Were one-week ownership interests in cruise-ship staterooms taxable tangible personal property rather than nontaxable securities?

Plain-English summary

A company sold one-week ownership units in cruise-ship staterooms. Each buyer received a title certificate for a specific cabin and week plus a percentage interest in the ship's common areas. Prices ranged from $1,900 to $5,700. The vessel was in a California harbor when title passed for the audited sales.

The recommendation rejected the argument that the units were securities. The seller's own materials described the vessel and stateroom units as personal property, gave purchasers full title, and framed the project for owner use rather than investment profits.

At least 102 units had been sold by September 1980, about 325 by the hearing, and 735 were planned. Those sales were sufficient in number, scope, and character to require a seller's permit and sales tax. Procedurally, the jeopardy determination was already final because the company had not timely filed a petition and security; the recommendation denied a stay and called for a later-period audit.

Jeopardy procedure, ownership documents, and source limits

Hearing Officer Robert H. Anderson held the administrative hearing in San Diego on July 31, 1981. Attorney F--- M. G--- and subcontract coordinator W--- W--- appeared for applicant L--- C--- S---, Ltd. Principal Auditor Walter A. Shaffer, Audit Supervisor John E. Johnsen, and Auditor Sue Ellen Koll appeared for the Board's San Diego District.

The Board issued a jeopardy determination June 9 for January 1 through September 30, 1980. It listed $20,178.06 tax on a $336,301 time-share-sales measure, $2,017.07 interest through July 1, and a $2,017.81 failure-to-file penalty. The company was told a redetermination petition and security equal to the determination were due within ten days. It filed neither. Applying section 6537, the decision says the determination became final June 20.

President P. B--- J--- instead applied June 26 for an administrative hearing under section 6538.5. That application was timely within 30 days and required no security. It disputed all tax, called the amount excessive, claimed liens and collection would cause irreparable injury, and sought lien release and a collection stay. No Board liens existed as of the hearing, and Anderson found no reason to stay collection.

The company sold one-week ownership interests in a vessel identified as R---. Its counsel cited an October 23, 1980 California Commissioner of Corporations cease-and-desist order as treating the interests as securities. Anderson relied on the seller's disclosure statement, certificate or title document, and purchaser question-and-answer document instead. Those materials described full title to a specific seven-day stateroom unit and a percentage interest in ship common areas, with title vesting on full payment or a promise of full payment.

The project materials said it was designed for owner use rather than investment, with no association profit or rental or collateral services producing third-party economic benefits. Every owner joined an incorporated nonprofit association. L--- would manage the vessel until early 1986 under a management agreement, and owner assessments funded crew, food, maid, and other operating costs. Forty-nine weeks were owner units; roughly three weeks formed a retained service unit dedicated to maintenance, ferrying, or replacing periods lost to specified events.

The seller's legal opinions, as summarized in the decision, treated the foreign vessel as a private motor yacht carrying owners, representatives, guests, and crew; characterized the vessel and units as personal property rather than real property; and said the units were not securities. The decision reports those positions but does not include the opinions or independently decide federal maritime restrictions beyond the sales-tax issue.

Under section 6010.5, the sale place was where the property physically sat when the sale act occurred. The vessel was in a California harbor when title passed on 102 audited sales through September 1980. Unit prices ranged from $1,900 to $5,700. By the hearing, company counsel said about 325 units had sold, while 735 total were planned—49 weeks across 15 cabins. Anderson found the audit measure too low, recommended a later-period audit and new jeopardy determination, and found the original determination not excessive.

The PDF does not include the June 9 notice, June 26 application, service evidence, notice of rights, security demand, securities cease-and-desist order, disclosure statement, title certificates, purchaser Q&A, management agreement, association documents, assessments, legal opinions, owner or sales list, payment records, vessel registration or location records, returns, audit workpapers, tax calculation, collection records, later audit or jeopardy determination, payment, refund claim, appeal, or eventual collection outcome. It proves the decision's stated finality and recommendations, not whether later collection or a new assessment occurred.

