Which assumed obligations measured tax in a mixed-asset corporate transfer, and how was the taxable portion allocated?

Plain-English summary

A corporate seller proposed first receiving a subsidiary's assets through liquidation, then transferring a division and those former subsidiary assets to a newly formed corporation. The package included inventory, land, buildings, equipment, vehicles, intangibles, contracts, and specified assumed debts. The seller then planned to sell all stock of the new corporation to a wholly owned subsidiary of another corporation.

The letter agreed that the liquidating subsidiary's in-kind distribution to its parent was not a sale. It treated the next asset transfer as taxable because, on two express presumptions, it did not meet the occasional-sale rules: the assets served activities requiring a seller's permit, and they were not substantially all—80 percent or more—of the seller's property. The new corporation's assumed indebtedness was consideration.

Future obligations under leases, supply and service contracts, labor agreements, benefits plans, bids, and permits were excluded to the extent they arose after closing for benefits received after closing. Any pre-closing liability or obligation for pre-closing benefits was included. The measure was taxable consideration multiplied by the ratio of tangible personal property's fair market value to the fair market value of all transferred assets. The later corporate stock sale was not taxable because stock was not tangible personal property.

Proposed record, presumptions, and exclusions

The January 8 letter answered a December 24, 1986 request for an expedited opinion and reorganized the requester's four statements. All transaction steps were described in the future tense. The assets included cash, receivables, inventory, land, buildings, equipment, vehicles, other tangible and intangible assets, governmental licenses and permits, cement transport trucks, a Public Utilities Commission cement-carrier permit, and the operating agreements listed in Exhibit A.

Exhibit A lists real-property and equipment leases; construction, material, and supply contracts; contracts to provide or receive services; purchase and sale contracts; proposals and bids; collective-bargaining agreements; employee-benefit plans; and government licenses and permits. Exhibit B separately lists accounts payable and accrued expenses, including association dues, a water payable, property and fuel taxes, federal and state transportation taxes, royalties, an hourly pension plan, salary and wage accruals, and vacation accruals. The letter treats Exhibit B as seller indebtedness assumed at closing, while separating future obligations for future benefits under Exhibit A.

The occasional-sale conclusion is conditional. The letter says the assets were presumably used in activities requiring a seller's permit and presumably were not substantially all—80 percent or more—of the seller's property. It provides no permit record, asset totals, or values to establish either premise. It also does not include the December 24 request, corporate records, liquidation documents, formation documents, transfer and stock-sale agreements, debt instruments, closing statements, valuations, allocation, invoices, tax returns, tax calculation or payment, audit, dispute, or later outcome.

Two equipment leases covered a dredge and concrete mixer trucks and included purchase options. The seller would either exercise the options or transfer the leases so the purchaser could exercise them, and the requester said the buyer would pay the resulting sales tax. Because no opinion was requested on those exercises, the letter expressly did not consider them.

The live annotation preserves the operating-agreement categories and the line between post-closing obligations for post-closing benefits and liabilities tied to pre-closing benefits. It also specifies vacation, pension, salary, and royalty accruals as included. It omits the four-question structure, five-entity sequence, exhibits' other liabilities and assets, two presumptions controlling occasional-sale treatment, excluded purchase options, mixed-asset allocation formula, liquidating dividend, stock-sale answer, cited historical annotations, and absence of implementation or outcome records.

What this means for you

Businesses transferring mixed assets and contracts

Taking over a contract is not automatically assumed debt. The timing of the obligation and who received the related benefit control its treatment.

Accountants and tax professionals

Build a closing-date liability schedule, classify pre- and post-closing benefits, and support fair-market-value allocations across tangible, real, and intangible property.

Common questions

Q: Was the subsidiary's liquidating distribution taxable?
A: No. The letter treated the in-kind liquidating dividend as not a sale.

Q: Which operating-agreement obligations were excluded?
A: Obligations incurred after closing for benefits the new corporation received after closing.

Q: Which obligations were included?
A: Listed assumed debt plus liabilities incurred before closing or tied to benefits received before closing.

Q: How was consideration allocated to taxable property?
A: By multiplying total taxable consideration by tangible personal property's fair-value percentage among all transferred assets.

Q: Did the letter establish that the transfer failed the occasional-sale thresholds?

