Were the sale and leaseback of a fixed steam-generating plant taxable transfers of tangible personal property?

Plain-English summary

B---'s refund claim concerned sale and leaseback of a steam-generation plant. A March 27 memorandum held the facts and an earlier recommendation; after reviewing more information—especially photographs—Assistant Chief Counsel superseded that position and recommended granting the refund. Neither memorandum/record nor the referenced photographs is supplied; the two-page PDF contains no photo attachment.

Sale and leaseback were analyzed separately. Regulation 1596(a), said to rest on the Uniform Commercial Code's goods concept, taxed an affixed building as personal property only when its sale contract called for seller severance. This steam plant was a building/structure/fixed work and severance was not contemplated, so its sale transferred a realty interest.

Leaseback did not strip the facility's improvement-to-realty character. It incorporated items classifiable as Regulation 1521 fixtures, and Regulation 1596(c) governed fixture transfers, but this contract covered the building—not merely separate fixture sales/leases.

Section 6016.3 classified leased fixtures as tangible personal property unless their lessor also leased the realty. Here, the structure was the realty and fixtures were attached to it; the whole-building contract therefore was a real-property lease and tax did not apply.

No claim, assessment, contract, plant/land/title evidence, severance provision, fixture schedule, invoice/tax record or granted refund is supplied. The live annotation adds that land was not sold, attributes the fixed-work point to Regulation 1521 and substitutes Regulation 1660(d)(7) for section 6016.3 without transition history.

Common questions

Did the sale-and-leaseback label make the plant tangible personal property?

No. Each step had to be classified independently, and both remained real-property transactions.

Why did severance matter?

Regulation 1596 treated an attached building as personal property only when the sale agreement contemplated severance by the seller. No severance was planned here.

Did the plant's component fixtures change the result?

No on these facts. The lease covered the building, not merely individual fixtures.

Was this the office's first recommendation?

No. The December memorandum expressly superseded an earlier recommendation after reviewing further information and photographs.

Are those photographs available in the PDF?

No. It says two were attached, but the official file contains only two text pages and no photograph exhibit.

Did counsel grant the refund?

No. Counsel recommended that it be granted; the final disposition is absent.

Does the live annotation use the same authority?

Not exactly. It uses Regulation 1660(d)(7) where the 1989 letter uses section 6016.3 and adds other detail without transition history.

Citations and references

• Regulation 1596(a); unnamed UCC goods provisions — affixed-building sale/severance rule
• Regulations 1521/1596(c) — construction fixtures and fixture transfers
• Section 6016.3 — fixture/realty-lessor classification in the 1989 letter
• March 27 memorandum, additional information/photos and refund/transaction/tax records — absent
• December 8, 1989 Jugum memorandum — superseding recommendation, not final disposition
• Official Annotation 330.2310.075 — uses Regulation 1660(d)(7) and adds details without history

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2310.075
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2310-075.pdf

Original ruling text

State of California

Memorandum

To:

Audit Review & Refund Unit
Attention: Mike Hilbert

From:

Gary J. Jugum
Assistant Chief Counsel

Subject:

B--- L--- Corporation
SS -- XX-XXXXXX

Board of Equalization

330.2310.075

December 8, 1989

By memorandum dated March 27, 1989, Mr. David H. Levine of our office communicated with you in regard to a claim for refund of tax filed by B--- of A--- L--Corporation. The facts related to the claim are set forth in this earlier memorandum. We have had an opportunity to review the tax consequences of this transaction in light of further information furnished to us, in particular, photographs of the installation in question. It is now our recommmendation that the refund be granted. This supercedes our earlier recommendation. Transactions involving sales of buildings and other property affixed to realty are governed by our Regulation 1596 and by Revenue and Taxation Code section 6016.3. The transaction in question has two aspects, a sale and a leaseback. Each transaction must be analyzed separately. A transaction is not a sale of tangible personal property if it is a sale of an interest in real property. Paragraph (a) of Regulation 1596 provides that “the transfer of buildings or minerals or the right affixed to land is taxable as a sale of personal property [only] if, pursuant to the contract or agreement of sale, the buildings or minerals or the right are to be severed by the seller thereof.” This rule is based upon the provisions of the Uniform Commercial Code identifying contracts for the sale of “goods”. The facility in question is a steam generation plant. It is a building or structure or fixed work. Severance is not contemplated. Accordingly, the sale is a sale of an interest in realty. Following the sale, the facility is then leased. The facility does not lose its character as an improvement to realty under the lease contract. It is true that the facility incorporates within it

Audit Review and Refund Unit
Attention: Mike Hilbert

-2-

December 8, 1989
330.2310.075

items which would be classified as “fixtures” under our Regulation 1521 concerning construction contracts. Paragraph (c) of Regulation 1596 applies to transfers of fixtures, but the contract in question involves the lease of a building, not merely the sale or lease of fixtures. Under section 6016.3, leased fixtures are classified as “tangible personal property” unless the lessor of the fixtures is also the lessor of the realty. Here the realty is the structure, and the fixtures in question are attached to the realty. Under these circumstances, the lease is a lease of realty, not tangible personal property, and tax does not apply. Attached are two of the photographs furnished to us by taxpayer.

GJJ:sr
Attach.

cc:

Mr. Donald J. Hennessy
Mr. E. L. Sorensen, Jr.
Mr. David H. Levine