Was a thrift branch asset sale exempt because taking deposits and making loans were service activities?

Plain-English summary

A thrift institution took deposits and made loans, but it also acquired equipment lease contracts, regularly entered automobile leases taxed on rentals, and sold checks at retail.

The memorandum found taxable sales in three transactions. Assignments of equipment leases and the underlying property were sales. A $5.6 million sale of an 80-percent lease-contract interest was taxable under the assumptions that the equipment was in California and the leases were not continuing sales. The branch description says the buyer assumed about $9 million in thrift deposits and lists premises rights, certificate loans, lease-contract receivables, leasehold improvements, furniture, fixtures, $300,000 cash, and a promissory note. Its punctuation and missing Exhibit D do not permit a confident allocation of each item or form of consideration.

The branch sale was not occasional. Equipment leasing and check sales were integrated with the institution's loan and depository activities, so the tangible property belonged to one business requiring a seller's permit.

Proceeding record and limits

An unidentified person sent a July 18, 1984 memorandum describing three transactions and attached related exhibits. HQ-Legal, identified only by the initials ELS, responded on August 16 by repeating each description and giving its tax opinion. The official PDF does not include the incoming memorandum or any of Exhibits A–D.

For Transaction 1, the thrift acquired office- and shop-equipment lease contracts through assignments from leasing companies. The original lessors had paid sales or use tax on equipment cost, and assignments occurred either with the original lease or months later. Counsel treated the assignments and leased tangible property as taxable sales measured by the item sales prices, citing Regulations 1596(a), 1595(b), and 1660(c)(9)(A). Exhibit A's sample leases and assignment agreements are absent.

For Transaction 2, the thrift sold an undivided 80-percent interest in the contracts to a redacted out-of-state leasing company for $5.6 million on December 29, 1983 and gave the buyer a security interest in the remaining 20 percent. Counsel expressly assumed that all transferred equipment was in California and none of the leases were continuing sales and purchases; only on those assumptions did it locate the sale here and measure tax by the equipment sales price. The source does not provide Exhibit B, Exhibit C, equipment schedules, locations, values, or lease tax terms.

Transaction 3 occurred the same day. The memorandum's single sentence says the buyer assumed approximately $9 million of outstanding thrift deposits in exchange for listed branch interests and then, inside an unclosed parenthetical, mentions lease-contract receivables plus $300,000 cash for improvements, furniture and fixtures, and a promissory note. Missing Exhibit D leaves unclear who transferred the cash or note and how each element was allocated. Counsel states only that tax was due based on the tangible property's sales price; it gives no taxable measure.

The thrift also regularly entered numerous automobile leases treated as continuing sales and purchases, collected and reported tax on rental receipts, and routinely sold checks at retail and reported tax. Counsel distinguished Ontario Community Foundation: that case concerned a hospital's one-time liquidation, with a concession for cafeteria and pharmacy property used in taxable nonpatient sales. Here, it treated leasing and check sales as inseparable from loans and deposits, so it said it did not reach the unitary-business concept that the court had struck down.

The PDF supplies no entity names, request memorandum, exhibits, Board determination, leases, assignments, equipment inventory, locations, tax-paid proof, security agreement, branch-sale agreement, asset allocation, deposit records, check-sales records, automobile leases, returns, audit, assessment, protest, hearing, payment, appeal, or later outcome. It also visibly prints Reg. l596, Reg. l595, Reg. l660, and § 60l0.5 with lowercase l characters. Its Ontario Community Foundation citation is 33 Cal.3d 811; the matching opinion record reports 35 Cal.3d 811, while 33 Cal.3d 811 resolves to the unrelated In re Atiles. This page therefore preserves and discloses the source's reporter-volume error rather than changing the original tail.

The live annotation supplies the neutral label Corporation A and preserves the three transactions, tax-paid lease equipment, timing, 80/20 interests, branch asset categories, automobile leases, integrated-activity holding, California-location limit, and August 16, 1984 date. It omits the $5.6 million amount, the two express Transaction 2 assumptions, original-lessor detail, $9 million deposits, $300,000 cash, promissory note, reported rental and check tax, Ontario analysis, unitary-business issue not reached, statutes and regulations, missing request and exhibits, citation defects, ambiguous consideration sentence, and absent tax measure and outcome.

What this means for you

Financial institutions with leasing or retail operations

Service-oriented lending and deposit functions do not isolate branch assets when taxable leasing and sales are operationally intertwined.

Accountants and tax professionals

Inventory lease interests, physical equipment, deposit assumptions, notes, cash, and retail activities separately, then determine whether the activities are genuinely separable. Do not derive an allocation from this source's Transaction 3 sentence without the missing Exhibit D.

Common questions

Q: Were assigned equipment leases treated as intangible contracts only?
A: No. The memorandum treated the assignments and leased property interests as taxable equipment sales.

Q: Did assumed thrift deposits count as part of the branch deal?
A: The source says the buyer assumed about $9 million in the transaction, but its punctuation and missing Exhibit D do not establish the complete consideration allocation.

Q: Why did the occasional-sale exemption fail?
A: Equipment leasing and check sales were integrated with the thrift's lending and depository activities.

Q: Did a separate service-enterprise theory protect most assets?
A: No. The memorandum found one integrated business rather than separable activities.

Q: Was the $5.6 million lease-interest conclusion unconditional?

