Would an income-tax election deeming a stock purchase to be an asset sale make the transaction taxable for California sales-tax purposes?

Plain-English summary

The requester asked about a possible sale of an ongoing business to an unrelated party: what would happen if corporate stock were sold and the buyer made a historical California income-tax election that deemed the target to sell and repurchase its assets?

The letter said that election operated for income-tax purposes only. Corporate stock was intangible property. Counsel said the election Apparently did not cause or require an actual transfer of the target's asset title to the buyer or another separate entity.

Assuming no actual asset title transfer occurred, counsel concluded that the transaction would remain a nontaxable stock transfer for California sales and use tax rather than a taxable sale of tangible personal property. The PDF does not establish that a sale or election occurred.

Hypothetical record and limits

Charles J. Graziano answered a November 13, 1984 letter from Mr. R--- A. H--- of a redacted company. The source does not identify the requester as buyer's counsel or say an actual buyer had been selected. The request says only that the proposed ongoing-business sale would be to an unrelated party and asks a conditional question about a stock buyer's possible section 24518 election.

The requester contrasted an ordinary corporate-stock sale, described as having no sales-tax implications under section 6006.5, with an asset sale whose allocation to tangible personal property would be taxable. The quoted section 24518 treated a target as selling all assets at the close of the acquisition date in a single transaction governed by sections 24512, 24513, 24514, and 24517, then as a new corporation buying them at the start of the next day. It set the deemed amount from the buyer's grossed-up stock basis, properly adjusted under Franchise Tax Board regulations for target liabilities and other relevant items.

Counsel distinguished that income-tax treatment from legal title. The letter says the election permitted income-tax-only treatment and an asset-basis increase or step-up tied to stock cost, then says Apparently it neither resulted in nor required actual asset-title transfer. Its final answer is expressly conditional: assuming there is no transfer of title to another separate entity or person, the stock transfer would remain nontaxable under the Sales and Use Tax Law.

The source does not include the full November request, purchaser or target identity, stock purchase agreement, price, acquisition date, qualified-purchase analysis, section 24518 election, Franchise Tax Board regulations or filing, stock-basis computation, liability adjustment, target asset list or values, allocation, title records, conveyance, merger or post-closing steps, sales-tax return, audit, assessment, protest, hearing, payment, appeal, or later outcome. Its quoted request prints Since §24518 is an income tax election.[sic]; the original tail preserves that form.

The live annotation preserves the income-tax-only election, no-title-transfer condition, intangible-stock result, and January 28, 1985 date. It says the purchaser elected deemed-asset treatment, while the supporting letter asks what would happen if a buyer elected and never says the transaction occurred. The live entry omits the unrelated-party hypothetical, requester's stock-versus-asset framing, section 24518 quotation and cross-references, grossed-up-basis and liability-adjustment mechanics, counsel's Apparently qualifier, missing records, source wording defect, and absent outcome.

What this means for you

Corporate buyers making deemed-asset elections

Under this historical opinion, an income-tax basis election did not by itself change the legal transfer analyzed under California sales tax. The answer assumes title did not actually move.

Accountants and tax professionals

Separate deemed tax treatment from actual title movement. Review merger documents, asset conveyances, and post-closing steps for any real transfer beyond the stock purchase.

Common questions

Q: Did the election step up the target's asset basis?
A: Counsel said the historical election resulted in an increase or step-up tied to stock cost, subject to the provision's grossed-up-basis and adjustment mechanics.

Q: Did it transfer title to the assets?
A: Counsel said Apparently not and expressly conditioned the conclusion on no title transfer.

Q: Why was the stock sale not subject to sales tax?
A: Corporate stock was intangible personal property outside the sales-tax provisions.

Q: What could change the conclusion?
A: A separate actual transfer of the target's tangible assets to the buyer or another person.

Q: Does the source show that a stock sale or election occurred?

A: No. The incoming excerpt asks a hypothetical, and the PDF provides no transaction or election record.

