Was a vessel transfer between two corporations nontaxable merely because a divorce settlement required the husband to arrange the purchase?

Plain-English summary

A divorcing husband and wife each owned half of one corporation. Their settlement required the husband to purchase that corporation's vessel at the current loan balance, and he arranged for a second corporation he wholly owned to make the purchase.

The Legal Division memorandum concluded that this was not an involuntary transfer arising from a divorce-property settlement. The vessel belonged to the first corporation, not directly to the marital community, and the purchasing corporation was not a spouse or a member of that community.

The transaction therefore remained a sale from one corporation to another. The court-approved settlement did not make an otherwise taxable corporate vessel sale exempt.

Divorce settlement, corporate sale, and source limits

Tax Counsel Elizabeth Abreu answered a September 16, 1993 memorandum from Vic Anderson, Supervisor of the Board's Petitions Section. The subject identifies redacted S--- E---, Inc. and a redacted account number. The source does not disclose a petition, assessment, tax amount, taxpayer argument, or procedural status beyond the request for a legal opinion.

The request, as quoted in the opinion, said the husband and wife each owned 50 percent of S--- D---, Inc. The husband had petitioned for divorce. They signed a marriage settlement agreement on February 11 of a redacted year, and a court approved it and ordered compliance with all executory provisions on February 17 of that year. One provision required the husband to buy SDI's vessel at the current loan balance; he complied through S--- E---, Inc., a corporation he wholly owned.

The memorandum distinguished Annotation 395.2420. There, each spouse took one community-property business as separate property, a transaction treated like a partnership distribution on dissolution with no tax due. It also cited page 20 of Tax Tips Pamphlet No. 23, Occasional Sales of Vehicles, Vessels, and Aircraft, for treating ownership arising from a divorce property settlement as an involuntary transfer rather than a sale or purchase.

Counsel limited that pamphlet rule to community property transferred to a spouse as separate property. Here, the vessel belonged to SDI as a separate corporation, and the transferee SEI was neither a spouse nor a community member. A hypothetical court-approved sale of a community-property hardware store followed by division of the proceeds illustrated why a settlement alone did not eliminate tax. Counsel therefore treated the actual structure as a taxable corporation-to-corporation vessel sale and said the parties could have structured the settlement to avoid tax but did not.

The PDF does not include the September 16 memorandum, divorce petition, settlement agreement, court approval or order, execution evidence, vessel description, title or registration, loan or current-balance statement, SDI and SEI formation and ownership records, purchase agreement, invoice, price or payment record, transfer record, Annotation 395.2420 source, Tax Tips Pamphlet No. 23, the unidentified enclosure, return, use-tax calculation, assessment, petition papers, hearing, payment, refund claim, appeal, or later outcome. It does not establish the tax amount, whether tax was assessed or paid, or how the matter ended.

The live annotation preserves the spouses' equal ownership, settlement-required purchase at the current loan balance, husband's wholly owned purchasing corporation, no-direct-community-property transfer, corporation-to-corporation sale, non-involuntary characterization, taxable result, and November 22, 1993 date. It omits the Petitions Section request and account provenance, agreement and court-order dates, court's executory-provision direction, separate-entity and transferee reasoning, Annotation 395.2420, partnership-distribution comparison, Tax Tips Pamphlet No. 23 and its page-specific rule, hardware-store hypothetical, alternative-structure statement, missing source materials and records, administrative posture, tax amount, and later outcome.

What this means for you

Business owners dividing property in divorce

A divorce order does not automatically make every related corporate transfer involuntary. Entity ownership and the identity of the actual transferor and buyer matter.

Accountants and tax professionals

Distinguish a direct division of community property to a spouse from a sale between separate legal entities undertaken to satisfy a settlement term.

Common questions

Q: Why was this not treated like a partnership distribution?
A: The vessel was owned by a separate corporation, and the transferee was another corporation rather than a spouse receiving community property.

Q: Did the husband's ownership interests make the vessel community property?
A: Not for the memorandum's analysis. It treated the vessel as property of the first corporation.

Q: Did the court-approved settlement control the tax result?
A: No. The memorandum said the agreement did not change the character of the corporation-to-corporation sale.

Q: What was the conclusion?
A: The vessel transfer was not an exempt involuntary transfer.

Q: What published guidance did counsel use?

