § 7-1-2 except the Income Tax Act, so gross receipts and state withholding tax are covered.
Under 3.1.10.16 NMAC, one of eight indicators, such as a noncompete, lets the Department presume a successor. Section 7-1-63 gives the successor thirty days to pay before an assessment, and paying the full value of the transferred property discharges it. That ceiling vanishes for assumed debts, evasion schemes, de facto mergers, and “mere continuation” deals, so insider buyouts under a new LLC usually lose it.
How does a New Mexico tax clearance certificate protect the buyer?
Section 7-1-62 puts the Department on a clock. After a written request, it has thirty days (longer if the seller’s records reach audit later, but never past sixty) to issue a certificate or mail a notice of tax due. Miss that, and the successor is released.
The request goes on Form ACD-31096 with the signed purchase agreement, and its instructions say a request made after the transaction’s effective date will not be processed. Restaurants and bars also need a separate liquor license clearance.
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Can a 363 sale order cut off New Mexico tax successor liability?
11 U.S.C. § 363(f) authorizes selling property “free and clear of any interest in such property” under five conditions, most usefully (f)(5), where the holder could be compelled to take money. In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003), read “interest” to reach obligations arising from the property sold, not only liens. In re Leckie Smokeless Coal Co., 99 F.3d 573 (4th Cir. 1996), is closer to tax: Coal Act premiums, a statutory successor obligation, could be extinguished under (f)(5).
In re Elk Grove Village Petroleum, LLC, 510 B.R. 594 (Bankr. N.D. Ill. 2014), an Illinois bulk-sales case, held that “IDOR’s right to assert transferee liability is an ‘interest’” under Section 363(f). The district court let that stand but held the state was owed adequate protection under § 363(e), though on remand it proved no realizable claim.
No published Tenth Circuit or Tenth Circuit BAP decision on this question was located on review. Section 7-1-61(B) ties the liability to the property itself, which helps the buyer, and 11 U.S.C. § 106(a)(1) abrogates state sovereign immunity as to §§ 363 and 505.
What happens to an IRS tax lien and unpaid payroll tax in a 363 sale?
No federal statute mirrors § 7-1-61 for payroll tax. The IRS reaches a buyer mainly through its lien, which attaches to the taxpayer’s property under 26 U.S.C. § 6321 and binds a purchaser once notice is filed under § 6323(a). A filed lien is the easy case: the sale closes under (f)(3) or (f)(5), and the lien moves to the proceeds.
The sale does not touch the trust fund recovery penalty. Section 6672 reaches any person “required to collect, truthfully account for, and pay over” the tax who willfully failed to, meaning owners and officers, and no sale order releases them.
What notice must the Taxation and Revenue Department and the IRS receive?
Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950), requires notice “reasonably calculated, under all the circumstances, to apprise interested parties,” which for known creditors means mail. The BowFlex bankruptcy court accepted newspaper notice only because the plaintiffs could not reasonably have been identified. In re Motors Liquidation Co., 829 F.3d 135 (2d Cir. 2016), refused to enforce GM’s sale order against plaintiffs owed mailed notice.
A taxing authority with an assessment or open audit is plainly known. Bankruptcy Rule 2002(a)(2) requires 21 days’ mailed notice of the sale, and in Chapter 11, Rule 2002(j)(3) adds the IRS. Rule 6004(c) requires serving interest holders with the sale motion, using Rule 7004 service (7004(b)(6) for a state) through Rule 9014. The New Mexico bankruptcy court’s register of governmental addresses lists separate Department addresses for notices and for service of process. Serve both.
How would the numbers work for an Albuquerque restaurant group?
Picture a hypothetical Albuquerque restaurant group, one location in Nob Hill, selling its assets in Chapter 11 for $950,000 subject to a $600,000 bank lien. The Department has assessed $180,000 of gross receipts tax with penalty and interest, and the IRS holds a filed junior lien for $60,000 of payroll tax.
In the clean version, both agencies are served at their register addresses, and the order names §§ 7-1-61 through 7-1-63. After the bank’s $600,000 and the IRS’s $60,000, $290,000 remains. The Department has a priority claim under 11 U.S.C. § 507(a)(8), which covers taxes “on or measured by income or gross receipts,” paid from that cash if administrative costs leave room, or through a plan under § 1129(a)(9)(C) within five years. The buyer owes nothing.
