Did assigning finance leases to lenders also sell the leased equipment?

Plain-English summary

A finance-lease partnership's customers normally negotiated purchases from suppliers; the partnership bought each item in its own name and leased it to the customer. To fund those purchases, it assigned leases directly to several financial institutions or, when a lender would not deal directly, first assigned them to F--- L--- Consultants, Inc. (FLC), which then assigned them onward. The report was uncertain whether claimant and FLC shared ownership or another legal relationship.

The refund amount was unspecified. An audit and reaudit for September 1, 1980 through December 31, 1983 listed $67,427 for unreported lease receipts and $169,441 for lease assignments with title transfers. The claimant said vendor tax had been paid on some transactions, but submitted no proof; the hearing officer recommended no adjustment on that point.

The audit treated direct assignments to four named-but-redacted institutions as equipment sales based exclusively on contract wording. Two forms assigned the lease and gave the lender a security interest in the property; two said the lease was sold, transferred and assigned but gave only a security interest in the equipment. The report construed all four as security grants with no passage of property title unless breach occurred.

Contract labels did not end the inquiry. The cited cases supported looking to actual substance, including who retained title after lender payments, UCC financing statements, sale-versus-loan income-tax treatment, who claimed depreciation, investment tax credit or similar ownership deductions, and whether the implied loan interest rate was usurious. Because no such contrary evidence was presented, the report found no direct-lender title transfers and recommended granting that portion of the claim.

FLC's form was different: it expressly said claimant sold, assigned and transferred all rights, title and interest in both the lease agreement and its property. With no evidence contradicting that language, the report found title passed and a taxable sale occurred. Because claimant waived its preliminary-hearing appearance believing the evidence was enough, the hearing officer recommended keeping the FLC record open 30 days for more evidence.

The underlying leases were not mobile transportation equipment or other section 6010(e)(1)–(4) exclusions. Where such a lease was not itself a sale/purchase, the audit taxed a property transfer on gross receipts, less a tax-paid-purchases-resold deduction when appropriate. The recommendation contains a blank computation line, unsigned audit-review lines and no later decision or payment.

The live annotation reduces this record to the general four-factor title inquiry. It omits the direct/FLC contract distinction, both recommended results, audit figures, open record and evidence gaps. The PDF also prints Cedars-Sinai's reporter page as 112; citation research identifies the case at 1182.

Common questions

Did assignment language alone always control?

No. The parties' labels could be outweighed by evidence showing who actually owned the property.

Why were the direct financial-institution assignments not taxable sales?

They were written as security interests, and no other evidence showed that title passed.

Why was the intermediary assignment treated differently?

Its document expressly transferred title, and the claimant had not supplied contrary evidence.

What title evidence did the report identify?

Post-payoff ownership, UCC filings, income-tax sale/loan treatment, ownership-based deductions or credits and whether a loan theory produced a usurious rate.

Did claimant prove tax was paid to vendors?

No. The report says no evidence supported that contention and recommends no adjustment.

Was the intermediary issue finally closed?

No. The recommendation held the record open for 30 days for additional evidence.

Did the claimant appear at a preliminary hearing?

No. Appearance was waived on the assumption enough evidence had already been submitted.

Was a final refund amount or outcome published?

No. The amount was unspecified, the computation and review lines are blank, and no later FLC evidence or final disposition is included.

Is the printed Cedars-Sinai citation accurate?

Apparently not. The PDF prints 162 Cal. App. 3d 112; independent citation research identifies Cedars-Sinai at 162 Cal. App. 3d 1182. The preserved source text is not corrected.

