Did assigning an existing tax-paid equipment lease to a new subsidiary make the remaining rental payments taxable?

Plain-English summary

An absent November 26, 1996 internal request supplied an absent October 28 letter from a redacted lessor's accounting manager. The letter described an out-of-state lessor that timely elected upfront sales/use tax on office-furniture and computer cost under a true lease.

About a year later, the lessor proposed assigning the lease and transferring all rights, title and equipment interest to a new wholly owned subsidiary serving the same end user. The subsidiary would register to bill, collect and remit tax; no new lease would be signed with the lessee, and an assignment would substantiate title. None of those documents or events is published.

Sections 6051, 6201 and 6401 supplied the general sales/use framework. Regulation 1595(b)(4) excluded a commencing-corporation property transfer solely for its first-issue stock. Any other consideration would be taxable gross receipts to that extent.

Assuming no mobile transportation equipment, sections 6006(g)(5), 6006.1, 6010(e)(5), 6010.1 and regulation 1660(b)(1)/(c)(2) treated a lease as continuing unless substantially-same-form property carried a timely purchase-price tax election. Counsel understood the original lessor paid that tax; regulation 1660(c)(3) made the election irrevocable, so its lease was not a continuing sale.

Under regulation 1660(c)(9), transferring an existing tax-paid lease with the property did not tax the assignee's rent during that lease term. The memo illustrates with a one-year existing lease. A renewal or new lease was generally taxable on rent under regulation 1660(c)(1).

The footnote said a purchaser of property subject to a tax-paid lease could not collect tax on rent and instead paid tax on cost under sections 6006(g)(5), 6010(e)(5), 6094.1 and regulation 1660(c)(9). It said this subsidiary was not a purchaser because its transfer was solely for first-issue stock.

Live Annotation 330.3634 adds that the new lessor neither paid acquisition tax nor inherited tax-paid status because the transfer was not substantially all of the parent's tangible personal property. That substantially-all fact is not in the PDF. The live text still preserves tax-free rent only for the current lease and taxable renewal/new-lease treatment.

No request, manager letter, property list, lease, tax election/payment, assignment, stock issuance, liability or other-consideration evidence, registration, transfer, rent, renewal, tax report, audit or later outcome appears.

Common questions

Did the assignment itself tax the remaining rents?

No, under the stated first-issue-stock transfer facts.

What if the parent received other consideration?

That consideration was taxable gross receipts.

Did a later renewal keep the old tax-paid status?

Generally no. The source says a renewal or new lease would usually be taxable on rentals.

What assumptions controlled the opinion?

A true lease of office furniture and computers, timely purchase-price tax, no mobile transportation equipment, and a direct transfer to a new wholly owned subsidiary solely for first-issue stock.

Was the subsidiary a purchaser under the PDF's analysis?

No. The footnote says the solely-for-first-issue-stock transfer made it a non-purchaser for that discussion.

What additional fact appears only in the live annotation?

It says the transfer was not substantially all of the original lessor's tangible personal property, so the subsidiary did not receive the property's tax-paid status.

Were the assignment, stock and tax proof published?

No. The source describes a proposed transaction and supplies none of those records or a later outcome.

Citations and references

• Revenue and Taxation Code sections 6051, 6201 and 6401 — sales/use tax framework
• Regulation 1595(b)(4) — commencing-corporation transfer solely for first-issue stock
• Revenue and Taxation Code sections 6006(g)(5), 6006.1, 6010(e)(5) and 6010.1; regulation 1660(b)(1)/(c)(2) — continuing lease and same-form exception
• Regulation 1660(c)(3) — irrevocable acquisition-tax election
• Regulation 1660(c)(9) — assignment of an existing tax-paid lease and purchaser treatment
• Revenue and Taxation Code section 6094.1 — purchaser footnote
• Regulation 1660(c)(1) — renewed or new continuing leases measured by rentals
• Live Annotation 330.3634 — existing-term result plus live-only substantially-all-property fact
• Requests, transaction documents, tax proof, property, stock, transfer, rent, renewal and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3634
• Original supporting opinion: 330.3634 PDF