The live annotation preserves the one-week cabin and common-area ownership, full title, vessel as personal property, seller's-permit and tax result, and tax measure as the amount charged. It dates the item July 31, 1981—the hearing date—rather than the decision's signed August 12 date that controls this page. It omits the company and hearing procedure, 102-sale audit count and California harbor, exact jeopardy amounts and period, finality and separate application paths, lack of liens, securities order and competing seller documents, owner association and management structure, service unit, title-vesting language, unit prices and later sales count, section 6010.5, later-audit and no-stay recommendations, missing records, and absent collection outcome.

What this means for you

Sellers of vessel or movable-property time shares

Giving buyers title to a specific time-based interest in personal property can create taxable tangible-property sales even when the arrangement resembles real-estate time sharing.

Accountants and tax professionals

Review the title instrument, physical location at title passage, common-area rights, buyer benefits, number of units, and jeopardy-protest deadlines separately.

Common questions

Q: Why were the units tangible personal property?
A: They conveyed title to time-based ownership interests in a vessel, which the source treated as personal property.

Q: Did a securities cease-and-desist order control sales tax?
A: No. The recommendation independently analyzed the ownership rights and the seller's disclosures.

Q: How many sales were involved?
A: At least 102 by the audit cutoff, about 325 by the hearing, with 735 total units contemplated.

Q: Why was no tax reduction recommended?
A: The sales were taxable and the jeopardy determination had already become final for lack of a timely petition and security.

Q: What amounts did the jeopardy determination state?

A: $20,178.06 tax on $336,301 of receipts, $2,017.07 interest through July 1, 1981, and a $2,017.81 failure-to-file penalty.

Q: Was the June 26 hearing application late?

A: No. It was timely under the separate 30-day administrative-hearing route, which required no security; that did not undo the missed ten-day petition-and-security deadline.

Q: Were Board tax liens already filed?

A: No liens had been filed as of the administrative hearing.

Q: Does the source show the later audit or collection result?

A: No. It recommends a new audit and jeopardy determination and no collection stay but supplies no later assessment, payment, lien, refund, or appeal record.

Citations and references

• California Revenue and Taxation Code sections 6010.5, 6536, 6537, 6538.5, and 6591
• October 23, 1980 Commissioner of Corporations cease-and-desist order — described but not included
• Disclosure statement, title certificate, purchaser Q&A, management agreement, association documents, and seller's legal opinions — summarized or quoted in part but not included
• Jeopardy notice, administrative-hearing application, security and service records, sales and vessel-location records, returns, audit workpapers, tax and collection records, later audit or determination, and outcome — described or implicated but not included

Verbatim support

From the official August 12, 1981 Hearing Officer recommendation:

No petition for redetermination was filed and no deposit was made. Instead, on June 26, 1981, P. B--- J---, President of L--- C--- S---, Ltd. filed an application for an administrative hearing pursuant to Section 6538.5 of the Revenue and Taxation Code.

Each owner may purchase one (1) or more units. Owners receive full title interest in their units, and a percentage of interest in all of the “common area” of the ship, which is all areas excluding the staterooms.

There have been 102 sales in [city] harbor up to September of 1980.

Inasmuch as there is evidence of additional sales of time-share units after the period covered under the jeopardy determination, there should be an audit of a period following the one covered by the jeopardy determination, and a new jeopardy determination issued for the subsequent period.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0380
• Original supporting opinion: 395.0380 PDF

Original ruling text

STATE OF CALIFORNIA

395.0380

BOARD OF EQUALIZATION

In the Matter of the Administrative )
Hearing on a Jeopardy Determination)
)
L--- C--- S---, LTD
)
)
Applicant. )

DECISION AND RECOMMENDATION
No. S- -- XX XXXXXX-010

The above-entitled matter came on regularly for hearing in San Diego, California on Friday, July 31, 1981 before Robert H. Anderson, Hearing Officer. Appearing for Petitioner:

F--- M. G--Attorney at Law
W--- W--Coordinator on Sub-contracts

Appearing for the Board:

Walter A. Shaffer
Principal Auditor
San Diego District
John E. Johnsen
Audit Supervisor
San Diego District
Sue Ellen Koll
Auditor
San Diego District

Summary and Conclusions
On June 9, 1981 L--- C--- S---, ltd., a California corporation, was issued a notice of Jeopardy Determination pursuant to Section 6536 of the California Revenue and Taxation Code. The determination is for tax in the amount of $20,178.06, interest to July 1, 1981 in the amount of $2,017.07, and penalty for failure to file tax returns in the amount of $2,017.81. The period covered by the determination is from 01-01-80 to 09-30-80 and the tax liability is measured by
$336,301 representing gross receipts from the sale of time shares in staterooms of a cruise ship. L--- C--- S---, Ltd. was advised that it could petition for redetermination and request a hearing on the petition. The firm was also advised that to be timely a petition had to be filed within ten days of June 9, 1981 and a security deposit had to be filed with the Board equal to the amount of the determination.