A: It expressly presumed both that the assets served seller's-permit activities and that they were less than 80 percent of the seller's property; it did not supply records establishing those points.

Q: Did the opinion cover exercise of the equipment purchase options?

A: No. The requester said the buyer would pay the resulting sales tax and did not ask for an opinion on those exercises.

Q: Does the source show that the proposed restructuring closed?

A: No. It supplies the requested prospective analysis but no executed closing, valuation, tax-payment, audit, or later-outcome records.

Citations and references

• California Revenue and Taxation Code §§ 6006, 6006.5, 6012, 6051, 6281, and 6367
• California Sales and Use Tax Regulation 1595(b), (b)(4), and (c)
• Business Taxes Law Guide Annotation 395.2280 (January 3, 1963) — cited source not included
• Business Taxes Law Guide Annotations 395.1040 (March 10, 1959) and 395.1260 (November 12, 1958) — cited sources not included
• Exhibit A operating agreements and Exhibit B liabilities — included in the official PDF
• December 24, 1986 request and corporate, liquidation, formation, transfer, stock-sale, debt, closing, valuation, allocation, tax, audit, dispute, and later-outcome records — implicated but not documented

Verbatim support

From the official January 8, 1987 letter:

The assets to be transferred are presumably used in the course of activities requiring a seller’s permit. Therefore, the transfer is not an occasional sale under section 6006.5(a). The assets transferred to [LGI] presumably are not substantially all the property (80% or more) held by Seller.

Liabilities incurred under the operating agreements will not be included in the measure of tax to the extent that those liabilities are incurred after the closing and are for benefits received after the closing.

If tangible personal property is sold along with real estate and intangible property, we determine the percentage that the fair market value of the tangible personal property bears to the fair market value of all assets transferred.

Stock in a corporation is not tangible personal property for purposes of California sales tax. Therefore, sale of the stock of [LGI] to Purchaser for cash or equivalent (bank to bank transfer, draft, check, etc.) is not subject to sales tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0011
• Original supporting opinion: 395.0011 PDF

Original ruling text

395.0011

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

January 8, 1987

--- [R]
[L]
XXX --- ----- ---, CA XXXXX-XXXX

Re:

F- --- XX-XXXXXX
S- --- XX-XXXXXX

Dear Mr. [R]:
This is in response to your letter dated December 24, 1986 to Tax Counsel E. L. Sorensen in which you ask for our expedited opinion regarding the measure of sales tax on transactions that result in the sale of businesses. Five entities are involved in transactions which result in [S] Corporation (“Seller”) selling a newly formed corporation, [LGI], to a wholly-owned subsidiary of [G] (“Purchaser”). Seller will transfer the assets of [LG], a division of Seller, and [LT], a wholly-owned subsidiary of Seller, to
[LGI] before [LGI] is sold to purchaser.
The assets of [LG] which Seller will transfer to [LGI] consist of cash, receivables, inventory, land, buildings, equipment, vehicles, and other tangible and intangible assets (including governmental licenses and permits). Seller will also transfer the various contractual rights of [LG] described in Exhibit A (“operating agreements”). The assets of [LT] which Seller will transfer to [LGI] consist of cement transport trucks, PUC cement carrier permit, and certain operating agreements described in Exhibit A. The operating agreements do not involve any liability for goods, services, or money received prior to the time the transfers to [LGI] are closed, although each may involve future obligations arising for future value in the normal course of business. Seller will liquidate [LT] and, in exchange for all [LGI]’s stock, will transfer to [LGI] substantially all the assets of [LG] and [LT], subject only to certain debts described in Exhibit B (“assumed indebtedness”) and future obligations arising under the operating agreements. Seller will

[S]

