Did one lease between commonly owned entities qualify as an occasional sale because it was a single agreement or preserved similar ownership?

Plain-English summary

Commonly owned lessors argued that equipment rentals were exempt for three reasons: the owners acquired interests in a predecessor partnership that held tax-paid property, there was only one lease agreement, and similar ultimate ownership made the lease an occasional sale.

The recommendation rejected each ground. Under the historical partnership rule applied, admitting a new partner created a new entity and did not preserve the predecessor partnership's ultimate ownership. A lease was also a continuing sale while the lessee possessed California property and made payments, so the lessor engaged in a series of taxable events requiring a permit.

Finally, section 6006.5(b) was construed to apply to outright property sales between entities, not a lease or rental between separate commonly owned entities. Common ownership alone created no exemption. The recommendation was to redetermine without adjustment.

The official PDF contains an internal wording conflict. One sentence says a transfer under general law "relates to a transfer of some lesser interest," but the immediately following sentence says the Board consistently applied the provision only to outright sales, and the operative conclusion excludes leases. CDTFA's annotation likewise states the outright-sale rule. This page preserves the source sentence without attempting to rewrite it.

Proceeding record and limits

Tax Counsel W. E. Burkett addressed counsel for the petitioner after an April 28 preliminary hearing in Pasadena. The letter organized the protest into three exemption arguments: inherited tax status through acquisition of partnership interests, a single lease as an occasional sale under section 6006.5(a), and common ownership under section 6006.5(b).

At the hearing, petitioner's counsel agreed to provide evidence that the individual lessors actually acquired interests in the predecessor partnership. Legal staff had received no evidence or other information by August 12. The recommendation nevertheless assumed those acquisitions and concluded that admitting a new partner created a new legal entity, so the individual owners did not continue the predecessor partnership's leasing activity and the ultimate ownership was not the same.

For the one-agreement argument, the source quotes section 6006.1's continuing-sale rule and section 6203's payment-time collection rule. It treated the recurring grant of possession and lease payments—not contract execution—as a series of taxable leasing sales that required a seller's permit.

The report says staff gave detailed tax-measure information at the preliminary hearing, but it makes no recommendation on any computation objection because counsel raised no specific question. It recommended redetermining the taxes without adjustment and said a later notice of redetermination would be the official action. That notice and final disposition are not included. Nor are the petition, lease, property schedule, purchase and tax-paid proof, partnership agreements, ownership records, promised evidence, permits, returns, rental invoices, payment history, tax computation, hearing submissions or transcript, July 28 hearing report, assessment, payment, claim, appeal, or later outcome.

The live annotation publishes only the third branch: a lease between commonly owned entities is not an outright transfer qualifying under Regulation 1595(b)(2). It omits the partnership-acquisition and continuing-sale arguments, missing promised evidence, April hearing, measure issue, recommendation, absent official notice, case citations, missing hearing report, and later-outcome gap. It also reads that a transfer relates to one person transferring to another and not to a transfer of some lesser interest; the PDF visibly lacks not, creating the internal conflict preserved here.

What this means for you

Equipment lessors under common ownership

One contract can generate recurring taxable lease sales, and common ownership does not collapse separate entities or automatically create occasional-sale treatment.

Accountants and tax professionals

Check acquisition tax status, every ownership change, legal-entity continuity, lease location and payments, and whether the claimed rule covers an outright transfer or only possession.

Common questions

Q: Was one lease agreement treated as one isolated sale?
A: No. The continuing grant of possession and periodic payments created a series of lease sales.

Q: Did common ownership make the lease occasional?
A: No. Separate commonly owned entities remained separate for the tax analysis.

Q: Did acquiring partnership interests preserve the predecessor's tax status?
A: Not under the historical entity and ownership analysis applied in the recommendation.

Q: What transfer did section 6006.5(b) cover under the operative conclusion?
A: Outright sales of property from one entity to another, not leases or rentals.

Q: Did the petitioner supply the promised partnership-interest evidence?

A: No evidence or other information had reached Legal staff by the letter's date; the analysis proceeded on an assumption that the interests were acquired.

Q: Did this report decide a challenge to the tax calculation?

A: No. Staff had discussed the method at the hearing, but the report made no recommendation because no specific computation question was raised.

Q: Does the PDF contain the official action on the petition?

A: No. It recommends redetermination without adjustment and says a later notice would constitute official action, but that notice is absent.

Citations and references

• California Revenue and Taxation Code §§ 6006(g)(5)(A), 6006.1, 6006.5(a)–(b), and 6203
• California Civil Code § 1039 and California Corporations Code § 1529
• Ellington v. Walsh, O'Connor & Barneson, 15 Cal.2d 673
• Northwestern Pacific Railway Co. v. State Board of Equalization, 21 Cal.2d 524
• Annotated Ruling 1620.75, California Tax Service — cited source not included
• July 28, 1971 hearing report — two copies described as attached but not included
• Petition, lease, property, acquisition-tax, partnership, ownership, permit, return, rental, payment, computation, hearing, notice, assessment, appeal, and later-outcome records — implicated but not documented

Verbatim support

From the official August 12, 1971 recommendation:

No evidence or other information has been received by this office to this date. However, assuming that the individual owners actually acquired partnership interest in the predecessor partnership it is nevertheless our conclusion that the individual lessors would not qualify for the exclusion provided by section 6006(g)(5)(A) of the code.

It is, therefore, clear that the taxable event is the continuing granting of possession under the lease agreement and not the execution of a lease or rental for a specified term.

However, under general law a transfer relates to a transfer of some lesser interest such as a bailment for hire (see Civil Code section 1039). Furthermore the board has consistently construed this provision as applying only to outright sales of property from one entity to another (see annotated ruling 1620.75, California Tax Service).