L--- C--- S---, Ltd.
S- -- XX XXXXXX-010

-2-

August 12, 1981
395.0380

No petition for redetermination was filed and no deposit was made. Instead, on June 26, 1981, P. B--- J---, President of L--- C--- S---, Ltd. filed an application for an administrative hearing pursuant to Section 6538.5 of the Revenue and Taxation Code. This was timely as the applicant has 30 days from the date of the notice of the Jeopardy Determination in which to file, and no security deposit is required for the application to be effective. Mr. J--- alleged, in his application, as follows: “…we do not believe that any determination whatsoever should have been found and that no state taxes are owed.” He requested the administrative hearing for the following reasons: 1.

To establish that the determination is excessive.

2.

To establish that any liens that may or do exist, and any related action, should be delayed because such action would result in irrepairable injury to L--- C--- S---, Ltd., and its related entities.

3.

To request release of all liens.

4.

To request a stay of collection activities.

As of the date of the administrative hearing, there were no liens filed by the Board of Equalization. Section 6537 of the Revenue and Taxation Code provides as follows: “If the amount specified in the (jeopardy) determination is not paid within 10 days after service of notice thereof upon the person against whom the determination is made, the amount becomes final at the expiration of the 10 days, unless a petition for redetermination is filed within 10 days, and the delinquency penalty and the interest provided in Section 6591 shall attach to the amount of the tax or the amount of the tax required to be collected. As noted above, to be effective, a petition for redetermination must be filed within 10 days of the date of the notice of jeopardy determination and a security equal to the amount of the determination must have been posted along with the petition. Inasmuch as this was not done, the matter became final on June 20, 1981. Accordingly, there is no reason to recommend a stay of collection activities. Counsel for L--- C--- S---, Ltd. contends that the California Commissioner of Corporations has ruled that the firm is selling securities and it issued a cease and desist order against such sales on October 23, 1980.

L--- C--- S---, Ltd.
S- -- XX XXXXXX-010

-3-

August 12, 1981
395.0380

Thus, it is argues that the transactions on which the tax has been assessed are not sales of tangible personal property. We disagree. This matter involves the sale of ownership interests in a vessel named “R---”. Ownership of the R--- staterooms is sold on a time interval ownership basis complete with title of ownership. Staterooms are sold as time interval units of one (1) week duration which are designated as “Stateroom-Time period Units”. The prices of units vary with the location and size of the stateroom and the time period of the unit. The time interval method of ownership affords the owner the use of his own ship during a specific time. (See Disclosure Statement, Preface. Copy is in the audit work papers.) All of the facts and information set forth herein relating to the sales of ownership interests is taken from the Disclosure Statement, title document and a question and answer document supplied to prospective purchaser; some follow: 1. The R--- project has not been conceived as an investment program, and the R--Association will not earn and there is no provision for it to obtain a profit. 2. All unit owners automatically become members of the “R--- Association,” a nonprofit, incorporated association. 3. The R--- will be managed by a management agent which until early 1986 will be L--C--- S---, Ltd. in accordance with the management agreement between the R--- Association and L--- C--- S---, Ltd. 4.

L--- C--- S---, Ltd. is the seller of the ownership interests and is referred to as “grantor”.

5.
The operation of the R--- is paid for out of the R--- Association’s income from owner assessments which are based upon forecasts of crew, food, maid and other operating costs. Monthly dues, similar to those paid by condominium time-share owners, are paid by stateroom time-share owners. Amounts vary depending on the stateroom that is owned. 6. Forty-nine (49) weeks of each year are owned as Stateroom Time Period Units. The remaining time of about three (3) weeks is designated as the “Service Unit”. The grantor has retained the service unit and dedicated it to the R--- Association for use as periods of maintenance, time to ferry the ship to new C--- locations as may be decided by the association, or time to reschedule C--- periods lost due to certain unanticipated events. 7. Each time-share unit, except the service unit, is comprised of a particular stateroom and a particular time period of seven (7) days duration commencing at 12:00 o’clock noon on one day and ending on the same day of the following week before 12:00 o’clock noon.

