Did a post-sale appraisal control over the parties' $2.32 million machinery allocation when a permitted printing business sold its California division?

Plain-English summary

A printer sold its California division for $2.5 million. The agreement expressly allocated $2.32 million to machinery and equipment and $180,000 to printing contracts, with nothing allocated to goodwill, leasehold interests, or other intangibles. A buyer-commissioned appraisal later assigned a lower machinery value.

The Tax Counsel recommendation used the parties' agreed $2.32 million machinery price rather than the later appraisal. Applying Hawley v. Johnson, it found no basis to recharacterize the difference as goodwill when the agreement assigned no amount to goodwill or other intangibles beyond the printing contracts.

The asset sale also failed occasional-sale treatment. The company held a permit and made taxable printed-matter sales equal to about 2.5 to 3.5 percent of total sales. Manufacturing was inseparable from selling the manufactured goods, and the low taxable-sales percentage did not allow the permit or business activity to be ignored. Property shipped away or later given away by the buyer did not change the seller's tax result.

The source has a numerical conflict. It says the appraisal was about $182,500 below $2.32 million but then prints the appraised figure as $2,157,500, which is not that difference. The live annotation prints $2,137,500, which does match the stated subtraction. This page preserves both official figures rather than changing the PDF's original tail.

Petition record and limits

Robert H. Anderson wrote to attorney J--- G. S--- about the petition of The C--- P---, Inc., P--- N--- Division and a hearing held the previous October 29 in Downey. The seller held a permit and made taxable sales of printed matter that did not qualify under section 6362, representing about 2.5 to 3.5 percent of total sales.

The California division sold for $2.5 million. The agreement allocated $2.32 million to machinery and equipment and $180,000 to printing contracts, with no amount for goodwill, leasehold interests, or other intangibles. The machinery consisted of four main presses, a proof press, supporting equipment, and office equipment. Two presses used only for exempt periodicals or other section 6362 matter were excluded from the audited determination.

The source says the sale closed on August 21, 19XX. It then says the buyer hired an appraiser to value the machinery as of August 21, 1968, but does not establish that the effective date was the sale date. The PDF gives the appraisal as $2,157,500 while calling it about $182,500 below $2.32 million. The live annotation gives $2,137,500. Missing sale and appraisal records leave the year and source figure unresolved.

The petitioner advanced six arguments. Counsel rejected separating manufacturing from sales because manufacturing goods for sale was inseparable from selling them, quoting the case printed as Northwest Pacific Railroad and relying on U.S. Industries. It rejected ignoring the permit because taxable sales were a small share of total sales; applying the seller-permit provision that the source labels section 6266; exempting property later shipped to Denver or given away by the purchaser; replacing the negotiated machinery price with the appraisal; applying the number-scope-character test when liability instead arose because the equipment served the permitted activity; and treating office assets as outside that activity because they had not previously been sold.

Counsel recommended redetermination without changing the audited tax measure. The taxpayer had requested a Board hearing and could either proceed or return two of three enclosed waiver forms. The PDF does not include the petition, sale agreement, asset schedule, printing contracts, goodwill or leasehold evidence, appraisal, purchase or payment records, tax returns, permit, sales records, exempt-periodical evidence, Denver shipping or gift records, audit workpapers, determination, hearing transcript, waiver forms, enclosures, Board calendar, final action, payment, appeal, or later outcome.

The source's case references were checked separately. Northwestern Pacific Railroad is reported at 21 Cal.2d 524 and includes page 529; the PDF prints Northwest Pacific Railroad and its quotation says tax aimed as all of such sales. U.S. Industries resolves at 198 Cal.App.2d 775, and Hawley resolves at 58 Cal.App.2d 232. The original tail remains unchanged.

The live annotation publishes only the negotiated-price issue: $2.32 million allocated to machinery, a $2,137,500 appraisal, the parties' appraisal argument, and Hawley's agreed-value rule. It omits the petition and hearing posture, $2.5 million total price, $180,000 printing-contract allocation, no-goodwill terms, machinery inventory, redacted sale year and 1968 appraisal date, the PDF's conflicting $2,157,500 figure, two excluded presses, taxable-sales percentage, first three and last two petitioner arguments, Northwestern Pacific Railroad and U.S. Industries, section 6266, recommendation, hearing and waiver options, missing records, and absent final Board action.

