How did staff measure tax when a company sold property to operators who became co-owners while the company might retain an interest?

Plain-English summary

A redacted company sold tangible personal property to operators who became tenants in common. Board staff explained that tax was measured by the consideration the company received for the ownership interest it actually transferred.

If the company was not one of the operators and transferred its entire interest, tax applied to 100% of the consideration. If the company remained an operator and retained a proportional ownership share, tax applied only to the consideration for the portion transferred.

The memorandum also discussed an audit involving a separately co-owned operation. Staff understood that operation to be separate and said one participant did not necessarily act for it merely because the participant acted for members of another redacted group. Unless an agreement designated an operator, staff thought Auditor Latham's proposed treatment was appropriate.

Clarification chain, two audit questions, conditions, and source limits

E. H. Stetson sent the internal memorandum to Wm. R. Thomson in Sacramento on July 26, 1950. It answers Thomson's June 5 memorandum seeking clarification of a sentence from Stetson's March 1 memorandum: when a redacted company sold its own used or surplus material to the operators, tax was payable. Neither earlier memorandum is included, and the published source redacts the company and every operation.

For the first question, Stetson assumed the company sold tangible personal property to operators who became tenants in common. If the company was not one of the operators and transferred its entire interest, tax applied to 100% of the consideration. If the company was itself an operator, it appeared to retain part ownership, and tax could apply only to the consideration for the interest actually transferred. The source gives no property description, ownership percentage, consideration, buyer, sale date, invoice, agreement, or tax calculation.

Auditor Latham's absent memorandum reported that two redacted people understood Stetson's earlier statement to make 100% of property value the measure when property moved from redacted stock to a redacted operation. Stetson invited one of them to clarify if that person believed the full-value treatment applied even when the company retained a proportional share. He referred to an unproduced conference in another redacted official's office and asked to learn of any different recollection of its conclusions. Subject to that conference, Stetson thought Latham's various proposed audit changes appeared proper.

The second question came from the Headquarters Reviewing Section and concerned sales to a redacted recipient from an operation jointly owned by two redacted parties. It was point 5 on the last page of Latham's absent report. The published text says an auditor recommended assessing a redacted party for tax measured by the sale of its transferred interest. Reviewing staff asked whether the full tax on the transfer could instead be assessed against either co-owner, relying on Stetson's March 1 statement that one redacted party would report tax on sales made by another and property owned by that party and other operating companies.

An August 30, 1943 agreement reportedly designated a redacted party to operate a field and provide services for operators. Stetson understood the jointly owned operation at issue to be separate. He therefore said the field operator did not necessarily act for that separate operation merely because it acted for members of another redacted group. Unless an agreement designated an operator for the joint operation, he thought the tax should be determined as Latham suggested. The source does not supply the 1943 agreement, ownership and agency documents, Latham's calculation, Reviewing Section materials, later clarification, audit disposition, assessment, payment, appeal, or final action.

No statute, regulation, case, or formal ruling is cited. The memorandum's result rests on Stetson's internal view of the transferred interest, retained ownership, the redacted operational relationships, his recollection of a conference, the assumed separateness of one joint operation, and the conditional absence of an operator-designation agreement.

The live annotation states only that a co-owner's tangible-property sale of an interest is taxable on the consideration received for that interest. It omits the June 5 and March 1 memoranda; company sale to operators as tenants in common; complete-transfer and retained-share alternatives; used or surplus material; Latham memorandum and report; full-value disagreement; conference; proposed audit changes; Reviewing Section question; separately co-owned operation; August 30, 1943 field-operation agreement; operator-designation condition; total-tax assessment question; absence of legal citations; redactions and missing records; and outcome gap.

What this means for you

Businesses transferring property into co-ownership

Separate the interest sold from the interest retained. The historical tax measure followed the percentage of ownership actually transferred rather than automatically using the full property value.

Accountants and tax professionals

Document the ownership percentages before and after the sale and the consideration assigned to the transferred share. For joint operations, retain the actual agreement establishing whether one participant is authorized to act for the others; this memorandum makes that point outcome-sensitive.

Common questions

Q: What if the seller transferred its entire interest?

A: Staff said tax applied to 100% of the consideration.

Q: What if the seller remained a co-owner?

A: Tax applied only to the consideration for the interest actually transferred.

Q: Did the buyers become co-owners?

A: Yes. The memorandum described them as tenants in common.

Q: Could one co-owner automatically be assessed for the whole joint operation?

A: The memorandum did not say so. It looked for an agreement designating an operator and, absent one, accepted the auditor's proposed treatment of the transferred interest.

