Did doctors' original tax-paid status carry to a new corporation when they exchanged medical equipment for stock and then leased it back?

Plain-English summary

A CPA's unreproduced December 5, 1969 letter sought confirmation of an answer received in a December 4 conference discussion group. The CPA and discussion leader believed tax-paid status would carry through the described structure; no conference record appears.

Several doctors had bought unspecified equipment and paid sales tax. They did not conduct activities requiring seller permits. They formed a corporation, exchanged equipment for its capital stock, then leased it back. No equipment, invoice/tax, entity, stock, transfer or lease record appears.

Counsel said the Board had considered the point several times and reached the opposite answer, but cites none of that work. Section 6005 made corporation a person distinct from shareholders; creating that separation for income-tax or other business reasons also made corporation—not doctors—the lessor.

Historical section 6010(e)(5) excluded a same-form lease only if lessor or qualifying transferor paid section 6052 reimbursement or purchase-price use tax. Transferor was limited to a person in a section 6006.5(b) transaction or a decedent whose property passed by will/succession.

Doctors paid original tax; corporation did not. Doctors were not section 6006.5(b) transferors because their equipment activities required no seller permit, and no decedent route existed. The exclusion therefore failed. Live Annotation 330.2920 adds that corporation paid doctors no tax and says it had to collect tax measured by leaseback rents.

The live annotation publishes the entity/rent result but omits conference/request posture, doctors' no-permit activity, two historical transferor categories, unspecified equipment/records, unidentified prior Board considerations and absent later outcome.

No conference note, request, doctor count/identity, equipment, original purchase/tax invoice, seller-permit evidence, articles/shareholders, stock issuance/value, transfer agreement, payment from corporation, leaseback, rent/tax invoice, return, audit, assessment, claim, appeal or later outcome appears.

What this means for you

Do not assume shareholder tax history automatically belongs to a corporation. Preserve entity/stock and transfer documents, who paid whom and which tax, seller-permit activity, equipment identity/form and every lease/rent record; then test the current transferor rules.

Common questions

Did common ownership make one lessor?

No. The opinion respected the corporation as a separate entity and person.

Was the doctors' original tax enough?

No. The lessor corporation had not paid it, and the doctors were not qualifying transferors under the cited rule.

Did exchanging equipment for stock preserve status?

No under these facts.

What were the two qualifying-transferor routes?

A section 6006.5(b) transfer or inheritance from a decedent by will/succession; neither fit.

Why did section 6006.5(b) fail?

The doctors were not engaged in activities requiring seller permits.

Were leaseback rents taxable?

Yes. The corporation was required to collect tax measured by rent.

Did the source identify equipment or amounts?

No.

Citations and references

• Section 6005 — corporation as separate person
• Section 6010(e)(5); section 6052 — historical lessor/transferor tax-paid exclusion
• Section 6006.5(b) — transferor route unavailable on stated no-permit facts
• Decedent by will/succession — second historical transferor route, inapplicable
• Conference/request, prior Board analyses and every equipment/entity/transfer/lease/tax/outcome record — absent
• Live Annotation 330.2920 — rent-tax conclusion with added no-payment fact

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2920
• Original supporting opinion: 330.2920 PDF

Original ruling text

STATE OF CALIFORNIA

330.2920

STATE BOARD OF EQUALIZATION

December 15, 1969

Mr. R--- W--Certified Public Accountant
XXXX --- ----- ---, CA XXXXX
Dear Mr. W---:
Mr. Thomas Putnam has asked me to reply to your letter of December 5, 1969, asking for a confirmation of an answer which you received in the discussion group at the conference on December 4, 1969. You represent a corporation which was formed by several doctors who exchanged their equipment for capital stock in the corporation. The doctors paid sales tax on the equipment when originally purchased. The doctors were not engaged in activities requiring the holding of seller’s permits. You and the discussion leader felt that the equipment in the hands of the corporation retained its tax-paid status, and when the corporation subsequently leased the equipment to the doctors, the lease payments would not be subject to sales tax. We have considered this point on several occasions and came to the opposite conclusion. A corporation is an entity separate and distinct from its shareholders. It is a separate “person” under section 6005 of the Sales and Use Tax Law. The reason that corporations are formed, particularly one such as you describe, is to create a separate entity for income tax or other business reasons. Thus the corporation, and not the doctors, is the “lessor” of the equipment. This is significant as section 6010(e)(5) is very clear in excluding from taxable leases only leases of tangible personal property leased in substantially the same form as acquired by the lessor or his transferor as to which the lessor or his transferor has paid sales tax reimbursement pursuant to section 6052 or has paid use tax measured by the purchase price.

Mr. R--- W---

-2-

December 15, 1969
330.2920

“Transferor” is limited to: (a) persons from whom the lessor acquired the property in a transaction described in subdivision (b) of section 6006.5, and (b) to a decedent from whom the lessor acquired the property by will or the laws of succession. The doctors, not the corporation, paid tax on the purchase price of the property when acquired, and consequently the “lessor” did not pay the tax. Neither are the doctors “transferors” as the property was not acquired in a transfer described in section 6006.5(b), which applies only to property used in activities for which a seller’s permit is required. Very truly yours,

Lawrence A. Augusta
Assistant Counsel

LAA:ph