Did tax-paid rental property lose its status when the owning corporation was absorbed into another corporation through a statutory merger?

Plain-English summary

The August 14, 1969 letter refers to ABC, Inc. and DEF petitions and hearings held last July 17 in Hollywood. No petition, hearing transcript/date year, audit or merger record appears. Its opening labels are internally unclear: it says In ABC when discussing $2,400 equipment sale and unsupported DEF equipment, then recommends denying the DEF petition.

The $2,400 sale was not protested. Lease receipts involved equipment the DEF people could not prove tax-paid or supported by cost-price tax. Counsel quoted a delinquency-certificate presumption and taxpayer burden to disprove determination and supply evidence for a proper alternative. He recalled the hearing said DEF records at merger left something to be desired; nothing supported deletion/reduction, so DEF denial was recommended.

ABC's audit had three items:

1. Item A was unreported rent from DEF equipment after statutory merger. Counsel treated merger as no sale/asset transfer, but absorption by operation of law continuing merged corporation's rights/obligations. Proven tax-paid property did not become ex-tax. He recommended reaudit on unchanged status, not automatic status for every asset.
2. Item B was use-tax measure when the lessor withdrew and used rental inventory. Without proof of which items were tax-paid, counsel recommended a tax-paid/ex-tax ratio.
3. Item C was credit for cost-price tax on post-merger equipment, reported by former DEF personnel contrary to ABC policy. It was untimely because not paid with returns due when property first rented. The disallowed payment reduced measure only; ABC's later California rents stayed taxable. Former Ruling 70 was identified as an enclosure but is absent.

DEF had some pre-merger rent liability from January 1, 1963 through December 9, 1965. Counsel expected some Item A liability after reaudit because the same property was involved, though ABC period was under seven months. Depending on amount, Item C credit might eliminate liability for both corporations. No calculation or result appears.

Failure-to-file penalty was separately unresolved. Section 6592 was the only possible relief, and counsel made no recommendation. He called filing unusual because a quarterly permit would have made first return timely, while merged corporation filed annually and ABC monthly. No permit, filing due date or return appears.

The PDF visibly prints People v. Schwartz, 31 Cal.3d 59 (1947). Citation checking maps 31 Cal.3d 59 to People v. Shirley (1982), not printed name/year. It also prints Mutual ... v. Wiborg, 59 Cal.app.3d 325 (1943), which did not resolve. Both strings were confirmed against rendered official pages and remain uncorrected. E. & J. Gallo Winery v. Commissioner, 227 F.2d 699, resolved and supports the source's merger discussion.

Live Annotation 330.2940 publishes only purchase-price-taxed property continuing through statutory merger with rights/obligations. It omits the ambiguous petition labels, $2,400 unprotested sale, missing-record burden, DEF denial, three ABC items, date ranges/credit interaction, penalty issue, citation defects, missing Ruling 70 and absent reaudit result.

No petition, hearing record, corporation/merger document, property/asset ledger, purchase/lease/tax invoice, delinquency certificate, audit workpaper, return, permit, inventory withdrawal/use, allocation, cost-tax payment, Ruling 70 enclosure, reaudit, adjusted determination, penalty ruling, claim, appeal or later outcome appears.

What this means for you

Trace every asset and tax payment across the statutory merger, preserve the merger instrument, ledgers, invoices, rental/use dates and reporting election, and separate each audit item. Merger continuity did not cure missing proof or late elections, and penalty relief followed its own procedure.

Common questions

Was the statutory merger itself a sale?

No. The letter treated it as absorption by operation of law.

Did every merged asset become tax-paid?

No. The taxpayer still had to prove the property's pre-merger status.

How was unproven withdrawn inventory handled?

The letter recommended using a ratio of tax-paid and ex-tax property unless the taxpayer supplied better proof.

Could late purchase-price tax stop later rent tax?

No. The payment was untimely; it functioned only as a credit reducing the measure.

Could Item C credit erase liabilities?

Possibly. Counsel said it might wipe out DEF and ABC liability depending on the reaudit amount.

Did the letter decide the filing penalty?

No. It pointed to section 6592 as the only possible relief procedure and made no recommendation.

Did the two printed state-case citations verify?

No. One reporter points to a different case/year; the other did not resolve. The official strings remain verbatim.

Was the reaudit outcome published?

No.

