How did assignment affect a qualifying acquisition sale-leaseback and an end-of-term purchase option?

Plain-English summary

A redacted correspondent asked whether a qualifying acquisition sale-leaseback executed before section 6010.65's January 1, 1995 cutoff stayed nontaxable when rent continued afterward. The January 15, 1992 request and all transaction records are absent. Counsel answered yes: execution before the cutoff controlled, so the leaseback remained outside continuing-sale treatment.

An end-of-term transfer of title was different. Section 6010.65(b) expressly included that transfer as a sale and purchase, so exercising a purchase option remained taxable regardless of when the option was granted or whether the original lessee or its assignee exercised it.

Assignment depended on the leaseback's substance. If it was a true lease, the new buyer/assignee paid under the original nontaxable lease, so neither the assignment nor rent became taxable. If the “lease” was actually a sale at inception, the supposed lessee already owned the property and its assignment was a new taxable retail sale, while amounts paid to the original “lessor” were not taxable rent.

The April 1, 1994 memorandum confirmed the 1992 true-lease answer and added the sale-at-inception explanation so annotation readers would not overlook the distinction.

If the lessor kept the property after termination, its own use was not taxed merely because its acquisition had been excluded. A later lease to a different lessee was a new taxable continuing sale measured by rent, with no specific authority to elect purchase-price tax. Section 6094.1 was cited only as an example of such authority in another setting.

The live annotation publishes only assignment and purchase-option results. It calls the new buyer/assignee a “sub-lessee,” while the supporting letter describes an assignment rather than supplying a sublease.

Common questions

Did the historical cutoff tax lease payments made later?

No, when the qualifying arrangement was executed before the deadline.

Was the purchase option exempt?

No. End-of-term title transfer was a sale/purchase no matter when the option was granted or who exercised it.

Were all assignments treated alike?

No. A true-lease assignment differed from assignment of a transaction that was actually a sale at inception.

Why did true-lease rent stay nontaxable after assignment?

The assignee paid under the same original qualifying lease; assignment did not create a new taxable lease.

Why was a sale-at-inception assignment taxable?

The person labeled the lessee was actually selling property in a new retail sale.

Was the original lessor taxed merely for keeping and using the property later?

No. Counsel said its own post-termination use was not taxable, whether before or after January 1, 1995.

What happened on a later lease to someone else?

That lease was a new taxable continuing sale measured by rent, and counsel found no specific purchase-price election.

Did the source show an actual assignment or tax assessment?

No. The letters answer hypotheticals and supply no contracts, amounts, return, assessment, payment, claim, appeal or completed outcome.

Citations and references

• Revenue and Taxation Code section 6010.65(a)-(c) — historical qualification, pre-1995 execution and end-of-term title-transfer rules
• Regulation 1660(a)(2)(A) — sale-at-inception classification
• Revenue and Taxation Code section 6094.1 — example of specific purchase-price-election authority in another setting
• January 15, 1992 requester letter — questions identified, letter absent
• February 21, 1992 Levine letter — rent, option, assignment, later use and later lease answers
• April 1, 1994 Levine memorandum — confirms the true-lease answer and adds sale-at-inception consequences
• Official Annotation 330.1874 — publishes only assignment and option results and uses a sub-lessee label

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.1874
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-1874.pdf

Original ruling text

330.1874

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-5550

February 21, 1992

--- --- ----- --- ----- --- -----, -- XXXXX
Re:

Amendment of Regulation 1660

---:
This is in response to your letter dated January 15, 1992 regarding the application of Revenue and Taxation Code section 6010.65. You note that the section is in effect until January 1, 1995. If a taxpayer enters into a sale and leaseback transaction prior to that date but the lease itself extends past January 1, 1995, you ask whether the lease payments made after January 1, 1995 would be taxable. You also inquire as to the tax treatment of a repurchase of the equipment after January 1, 1995 if the repurchase were pursuant to an option granted in the contract signed prior to January 1, 1995. Subdivision (c) states that section 6010.65 applies to acquisition sale and leaseback arrangements executed before January 1, 1995. Thus, if the acquisition sale and leaseback arrangement is executed prior to January 1, 1995, the leaseback portion comes within the terms of section 6010.65 and is not regarded as a continuing sale subject to use tax. With respect to repurchases, the date of the repurchase is irrelevant, regardless of when the option is granted. Subdivision (b) of section 6010.65 specifically states that “sale” and “purchase” include, for purposes of sales and use tax, the transfer of title to a lessee upon termination of an acquisition sale and leaseback. That is, there is no exemption or exclusion under section 6010.65 with respect to a sale at the end of the lease term. You ask what happens if the lessee sells its business and the lease is assigned to the new buyer along with the option to acquire the property at termination of the initial lease contract. Assuming the lease is pursuant to a qualifying acquisition sale and leaseback, the lease is not regarded as a sale for purposes of sales and use tax. You ask whether the rentals to the assignee are exempt. I assume you are asking whether the rentals paid to the lessor are not taxable since the

