Was a seller-mortgagee's reacquisition of restaurant equipment after buyer default a taxable sale when the purchase-money debt was cancelled?

Plain-English summary

Restaurant owners sold a business and equipment for $100,000 under a purchase-money chattel mortgage. After the buyer paid about $44,000 and defaulted, the sellers repossessed the collateral in full satisfaction of an unpaid balance of about $78,000 including interest.

California said the reacquisition was not a taxable sale. It occurred under the original purchase-money mortgage, and cancelling the remaining note did not create an entirely separate transfer by the defaulting buyer back to the seller.

The memorandum contrasted a nonpurchase-money mortgage. If a mortgagor transferred beneficial interest and title to satisfy that separate debt in lieu of foreclosure, the transfer could be a taxable sale for consideration under section 6006(a).

Source and live-annotation limits

The memorandum does not reproduce the April 3 and June 15 audit requests or identify “A” and “B.” It supplies no restaurant business or equipment, sale contract, $32,000 declared equipment value evidence, lease or improvements, mortgage and note, $15,000 down payment, $750 monthly payments, approximately $44,000 paid, approximately $78,000 balance with interest, default, March 1, 1967 retention agreement, repossession record, debt cancellation, tax return, audit, assessment, or later outcome. An April 28, 1952 Attorney General's office letter described as enclosed is absent.

The live annotation preserves the purchase-money reacquisition/no-sale rule and nonpurchase-money transfer/taxable-sale contrast. It omits the internal audit posture, request dates, restaurant facts, every dollar amount, lease and improvements, payment and agreement dates, section 6006(a), missing records and Attorney General letter, and later-outcome gap.

What this means for you

Secured sellers, buyers, and tax professionals

Identify whether the security interest is purchase-money or later nonpurchase-money debt, then document the original sale, collateral, default, repossession agreement, title transfer, and consideration released.

Common questions

Q: Was the purchase-money reacquisition taxable?

A: No.

Q: Why not?

A: It was a repossession under the original purchase-money mortgage, not a separate sale back by the buyer.

Q: Could a nonpurchase-money transfer be taxable?

A: Yes, when title transferred for cancellation of that obligation as described.

Citations and references

• California Revenue and Taxation Code § 6006(a)
• April 3 and June 15 audit memoranda and April 28, 1952 Attorney General's office letter to the Board — described or referenced but not included
• Restaurant sale, purchase-money chattel mortgage, lease, improvements, payments, default, and March 1, 1967 agreement — described but not included

Verbatim support

From the official June 27, 1967 memorandum:

Where a purchaser-mortgagor is in default and the seller-mortgagee reacquires the property by agreement pursuant to a purchase money mortgage and the only consideration received by the mortgagor from the mortgagee is a cancellation of the unpaid balance of the mortgage note, it has been our position that the reacquisition does not constitute a taxable sale.

Inasmuch as the subject sales transaction and security arrangement appears to fall within the purchase money mortgage category, we are of the opinion that "A"'s reacquisition of the restaurant equipment does not constitute a taxable sale.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 365.0040
• Original supporting opinion: 365.0040 PDF

Original ruling text

365.0040

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
June 27, 1967
To:

San Jose - Auditing

From:

Tax Counsel (EDM)

We regret our delay in reply to your memoranda of April 3 and June 15, in which you ask our opinion with respect to the application of the tax to the following sales transaction and security arrangements. In November of 1963, "A", owners of a restaurant business and equipment therein, sold the business and equipment to "B" pursuant to a purchase money chattel mortgage. The original sales price was $100,000. The equipment assets declared value was $32,000. There is a valuable lease involved and improvements. The down payment was $15,000 with payments of $750 per month. "B" paid about $44,000 before he defaulted. With interest, the balance is about $78,000. "A" (the secured party) repossessed the property under the purchase money chattel mortgage on "B"'s default. "A"'s action was taken pursuant to an agreement with "B" entered into on March 1, 1967, whereby "A" proposed to retain the collateral (property) covered by said chattel mortgage, in full satisfaction of the mortgagor debtor's ("B") obligation. Where a purchaser-mortgagor is in default and the seller-mortgagee reacquires the property by agreement pursuant to a purchase money mortgage and the only consideration received by the mortgagor from the mortgagee is a cancellation of the unpaid balance of the mortgage note, it has been our position that the reacquisition does not constitute a taxable sale. On the other hand, where a purchasing-mortgagor under a nonpurchase money mortgage defaults in payment and, by agreement in lieu of foreclosure, transfers his beneficial interest and title in the mortgaged property to the seller-mortgagee in exchange for a cancellation of the mortgagor's obligation under the chattel mortgage, we believe that the reacquisition by the sellermortgagee constitutes a taxable sale under Section 6006(a) in that it entails a transfer of title of tangible personal property for a consideration. Inasmuch as the subject sales transaction and security arrangement appears to fall within the purchase money mortgage category, we are of the opinion that "A"'s reacquisition of the restaurant equipment does not constitute a taxable sale. This conclusion is attributable to the fact that when "B" defaulted on its "purchase money mortgage" and "A" reacquired the property in full satisfaction of "B"'s mortgage obligation, it could not be said that "B" entered into an entirely separate transaction whereby he transferred title in tangible personal property to "A" • For your further information, with respect to this matter, we are enclosing a letter relating to a similar problem from the Attorney General's office to this Board dated April 28, 1952. EDM:mm [lb]