Could one equipment lessor sell ex-tax rental property at fair market value to a sister lessor and lease it back tax-paid?
Apply this to your situation
This page answers the general question as of 1983. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
The requester's client controlled both Corporation A and Corporation B. Each had existed over three years, leased same-form equipment to the public, operated entirely separately and worked at a different location. The live annotation instead says both were owned by Company C; the PDF does not mention such a company.
A had bought many equipment items without sales-tax reimbursement or purchase-price use tax, so it paid tax on public rent. Because successful-business rent was high compared with equipment fair value, it proposed selling the equipment to B, paying sales tax on the sale and leasing it back. Both the sale and leaseback would use actual fair market value at that time.
Counsel said the proposal came within section 6006(g)(5) and Regulation 1660(c)(2)–(3). With sales-tax reimbursement paid by the lessor corporation based on actual fair value at the sale to it, rent on B's leaseback was not taxable because the equipment was tax-paid. A's public subleases were likewise nontaxable under (c)(5).
The opinion accepts, but does not independently prove, the separate operations and actual fair value. It cites no distinct related-party substance/valuation authority. The request, valuation, sale, leaseback and tax records are absent, and no completed result is supplied. The enclosed regulation copy is missing.
The live annotation preserves the core treatment but changes the stated ownership structure to Company C and says A collects/pays sales-tax reimbursement. It omits entity age/different locations, high-rent motive, source limits and the absence of an implemented transaction.
Common questions
Did common control prevent the described treatment?
No under the stated facts. The corporations were separately operated businesses and used fair market value.
What facts supported separate-company treatment?
Each company had existed over three years, operated an entirely separate equipment-rental business and worked at a different location.
What tax established the new tax-paid status?
Sales-tax reimbursement paid on corporation B's purchase at actual fair market value.
Were corporation A's customer rentals taxed afterward?
No. Once the equipment was tax-paid, the leaseback and subsequent subleases were not taxed on rental receipts.
Did the letter independently validate fair market value?
No. Actual fair value was a stated premise; no appraisal or calculation is supplied.
Would a paper transfer without real value or separate operations get the same result?
The opinion does not decide that. Its conclusion expressly rests on the described fair-market-value transaction between separately operated companies.
Was the proposed transaction shown as completed?
No. There is no sale, tax payment, leaseback, sublease, return, audit or later outcome.
Do the live annotation and PDF identify ownership the same way?
No. The PDF says the requester's client was controlling shareholder of A and B; the live entry says both were owned by Company C.
Was the enclosed regulation included?
No. The letter identifies a copy of Regulation 1660(c)(2)–(3) as enclosed, but the PDF omits it.
Citations and references
- Revenue and Taxation Code section 6006(g)(5) — tax-paid same-form lease treatment
- Regulation 1660(c)(2)–(3) — purchase-price/sale-leaseback treatment; enclosed copy absent
- Regulation 1660(c)(5) — subsequent tax-paid sublease treatment
- September 29, 1983 requester letter — proposal quoted; standalone letter absent
- Ownership/operations/equipment/valuation/sale/lease/tax records — described but not supplied
- November 22, 1983 counsel letter — stated-fact approval without separate related-party authority or implemented outcome
- Official Annotation 330.2022 — core result with a Company C ownership recast and added collection/payment wording
Source
- Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
- Annotation page: Annotation 330.2022
- Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2022.pdf
Original ruling text
330.2022
STATE OF CALIFORNIA
STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-8485
November 22, 1983
Mr. K--- J. C--E---, K--- & M--Attorneys at Law
Suite XXX
--- --- --- Bldg.
XXXX --- Boulevard
--- ---, CA XXXXX
Dear Mr. C---:
This is in response to your letter of September 29, 1983 relative to the application of the California Sales and Use Tax Law to the following described sale and leaseback transaction. “Our client is the controlling shareholder of both corporation “A” and corporation “B”. Corporation “A” and corporation “B” have both been in existence for over three (3) years. Corporation “A” purchases equipment and leases it to the general public in substantially the same form. Corporation “B” is engaged in a similar business in a different location. Both businesses are operated entirely separate from each other. Corporation “A” purchased numerous items of equipment upon which no sales or sales reimbursement tax or use tax measured by the purchase price has been paid. As a result, corporation “A” is being taxed based upon its gross receipts from the rentals of such equipment to the general public. The business is quite successful, and as a result the receipts from rentals of the equipment are quite high in comparison with the actual fair market value of the equipment. Therefore, corporation “A” wishes to sell the equipment to corporation “B”, pay a sales tax upon that sale, and then lease the equipment back from corporation “B”. Both the sale from corporation “A” to corporation “B” and the leaseback from corporation “B” to corporation “A” would be based upon the actual fair market value of the equipment at the time of the sale and leaseback transaction.” In our opinion, the foregoing transaction comes within the purview of Revenue and Taxation Code Section 6006, subdivision (g)(5) [see also Regulation 1660(c)(2) and (3), copy enclosed]. Pursuant to those provisions, where sales tax reimbursement has been paid by the lessor corporation based upon actual fair market value at the time of the sale to it, no tax is due based on
Mr. K--- J. C---
-2-
November 22, 1983
330.2022
rentals payable. Additionally, since the property is considered leased in a tax paid status, subsequent subleases of the equipment to the general public by the lessee corporation are, likewise, not subject to tax [Reg. 1660(c)(5)]. Very truly yours,
Les Sorensen
Tax Counsel
LS:rar
Enclosure
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