Q: Did the source identify the property, parties, percentages, or price?

A: No. Those transaction facts are redacted or omitted.

Q: Was an operator already designated for the separately co-owned operation?

A: The source does not establish one. It describes a 1943 agreement for a field and other operators, then says the joint operation was understood to be separate and conditions its answer on the absence of another designation agreement.

Q: Did staff agree that full property value always controlled?

A: No. Stetson invited clarification if another official believed that rule applied despite the seller's retained proportional ownership.

Q: Does the memorandum show the completed audit result?

A: No. It discusses proposed changes and an assessment method but supplies no later clarification, final assessment, appeal, or other outcome.

Citations and references

• No statute, regulation, case, or formal ruling is cited in the memorandum.
• June 5, 1950 Wm. R. Thomson clarification request — identified but not included
• March 1, 1950 E. H. Stetson memorandum about used or surplus material — quoted in part but not included
• Auditor Latham memorandum and report, including point 5 — quoted or described but not included
• Audit conference in a redacted official's office — described; date, complete participants, and record not included
• Headquarters Reviewing Section question — described but not included
• August 30, 1943 field-operation agreement — described but not included
• Property, co-ownership, sale, operator-designation, audit, assessment, clarification, and final-outcome records — described or implicated but not included

Verbatim support

From the official July 26, 1950 E. H. Stetson memorandum:

If G--- is not one of the operators so that G--- transfers 100% of its interest, then the tax applies to the 100%. On the other hand, if G--- is one of the operators, then it appears that G--- retains a part ownership of the property and the tax could only be applied to the consideration for the interest actually transferred by G---.

I understand that the operation jointly owned by --- and --- is a separate operation and, therefore, presumably --- does not necessarily act on behalf of this operation merely because it does so on behalf of the various members of the --- group.

Unless there is an agreement designating --- as the operator it would seem appropriate to determine the tax as Latham suggests.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.0760
• Original supporting opinion: 395.0760 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

395.0760
Sacramento, California
July 26, 1950

To:

Mr. Wm. R. Thomson (LJR)

From:

E. H. Stetson

This is in answer to your memorandum of June 5, 1950 requesting clarification of the following statement made in my memorandum of March 1, 1950 concerning the above company: “When G--- sells its own used or surplus material to the operators, tax is payable upon such a sale.” It is my opinion that if G--- sells tangible personal property to the operators, who become tenants in common of the property sold, the tax applies to the consideration received by G--- for the interest transferred by G---. If G--- is not one of the operators so that G--- transfers 100% of its interest, then the tax applies to the 100%. On the other hand, if G--- is one of the operators, then it appears that G--- retains a part ownership of the property and the tax could only be applied to the consideration for the interest actually transferred by G---. I note the statement in Auditor Latham’s memorandum, that: “Mr. R--- and Mr. H--- have told me that they consider this (my statement) to mean that the measure of tax is 100% of the value of property transferred from the --- stock to the --- operation.” If Mr. R--- is of the opinion that this is true even where G--- retains ownership of a proportionate part of the property sold, I would be pleased to receive a statement from Mr. R---, clarifying his position in this regard. As you know, Mr. R--- and I attended the conference in Mr. S---’s office together and if he has any different recollection of the conclusions reached than I have, I should like to be so advised. The various changes which Auditor Latham indicates, he believes, should be made in the audit as it now stands, appear proper to me in view of the conclusions reached at the conference. Headquarters office Reviewing Section has raised a question as to the handling of sales made to --- from an operations owned jointly by --- and ---. This is point 5 on the last page of Mr. Latham’s report. It appears that the audito of --- recommends an assessment against --- for tax measured by the sale of its transfer of its interest.

To: Mr. Wm. R. Thomson (LJR)
From: E. H. Stetson

-2-

July 26, 1950
395.0760

The Reviewing Staff questioned me as to whether it would not be possible to assess the total tax due with respect to the transfer against one or the other of the co-owners, pointing out to the statement in my Memo of March 1, 1950 that --- would return the tax on taxable sales made by ---, the property owned by --- and the other operating companies. Under the letter agreement of August 30, 1943 between --- and ---, --- operates the field and performs various services for the operators. I understand that the operation jointly owned by --- and --- is a separate operation and, therefore, presumably --- does not necessarily act on behalf of this operation merely because it does so on behalf of the various members of the --- group. Unless there is an agreement designating --- as the operator it would seem appropriate to determine the tax as Latham suggests.

EHS:AMD

395.0760.doc