Citations and references

• Regulation 1660(c)(9)(A) — assignment of a lease that is not a sale/purchase and sales-price tax when title transfers
• Revenue and Taxation Code section 6010(e)(1)–(4) — excluded lease categories identified as not involved
• Southern California Edison Co. v. State Board of Equalization, 7 Cal. 3d 652, 662 — transaction language does not necessarily control
• Cedars-Sinai Medical Center v. State Board of Equalization — PDF prints 162 Cal. App. 3d 112; citation research identifies 162 Cal. App. 3d 1182
• 1980–1983 audit and reaudit — listed amounts and findings described; underlying workpapers absent
• Direct-lender and FLC assignment contracts — excerpts supplied; complete agreements absent
• Vendor tax proof and four categories of substantive title evidence — expressly absent
• January 16, 1987 Decision and Recommendation — partial grant/open-record recommendation; computation, audit review and final result absent
• Official Annotation 330.1878 — publishes only the four-factor title inquiry

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.1878
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-1878.pdf
• Citation verification: Southern California Edison and Cedars-Sinai

Original ruling text

STATE OF CALIFORNIA

330.1878

BOARD OF EQUALIZATION

In the Matter of the Claim for
Refund Under the Sales and Use
Tax Law of:
E--- H--- & R--- S---,
ET AL.
dba F--- F--- SERVICES - O--Petitioner

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DECISION AND RECOMMENDATION

No. SR -- XX XXXXXX-001

The preliminary hearing on the above taxpayer’s claim for refund was waived. James E. Mahler, Hearing Officer. Subject of Claim Claimant seeks a refund in an unspecified amount. The taxes were paid after an audit and reaudit for the period September 1, 1980, throught December 31, 1983, which included the following audit items:

Item

State, Local
and County

A.

Lease receipts not reported

$ 67,427

C.

Assignments of leases with
transfer of title

$169,441
Taxpayer’s Contentions

1.

Tax was paid to the vendor on several transactions.

2.

The assignments of leases to financial institutions did not entail sales of the leased property Summary

Claimant is a partnership engaged in the “finance lease” business. As we understand it, the customers in these transactions normally negotiate to purchase tangible personal property from suppliers but come to claimant in order to obtain financing. Claimant purchases the property in its own name, pursuant to the price and other terms as negotiated by the customers

E--- H--- & R--- S---, ET AL.
dba F--- F--- SERVICES - O---

-2-

January 16, 1987
330.1878

and then leases the property to the customers. Insofar as concerns us here, none of the leases involved mobile transportation equipment or other types of property subject to exclusion under Revenue and Taxation Code Section 6010(e)(1) to (e)(4). 1. Sometimes claimant buys the property tax-paid and sometimes it does not. Claimant contends that it paid tax reimbursement to the vendor or use tax to the state in some cases where the audit found to the contrary. No evidence has been presented. 2. In order to obtain financing to purchase the property, claimant often assigns the leases to a financial institution. The audit found that the assignments to the following financial institutions were accompanied by sales of the leased property: C--- Thrift, A--- Thrift & Loan Assn., C--- Thrift & Loan and C--- F--- Corporation (later W--- C--- M---). In cases where the underlying lease was not a sale or purchase, the audit further found that the sale of the leased property was subject to tax. Tax was asserted on the gross receipts from the sale, less a tax-paid purchases resold deduction where appropriate. The finding that claimant had sold the leased property was based exclusively on the language of the lease assignment contracts. Specifically, the audit found that the following contractual language evidenced an intent to pass title from claimant to the financial institution. The contracts with C--- Thrift and A--- Thrift & Loan Assn. provided: “For value received, [claimant] hereby assigns to [the financial institution] the annexed lease of personalty…. As security of payment for rents, [claimant] also assigns all right, title, and interest of lessor in and to the personalty leased….” The contracts with C--- Thrift and Loan and C--- F--- Corporation (W--- C--- M---) provided: “As an inducement to extend or continue credit to [claimant], but without obligation to do so, [claimant] sells, transfers and assigns to [the financial institution] (hereafter called “lender”) all its right, title and interest in and to the lease…[¶] To secure lessee’s payments, [claimant] hereby transfers to lender a security interest in…the leased equipment….” Some financial institutions refused to deal directly with claimant. In such cases, claimant assigned the leases to a corporation called F--- L--- Consultants, Inc. (FLC), and FLC then assigned the leases to the financial institution. The audit found that the assignments from claimant to FLC were accompanied by sales of the leased property. Tax was asserted in the manner described above. The contracts between claimant and FLC provided: “For value received, [claimant] hereby sells, assigns, transfers and sets over to
[FLC] all of its rights, title and interest (a) in and to the [lease] agreement…and (c) in and to the property described in said agreement.”

