Was a business-asset sale-and-leaseback merely secured financing, or did title pass so the leaseback or conditional sale became taxable?

Plain-English summary

A business owner sold all or part of its assets to a taxpayer and leased them back. The memorandum describes affixed carpets and wall panels, furniture and other property. Title reportedly returned automatically after the required payments, but the Security Agreement did not say so. The issue was whether the taxpayer acquired ownership or only a security interest.

The memorandum instead found support for actual title transfer. An assignment represented the taxpayer as lawful owner, the lessee agreed to insure property leased from the taxpayer, and the taxpayer lacked the broker license that the source said a financing business would have required. Absent clear contrary proof, the Board treated the taxpayer as owner.

Because title passed and ultimately returned after payments, the arrangement was taxable as either a lease in lieu of sale or a conditional sale. If acquisition was tax-paid, tax was measured by the spread between cost and total contract amount, less interest; if ex-tax, the total contract amount less interest was the measure.

Readily removable items were tangible personal property. The parties' agreement that affixed assets remained personal property supported that classification where the items reasonably could be treated that way.

Evidence and limits of the conclusion

The November 28, 1966 headquarters memorandum to San Bernardino auditing says counsel reviewed transaction documents and auditor W. B. Flynn's July 29, 1966 memorandum. Those materials are not attached. The automatic return of title was reported to a redacted person, not expressed in the Security Agreement, and counsel acknowledged uncertainty about the interest the taxpayer received.

Three facts supported the ownership inference: the Assignment of Lease to Union Bank warranted that the taxpayer was the lawful owner; the Agreement to Furnish Insurance made the business owner responsible as lessee; and the Corporation Commissioner's office reportedly confirmed that the taxpayer lacked a Personal Property Broker's license. Under the historical Financial Code provisions cited, an unlicensed financing business would be a misdemeanor. The memorandum presumed the taxpayer did not intentionally act illegally, but expressly allowed “clear and convincing evidence to the contrary.” It did not adjudicate a licensing offense.

The tax calculations were alternatives, not findings that either acquisition-tax history had been proved. Allowed interest would be the amount on the promissory notes described under “Debts” in the Security Agreement. Counsel did not possess those notes and could not identify the rate. No purchase cost, total contract price, interest amount or computed assessment is supplied.

Former Ruling 11's materials/fixtures distinction ordinarily guided whether an item was integral to the premises unless the parties expressed a contrary intent. Paragraph IV of this Security Agreement said assets remained personal property despite attachment. Counsel applied that expression only to assets “reasonably capable of being considered personal property”; the opinion did not make every affixed asset taxable by label alone.

The live annotation describes a sale of real property and personal property within it. The PDF describes business assets, including items affixed to realty, but supplies no separate real-estate conveyance. The live entry also omits the tax-measure alternatives, missing notes and item-classification analysis. This page follows the fuller memorandum without inferring missing transaction records or a later assessment outcome.

Common questions

Did calling the document a security agreement settle the issue?

No. The memorandum considered the full set of ownership, lease, insurance, and licensing facts.

Why did licensing matter?

The source inferred the taxpayer was not intentionally operating an unlicensed personal-property-broker business.

Did tax-paid acquisition change the measure?

Yes. It allowed cost to be removed from the contract measure, with stated interest also excluded.

Were all affixed assets automatically real property?

No. Removability and the parties' express personal-property treatment mattered.

Did counsel review the promissory notes or establish an interest rate?

No. The notes were missing, so the allowed-interest calculation could not be completed from the published record.

Citations and references

• Former Cal. Fin. Code §§ 22200, 22653, and 23009 — licensing provisions used in the source's financing-versus-ownership inference
• Former Ruling 11 — materials-versus-fixtures distinction cited for realty classification

Verbatim support

From the official memorandum:

Although there is some question as to what interest taxpayer received, we are of the opinion that the following factors support our position that taxpayer became the owner of the property:

Since we do not have a copy of these notes, we are unable to tell what the interest rate is.

these assets that are reasonably capable of being considered personal property should be considered as such for sales tax purposes.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/330-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-5270.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Bernardino - Auditing (BM)

From:

Tax Counsel (EHS:CLR) - Headquarters

330.5270

Date:

November 28, 1966

Subject:

I have examined the copies of the various documents from you in the transactions of the above captioned matter including the memorandum of auditor W. B. Flynn dated July 29, 1966. We understand the taxpayer engages in the following type of transaction: "X," an owner of a business, sells all or a portion of its assets to taxpayer who leases it back to X. The assets include property such as carpets and wall panels affixed to the real property as well as furniture and other property. Although it is not stated in the "Security Agreement," Mr. --- was informed that title to the assets automatically passes to X when the amount due taxpayer per the "Security Agreement" is paid. The initial problem to be solved in determining the taxability of transactions is whether or not title to the property passed to the taxpayer or whether he merely received a security interest. Although there is some question as to what interest taxpayer received, we are of the opinion that the following factors support our position that taxpayer became the owner of the property: 1. The Assignment of Lease between taxpayer and Union Bank provides "Lessor hereby represents and warrants to Bank that it is the lawful owner of the property ...." 2. The Agreement to Furnish Insurance, entered into between X and taxpayer, provides X as lessee would provide the insurance. If taxpayer did not become the owner of the property, he would have nothing to lease back to X. 3. If taxpayer was not the owner of the property, the transaction would be considered a financing arrangement and not a sale. If this were the case, the taxpayer would be engaged in the business of a Personal Property Broker (§ 23009 of the Financial Code), and as such, would

be required under § 22200 of the code to obtain a license from the Corporation Commissioner. Without the license, taxpayer would be guilty of a misdemeanor under § 22653 of the code. We have checked with the commissioner's office and were informed taxpayer does not have a Personal Property Broker's license. Since it is presumed that a person does not intentionally engage in an illegal activity, we are of the opinion that, absent clear and convincing evidence to the contrary, the taxpayer must be considered to have received title to the property. Assuming that title to the property initially passed to the taxpayer, we are then faced with the question of the application of tax to the lease back to X. We understand that if all required payments were made, title to the property will ultimately reside in X. Under such circumstances, the transaction would be considered taxable, either as a lease in lieu of sale or as a conditional sale contract. For our purposes, it makes no difference which characterization we use. However, the amount of tax due from taxpayer will depend on which of the following circumstances are applicable: 1. If taxpayer purchased the property tax paid, the tax due form taxpayer would be computed on the difference between his cost and the total amount of the lease or conditional sales contract, less interest. The amount of interest allowed would be the amount appearing on the promissory note or notes executed by X in favor of taxpayer per the terms of the "Security Agreement" under the heading "Debts." Since we do not have a copy of these notes, we are unable to tell what the interest rate is. 2. If taxpayer purchased the property ex tax, the tax due would be computed on the total amount of the lease or conditional sales contract, less interest. Sales of readily removable items that are not an integral part of the premises are treated as sales of tangible personal property and subject to sales tax. In determining what items are an integral part of the premises, it is proper to be guided by the distinction made in ruling 11 between "materials" and "fixtures." However, this guideline is ordinarily used only when there is no expression of the parties to the contrary. Such an expression is found in paragraph IV of the "Security Agreement" which provides that all assets are to remain personal property even though they are affixed to the real property. Accordingly, we are of the opinion that these assets that are reasonably capable of being considered personal property should be considered as such for sales tax purposes.

CLR:md
cc:

Santa Ana - Subdistrict Administrator