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

Memorandum
330.3634
To :

Mr. J. W. Cornelius, Supervisor
Audit Evaluation and Planning Section
(MIC:40)

From :

Sophia H. Chung
Tax Counsel

Subject:

F--- C--- Leasing
SS -- XX-XXXXXX

Date: January 24, 1997

Telephone: 324-2614

Your memorandum dated November 26, 1996, addressed to Mr. David H. Levine, Supervising Tax Counsel, has been referred to me for response. You request a legal opinion regarding the application of tax to the F--- C--- Leasing’s (“FCL”) proposed transfer of certain leased property, together with an assignment of the lease, to its whollyowned subsidiary. With your memorandum, you furnished us with a copy of a letter dated October 28, 1996, from Ms. C--- C---, Accounting Manager of FCL. In that letter, Ms. C--- provides the following factual background: “F--- C--- Leasing (FCL) is an out of state lessor which has made a timely election to pay sales/use tax upfront based on the cost of the equipment (office furniture and computers) being leased under a true lease transaction. Approximately one year later, FCL will transfer the lease, including all rights, title, and interest in the equipment, to a newly formed subsidiary which will continue to lease the equipment to the same end user. Although the new subsidiary will be registered to bill/collect/remit tax as a leasing company, there will be no new lease documentation between the lessee and the new subsidiary. An assignment document between FCL and new subsidiary will be used to substantiate the transfer of title.” DISCUSSION As you know, retail sales of tangible personal property in California are subject to sales tax, measured by the gross receipts, unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) When sales tax does not apply, use tax, measured by the sales price, applies to the use of tangible personal property purchased from a retailer for storage, use, or other consumption in California, unless the use is exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401.)

Mr. J. W. Cornelius

-2-

January 24, 1997
330.3634

Sales and Use Tax Regulation 1595(b)(4) provides that tax does not apply to a transfer of property to a commencing corporation in exchange solely for first issue stock of the commencing corporation. Thus, if FCL transfers assets directly to its whollyowned subsidiary solely in exchange for first issue stock of the subsidiary, such transfer is not subject to tax. To the extent that FCL receives consideration other than the commencing corporation’s first issue stock, such consideration constitutes gross receipts which are subject to tax. (Id.) With regard to the assignment of the lease, we assume that none of the property transferred constitutes mobile transportation equipment. A lease of tangible personal property in California is a continuing sale and purchase unless the lessor leases the property in substantially the same form as acquired and timely pays sales tax reimbursement or use tax measured by the purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1; Reg. 1660 (b)(1) and (c)(2).) Our understanding is that the lessor, FCL, timely paid the applicable sales or use tax measured by the purchase price of the property. The payment of the tax or tax reimbursement by FCL at the time the property was acquired constituted an irrevocable election not to pay tax measured by rentals receipts. (See Reg. 1660 (c)(3).) Thus, the lease between FCL and the lessee is not a continuing sale and purchase under the Sales and Use Tax Law. 1 When property subject to an existing tax-paid lease is transferred, together with an assignment of the existing lease, as in this case, the rental payments received by the assignee during the term of that lease are not subject to tax. (Reg. 1660 (c)(9).) For example, if the term of the existing lease between FCL and the lessee is for a period of one year, the rentals received by the assignee, FCL’s whollyowned subsidiary, during the one-year period would not be subject to tax. However, a renewal of the existing lease or any new lease would generally be a continuing sale and purchase, subject to use tax measured by rentals payable. (See Reg. 1660(c)(1).)

SHC:cl
cc:

1

--- --- District Administrator

We note that a purchaser of property subject to an existing tax-paid lease cannot collect tax on rentals, but rather is required to pay tax on cost. (Rev. & Tax. Code §§ 6006(g)(5), 6010(e)(5), 6094.1; Reg. 1660(c)(9).) Here, however, FCL’s wholly-owned subsidiary is not a purchaser since the transfer of the property to the subsidiary is solely in exchange for first issue stock of the commencing corporation.