E--- H--- & R--- S---, ET AL.
dba F--- F--- SERVICES - O---

-3-

January 16, 1987
330.1878

Claimant refers to FLC as the “managing corporation” for claimant and various other partnerships. However, we are uncertain as to whether there is any common ownership or other legal relationship between FLC and claimant. Analysis and Conclusions 1. No evidence has been presented to indicate that claimant paid tax reimbursement or use tax on any transaction where the audit found to the contrary. Accordingly, we recommend no adjustment. 2. Sales and Use Tax Regulation 1660 provides, in the second paragraph of subdivision (c)(9)(A): “Generally, when an existing lease that is not a ‘sale’ and ‘purchase’ is assigned, whether or not title to the leased property is transferred, the rental payments are not subject to tax. If title is transferred, tax applies measured by the sales price.” We have reviewed the assignment contracts between claimant and C--- Thrift, A--- Thrift
& Loan Assn., C--- Thrift & Loan and C--- F--- Corporation (W--- C--- M---). We agree with claimant that the language of these documents does not evidence an intent to transfer title. The documents are phrased in terms of a grant of a security interest, with no passage of title unless and until such time as the contract might be breached. This does not end our inquiry, however. “In sales and use tax matters, the language used by the parties to characterize their transaction does not, in itself, necessarily control.” (Southern California Edison Co. v. State Board of Equalization, 7 Cal.3d 652, 662; see also Cedars-Sinai Medical Center v. State Board of Equalization, 162 Cal.App.3d 112.) Therefore, despite the language of the contracts, we would conclude that a taxable sale occurred if other evidence indicated that title in fact passed from claimant to the financial institution. Such other evidence would include the following factors: (1) Whether claimant or the financial institution retained title in the property after the payments to the financial institutions were completed; (2) Whether the parties filed financing statements under the Uniform Commercial Code; (3) Whether the parties treated the transaction as a sale or a loan for income tax purposes, and more specifically, whether claimant or the financial institution claimed depreciation, investment tax credits or similar deductions predicated upon ownership of the property; and (4) Whether the putative interest rate, if the transaction were treated as a loan, would be usurious under California Law. No such evidence has been presented, however. Lacking such evidence, we conclude that title in the property did not pass from claimant to the financial institutions. Accordingly, these transactions were not taxable sales.

E--- H--- & R--- S---, ET AL.
dba F--- F--- SERVICES - O---

-4-

January 16, 1987
330.1878

We reach a different conclusion with respect to the transactions between claimant and FLC, however. The documentation for these transactions expressly stated that title would from claimant to FLC. As above, the language of the documents would not necessarily be controlling, if contrary evidence were presented but no such contrary evidence is available. Accordingly, for these transactions, we find that title did pass and that a taxable sale occurred. Claimant waived appearance at the preliminary hearing on the assumption that sufficient evidence had already been presented to warrant a decision in its favor. Since we have found the evidence insufficient with respect to the transactions with FLC, claimant should be given an opportunity to present further evidence. We recommend that the record in this matter be held open for 30 days for that purpose. Recommendation Grant the claim with respect to the transactions with C--- Thrift, A--- Thrift & Loan Assn., C--- Thrift & Loan and C--- F--- Corporation (W--- C--- M---). Hold the record open for 30 days so that claimant may present additional evidence with respect to the transactions with FLC. Necessary computations are to be initiated by _____.

________
James E. Mahler, Hearing Officer

1/16/87
________
Date

REVIEWED FOR AUDIT:

_______
Principal Tax Auditor

________
Date