A: The memorandum discussed Annotation 395.2420 and page 20 of Tax Tips Pamphlet No. 23, but the supporting PDF reproduces neither source.

Q: Did the source disclose an assessment or tax payment?

A: No. It gives no tax amount, return, assessment, payment, hearing, appeal, or later outcome.

Citations and references

• California Sales and Use Tax Annotation 395.2420 — described but not reproduced
• Tax Tips Pamphlet No. 23, Occasional Sales of Vehicles, Vessels, and Aircraft, page 20 — described but not included
• September 16, 1993 Petitions Section memorandum, marriage settlement agreement, divorce petition, and court approval/order — quoted or described but not included
• Unidentified enclosure — listed but not identified or included
• Corporate, vessel, title, loan, purchase, transfer, return, assessment, petition, administrative, payment, and outcome records — implicated but not included

Verbatim support

From the official November 22, 1993 Tax Counsel memorandum:

Involuntary transfers are not regarded as sales and purchases.

The transfer in this case is not analogous to a partnership distribution because the vessel was not owned by the community but by SDI, which is a separate entity and a corporation. Nor was the transferee, SEI, a member of the community.

The provision regarding marriage settlement agreements in the Tax Tips Pamphlet only applies to a transfer of community property to a spouse as his or her separate property.

Rather, one corporation sold a vessel to another corporation.

The marriage settlement agreement does not change the result. The parties could have structured the property settlement in a way to avoid tax but chose not to.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0081
• Original supporting opinion: 395.0081 PDF

Original ruling text

State of California

Board of Equalization
Legal Division

395.0081

Memorandum

To

:

Mr. Vic Anderson
Supervisor, Petitions Section
(MIC:38)

From :

Elizabeth Abreu
Tax Counsel

Subject:

S--- E---, Inc.
SB -- XX-XXXXXX-010

Date: November 22, 1993

This is in response to your memorandum dated September 16, 1993, in which you state: "We are requesting a legal opinion on whether the ownership of a vessel resulting from a property settlement in divorce constitutes an involuntary transfer. "L--- and K--- F--- (husband and wife) each owned 50% of the stock of S--- D--- Inc. (SDI). L--- F--- petitioned for divorce and a marriage settlement agreement was signed by Mr. and Mrs. F--- on 2-11-8X. On 2-17-8X the court approved the marriage settlement agreement and ordered the F---'s to comply with all its executory provisions. "One provision of the agreement required that Mr. F--- purchase a vessel from SDI at the current loan balance. Mr. F--- complied with the provision and purchased the vessel through his corporation, S--- E--- Inc. (SEI). Is the transfer of the vessel from SDI to SEI exempt from use tax as an involuntary transfer?" In Annotation 395.2420 the husband owned and operated two places of business, each of which was community property. Upon a divorce and property settlement agreement, the husband took one of the businesses as his separate property and the wife took the other business as her separate property. We concluded that the transaction was analogous to a distribution of partnership assets upon dissolution and that no tax was due. Tax Tips Pamphlet No. 23, "Occasional Sales of Vehicles, Vessels, and Aircraft," includes ownership as a result of a property settlement in a divorce in the definition of an involuntary transfer. (See page 20, Pamphlet No. 23.) Involuntary transfers are not regarded as sales and purchases.

Mr. Vic Anderson

-2-

November 22, 1993
395.0081

The transfer in this case is not analogous to a partnership distribution because the vessel was not owned by the community but by SDI, which is a separate entity and a corporation. Nor was the transferee, SEI, a member of the community. Furthermore, this was not an involuntary transfer. The provision regarding marriage settlement agreements in the Tax Tips Pamphlet only applies to a transfer of community property to a spouse as his or her separate property. Any other interpretation would allow spouses to avoid tax on transactions that are clearly taxable. For example, suppose the spouses owned a hardware store as community property. Pursuant to their court approved marriage settlement agreement, the spouses sold the store and divide the proceeds. The mere fact that the sale was pursuant to a marriage settlement agreement does not permit the spouses to escape taxation on the sale. In this case, community property was not transferred to the husband as his separate property. Rather, one corporation sold a vessel to another corporation. If this sale was not made pursuant to a marriage settlement agreement, it would clearly be taxable even though the husband owned 50 percent of the stock in one corporation and all of the stock in the other. The marriage settlement agreement does not change the result. The parties could have structured the property settlement in a way to avoid tax but chose not to.

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Enclosure