What this means for you

Buyers and sellers of operating divisions

Put defensible values for machinery, contracts, goodwill, and other rights directly in the agreement. This recommendation did not let a later appraisal displace the negotiated allocation.

Accountants and tax professionals

Do not isolate manufacturing assets from a permitted seller's integrated business merely because taxable retail sales are a small share of total sales.

Common questions

Q: Which machinery value controlled?
A: The $2.32 million price agreed by buyer and seller, not the later appraisal.

Q: Could the difference be assigned to goodwill after the fact?
A: No. The recommendation found no basis for that assumption when the agreement made no goodwill allocation.

Q: Did taxable sales of only 2.5 to 3.5 percent matter?
A: Yes. The company engaged in taxable selling and held a permit, so the small percentage did not exempt its business assets.

Q: Did equipment later shipped away or given away become exempt?
A: No. The buyer's later disposition did not change tax on the seller's transaction.

Q: Why do the appraisal numbers differ?

A: The PDF says $2,157,500 but also says the appraisal was $182,500 below $2.32 million. The live annotation prints $2,137,500, which matches that subtraction; the underlying appraisal is absent.

Q: Was liability based on a series of equipment sales?

A: No. Counsel said it arose because the equipment was held and used in an activity for which the seller held a permit.

Q: Was the recommendation the Board's final decision?

A: No final action appears. The taxpayer had requested a Board hearing and was offered hearing-waiver forms.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(a), 6266 as printed, and 6362
• Northwestern Pacific Railroad v. State Board of Equalization, 21 Cal.2d 524, 529 (1943) — the PDF prints Northwest Pacific Railroad
• U.S. Industries, Inc. v. State Board of Equalization, 198 Cal.App.2d 775 (1962)
• Hawley v. Johnson, 58 Cal.App.2d 232 (1943)
• Petition, sale, asset, contract, appraisal, permit, sales, exemption, disposition, audit, hearing, waiver, enclosure, Board-action, and outcome records — implicated but not included

Verbatim support

From the official December 13, 1971 recommendation:

Manufacturing of goods for sale is inextricably tied to the selling of the goods manufactured.

The liability has not been assessed on the number, scope, and character of sales of machinery and equipment made by C--- [P---]. It is asserted because the equipment was held and used in an activity for which a seller’s permit was held.

There is no basis on which to assume that the difference between the appraised price and the actual price agreed upon represents something paid for goodwill.

Accordingly, we propose to recommend that the matter be redetermined without any adjustment to the audited measure of the tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0073
• Original supporting opinion: 395.0073 PDF

Original ruling text

395.0073

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

December 13, 1971

Mr. J--- G. S--Attorney at Law
XXX --- --- St., Suite XXXX
--- ---, California XXXXX

Dear Mr. S---:
SR -- XX XXXXXX
The C--- P---, Inc.
P--- N--- Division

This is with reference to the petition of The C--- P---, Inc., P--- N--- Division, and the hearing held on the matter last October 29 in Downey, California. Briefly, C--- P--- held a seller’s permit and made retail sales of printed matter that did not qualify for sales tax exemption under Section 6362 of the Revenue and Taxation Code. The taxable sales were around 2.5 to 3.5 percent of the total sales. C--- P--- sold its California division to the D--- P--- for $2,500,000 under an agreement that contained a breakdown of the selling price as follows: $2,320,000 for machinery and equipment and $180,000 for assignment of printing contracts. No part of the agreed upon price was allocated to goodwill, transfer of leasehold interest, etc. The machinery and equipment consisted of four main presses and a proof press, along with supporting equipment and the office equipment necessary to operate the business. The sale was completed on August 21, 19XX, and the D--- P--- hired the A--- A--Company of --- to make a fair market value appraisal of the machinery and equipment acquired under the agreement using August 21, 1968 as the effective date of the values placed or assigned to the property purchased.