Citations and references

• California Revenue and Taxation Code § 6006.5 — cited in the requester's stock-sale premise
• Former California Revenue and Taxation Code § 24518(a) and (b)(1)
• Former California Revenue and Taxation Code §§ 24512, 24513, 24514, and 24517 — cross-referenced by the quoted section 24518 text
• November 13, 1984 request, purchaser, target, stock agreement, election, basis, adjustment, asset, title, allocation, filing, administrative, and outcome records — implicated but not included

Verbatim support

From the official January 28, 1985 Tax Counsel letter:

Corporate stock is considered to be intangible personal property rather than tangible personal property.

Revenue and Taxation Code Section 24518 permits a corporation to elect to treat for income tax purposes only, its purchases of the assets of the target corporation.

Apparently, this election made under Section 24518 does not result in, nor does it require an actual transfer of title in the assets of the target corporation from the target corporation to either another separate entity or to the buyer corporation.

Therefore, assuming there is no transfer of title in the assets of the target corporation to another separate entity or person when the election is made by the buyer of stock under Section 24518, it is our opinion that the sale and purchase of the target corporations’ stock will be treated for purposes of the Sales and Use Tax Law as a nontaxable transfer of stock rather than a sale of tangible personal property which is subject to tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0072
• Original supporting opinion: 395.0072 PDF

Original ruling text

395.0072

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
916/ 445-6493

January 28, 1985

Mr. R--- A. H--H---,--- & ---, Inc.
XXX ---, Suite XXX
---, California XXXXX
Dear Mr. H---:
Your letter of November 13, 1984 has been referred to me for reply. Your letter states as follows: “I have a question relating to the sale of an ongoing business to an unrelated party. “Generally, if the stock of a corporation is sold, there is no sales tax implications under Rev. & T.C. Sec. 6006.5. If the assets of a business are sold, the amount allocable to tangible personal property is subject to sales tax. “What would happen if stock of a corporation was sold, and the buyer elected under Rev. & T.C. §24518 to treat this as an asset purchase? Would the amount allocated to tangible personal property still be treated for sales tax purposes as a sale of stock, or would it be treated as a sale of assets? Since §24518 is an income tax election.[sic] I am not sure if it has an effect on sales taxes.” Revenue and Taxation Code Section 24518 provides, in pertinent part, that: “(a) For purposes of this part, if a purchasing corporation makes an election under this section (or is treated under subdivision (e) as having made such an election), then, in the case of any qualified purchase, the target corporation-“(1) Shall be treated as having sold all of its assets at the close of the acquisition date in a single transaction to which Sections 24512, 24513, 24514, and 24517, apply, and

Mr. R--- A. H---

-2-

January 28, 1985
395.0072

“(2) Shall be treated as a new corporation which purchased all of the assets referred to in paragraph (1) as of the beginning of the day after the acquisition date. “(b)(1) For purposes of subdivision (a), the assets of the target corporation shall be treated as sold (and purchased) at an amount equal to-“(A) The grossed-up basis of the purchasing corporation’s stock in the target corporation on the acquisition date. “(B) Properly adjusted under regulations prescribed by the Franchise Tax Board for liabilities of the target corporation and other relevant items.” California Sales and Use Tax Law imposes a tax on the sale or use of tangible personal property in this state. Corporate stock is considered to be intangible personal property rather than tangible personal property. Therefore, the sale or purchase of stock in a corporation is not subject to tax, since such a transaction is outside the provisions of the Sales and Use Tax Law. Revenue and Taxation Code Section 24518 permits a corporation to elect to treat for income tax purposes only, its purchases of the assets of the target corporation. There results from this election under 24518 an increase or step-up in the basis of the target corporation’s assets to an amount that is equal to the cost of the purchased stock, i.e., the assets of the target corporation may have been “grossed up.” Apparently, this election made under Section 24518 does not result in, nor does it require an actual transfer of title in the assets of the target corporation from the target corporation to either another separate entity or to the buyer corporation. Therefore, assuming there is no transfer of title in the assets of the target corporation to another separate entity or person when the election is made by the buyer of stock under Section 24518, it is our opinion that the sale and purchase of the target corporations’ stock will be treated for purposes of the Sales and Use Tax Law as a nontaxable transfer of stock rather than a sale of tangible personal property which is subject to tax. If you have any further questions, please write this office. Very truly yours,

Charles J. Graziano
Tax Counsel

CJG:ba