A: No. Counsel assumed all equipment was in California and none of the leases were continuing sales and purchases.

Q: Did counsel decide the unitary-business issue after the Ontario case?

A: No. It said the leasing and check-sales activities were not separate from lending and deposits, so it did not reach the struck-down unitary concept.

Q: Does the PDF show the taxable measure or final outcome?

A: No. It gives opinions on taxability but no asset allocation, computed tax, agency disposition, or later result.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(a) and 6010.5
• California Sales and Use Tax Regulations 1595(a)(1), 1595(b)(1), 1595(b), 1596(a), and 1660(c)(9)(A)
• Business Taxes Law Guide Annotation 540.0280
• Ontario Community Foundation, Inc. v. State Board of Equalization, 35 Cal.3d 811 — the PDF prints 33 Cal.3d 811, which resolves to unrelated In re Atiles
• July 18, 1984 request, Exhibits A–D, lease, assignment, equipment, security, branch-sale, allocation, deposit, sales, return, administrative, and outcome records — implicated but not included

Verbatim support

From the official August 16, 1984 HQ-Legal memorandum:

We assume that all of the equipment transferred was located in California at the time the sale occurred and that none of the leases were continuing sales and purchases.

Here again, tax is due based upon the sales price of the tangible personal property transferred.

In our view, --- leasing and check sales activities were clearly not activities separate or separable from its loan and depository activities.

It follows, we do not even reach the question of the unitary concept embodied in Regulation 1595 which the Court struck down.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0066
• Original supporting opinion: 395.0066 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

From:

395.0066

Date:

August 16, 1984

HQ-Legal (ELS)

Subject:

This is in response to your memorandum of July 18, 1984. Your memorandum detailed various transactions entered into by --- and asked that we review the described transactions, along with exhibits pertaining thereto, and render our opinion as to the proper application of the tax. For the sake of convenience, we will reiterate your description of each transaction and then follow each description with our opinion as to how the tax applies. Transaction No. 1
--- acquired through assignments all rights, title and interest to equipment (office & shop equipment) lease contracts from various leasing companies. Either sales tax or use tax had been paid by the original lessors on the cost of equipment leased. Some contracts were acquired by --simultaneously at the time the original lease contracts were entered into; some contracts were acquired some months later. (Sample of lease agreements along with assignment agreements are attached as Exhibit A.) The assignment of office and shop equipment as well as tangible personal property under lease at the time of this transaction were subject to tax based upon the sales price of these items since such assignments were, in fact, sales of the items in question [Reg. l596(a); Reg. l595(b); Reg. l660(c) (9)(A)]. Transaction No. 2 On December 29, 1983, --- sold an undivided 80% of its right, title and interest on these equipment lease contracts to an out-of-state leasing company, --- totaling $5,600,000 (Exhibit B). A security interest was granted to the buyer in the remaining 20% per. security agreement (Exhibit C).

We assume that all of the equipment transferred was located in California at the time the sale occurred and that none of the leases were continuing sales and purchases. Under such circumstances, the sale is deemed to have occurred here and tax is due measured by the sales price of the equipment transferred [Rev. & Tax. Code § 60l0.5; Reg. 1660 (c) (9) (A); BTLG anno. 540.0280]. Transaction No. 3 On the same date (December 29, 1983), --- sold its --- branch to a ---. Buyer assumed approximately $9,000,000 of outstanding thrift deposits in exchange for the lease to the business premises, certificate loans and all right, title and interest to certain accounts receivables (these receivables are actually equipment lease contracts similar to those that were sold to --- plus
$300,000 cash for the leasehold improvements, furniture-& fixtures, and a promissory note. (Exhibit D.) Here again, tax is due based upon the sales price of the tangible personal property transferred. Your memorandum indicated that, in addition to the foregoing transaction, --- regularly entered into numerous automobile leases which were continuing sales and purchases and, accordingly, --- collected and reported tax based on rental receipts during the period in issue. Also, --- routinely sold checks at retail to its depositors-and reported tax from such sales. Under the foregoing conditions, you asked whether the recent case of Ontario Community Foundation Inc. etc., et. al. v. State Board of Equalization, 33 Cal.3d 811 would operate to qualify transaction No. 3 as an exempt occasional sale. In our view, the Ontario case, which struck down the unitary business provisions of Regulation 1595, is distinguishable from the case at hand and is not authority for exempting the sale in question as an occasional sale. The Ontario case involved the one-time liquidation sale of hospital tangible personal property which the court found was not held or used by a seller in the course of activities for which it was required to hold a seller's permit. Prior to trial, the hospital conceded liability with respect to tangible personal property sold which had been utilized in the hospital's cafeteria and pharmacy since taxable sales to non-patients had been made in connection with those aspects of its business. Here, --- was in the business, not only of loaning money and retaining deposits, but also .of leasing tangible personal property and making regular sales of checks to its customers. In our view, --- leasing and check sales activities were clearly not activities separate or separable from its loan and depository activities. It follows, we do not even reach the question of the unitary concept embodied in Regulation 1595 which the Court struck down. Here, the activities regularly engaged in by --- clearly required the holding of a seller's permit and, accordingly, the occasional sale exemption does not apply [Rev. & Tax. Code § 6006.5(a) ; Reg. 1595(a) (1) and (b) (1)].

ELS:rar