Now suppose the Department was left off the service list and nobody asked for a clearance. The Department can argue the order never bound it and assess the buyer, and the value ceiling does nothing against $180,000. With no trust account, the buyer pays and then chases the estate.
What can a buyer do if the Department assesses after closing?
Prevention is cheaper: a holdback sized to the Department’s figure plus interest, and a sale order naming New Mexico successor liability with an injunction. An inflated assessment can be redetermined under 11 U.S.C. § 505(a), “whether or not previously assessed,” unless a tribunal decided it before the filing.
Two tracks can run at once. NMSA 1978, § 7-1-24 generally allows a written protest within ninety days of the assessment’s mailing, a state-law step for New Mexico-licensed counsel. The other track returns to the bankruptcy court, which in BowFlex called enforcing its own sale order core, with § 105(a) authorizing orders “necessary or appropriate” to carry out the Code. Section 363(m) protects good-faith buyers on appeal, not missing notice.
| Liability | Cut off by § 363(f) order? | Notice that matters | Buyer’s pre-closing step |
|---|---|---|---|
| NM successor tax (§§ 7-1-61 to 7-1-63) | Likely, as an “interest”; no Tenth Circuit ruling | Mail to both D.N.M. register addresses | ACD-31096 before closing; holdback; name the statute in the order |
| Filed federal tax lien | Yes; lien moves to proceeds | Rule 2002(j)(3); Rule 6004(c) | IRS payoff; lien paid or attached to proceeds |
| Trust fund recovery penalty | No; runs against responsible persons | Not a sale-notice issue | Seller’s owners resolve separately |
| Pre-closing product liability | Often, for unknown claimants with publication notice | Mail to known claimants | Search recalls and litigation |
| Unassumed contract claims | Generally, if excluded | Rule 2002(a)(2) mailed notice | Keep the assumed-liability schedule tight |
Frequently Asked Questions
Does buying a New Mexico business make me liable for the seller’s gross receipts tax?
It can. Under NMSA 1978, § 7-1-61, a successor must either hold enough of the purchase price in trust until the Taxation and Revenue Department certifies no tax is due, or pay the seller’s tax on demand. Liability generally caps at the value of the property received, except for continuations or assumed debts.
How long does the Taxation and Revenue Department have to answer a tax clearance request?
Under NMSA 1978, § 7-1-62, the Department has thirty days from the written request (longer if the seller’s records reach audit later, but never past sixty) to issue a certificate or mail a notice of tax due. If it misses that deadline, the successor is released.
Can I request a New Mexico tax clearance after the sale closes?
Generally no. The instructions to Form ACD-31096, the Department’s Tax Clearance Request, say a request made after the transaction’s effective date will not be processed. A signed purchase agreement must be attached, so the clearance belongs in the pre-closing schedule.
Does a bankruptcy sale remove an IRS tax lien from the assets I buy?
Usually, if the IRS is properly served. A sale under 11 U.S.C. § 363(f) can transfer assets free of a federal tax lien, which typically moves to the proceeds. Bankruptcy Rules 2002(j)(3) and 6004(c) require notice to the IRS and service on lienholders.
Does a 363 sale end the seller’s personal liability for payroll taxes?
No. The trust fund recovery penalty under 26 U.S.C. § 6672 falls on responsible persons, such as owners and officers who willfully failed to pay over withheld taxes. A sale order protects the buyer and assets, not those individuals, and personal guaranties survive.
What happens if the Taxation and Revenue Department was not notified of the bankruptcy sale?
The buyer’s protection is at risk. Due process requires mailed notice to known creditors, and courts have refused to enforce sale orders against parties denied it. A Department holding an assessment or running an audit is known, so it may assess the buyer under NMSA 1978, § 7-1-63 anyway.
How North Star Law Firm Can Help
North Star Law Firm advises New Mexico business buyers and sellers on business sale tax structuring, gross receipts tax exposure, and sale motions in Chapter 11, with IRS issues handled through its tax defense practice.
Phillip Zagotti, JD/CPA, is admitted before the United States District Court and Bankruptcy Court for the District of New Mexico and the United States Tax Court. He is licensed by the State Bar of California and holds a Texas CPA license; he is not licensed by the State Bar of New Mexico, and the firm works alongside New Mexico-licensed counsel on state-law questions. Sellers may also want the firm’s post on a clean sale process. To discuss a deal, contact North Star Law Firm.