Mr. J--- G. S--(SR -- XX XXXXXX)

-2-

December 13, 1971
395.0073

The appraisal valued turned out to be about $182,500 less than the selling price agreed upon. In other words, the appraised figure was $2,157,500 rather than $2,320,000. Two presses were not included in the audited determination because it was understood that they were never used to print anything but exempt periodicals or other matter qualifying for the exemption under Section 6362. However, you contend that the sale of the other presses and supporting equipment should have been exempted on an occasional sale too. Several theories were advanced to support your arguments for exemption: 1. You contend that the machinery and equipment was not held and used in an activity for which a seller’s permit was required because they were used in the company’s manufacturing activity and not its selling activity. It appears that you are “departmentalizing” the C--- P--- business activities on the theory that a single business may have many activities some of which do not involve selling tangible personal property, and without the selling activity the others would not require the holding of a seller’s permit. We disagree with this. Manufacturing of goods for sale is inextricably tied to the selling of the goods manufactured. The court in Northwest Pacific Railroad v. State Board of Equalization (1943) 21 Cal. 2d at page 529, said: “While for reasons considered desirable plaintiff corporation may departmentalize its business, it cannot, by such process set up for tax purposes a distinction between the types and kinds of sales made to escape the tax aimed as all of such sales. Specific sales of a retailer cannot be segregated from the bulk of its sales and treated separately as isolated or occasional sales.” Your argument is contrary to the holding in U.S. Industries, Inc. v. State Board of Equalization (1962) 198 Cal. App. 2d 775, wherein the court held that a manufacturer who customarily made sales at retail and held a seller’s permit is subject to the retail sales tax on the sale of all capital assets used in operating the business. 2. The second argument is one that is apparently made in an attempt to urge the Board that, notwithstanding the fact that a seller’s permit was held, the taxable sales made in the regular course of business was very small in volume compared to the exempt sales that were regularly made and the seller’s permit should be ignored. There is no basis under the law on which such an argument can be sustained. Section 6266 of the Revenue and Taxation Code provides that every person desiring to engage in or conduct business as a seller within this State shall file with the Board an application for a permit. The C--P--- did engage in business as a seller, and it made taxable as well as exempt sales.

Mr. J--- G. S--(SR -- XX XXXXXX)

-3-

December 13, 1971
395.0073

3.
The third point argued was that tax should not apply to the sale of the tangible personal property that the purchaser shipped to Denver and to the property that was not needed and which was given away after acquired. There is no basis in law that would dictate such a conclusion. 4. Notwithstanding the various arguments for deleting some or all of the items sold, you contend that the appraisal value should control over the actual price stipulated as having been paid for the machinery and equipment. This argument fails in the face of what the court held in Hawley v. Johnson (1943) 58 Cal. App. 2d 232, wherein the court held that the value fixed by agreement between seller and buyer of property exchanged as part of the purchase price, rather than the appraised or market value, constitutes “gross receipts” upon which the tax is imposed. There is no basis on which to assume that the difference between the appraised price and the actual price agreed upon represents something paid for goodwill. There may have been goodwill and other intangibles sold along with the entire business; however, no value was, in fact, placed on the intangibles if there were any other than the assignment of printing contracts. 5. You also argue that the sale of the machinery and equipment was not one of a series of sales sufficient in number, scope, and character to constitute an activity requiring a seller’s permit. Presumably, this argument is made in conjunction with the argument that the activity of manufacturing was not one, in and of itself, that required holding a seller’s permit. The liability has not been assessed on the number, scope, and character of sales of machinery and equipment made by C--- [P---]. It is asserted because the equipment was held and used in an activity for which a seller’s permit was held. If the C--- P--- business activity did not involve any selling activity, it would not have needed a seller’s permit and if this were so, the number, scope, and character test would have been applied. 6. Finally, it was contended that the office furniture and equipment was not held in the course of an activity requiring the holding of a seller’s permit because it was not held for resale and none had been previously sold. It was sold only as a part of a sale of the entire business in a single transaction and not a series of sales. Again, this argument does not stand up in the face of the case law under U.S. Industries, Inc. v. State Board of Equalization, supra. In summary, it is our opinion that the sale to the D--- P--- did not qualify for an occasional sale under Section 6006.5, subsection (a). Further, it is our opinion that the proper measure of tax was the agreed upon selling price, not the appraised market value. Accordingly, we propose to recommend that the matter be redetermined without any adjustment to the audited measure of the tax.

Mr. J--- G. S--(SR -- XX XXXXXX)

-4-

December 13, 1971
395.0073

It is noted that you have requested a hearing before the Board. Under the law, your client is entitled to such a hearing. However, if after considering our recommendation and the reasons for it, a hearing is no longer desired, please sign and return two of the three waiver of hearing forms enclosed. The third is for your records. If a hearing is still desired, the matter will be place on the Board’s hearing calendar as soon as possible. Very truly yours,

Robert H. Anderson
Tax Counsel

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Enclosures