L--- C--- S---, Ltd.
S- -- XX XXXXXX-010

-4-

August 12, 1981
395.0380

8.
Each owner may purchase one (1) or more units. Owners receive full title interest in their units, and a percentage of interest in all of the “common area” of the ship, which is all areas excluding the staterooms. 9. Each unit is priced differently according to size, location, configuration and the time period purchased. Title to each unit vests at the time full consideration is paid for the unit. 10. Each purchaser receives a certificate that serves as a title document and evidence of ownership. The first paragraph on the reverse side of the document reads: “Upon payment or promise of payment in full of &__ Grantor, L--- C--S---, Ltd., does hereby grant this Title of Ownership to Grantee named on the reverse side hereof, the Stateroom, Time Period Unit described on the reverse side hereof.” 11. L--- C--- S---, Ltd. retained legal counsel to research and render opinions about various matters related to the operation and plan of Interval Ownership of the R---; some of these are: (1) Status of the R--- as a private motor yacht. Federal law precludes a foreign vessel from engaging in commerce including the carrying of passengers who contribute consideration for their passage, between ports or places in the United States, either directly or by way of a foreign port. The R--- is a private foreign vessel used exclusively for pleasure purposes carrying only its owners, their representatives and guests and crew and, as such is not subject to the aforementioned federal restrictions on a foreign vessel’s movement between locations in the United States. (2) R--- Stateroom – Time Period Units as Personal Property. The R--- is personal property or chattel and the Stateroom-Time Period Units comprising the R--- are an interest in personal property. As personal property, the units are not subject to the laws governing real property transactions. (3) R--- Stateroom-Time Period Units are not securities and not within the purview of State or Federal Securities Laws or Regulations. The units offered under the R--- plan of interval ownership are not accompanied by rental or collateral services from which purchasers will realize economic benefits derived from the activities of persons other than the purchaser. 12. The R--- plan of interval ownership does not contemplate an investment type project, but does envision a group of owners enjoying the use, occupancy and pleasure of their stateroom on their ship at specific times of the year for many years into the future.

L--- C--- S---, Ltd.
S- -- XX XXXXXX-010

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August 12, 1981
395.0380

13.
Many condominium projects have multiple owners of the same condominium. The concept of time sharing is not new, although it is unique to C--- ships. The R--- program has drawn upon the practices experienced in the real estate industry to develop an efficient, secure method of owning a stateroom for a period of time and a percentage of the common and restricted areas. In summary, L--- C--- S---, Ltd. has been making sales of tangible personal property sufficient in number, scope and character to require that it hold a seller’s permit and report sales tax on its retail sales. Up to September 1980, there had been 102 sales of stateroom-common-restricted area interests in the cruise ship R---. During this time, the ship has been located in [city] Harbor. Title passed to the purchasers upon payment in full or promise of payment in full of the purchase price. The audited sale price of the time-share units ranged from $1,900 to $5,700 depending on the type of stateroom that was purchased. Section 6010.5 of the Revenue and Taxation Code relates to place of sale and provides: “For the purposes of this part, the place of the sale or purchase of tangible personal property is the place where the property is physically located at the time the act constituting the sale or purchase, as defined in this part, takes place.” There have been 102 sales in [city] harbor up to September of 1980. Counsel for L--- C--- S---, Ltd. stated that approximately 325 time-share units have been sold to date. This means that there has to be an updating of the audit since the measure is too low. The total number of time-share units to be sold is figured to be 735. (Forty-nine weeks times 15 cabins.) The determination is not excessive. Recommendation The determination issued June 9, 1981 is now final. No adjustment to the tax can be recommended. Penalty and interest should be added pursuant to Section 6591 of the Revenue and Taxation Code. Inasmuch as there is evidence of additional sales of time-share units after the period covered under the jeopardy determination, there should be an audit of a period following the one covered by the jeopardy determination, and a new jeopardy determination issued for the subsequent period. It is recommended that there be no stay of collection activities.

________
Robert H. Anderson, Hearing Officer

AUG 12, 1981
________
Date