In view of the above stated conclusions we have recommended that the taxes be redetermined without adjustment. In due course your client will receive a notice of redetermination which will constitute official notice of the action taken on the petition.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0014
• Original supporting opinion: 395.0014 PDF

Original ruling text

395.0014

STATE OF CALIFORNIA

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

August 12, 1971

Mr. A--- A. A--A---, B--- & S--Attorneys At Law
XXX South --- Street, Suite XXXX
--- ---, CA XXXXX
SR – XX XXXXXX
--- & --- L--- Corporation
dba P--- M--- C--- C--Dear Mr. A---:
This is with reference to the above named taxpayer’s petition for redetermination of sales and use taxes which was reviewed at a preliminary hearing held in Pasadena on April 28. Our conclusions on the merits of the protest are set forth below preceded by a summary of each of the grounds discussed at the hearing. 1.

The rental transactions were exempt from tax because the
rental property was acquired by acquisition of partnership
interest in a partnership which held the property in exempt
status.

This claim for exemption is based upon the provisions of section 6006(g)(5)(A) of the Revenue and Taxation Code which in essence allows the lessor of personal property to retain the tax status of his transferor if (1) the transferor paid sales tax reimbursement or use tax on its acquisition of the assets and (2) the real or ultimate ownership of the lessor is substantially similar to that of the transferor (transfer described in section 6006.5(b) of the Revenue and Taxation Code). At the conclusion of the preliminary hearing you agreed to provide evidence to show that the individual lessors actually acquired partnership interest in the predecessor partnership. No evidence or other information has been received by this office to this date. However, assuming that the individual owners actually acquired partnership interest in the predecessor partnership it is nevertheless our conclusion that the individual lessors would not

Mr. A--- A. A--SR – XX XXXXXX

-2-

August 12, 1971
395.0014

qualify for the exclusion provided by section 6006(g)(5)(A) of the code. The admission of a new member into a partnership continuing the business results in the creation of a new legal entity (see Ellington v. Walsh, O’Connor & Barneson, 15 Cal. 2d 673; California Corporation Code section 1529). Thus the individual owners of the property did not carry on their leasing activities as members of the old partnership no could it be said that the real or ultimate owners of the property were the same of those of the predecessor partnership. 2.

There was only one rental or lease of tangible personal
property.
Accordingly, the transfer qualifies as an
occasional sale under section 6006.5(a) of the Revenue and
Taxation Code because petitioner was not required to hold
a seller’s permit for the purpose of making a single rental
sale.

Under the provisions of section 6006.1 of the Revenue and Taxation Code, the granting of possession of tangible personal property by a lessor to a lessee “is a continuing sale in this state by the lessor for the duration of the lease as respects any period of time the leased property is situated in this state, irrespective of the time or place of delivery of the property to the lessee or such other person.” Under section 6203 of the code a retailer is required to collect the tax from the lessee “at the time amounts are paid by the lessee under the lease.” Thus, it is clear that under the scheme of taxation of leasing sales the tax attaches while the lessee is in possession of the property and to the extent the lessee makes payments under the lease. It is, therefore, clear that the taxable event is the continuing granting of possession under the lease agreement and not the execution of a lease or rental for a specified term. Accordingly, it is our conclusion that there was a series of taxable events each constituting leasing sales and that petitioner was by reason of having made such series of leasing sales required to hold a seller’s permit. It follows that petitioner’s lease transactions would not qualify for exemption under section 6006.5(a) of the Revenue and Taxation Code. 3.

The rental transactions qualify as occasional sales under the provisions of Revenue and Taxation Code section 6006.5(b).

Revenue and Taxation Code section 6006.5(b) provides as follows: “‘Occasional sale’ includes:

“Any transfer of all or substantially all the property held or used by a person in the course of such activities when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer. For the purposes of this section, stockholders, bondholders, partners, or other persons holding an ownership interest in a corporation or other

Mr. A--- A. A--SR – XX XXXXXX

-3-

August 12, 1971
395.0014

entity are regarded as having the “real or ultimate ownership’ of the property of such corporation or other entity.” It is our conclusion that the transfer does not qualify as an occasional sale under this section of the law. The classification made by this provision of the law is conditioned upon their being a transfer of all or substantially all of the property held in the course of activities for which a seller’s permits are required. The term “transferor” is not afforded a special meaning under the Sales and Use Tax Law. However, under general law a transfer relates to a transfer of some lesser interest such as a bailment for hire (see Civil Code section 1039). Furthermore the board has consistently construed this provision as applying only to outright sales of property from one entity to another (see annotated ruling 1620.75, California Tax Service). Upon this analysis it is our conclusion that a lease or rental of tangible personal property between entities of common ownership does not qualify as an occasional sale under section 6006.5(b). I believe you are aware that the mere fact that separate legal entities are commonly owned does not of itself provide a basis for exemption under the Sales and Use Tax Law (see discussion in Northwestern Pacific Railway Co. v. State Board of Equalization, 21 Cal. 2d 524). At the preliminary hearing we provided you with detailed information as to the method of computing the rentals attributable to the tangible personal property. Since no specific question has been raised our report does not include any recommendation with respect to any objection you may have to the method of computing the measure of tax. In view of the above stated conclusions we have recommended that the taxes be redetermined without adjustment. In due course your client will receive a notice of redetermination which will constitute official notice of the action taken on the petition. Very truly yours,

W. E. Burkett
Tax Counsel

WEB:kc
bcc: --- --- – District Adm.
Attached are two copies of hearing report dated 7-28-71.