[ABC]

-2-

February 21, 1992
330.1874

assignee is not the lessee (that is, the assignee in your question is the lessee and is not receiving rents but rather is paying them). As noted above, if the acquisition sale and leaseback qualifies under section 6010.65, the lease receipts are not taxable rentals.* You ask whether the exercise of a purchase option on the equipment by the assignee would be subject to tax. As noted above, the exercise of the option to purchase is not exempt or excluded from taxation under section 6010.65 no matter who exercises the option. Your final questions relate to use of the property upon termination of the lease when the lessee does not exercise an option to purchase. You ask whether subsequent use of the rental property by the lessor is subject to tax. since the lessor acquired the property in a transaction not subject to tax, its use of the property is not subject to tax, regardless of whether that use occurs before or after January 1, 1995. On the other hand, when the lessor leases that property to a different lessee, that lease is a continuing sale and purchase and is subject to use tax measured by rentals payable. I note further that there is no election for the lessor to pay tax measured by purchase price since there is no specific statutory authority to do so. (See, e.g., Rev. & Tax. Code § 6094.1 (specific authority to pay tax measured by purchase price when lessor acquires property in an exempt occasional sale).) If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel

DHL:cl
0612E

bc:

Culver City District Administrator

*If the leaseback portion of the transaction is a true lease (as opposed to a sale at inception), then no tax applies to the rentals paid by the new lessee and the assignment is not taxable. If, however, the leaseback portion is a sale at inception, the assignment of the “lease” is actually a sale of the property. That sale is taxable, but the “lease” receipts paid by the new lessee are not taxable. DHL

State of California

Board of Equalization
Legal Division MIC:82

Memorandum
To

:

Mr. Robert Nunes
MIC:40

From :

David H. Levine

Subject:

Annotation on section 6010.65

330.1874
Date:

April 1, 1994

I wrote a letter dated February 21, 1992 related to the interpretation of Revenue and Taxation Code section 6010.65. One question I addressed was a lessee's assignment of a lease that had been the leaseback portion of an acquisition sale and leaseback within the meaning of section 6010.65. I concluded that the rentals payable by the new lessee would not be taxable. The leaseback portion of a qualifying acquisition sale and leaseback is not a sale for purposes of the Sales and Use Tax Law, and the rentals payable from such lease are not taxable. I concluded that such rentals payable by the new lessee (assignee) were also not taxable. The basis for this conclusion was that the original lease was not taxable, and the assigned lease was, in fact, the original lease. Upon review of the letter, I conclude that my original answer was correct. However, I have concluded that it would be helpful to also address in the annotation the implications of assigning a “lease” that is actually a sale at inception. I note that the analysis in my original letter remains accurate under either circumstance, but some persons reading the annotation may overlook the fact that there are additional ramifications when a “lessee” under a sale at inception assigns its rights thereunder as opposed to a lessee's assignment of rights under a true lease. The leaseback portion of a qualifying acquisition sale and leaseback may be a true lease, but it may also be a transaction which would constitute a sale at inception under subdivision (a)(2)(A) of Regulation 1660. When a person designated as a lessee under a sale at inception “assigns the lease,” he or she is actually selling the property. Thus, the applicable transaction that would be subject to tax (or not) is the sale of tangible personal property by the “lessee” and not the amounts paid to the “lessor.” Such a sale of tangible personal property by the “lessee” is subject to tax even when the “lease” was created as part of a qualifying acquisition sale and leaseback. That sale is not covered by the exclusions provided by section 6010.65 because the “assignment” is actually a new retail sale. The “lease receipts” of course are not taxable.

DHL:cl