Was an aircraft bought for resale when the buyer planned to transfer it solely for first-issue stock to a new corporation that would run the charter business?

Plain-English summary

Attorneys described a taxpayer that bought an aircraft, planned to inspect and refurbish it, and then transfer it to a newly formed corporation solely for all of that corporation's first-issue shares. The new corporation—not the buyer—would operate the charter business.

Tax counsel assumed that the seller was not required to hold a seller's permit because of aircraft sales, the buyer was not itself an aircraft dealer, and the corporation would give no consideration beyond first-issue stock. On those assumptions, the corporate contribution itself was not a taxable sale under Regulation 1595.

The buyer's acquisition was nevertheless not for resale. It bought the aircraft for a nontaxable contribution to the new corporation, which was a taxable use by the buyer. Section 6366 also did not protect the buyer merely because the recipient corporation might later be a common carrier.

The source explained an alternative structure: if the buyer leased the aircraft to the new corporation and that corporation used it in qualifying common carriage for more than half of operational use during the first 12 months, section 6366.1 could exempt the lessor's use. The parties had to accept the tax consequences of the structure they selected.

Citations and references

• California Revenue and Taxation Code sections 6366 and 6366.1 (as cited)
• California Sales and Use Tax Regulations 1593 and 1595 (as cited)
• Simplicity Pattern Co. Inc. v. State Board of Equalization (1980) 27 Cal.3d 900

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/105-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/105-0200.pdf

Original ruling text

105.0200
STATE OF CALIFORNIA
WILLIAM M. BENNETT
First District, Kentfield

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

July 27, 1992
BURTON W. OLIVER
Executive Director

Mr. D--- J. F----- & --Attorneys at Law
XXXXX --- ---, Suite XXXX
--- ---, California XXXXX
Re:

Unidentified Taxpayer

Dear Mr. F---:
This is in response to your letter dated June 17, 1992 regarding the application of tax to your unidentified client’s purchase of an aircraft. You state: “Our client (hereinafter the ‘Taxpayer’) purchased, from an unrelated party, an aircraft. The intent of the Taxpayer in purchasing the aircraft was to utilize the aircraft in the chartering business. To accomplish this, the Taxpayer intended, after inspection and refurbishing of the aircraft, to transfer the aircraft to a newly formed corporation in exchange for all of that corporation’s shares. Thereafter, the shares of the newly formed corporation would be distributed to the Taxpayer’s shareholders. The Taxpayer is the holder of a valid resale certificate. The business purpose for transferring the aircraft to the newly formed corporation is to limit the Taxpayer’s potential liability with respect to operation of the aircraft in the air charger business.” You do not state whether your client purchased the aircraft from a dealer or instead from a person who was not required to hold a seller’s permit by virtue of its sales of aircraft. I assume that the aircraft was purchased from a person who was not required to hold a seller’s permit by virtue of its sales of aircraft.

Mr. D--- J. F---

-2-

July 27, 1992
105.0200

You state that your client holds a valid “resale certificate” (I assume you mean that it holds a seller’s permit - a person who holds a seller’s permit may issue a resale certificate showing that persons’s seller’s permit number if that person is purchasing property for resale in the regular course of business). However, you do not state whether your client was required to hold a permit by virtue of its sales of aircraft. I assume that your client makes sales of tangible personal property other than aircraft and is not required to hold a seller’s permit by virtue of its sales of aircraft. You believe that your client’s purchase of the aircraft was not at retail since it intended to resell it. You believe that the transfer to the new corporation is exempt from tax under Revenue and Taxation Code section 6366 to the extent the new corporation is a common carrier under applicable law. Discussion Initially, I note that it is unclear what you mean when you state your conclusion that the transfer to the new corporation is exempt “to the extent the new corporation is a common carrier under applicable law.” The exemption provided by section 6366 is not based on merely whether the purchaser is a common carrier. The aircraft must be used more than 50 percent of its operational use in actual common carriage to qualify for exemption. This is explained in Regulation 1593. The exemption is not prorated based on percentage of use as a common carrier. If the aircraft is used in a manner qualifying for the exemption, the sale to, and use by, the common carrier is entirely exempt from sales and use tax. If a common carrier purchases an aircraft and uses it in a manner not qualifying for the exemption, the sale or use of the aircraft is subject to sales or use tax measured by the full purchase price. You state that your client will transfer the aircraft to the new corporation in exchange for the stock of that corporation. I assume that the new corporation gives no other consideration for the transfer. Thus, the transfer of the aircraft to the new corporation solely in exchange for first issue stock of that commencing corporation is not a sale subject to sales or use tax. (Reg. 1595.) You state that your client purchased the aircraft for use in a chartering business. We disagree. The person who will use the aircraft in the chartering business is not your client but rather is the new corporation. Your client did not purchase the aircraft for resale but rather for the purpose of transferring it to a commencing corporation in a nontaxable transaction. This is a use subject to use tax. If your client were to itself use the aircraft as a common carrier in a manner qualifying for the section 6366 exemption, then of course that use would be exempt from tax. Similarly, if your client leases the aircraft to the new corporation and the new corporation uses the aircraft as a common carrier more than 50 percent of its operational use during the first twelve months after

Mr. D--- J. F---

-3-

July 27, 1992
105.0200

its first operational use, then the use by your client would again be exempt from use tax under the provisions of Revenue and Taxation Code section 6366.1. (The lease of an aircraft is never a sale but rather is a consumption by the lessor. The use by the lessee is attributable to the lessor, and section 6366.1 was adopted as a corollary to section 6366.) The parties to a transaction often have many ways to structure their transaction to accomplish their goals. The parties must accept the burdens along with the benefits of their chosen method of reaching their goals. (Simplicity Pattern Co. Inc. v. State Board of Equalization (1980) 27 Cal.3d 900.) If your client chooses to transfer title to the aircraft to the new corporation, then the section 6366 exemption is not available to your client since it would not be using the aircraft in an exempt manner. If, instead, your client leases the aircraft to the new corporation, it would be the consumer and the use of the aircraft by the new corporation would be attributable to your clients. If that use meets the requirements of the section 6366.1 exemption, no use tax will be applicable to that exempt use. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel
DHL:cl