Could a lessor cure a missed purchase-price election through a circular sale and resale with an unrelated liquidator?

Plain-English summary

A--- had one rental-inventory equipment item apparently bought ex-tax without a timely Regulation 1660(c)(2) purchase-price election. Because all its other rental equipment was tax-paid, it wanted to convert this item too. The acquisition, election and fleet records are absent.

The proposal was a fair-market-value sale to an unrelated liquidation company, immediate resale to A---—presumably at the same price—and tax paid by the intermediary. No appraisal, agreement, payment, title transfer, possession, risk or independent purpose is supplied.

Sections 6006(g)(5)/6010(e)(5) and Regulation 1660(c)(2) allowed purchase-price treatment for same-form leased property only with the first-rental-period return election. After that deadline, tax was measured by rent. Action Trailer Sales had upheld the regulation as consistent with legislative intent.

Commissioner v. Court Holding required transfer substance to control over title form. Cumberland also confirmed taxpayers could structure business transactions to minimize tax if a transfer had genuine business substance and was not a sham.

Here, counsel found the sole purpose was to subvert the timely-election requirement. With no business substance, the proposed sale/resale was a sham and received no sales/use-tax effect. The opinion does not say every tax-saving transaction fails; it contrasts this proposal with substantive business transfers.

No implemented transaction or tax outcome appears, and an unidentified Attachment is absent. The live annotation publishes the full proposal and core case-based rule but omits the PDF's uncertain/presumed facts and source gaps; it also prints Commission rather than Commissioner in one case name.

Common questions

Could the lessor make the original election late?

No. The source says the purchase-price election had to be made for the period when the property first entered rental service.

Did using an unrelated liquidation company save the plan?

No. The memorandum looked through the formal title transfers because the proposal had no independent business substance.

Was the same resale price established?

No. Counsel says it was presumably the same price.

Was fair market value independently proved?

No. It was part of the proposal, without an appraisal or calculation.

Did the source say every tax-motivated transaction is invalid?

No. It acknowledged that taxpayers may structure genuine business transactions to reduce tax when the transfer has substance and is not a sham.

What transfer facts were published?

Only the proposed form. No agreement, payment, title, possession, risk, financing or separate business reason is supplied.

Was the proposal implemented?

No implementation, return, audit, assessment, payment, claim or appeal is shown.

What was the attachment?

The memo lists one but neither identifies nor includes it.

Citations and references

• Revenue and Taxation Code sections 6006(g)(5), 6010(e)(5) — same-form tax-paid exception
• Regulation 1660(c)(2), (c)(1) and sections 6006(g), 6010(e), 6201 — timely election/rent-tax framework
• Action Trailer Sales, Inc. v. State Board of Equalization, 54 Cal. App. 3d 125 — regulation/legislative intent; citation independently resolved
• Commissioner v. Court Holding Co., 324 U.S. 331 — substance over transfer form; citation independently resolved
• United States v. Cumberland Public Service Co., 338 U.S. 451 — substantive tax planning versus sham; citation independently resolved
• Undated suggestion/request and unidentified attachment — referenced; absent
• Equipment/acquisition/election/fleet/valuation/transfer records — absent
• October 21, 1988 counsel memorandum — proposed sham result without implementation/outcome
• Official Annotation 330.2112 — core result with one case-name defect and without uncertainty/source limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2112
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2112.pdf
• Citation verification: Action Trailer Sales, Court Holding, and Cumberland

Original ruling text

State of California

Memorandum

To:

Mr. Jerry Cornelius

From:

E. L. Sorensen, Jr.

Subject:

A--- M--- and H--- C--- Inc.

Board of Equalization

330.2112

October 21, 1988

As requested, we have reviewed A---’s suggestion regarding changing the tax status of a piece of equipment in its rental inventory. The equipment in question was apparently purchased ex-tax but a timely election was not made, pursuant to Regulation 1660(c)(2), to report tax upon the purchase price. Since all of A---’s other rental equipment is in a tax paid statue, A--- would like to convert the item in question to a tax paid status, as well. It proposes to accomplish this result by “selling” the property for fair market value to an unrelated “liquidation company” for immediate “resale” back (presumably at the same price) to A---. It is suggested tax would be paid by the “liquidation company” and the equipment could then be leased tax paid by A---. Revenue and Taxation Code Sections 6006(g)(5) and 6010(e)(5) provide, in essence, that tangible personal property which is leased in substantially the same form as acquired and as to which the lessor has paid sales tax reimbursement or use tax measured by the purchase price of the property are not “sales” or “purchases”. Regulation 1660(c)(2), interprets and applies the statutes by requiring that in order to elect to pay the tax measured by purchase price such election must be made by the lessor with the return for the period during which the property is first placed into rental service. If the election is not made timely, tax must be paid based on rentals payable (Rev. & Tax. Code §§ 6006(g), 6010(e), 6201; REg. 1660(c)(1)). In Action Trailer Sales Inc. v. State Board of Equalization, 54 Cal.App.3d 125, the court confirmed that the provisions of Regulation 1660 in issue here are reasonable and consistent with Legislative intent. It is well settled that the incidence of taxation with respect to a transfer of property depends on the substance of the transaction, and is not controlled solely by the means employed to transfer the title (Commissioner v. Court Holding Co., 324 U.S. 331). Nevertheless, a taxpayer may carry out his business transactions in a fashion calculated to minimize the tax

Mr. Jerry Cornelius

-2-

October 21, 1988
330.2112

liability so long as the transfer has business substance and is not a mere sham (see U.S. v. Cumberland, 338 U.S. 451). In our view, the sole purpose of A---’s proposal is to subvert the clear intention of the law that, unless a timely election is made to pay tax based upon the purchase price, tax on leased property is due based on rentals payable. There is no business substance to the proposal and, accordingly, we should recognize it as a sham and should not give it any effect for sales and use tax purposes.

ELS:rar

Attachment