Would staff continue following a lease option and impose tax when the equipment sale occurred more than one year after the seller's permit closed?

Plain-English summary

Board staff reviewed conflicting older approaches to equipment sold after a business closed. A 1953 view placed a one-year limit on taxability after closeout, while a 1965 view taxed a sale two years later, possibly because the seller still held a permit.

The 1969 memorandum reasoned that as time passed, continued follow-up became more burdensome and the legal rationale for tax became more tenuous. It recommended not maintaining follow-up on a lease purchase option for more than one year after the seller's permit closed and not attempting to tax a later option exercise.

This was framed as an administrative disposition of an isolated case, not as a statutory holding. The complete memorandum does not state CDTFA's annotation-page condition concerning three or more substantial sales in 12 months; that condition should not be attributed to this supporting memorandum itself.

Internal record and limits

T. P. Putnam sent the September 18, 1969 memorandum to W. T. Denny after a discussion of a redacted equipment-after-closeout matter. Putnam said he was attaching a Lawrence A. Augusta memorandum and relevant materials Augusta had found. The published PDF includes only Putnam's two-page memorandum; none of the attachments is reproduced.

Putnam could not explain Mr. Stetson's 1953 one-year limit or Trigueros's 1965 two-year result. He offered an inference: Stetson may have weighed the increasing burden of follow-up and declining likelihood a court would uphold tax, while Trigueros may have relied partly on the seller apparently still holding a permit. The source supplies no date, title, text, facts, or legal citation for either prior item.

The memorandum also declined to modify or remove R. G. Hamlin's 1951 letter opinion from the California Tax Service because it had apparently been followed without administrative or legal problems. The extension question was described as isolated. Putnam suggested disposing of the redacted matter on his reasoning but offered to present the question to the Attorney General. The source does not include Denny's response, an Attorney General submission or opinion, the actual disposition, or later treatment.

No statute, regulation, or court decision is cited in the supporting memorandum. It does not supply the lease, option, seller identity, business facts, permit record, exact closeout or option-exercise date, sale amount, correspondence, audit material, tax calculation, assessment, payment, claim, appeal, or outcome.

The live annotation converts the memorandum into a concise rule: an option exercise more than one year after closeout is an occasional sale unless it is one of three or more substantial sales in 12 months under Regulation 1595(a)(1). The supporting memorandum instead recommends ending follow-up after one year as an administrative and litigation-risk judgment; it never states the three-sales condition or cites Regulation 1595.

What this means for you

Businesses with post-closeout purchase options

Do not treat the historical one-year practice as a current exemption. It reflected staff follow-up and litigation-risk judgment on an old isolated matter.

Accountants and tax professionals

Check current law, permit status, transaction timing, option documents, and other asset sales rather than relying only on the age of this memorandum.

Common questions

Q: Did the memorandum recommend follow-up beyond one year?
A: No. It recommended ending follow-up after one year from permit closeout.

Q: Why?
A: Administrative burden increased and staff believed a court was less likely to sustain tax as the delay grew.

Q: Did the memorandum announce a statute-based one-year safe harbor?
A: No. It described an internal administrative approach to an isolated issue.

Q: Does the complete memorandum state a three-sales condition?
A: No. That qualification appears in CDTFA's annotation summary, not in this supporting memorandum.

Q: Were the older opinions and underlying option records published with it?

A: No. The memorandum describes prior guidance and says an Augusta memorandum and related materials were attached, but the official PDF does not reproduce them or the lease and option.

Q: Was the issue sent to the Attorney General?

A: The author offered that route, but the published source does not show whether it happened or how the matter was finally disposed.

Citations and references

• California Sales and Use Tax Regulation 1595(a)(1) — cited only by the live annotation, not the supporting memorandum
• Lawrence A. Augusta memorandum and related attached material — referenced but not included
• Mr. Stetson's 1953 guidance, Trigueros's 1965 guidance, and R. G. Hamlin's 1951 letter opinion — described but not included
• Lease, option, permit, transaction, audit, tax, disposition, Attorney General, and later-treatment records — implicated but not documented

Verbatim support

From the official September 18, 1969 memorandum:

I am not sure what the explanation is for Mr. Stetson’s limitation or from Mr. Trigueros’ extension of that limitation.

I believe it is true that the longer the time between the close-out and the sale the more tenuous the rationale supporting the tax becomes and the less likely that a court would uphold it.

Accordingly, it is my opinion that we would be justified in not maintaining a follow-up on an option in a lease for longer than one year after close-out of the seller’s permit and in not attempting to impose tax on a sale pursuant to such an option.

I suggest disposing of the --- --- matter on the basis expressed in this memorandum. If you would like to have the question presented to the Attorney General, however, or if you have any other suggestions, please let me know.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0013
• Original supporting opinion: 395.0013 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

W. T. Denny

From:

T. P. Putnam

Subject:

Sales of Equipment After Close-out

395.0013

September 18, 1969

-- --- XX XXXXXX

In connection with our discussion of the above matter, I am attaching a copy of a memorandum from Mr. Lawrence A. Augusta together with som relevant material which he has discovered. The material which Mr. Augusta discovered indicates that in 1953 Mr. Stetson placed a one-year limit on the taxability of a sale after close-out. In 1965, however, Mr. Trigueros concluded that tax applied to a sale two years after the seller quit business. I am not sure what the explanation is for Mr. Stetson’s limitation or from Mr. Trigueros’ extension of that limitation. However, I am inclined to believe that Mr. Stetson felt that the longer the time between the close-out and the sale, the greater the administrative burden would be in maintaining follow-ups and the less likely that it would be that a court would sustain the application of tax. Mr. Trigueros’ extension of the limitation may have been based, at least in part, on the apparent fact that the seller still held a permit for the business at the time of the sale. I believe it is true that the longer the time between the close-out and the sale the more tenuous the rationale supporting the tax becomes and the less likely that a court would uphold it. Accordingly, it is my opinion that we would be justified in not maintaining a follow-up on an option in a lease for longer than one year after close-out of the seller’s permit and in not attempting to impose tax on a sale pursuant to such an option. It does not seem necessary or desirable to modify Mr. Hamlin’s letter opinion of 1951 or to remove it from the California Tax Service. It has been in the California Tax Service for many years and has apparently been followed without creating administrative or legal problems. The question arising from its extension to the --- --- case appears to be an isolated one.

Mr. W. T. Denny

-2-

September 18, 1969
395.0013

I suggest disposing of the --- --- matter on the basis expressed in this memorandum. If you would like to have the question presented to the Attorney General, however, or if you have any other suggestions, please let me know.

TPP:kc
Enclosure
cc:
Mr. R. G. Hamlin – w/attach.
Mr. C. H. Otterman – w/attach.
Mr. B. D. Doyle – w/attach.
Mr. H. A. Dickson – w/attach.
Mr. R. R. Gregory – w/attach.
Mr. L. A. Augusta – w/attach.