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January 8, 1987
395.0011

then sell all stock of [LGI] to Purchaser. Except for the assumed indebtedness, Seller will retain all other indebtedness of [LG] and [LT]. Seller is a party to two equipment leases with purchase options covering a dredge and certain concrete mixer trucks which are essential to [LG]’s business. Seller will either exercise the purchase options and pay the purchase prices, or transfer the leases to Purchaser who will then exercise the purchase options and make the equipment available to [LGI]. Sales tax resulting from the exercise of the purchase options will be paid by the buyer (that is, Seller or Purchaser) and you do not request an opinion with regard to the exercise of these purchase options. We therefore do not consider the exercise of these purchase options in this opinion. You ask us to agree with four statements. I have rephrased your statements and discuss each below. STATEMENT 1 California sales tax does not apply to the dissolution of [LT] and liquidating distribution of
[LT]’s assets to seller.
DISCUSSION
We agree. A liquidating dividend does not constitute a sale under Revenue and Taxation Code (all references to sections are to this code) section 6006. (Business Taxes Law Guide (“BTLG”) Annotation 395.2280 (1/3/63).) As a liquidating dividend, the transfer of [LT]’s assets to Seller is not subject to sales tax. STATEMENT 2 The sales tax applicable to Seller’s transfer to [LGI] of the assets held by [LG] and those previously held by [LT] will be measured by the indebtedness of Seller assumed by [LGI]. For purposes of this opinion, the assumed indebtedness listed in Exhibit B constitutes an indebtedness of Seller whereas the operating agreements listed in Exhibit A do not constitute indebtedness of Seller. DISCUSSION We agree. The transfer of assets to [LGI] does not qualify as an exempt occasional sale under sections 6006.5, 6281, and 6367. The assets to be transferred are presumably used in the course of activities requiring a seller’s permit. Therefore, the transfer is not an occasional sale under section 6006.5(a). The assets transferred to [LGI] presumably are not substantially all the property (80% or more) held by Seller. Therefore, the transaction is not an occasional sale under section 6006.5(b) and is not exempt under sections 6281 and 6367. (Sales and Use Tax Regulation 1595(b) & (c).)

[S]

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January 8, 1987
395.0011

Since the transfer of assets to [LGI] is not exempt, the measure of the sales tax is the consideration received by Seller for the transfer of tangible personal property. (§§ 6012, 6051.) That consideration is the assumed indebtedness. (Reg. 1595(b)(4).) Liabilities incurred under the operating agreements will not be included in the measure of tax to the extent that those liabilities are incurred after the closing and are for benefits received after the closing. However, any liabilities incurred under the operating agreements prior to the date of closing the transfer to [LGI] and any liabilities related to benefits received by [LG], [LT], and Seller prior to closing the transfer to [LGI] will be included in the measure of tax. STATEMENT 3 The actual measure of the sales tax is the percentage that the fair market value of the tangible personal property transferred bears to the fair market value of all assets transferred, multiplied by the taxable consideration received (that is, the assumed indebtedness). DISCUSSION We agree. Only the sale of tangible personal property is subject to sales tax. (§ 6051; see BTLG 395.1040 (3/10/59), 395.1260 (11/12/58).) If tangible personal property is sold along with real estate and intangible property, we determine the percentage that the fair market value of the tangible personal property bears to the fair market value of all assets transferred. That percentage of the consideration received by the transferor is attributed to the transferred tangible personal property and is subject to sales tax. STATEMENT 4 Sales tax will not apply to the sale by Seller of [LGI] stock to purchaser. DISCUSSION We agree. As discussed above, sales tax applies only to the sale of tangible personal property. Stock in a corporation is not tangible personal property for purposes of California sales tax. Therefore, sale of the stock of [LGI] to Purchaser for cash or equivalent (bank to bank transfer, draft, check, etc.) is not subject to sales tax. If the discussion herein of the restatements of your requests does not answer all your questions, feel free to write us again. Sincerely,

David H. Levine
Tax Counsel

[S]

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OPERATING AGREEMENTS
1.

Leases of real property and equipment;

2.

Construction, materials and supply contracts;

3.

Contracts to render or receive services;

4.

Contracts to sell or buy goods;

5.

Proposals and bids;

6.

Collective bargaining agreements, and
Employee benefit plans and related
Agreements; and

7.

Miscellaneous governmental licenses and
Permits.

EXHIBIT A

January 8, 1987
395.0011

[S]

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LIABILITIES TO BE ASSUMED
BY [LGI] AT CLOSING

ACCOUNTS PAYABLE
Accts. Payable – Deferred
Association Dues
San Gabriel Water Payable

ACCRUED EXPENSES AND OTHER
LIABILITIES
.
Taxes – Property & General
State Fuel Taxes
Federal Transportation
Taxes
Royalties Payable
Pension Plan – Hourly
Salaries and Wage Accrual
Vacation Pay Accrual
State Transportation
Taxes

EXHIBIT B

January 8, 1987
395.0011