Citations and references

• Section 6592 — possible penalty relief; no recommendation
• Gallo Winery v. Commissioner, 227 F.2d 699 — verified merger authority
• Printed People v. Schwartz, 31 Cal.3d 59 (1947) — reporter maps to different 1982 case
• Printed Mutual ... v. Wiborg, 59 Cal.App.3d 325 (1943) — unresolved
• Former Ruling 70 — timely election authority; enclosure absent
• Petitions/hearings and all merger/asset/tax/audit/permit/reaudit records — absent
• Live Annotation 330.2940 — merger rule without procedural/evidence posture

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2940
• Original supporting recommendation: 330.2940 PDF
• Citation checks: 31 Cal.3d 59 and 227 F.2d 699

Original ruling text

330.2940

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

August 14, 1969

--- --- ----- --- -----, CA XXXXX
Attention:

Mr. --- ---

Gentlemen:
This is with reference to the petitions of ABC, Inc., and DEF, and the hearings held on the matters last July 17 in Hollywood. In ABC, the measure included the sale of some equipment for $2,400 which was not protested. It also included receipts from lease of equipment which the DEF people could not support as having been acquired tax paid, nor as having paid tax on the cost price. A certificate of delinquency carries with it the presumption that the board’s determination is correct. The taxpayer has the burden of proving not only that the determination, based upon his records, is incorrect, but also of producing evidence form which another and proper determination may be made. (People v. Schwartz, 31 Cal.3d 59 (1947).) I recall that something was said at the hearing that the condition of the DEF’s records at the time of the merger into ABC, Inc., left something to be desired. In any event, nothing was offered to support a recommendation that the measure be deleted or even reduced. Thus, as to the DEF petition, we are recommending that it be denied. In the ABC, Inc., audit, there are three items which make up the measure of tax liability. The first is lease receipts not reported, and it relates to the lease of DEF equipment after the statutory merger.

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330.2940

The question, in part, turns on the status of tax-paid property after a statutory merger. It is well established that a statutory merger is not a sale. There is no transfer, as such, of assets, but by operation of law there is what might be called an absorption of the constituent or merged corporation. It follows that this does not operate to change the status of property from tax paid to ex tax. We agree that Mutual Building & Loan Association of Pasadena v. Wiborg, 59 Cal.app.3d 325 (1943) and Gallo Winery v. Commissioner, 227 F.2d 699, each support this conclusion. Thus, as to item A, we are recommending that there be a reaudit and the tax be computed on the basis that there was no change in the status of the DEF property absorbed under the statutory merger. Item B represents a measure of use tax for liability arising when rental inventory was withdrawn and used by the lessor. Obviously it would not arise if the inventory property was held in a tax paid status, and this might be the case in the light of the above conclusion regarding statutory mergers. At the same time, the property might have been that which your client could not support as having been acquired with payment of sales or use tax. Thus, we are recommending that the measure of use tax be computed using a ration of tax paid and ex tax property in the absence of a showing that the property was tax paid. Item C represents a credit for tax paid on the cost price of equipment purchased after the merger. Tax was reported and paid by persons formerly with DEF who remained with the business after the merger. We understand that this was done contrary to ABC policy. It was disallowed by the auditor because the payment was not timely, in that it was not paid with the returns due from the rentals when the property was first rented. We have enclosed a copy of ruling 70 which covers this point. Thus, as to item C, we are of the opinion that the payment was properly disallowed. The credit will operate to reduce the measure of the tax; however, rental receipts from rentals of that property will always be subject to tax when held by ABC and rented in California. As we see it, by reason of the fact that there was some liability on rentals made by DEF before the merger (1-1-63 to 12-9-65), there will no doubt be some liability under item A in the ABC, Inc., determination after the reaudit because the same property is involved. It will be small, since the ABC Inc., audit period is less than seven months. Depending on how much this comes to, the disallowed payment of tax on cost price (item C) may wipe out the liability in both DEF and ABC, Inc. With respect to the penalty for failure to file returns which was discussed at the hearing, we again make reference to section 6592 of the Revenue and Taxation Code, as this is the only way relief can be had, if at all. We do not make recommendations on penalties where they have been asserted for failure to file returns. In your client’s case the failure to file was somewhat unusual because if your client had been issued a permit to report on a quarterly basis, the first return would

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August 14, 1969
330.2940

have been timely. We do not attempt to second guess the people who issue the permits, although it is noted that the merged corporation reported on an annual basis, and ABC, Inc., reported monthly. You will hear from the auditors after they have completed the reaudit and adjusted the tax measure in accordance with the above recommendations. Very truly yours,

Robert H. Anderson
Tax Counsel